The UK public finances are going from bad to worse as government spending continues to rise

One area that seems to be keen to follow the inflationary theme of these times is the number of claims that the world is about to end! However I intend to assume that the Mayans are incorrect and wish today to present an analysis of where the UK stands in terms of its public finances. This does key in with Tuesday’s update on the under performance of the UK government-bond or Gilt market as clearer evidence of weak UK public finances has coincided as you might expect with poor Gilt performance. On that subject the French benchmark ten-year bond yield (1.99%) nearly equalled the UK Gilt equivalent (1.96%) yesterday. Of course it is not the only reason as our economic growth and inflation trajectories are in there too but it has been a factor.

The Institute of Fiscal Studies view

This body is treated with reverence by many and sometimes correctly so but it is not always right and I intend to challenge the consensus which it has spread. Let me first explain their position via their update on the October public finance numbers.

It is revenues (taxes) fault

As was the case last year, a worse-than-expected decline in corporation tax receipts in October has contributed to an overall picture of lower-than-expected growth in revenues so far this year.

Spending is not at fault

Spending on the administration and delivery of public services has also again grown more slowly so far than forecast for the year as a whole.

Leaving an expected problem of

If the trends in central government receipts and non-investment spending were to continue for the remainder of 2012−13, borrowing would come in £13 billion higher than forecast by the Office for Budget Responsibility in March.

Have you spotted what the IFS have done?

Let me point it out.

higher than forecast ……..lower-than-expected

Their numbers are compared to the forecasts of the Office of Budget Responsibility. The OBR could forecast anything and it often feels like it does! It already has established a very poor track record on this front which is quite an anti-achievement considering its brief lifespan.

The mainstream media invariably follows this line as it does not appear to have taken time to stop and think about what is actually happening.

Now let me use the actual numbers and not the forecasts

Government revenue has been rising.

Central government current receipts in October were 1.8% higher than in the same month last year. Receipts over the seven months April to October were 0.4% higher than in the same months of 2011

So on the year it is up if only marginally. If you look at our economic performance this should not be too much of a surprise. However October was slightly better if you look at the actual numbers rather than being worse than forecast.

Central government current spending in October was 7.3% higher than in the same month last year. Spending over the first seven months of 2012−13 was 2.3% higher than over the first seven months of 2011−12.

Now we get to what has been something of the nub of the UK debate as we get to what type of austerity we have and in particular for all the media screams of “cuts,cuts,cuts” I note that spending up to October was up 2.3% on the year before. For my purposes here I will simply point out that spending is higher than in the year before and that October with its 7.3% increase in spending was a particularly poor performance.

Just to confirm the point the IFS feels it can argue that the UK government is in fact underspending because the 2.3% increase in it is less than the number below.

The OBR’s forecast at the time of the March 2012 Budget implied that central government current spending for the whole of 2012–13 would be 3.0% above 2011–12 levels

So in a nutshell I look at the actual numbers whereas the IFS look at comparative forecasts. How often are forecasts particularly official ones correct these days? I am surprised it is only me challenging this but there you go.

We do agree that this fiscal year looks on course for an overshoot in UK public-sector borrowing.

Today’s numbers

We now also have the November figures from the Office of National Statistics

Public sector net borrowing was £17.5 billion in November 2012; this is £1.2 billion higher net borrowing than in November  2011

This means that the year as a whole is now even worse.

For the period April to November 2012, public sector net borrowing (excluding the capital payment recorded as part of the Royal Mail Pension Plan transfer in April 2012) was £92.7 billion; this is £8.3 billion higher net borrowing than in the same period the previous year

We find ourselves reviewing yet another version of austerity which seems to have increased and not reduced public-sector borrowing.

How did it break down?

Revenues rose again

In November 2012, central government accrued current receipts were £39.1 billion, which was £0.2 billion, or 0.6%, higher than in November 2011

Although on a year on year basis (there must have been revisions) we are in fact facing taxes 0.1% lower than last year.

But look at spending.

In November 2012, central government accrued current expenditure was £55.0 billion, which was £3.3 billion, or 6.3%, higher than November 2011,

So yet another month which shows a surge in public-sector spending which has had its impact on annual growth in this area which has risen from the previous 2.3% to 2.7%.


So the underlying issue here is that the UK government looks as though it has lost control of its spending. Against that we see that taxes which had been growing in 2012 up to now have now lost that growth. Accordingly the pattern for our fiscal deficit has been poor and it looks ever more likely that there will be a considerable overshoot for the year as a whole.

This poses various questions as “austerity” suddenly looks rather like “fiscal pump priming” does it not? Suddenly there is a long list of candidates for my financial lexicon.

Or you can take the IFS style view that as long as you forecast that something will grow the fact that it does is not of much importance at all really……

A Wry Smile

Regular readers will be aware that I have made the case for UK deficit and national debt figures including our financial interventions, basically on the ground that we have made them. They were officially sidelined and slipped ever further down the report. However whilst they do show a much higher national debt of 138% of our economic output it has fallen over the past year. I bet they wish they had not put it so far down the report now….

UK Economic Growth

Glass Half Full

On a year on year basis UK economic growth was revised up from -0.1% to flat this morning.

Glass Half Empty

On a quarter on quarter basis UK economic growth was revised down in the third quarter of 2012 from 1% to 0.9%. Both industrial production and service production was revised down which a small upwards construction revision was unable to offset.

Oh and confirming today’s theme the fastest growing influence on economic growth was government spending.

How can they be simultaneously true?

Apparently the past was better than we realised at the time as the last two quarters of 2011 were revised upwards.

Oh and as you consider revisions from a year ago can you spot the possible flaw in nominal GDP targeting?

This entry was posted in GDP, General Economics, Gilts, Stagflation, UK Inflation Prospects and Issues and tagged , , . Bookmark the permalink.
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  • anteos

    Hi Shaun

    great article as always. I really can’t see a way out of this mess. the public is convinced that austerity is occurring and yet we can see it isn’t. The politicians don’t have the will to make the cuts, the public will not accept a reduced standard of living.

    If the government keeps printing, then the currency will devalue and imported inflation will reduce consumer spending further. Its a lose/lose scenario.

  • DaveS

    Poor George – everybody told him we would bounce back from recession by now (look at the historic graphs) – all he had to do was a bit of mocksterity and he gets to look rough and tough for the Tory right.

    The two Eds will be feeling pretty smug this Xmas. Poor George will be writing a lot more Xmas cards to wealthy “friends” – he might need some favours in a couple of years.

    They still think they are in the debating chamber of the Oxford/Cambridge unions and its all a bit of a wheeze.

    Still no need to worry, Mark will be getting a new ink jet for Xmas.

  • James

    Shaun, Great if depressing article.
    The figure that is just amazing is £17.5 billion deficit JUST FOR NOVEMBER. That is nearly £600 million a day OR
    £10 each a day in the UK OR
    £70 each for a week OR
    £3500 each a year OR
    £14,000 a year for a four-person family.
    And yet, all we hear is, as you say, cuts, cuts, cuts.
    Why don’t we hear crazy borrowing, crazy borrowing, crazy borrowing??

  • JW

    Hi Shaun
    Comparing estimated outturn with forecast means you never have to talk about ‘real’. Not that anything is ‘real’ any more. CPI/RPI is understated by many orders of magnitude quite deliberately so GDP is meaningless. Now there seems to be a move afoot to produce a ‘core GDP’ which looks better because it omits nasty things that are going down.About 50% of things, unimportant things like ‘energy’. Which coincidentally are often left out of ‘core CPI’ because , well, people actually have to buy them and they have this nasty habit of going up in price.

    So there you have it. The UK is actually performing about the same as the early 90s in recovery mode if you leave out everything that isn’t and compare estimates with forecasts. And that pesky deficit is really OK because dear old George knows he has ‘retired’ about 40% of it with QE. Inflation I hear you say, nah humbug ( to get into the festive spirit), a good positive overhaul of the methodology will soon put estimated, reported CPI back into its ‘we’ve only missed the target by 2-3 %’ mode; honestly said the Mad Hatter.

  • John

    Just to point out that the money from the deficit has been spent by the government (not destroyed by them). It still exists and is in the non-government sector; ie it is held by business, households or foreigners. Its still there, waiting to be spent into the UK economy. As our economy is demand deficient due to the high level of unemployment, and the imminent threat of it, the jobs that do exist need to be supported from somewhere or GDP will just decline into recession again. There is really only government spending keeping our GDP where it is. If they cut further, the economy sinks. Since the election the business sector has shown a marked reluctance to invest, not surprising really, and households have wanted to pay down debt. So the level of demand is reduced below the level at which most who want a job (and not be underemployed) can have a job. I have to agree that GDP targeting is pointless; they should be targeting employment, raising it to a level where there is perhaps 2-3% only. All the money spent on benefits and allowances would markedly reduce. The deficit would reduce as a result.

  • John

    Sorry, but austerity is occurring. By that, I mean that those in work are getting poorer and people are loosing their good jobs they used to have. I know too many people who have been made unemployed; some have taken other work, far below their real capability, just to have some money coming in. Another significant measure is the number of people who now go to the Trussell Trust just to keep body and soul together. The fact is that they cover significant areas of the country, and it continues to grow, As a country we really are not making progress.

  • DaveS

    Sorry John – I can’t agree.

    We don’t live in a bubble – we import over half our food, over half our energy and most of the rubbish we consider to be essential to modern living.

    We run massive trade and current account deficits and thats the real problem.

    If we were self-sufficient then perhaps Keynsian demand stimulus might work. Perhaps we could just hire all the unemployed on to the government payroll – it would certainly reduce benefit claims. Perhaps it wouldn’t matter that they just consume and don’t produce.

    We might accept being paid in printed pounds – we have no choice. But foreigners do and one day they will not be willing to accept worthless pounds for oil or gas or food – neither will they lend us the money to pay for them. Thats when we find out we are poor.

  • John

    All I have described is a fundamental accounting identity; you cannot argue it away. Its fundamental to our National accounts. From the data you can draw the conclusion that we are demand defficient. With imports exceeding exports and the household + corporate sectors saving, the government sector must be in deficit. The maths will not allow anything else. The consequence of cutting the governments spend has to be a fall in GDP until we can alter what is happening in the other sectors. To reverse the current situation, I suggest we need to see higher employment, surely you would applaud that. It would cut the government spend on benefits, which we all want to see. There is a problem in this country, we are not productive enough nor do we produce enough that the world wants to buy. Only investment will solve that and industry, in aggregate are not doing it; they don’t see a good enough prospect of return to invest the savings they have made since 2002 and they certainly are now very wary of asking banks for loans. We are now a small country and cannot have a huge effect in th world on trade. The government is the only sector that can support the economy at the moment. Take that away and unemployment rises, benefit bills rise and with them the deficit will rise as the tax take falls. Austerity won’t work, its self defeating, so should we have different policies? It makes sense to me

    The US Fiscal Cliff (which in my view is all a load of nonsense) seems to now be a real danger.

  • Rods

    Hi Shaun,

    An excellent and invaluable analysis, which to me shows the important contribution this blog makes in trying to hold the official bodies and politicians to account and the total failings of our main news media and their journalists with very few exceptions.

    I think if you look in your financial lexicon for nominal GDP targeting, it will read something along the lines of “Pumping up inflation to try and make unsustainable debts, sustainable for a bit longer”.

    This Government had a diminishing window of opportunity to get Government spending under control and they have failed. When increasing Overseas Aid is classed as a priority. It makes you realise how totally out of their depth are our wet behind the ears, young career politicians are. Refolding towels in Selfridges is hardly an appropriate apprenticeship for a Chancellor. Re-balancing the economy through cutting government spending across ALL departments should have been a priority, followed by tax cuts, where we had 10 years of the reverse of this under the last Government.

    With Government spending out of control it is interesting that public sector pay increases are sill much higher that in the private sector, so the gap between average wages for similar jobs will continue to grow. From what I can see any cuts that have been made in the public sector have been in the main to cover the UK’s ballooning interest payments.

    Still when they really let rip with inflation, fiscal drag will ensure that the tax take goes up to 45% to cover the deficit. The narrow 20% band will be like the old 10%, with 40% the norm.

    2013 promises to be interesting with stagflation and the ever increasing threat of the market not liking what they see where currently we are heading further and further into the inflate the debts away one way street.

    Our politicians seem to be in a bit of a race to see who can cause a financial crisis first, us or the French, but at least the French can feed themselves and they don’t need to import much fuel to generate electricity.

    Shaun, let me wish you and your family a very happy Christmas and a happy new year, with a prosperous, healthy and successful 2013. :-)

  • Midge

    Great debating on these pages.Austerity or Keynes.Too much austerity leads to downward spiral but must cut fiscal deficit as national debt is ballooning As John states austerity taking place note underemployed rate,food kitchens and payday loans.But I believe like anteos much more cutting still to be done by government.2013 is going to be as interesting as 2012 in this country and around the world. Just can’t imagine what unemployment rates will be in Greece and Spain.May I take this opportunity to thank Shaun for keeping us informed and amused during the year and I wish him and all contributors to this blog the very best for Christmas and the new year.

  • Carys

    Please keep this up next year, Shaun, yours is one of very few sources of well thought-out economic comment.

  • John

    @MIdge and others

    You raise an interesting point in your piece.

    A graph of the UK National debt from 1900 can be found at
    It puts the current situation in a bit of historical context over the 20th century, showing that, as a percentage of GDP, the debt was larger than it is now from about 1918 to 1970.
    Currently the government, and others are all worked up about the current level of debt. Do they really need to be? It might be comforting to see it fall, but I don’t believe this can happen by just concentrating on the debt bit of the (debt)/(GDP) ratio. It ignores the obvious fact that if the GDP grows (Note, I am not saying ‘inflates’) the (debt)/(GDP) ratio will fall. This country has enormous amount of unused resources, the unemployed, the under employed and those who have simply given up and left the labour market. Concentrating on the debt seems to me to suit a particular political agenda and the efforts that have been made so far in the UK are not working and are poisoning the patient. In these circumstances, you don’t give more of the same medicine, a good doctor sees the patient continuing to suffer and he would change the prescription.

    I am simply suggesting that there isn’t in any economic theory I am aware of that can show that there is a correct size for the deficit or national debt. The deficit should be the the size needed to ensure that all who want a job have one and that inflation should be controlled. These would be my two measures that the government should consider when setting economic policy and deciding whether or not they have been successful. To me, they are an abject failure.

  • Anonymous

    Hi Anteos
    The “cuts,cuts,cuts” media spin ignored the reality that the plan was to cut public spending in real terms by allowing it to grow by less than inflation rather than outright. However the latest numbers show that so far in 2012 public spending growth over the year is now similar to the level of the CPI with the last couple of months well above it.
    So we await 2013 to see what happens next….

  • Anonymous

    Hi John
    You make a good point which is that there are plenty of signs of austerity in areas of the private-sector……

  • Anonymous

    Hi Dave
    Mr.Carney had better get his inkjet order in early as there are likely to be orders too from Ben and whoever replaces Shirakawa in Tokyo before we even get to Mario…

  • JW

    Hi John
    I have for some time written that the balance between ‘labour’ and ‘capital’ has been increasingly unbalanced over the last 30 years with the last decade being the most extreme. This has happened on both sides of the ‘pond’ and with governments of every hue.

    The link you mention is a little short of data references, it diminishes its message by being selective in its use of data. This is unfortunately true of most ‘messages’ given out by sources supporting one side or the other of the political spectrum.

    Indeed it is a very good rationale for being regular readers of Shaun’s blog which steers clear of political bias and tries to tell it as it is , an increasingly lone voice in the wilderness of hype.

  • Anonymous

    Hi JW
    It is a bit like the “hokey cokey” isn’t it?
    On one set of numbers they wish to ignore the things which are going up and on another they wish to ignore the numbers which are going down.
    I had a wry smile at the recent US inflation figures as “core” CPI is now above the CPI itself and I wondered what would happen if this carried on. A bit like when Adam Posen spent his time picking and choosing amongst the various UK inflation measures to try to find one which wasn’t rising so much.

  • Anonymous

    Hi Rods

    Thank you and a Merry Christmas to you and your family too.

    The public-sector pay figures have turned out to be something of a battleground between appearance and reality have they not? We are told that pay freezes etc. are in place and I am sure for some they are but then the bill shoots up! I would want to know Who? What? When? Where? And Why? But instead it justs slips away into the background.

  • Anonymous

    Merry Christmas to you too.

  • Anonymous

    Thank you Carys. I have no intention of stopping and in fact I think that the message is beginning to get home in more and more areas so if anything it is time to press on.

    However it may be a while before I put up anymore light fittings! :(

  • Drf

    Hi John,
    “There is really only government spending keeping our GDP where it is.” I am sorry, but I do not agree with that at all! Government spending, as it seems Shaun points out here, does not contribute to real GDP; it is a cost centre on real GDP. The money has to come from taxes which are levied against real wealth generated. That is what is so unrealistic about how these manipulators want to include public spending in the supposed GDP. It is the same sort of nonsense as arguing that what you personally just spent on a new car is part of your income! It is not – it is part of your costs; and your net real income is revenue less costs.

  • Drf

    Seems to me John that here you are arguing for Socialist politics rather than economics per se.

  • JW

    Hi Shaun
    Have a great Christmas. Are you posting before the New Year?
    I also wondered if you had considered doing a ‘UK’ version of ‘Shadowstats’ a la Mr Williams?

  • pavlaki

    There is a quite frightening video on the Reuters site about Britain’s tidal wave of debt and the consequences. It has been posted by Money Week publication and whilst obviously is to sell subscriptions to the magazine, it is difficult to argue with their observations or conclusions. If you want to totally ruin Xmas then listen to it (it’s quite long)! It is along the lines of what you are discussing here.

  • John

    Politics and economics fade into each other and can become confused. I have tried to argue from an economic viewpoint, but please consider that the austerity line could be confused with a right wing neoliberal viewpoint.

    However, my political position is difficult to put into left-centre-right terms; but I believe that all Britains do deserve enough to ensure body and soul are kept together and that, in some way we all have access to the essential services, water, heat for example, and increasingly the internet as the government is moving its service delivery on to the web.

  • John


    Sorry but I fundamentally disagree. I have lifted this from

    It is all from the National accounting equations. Its non-political at this point.

    The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

    From the sources perspective we write:

    GDP = C + I + G + (X – M)

    which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

    From the uses perspective, national income (GDP) can be used for:

    GDP = C + S + T

    which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.

    Equating these two perspectives we get:

    C + S + T = GDP = C + I + G + (X – M)

    So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.

    (I – S) + (G – T) + (X – M) = 0

    That is the three balances have to sum to zero. The sectoral balances derived are:

    The private domestic balance (I – S) – positive if in deficit, negative if in surplus.
    The Budget Deficit (G – T) – negative if in surplus, positive if in deficit.
    The Current Account balance (X – M) – positive if in surplus, negative if in deficit.

    These balances are usually expressed as a per cent of GDP but that doesn’t alter the accounting rules that they sum to zero, it just means the balance to GDP ratios sum to zero.

    If you want more evidence look at

    from Martin Wolf of the FT. who has produced a graphical variation

  • JW

    Hi John

    Yes but that is just arithmetic. The point DrF was making was that if G isn’t met by T you get an increasing -ve. Indeed all that happens is that the currency gets devalued as govt/CB create more ‘electronic money’ to balance the books as they cannot increase taxes to cover their own expenditure because it would just crater the I and S. Of course devaluing currency can have effect on the X and M balance.

    I guess the politics in both the UK and US is whether you believe G should be small or large. The rest just flows from that.

    None of the above goes anyway to describe/explain the effect of an increasing debt both public/private, the effect of firstly enormous non-banking financialisation of the economy and its subsequent ‘nationalisation’ and the effect of its withdrawal as a stimulus. Which is just the latest manifestation of the attempt to hide the effects of globalisation, demographics and automation , which has been going on for 30 years plus in the western economies ( inc Japan).

    Petty little squabbles between Labour and the Tories or indeed between Republicans and Democrats are ‘fiddling while Rome burns’. No-one dares to talk about the real issues in front of an electorate that frankly would rather live in its Soma-induced world of TV and i-gadgets.

  • Rods

    Hi Shaun,

    My take on this is that all non-industrial staff grades have pay scales with paying going up with experience (ie. time) in that position, so over a period of time there will be a trend to have more staff at the higher end of the scale. When the pay was poorer in the public sector than in the private sector, more people would have left with more recruitment at these positions through internal promotion or external recruitment starting at the bottom or near the bottom of the pay scale.

    I don’t know if there is also a bunching of jobs upwards where staff are still getting internally promoted. The more admirals than ships factor!

  • Rods

    Hi JW,

    Totally agree with what you are saying.

    Generally the private sector invests capital much more efficiently than the public sector to generate a return and that when money is spent in the private sector the velocity of the money is much higher which helps with growth.

    This is one of the reasons why when you have too much government spending the economy grinds to a halt. As taxes rise there is also a disincentive to invest as the risk v reward goes up where increased taxes make the post tax reward smaller and with entrepreneurs there is also a human cost on the number of hours worked v disruption to social and family life v reward. Add to this a lack of demand and it is a pretty toxic mix when looking for growth in the UK at the moment.

    Until in the UK the economy is re-balanced in favour of the private sector, where this was severely squeezed by the last Government, I can’t see any significant growth and without that the only way we will reduce the deficit is through austerity and we can all see how successful this has been in Greece, Spain and Portugal! This current Government had a 3 to 4 year window to do this and they have failed, which is why in the longer term I’m not optimistic on this country not having to default.

  • pavlaki

    I hope that Shaun and all who comment here have a great Xmas and prosperous New Year and let us hope that by this time next year things are no worse! Hoping that they will be better may be rather optimistic.

  • John

    I am clearly the odd one out posting here as I cannot agree with much that you have written. But I would like to suggest that Spain, Greece, Ireland and Portugal, which all use the euro over which they don’t have sovereignty, are really very different from the UK. They can go broke and probably already are. Those countries are currency users. The UK, in contrast, is a currency issuer and cannot go broke if its debt is denominated in the GB Pound, except by political will. We can always pay. Many other countries have the same status; US, AUS, Japan, Canada. I see little chance that the UK will default, it can pay its debts. QE has paid off a significant amount of the UK’s outstanding debt, which the Chancellor has belated recognized.

    Now I recognise freely that this raises the spectre of inflation and where necessary, it would need to be controlled by fiscal and monetary measures. The german inflation is often held up as an example, but that was caused by unachievable demands for reparations made after WW1. To pay the reparations denominated in foreign currencies, German printed the money needed as they simply did not have the productive capacity to meet the demands made on them. This caused their exchange rate to fall requiring yet more marks to be needed to meet the next set of payments and it became a vicious circle. The UK is not in anything like this siuation, nor will we be unless we are governed by buffoons.

    The graphs produced by Martin Wolf, that I previously referenced, show that the corporate sector was saving, in aggregate, from 2002 onwards. They were not investing, they chose to save presumably because they were doubtful about the prospects of making money out into the future. Since then their saving has continued. Saving on this scale doesn’t suggest that industry were being squeezed. The UK has had austerity now for a number of years and our economy has not grown; the automatic stabilisers have kicked in, increasing government expenditure as they are bound to. Many have been made redundant, for many more it has been threatened. People have saved if they can seeing redundancy coming; debts have been paid off. Both have led to falling demand and falling tax receipts leading to a stagnant economy. As you state, growth is needed to reverse this situation, but that can only happen now if the general public have confidence to spend. For this they need an adequate income giving excess money at the end of the month for discretionary items. Its unlikely to happen while government policy is to squeeze all it can out of the majority of the population to raise tax revenue. Thus demand falls. It is this that is the primary disincentive to investment. GDP falls as a result. Even if the debt remained constant, in these circumstances, the debt to GDP ratio will rise. The policy becomes a self-fulfilling failure.

  • JW

    Hi John
    You are not the odd one out.
    I have repeatedly posted that ‘labour’ needs more of the income. The balance has been tilted towards capital for too long. Until people have more disposable income the economy and the population in general will suffer more than they have to. However this is very different to saying G should increase and debts/deficits should increase more, which would just make the situation worse.

    A brave government would apply meaningful supply side improvements, split and break-up banks, reduce taxes and cut expenditure. It would definitely not just spend more money it doesn’t have as it will eventually create inflation, devalue the currency which actually transfers wealth from labour to capital, the exact opposite of what I think you want to see.
    Unfortunately I believe even this ‘fictional brave government’ cannot stop or even less reverse the relentless logic of the macro factors; demographics, globalisation, and automation. The UK along with most of the western world will see declines in living standards, but the current behaviour of most governments of every hue are making it worse than it needs to be for the 99% and to the advantage of the 1%.

  • Brad McEvoy

    Hi John, I also consider myself a left-centre-right-ist, but i think there’s a flaw in your reasoning which has become rather widespread lately.

    We use money as a proxy for the things that we need and want, but the money itself is otherwise not important.

    When a government spends money the important thing is not the money that they’ve spent (as you said, “held by business” etc), but whats important is the resources they’ve consumed by that spending.

    You say “our economy is demand deficient due to the high level of unemployment” so this shouldn’t matter. That would be true if the government only used under-utilised resources. In reality government only ever buys the best and brightest, which is already in demand.

  • Brad McEvoy

    BTW – I’ve been employed in building government service websites (i’m a
    programmer) and i really wish the government would just build a
    framework for private enterprise to deliver those services – ie build a
    market place such as exists for domain names. It would result in better
    services, a more dynamic private sector, more entrepreneurs, more
    exports, etc.

  • Drf

    Exactly James, you confirm my point; but the issue is can we still afford that extravagance?

  • Drf

    John, you are free to disagree of course, but you are also free to be completely wrong!

  • Anonymous

    I haven’t seen the video, but I’ve read the associated promotional article from Money Week. It’s unbelievably bad. I don’t want to abuse Shaun’s hospitality by taking it apart here, but just for starters, quoting debt in £ since 1900 without reference to either GDP growth or inflation during that time is completely meaningless – yet that is the only debt chart they provide. So yes, I can absolutely argue with both their observations and their conclusions. They’ve produced a scaremongering article and video to sell their rag. Don’t buy it.

  • Drf

    Sorry I meant John.

  • Anonymous

    Hi Shaun.

    Whether or not the government is actually cutting spending is not the point. It’s whether people believe they are. The government has strongly promoted the idea not only that cuts are being made but that far more cuts will be made in future. And they have actually hiked taxes. As John points out, this comes at a time when there is a real squeeze on the incomes of people in private-sector employment or on fixed incomes. Therefore people FEEL poorer, and they expect to feel even poorer in coming months and years. People who feel poorer and are worried about their incomes and their jobs don’t spend – they cut expenditure on everything but essentials and they save as much as they can afford. Businesses therefore experience a shortage of demand, so they don’t invest – and the signals they too are receiving from government are that things will get worse, not better. We did have a demand shortage after the financial crisis. But that’s not the cause of this one. This is to my mind caused by an inept government frightening its population. They should shut up.

  • JW

    Are you seriously saying the current economic situation is caused by some inane comments by Osbourne etc? Nothing to do with the debt overhang for all the G7 nations? Really? Goodness I wish it was so, how easy to do something about it. Blimey thats all right then!

  • JW

    I have no political issue, but perhaps you would like to ‘rubbish’ this report as well.

  • Anonymous

    Clearly there have been cuts in the public sector in both local and national government. Many thousands of jobs have been lost and services have been closed. Indeed the cuts at local government level were being worked on by local government some months before the last general election.

    I don’t know if this level of detail is available from your sources Shaun, but I would like to see:

    - what are the bigger growth areas of public expenditure?
    - How does the tax revenue growth rates since the(se) so called recession(s) compare to previous recessions?
    - Similarly how does the benefits expenditures for working age people compare with previous expenditures.

    As you know Shaun, I don’t accept that there is a revenue constraint on central government expenditure at least while we remain outside of the Euro and do not fix our exchange rate. Instead, I suspect that the constraint on public and private expenditure may be more of a balance of payment constraint although I am unclear as to how that works and the nature of the constraint (It’s something I plan to read-up on).

    There are growing concerns about fixed interest as a financial asset – across the range of yields and issuers and the fear of a liquidity problem on the investment grade corporate bond market is exercising the mind of one asset manager I am close to – to the extent that it has severely reduced the duration of its clients’ portfolios.

  • Anonymous

    People whose incomes are mainly wages and interest feel poorer because they are. With regard to expenditure – government or otherwise – then it is not only the direction of change that is important but its rate of change too.

  • Anonymous

    Hi John,

    Weimar is not the only example of government printing to cover unsustainable outgoings. There are many examples including Argentina and one I’ve personally seen in Bulgaria.

    The risk of excessive printing is that the money becomes worthless and cannot buy food. The elite will be “I’m alright Jack” while the middle class & lower class are starving. This is particularly scary for a country that needs to import food like the UK.

    The debatable question – Where is the UK’s inflationary tipping point ?

    If we run over the tipping point, bond yields and interest payments will rise to painful or possibly unaffordable levels. At that point savage austerity may not be enough to prevent an inflationary death spiral. It’s safer to accept modest austerity now – living on ever increasing borrowing is an illusion of wealth.

  • Anonymous

    Your examples highlight that debts should not be denominated in a foreign exchange rate and pegging your currency to another one can have a disastrous effects on ordinary people trying to look after their families and also enjoy lives to boot.

    There isn’t, therefore a read across to the UK’s current situation, and the risk of GBP becoming worthless in the same way is remote and should not stop us from dealing with today’s problems.

    Argentina also has important thing to teach us with regard to Jobs Guarantee and import substitution.

    And again – the serious increase in borrowing relates to that taken on by UK companies in the financial sector.

  • Anonymous

    That will be too hard for him John. Good try though.

  • Anonymous

    This post is extraordinarily silly. A whiff of blogosphere Austrian nonsense to it.

    Quite clearly someone who buys a car does not do so from themselves, but they do buy it from someone on this planet.

  • Anonymous

    Yes the country is getting poorer – the nominal GDP increases fail to show impoverishment by inflation.

    The UK had a huge boom and is now having a large bust. If you adjust UK GDP for inflation, we’ve been in recession since 2008.

    The private sector is in recession (in real terms). Small businesses struggle to get any finance, and what they can get is more expensive. This makes contraction and debt repayment essential, not optional. Bank fees increase and failed bankers are rewarded with huge subsidies – these handouts rob the poor to pay the rich.

  • Anonymous

    But JW, who else in the comments section of this post is sourcing data?

  • Anonymous

    Sorry – I don’t understand your point about Argentina. What I read about Argentina includes the jailing of economists who disagree with unbelievable govt inflation numbers.

  • Anonymous

    My post should have read: “Argentina also has important things to teach us with regard to Jobs guarantee and import substitution”. I missed the “s” off “things”. If that helps.

  • Anonymous

    The UK govt has a poor track record of running businesses. Did British Leyland make a profit ? Was BT profitable ? Did you have to wait months for a phone line ? Did the UK govt make a profit from building concorde ?

    The govt is the regulator – enforces safety and pollution rules. If they enter business, they need to regulate themselves – at very least a conflict of interest.

  • Anonymous

    What you are seriously missing out on – and at some stage it will become an area of economic analysis again.- is the extent to which private economic activity is freeloading based upon the ownership of existing assets rather than an addition to the stock of productive (real) assets (as opposed to financial assets).

  • JW

    I was referring to the graphs contained in the report linked by John. The report doesn’t state where it got its data from.

  • Anonymous

    I read in the economist that the Argentinean middle class were unhappy at becoming poorer by price rises – price rises that were not accurately recorded by official inflation statistics.

    If the Argentinean “substitute imports” were any good, they’d not need protection from competition – hence the lesson should be that import substitution (protectionism) will lower the quality and increase the price of aforesaid goods. -> Consumers receive a lower standard of living.

    Argentina is an example of how things should NOT be done ….

  • Anonymous

    Argentina imprisoning economists and now British Leyland. None of these are pertinent to the comments in this thread.

    Clearly an economy’s profits (a financial flow) cannot be increased by an economy’s businesses selling more goods to each other at a mark-up on cost.

  • Anonymous

    History shows us that the UK govt has tried to run businesses in the past. Those who do not learn the lessons from history are doomed to repeat the same mistakes.

    If the UK govt’s expenditure does not derive from taxes, then where does it come from ?

  • Anonymous

    No. there is no country on this earth that will provide all the answers. And free markets – because size is important and the conditions of perfect competition (or ones approximating these) rarely if ever apply – reward size. Countries need to position themselves to increase their economic sovereignty – including particularly the production of staples such as food and energy. rather than saying – it can be produced elsewhere more cheaply so we won’t bother doing it here. Instead we’ll expand our financial sector because of all that GBP out there used to pay for the stuff. That’s one important dynamic in how the UK economy got into this mess.

  • Anonymous

    Money – of which is a monopoly issuer.

  • Anonymous

    That sort of data is available on this website:

    You can build you own graphs from its data.

  • Anonymous

    And there you go:

    The stock of government debt going down with all those Keynesians and Socialists in power. Gee! Imagine!

  • Anonymous

    The UK has tried lots of QE, but the economy is still in bad shape.QE has not worked. – why would more QE be different ?

    Weimar was a monopoly money issuer. History teaches us that money printing can lead to hyper inflation and economic catastrophe.

  • Guest

    I’m not talking about QE. It also includes spending into the economy to buy the goods and services. I think my posts in the past have been fairly clear on the point of QE, but I will go through it again – but I need to eat first.

  • Anonymous

    Weimar was a monopoly issuer of a currency in which its debt – sadly – was not denominated in. This was as a result of the Versailles Treaty. And history’s lessons did not have to be waited on – as was stated at the time:

    “If we aim at the impoverishment of Central Europe, vengeance, I dare say, will not limp. Nothing can then delay for very long the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the later German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation.”

  • JW

    Oh come on! You can’t seriously believe UK debt at 60%? This is exactly what I meant when responding to previous posts, official ‘data’ masquerading as ‘real’. And that comment is nothing to do with any hue of politics.

  • Anonymous

    Suddenly arithmetic seems much more important to you….

    Well you can always go out there and collect the data yourself.

  • Anonymous


    Basically Quantative Easing is a freeloader assistance plan for those people with a sense of entitlement and who want to increase their wealth without working for it.

    According to the BoE the rationale is that deposits are an imperfect substitute for gilts and so holders of gilts (not even primarily banks) would want to use the deposits from the proceeds of selling gilts to the BoE to purchase other financial instruments. This would bid up the price of (existing) assets (that rentier thing again) so that holders of financial assets would feel wealthier and spend more. And hence economic recovery beckons.

    The mechanisms by which a bidding up of the prices of existing financial assets results in the increase of real assets through productive investment is not spelled out – as far as I am aware.

    In fact it is just as likely that all it does is encourage more money to bid up the price/ value of financial assets, and encouraging rentier activity.

    Given recent history it is likely that investors and their financiers review potential projects for productive investment on a more conservative basis, and also attend more to balance sheet repair in any case.

    In short monetary policy – even of this extraordinary kind – is “pushing on a string” as we used to say.

  • Anonymous

    The version I have seen – which is courtesy of an article by an independent economic consultancy and owes something to Michal Kalecki goes like this:

    At an aggregate level and a simple closed economy consisting of only firms and households expenditure is consumption (C) and investment (I), and income is profits (pi) and wages (w).


    C + I = w + pi

    and so:

    C + I – w = pi

    That is, the higher consumption and corporate investment are relative to wages, the higher or corporate profits.

    So, during the 2000s bubble period when consumption (fueled by increasing debt) was higher than wages and companies (fueled by increasing debt) were investing heavily corporate profits boomed. However when the global financial crisis hit consumption and investment and so profits collapsed prompting the economic depression that we are now in.

    It would not be correct to say the the causation runs the other way because people can decide to consume more and firms to invest more but the latter cannot decide to earn more.

    Including government deficits (G):

    C + G + I – w = pi

    So the higher government deficits are relative to wages then higher are corporate profits.

    And this explains why since then profits have fared better than wages. In fact this has been recognised in the USA on 13/10/2010 by a briefing note produced by Morgan Stanley: the US fiscal stimulus was a transfer from the public sector to profits.

    So profits became a larger part of national income but this did not prompt a recovery of investment and firms, particularly large firms, are sitting on ever larger piles of cash. Hence we’re still below the level of national income in 2007.

    Where the Government deficit reduces or even, if we think dynamically, the rate of its growth reduces, in the absence of counterveiling changes in consumption or investment then the rate of growth of national income will also reduce.

  • Anonymous

    I regard any increasing of the money supply as alchemy. Taxation takes real wealth – where increasing the money supply is like taking wealth out of thin air.

    As a fiscal conservative, I believe in minimizing national debt for the following reasons
    1 ) reduces interest payments, which means lower tax rates and/or better use of tax money.
    2 ) It’s irresponsible to saddle future generations with our debts.
    3 ) Deficit is misery, surplus is happiness as Micawber observed.
    4 ) The bond markets can be very cruel to debtor nations and changes can be sudden.

  • Anonymous

    These are beliefs they are not facts. Or where there is factual content then I want to be careful with their applicability.

    For my part I believe that economic activity is not just about maximising profits but also about reproducing a society. Because I believe that there is such a thing as society I do not accept that individual preferences are merely additive: therefore economic and political choices are more complex than that.

    On your points 1) to 4) I would say the following:

    1) the payment of interest is an income flow from government to the private sector.

    2) Future generations are not saddled with our debts. The interest is an income flow. And it is generally believed (incorrectly) that the borrowing facilitates government expenditure on private goods and services now.

    3) And Mr Micawber is correct, But his individual misery/happiness is not additive with that of other members of society (fallacy of composition) and if the government sector is in deficit then some combination of the domestic private sector and the foreign sector is in surplus. Policies that seek to mean that it is more the domestic private sector than the foreign sector is surplus may be preferable (I think they are).

    4) The bond markets recognise that the UK government has the ability to pay its GBP liabilities with GBP.

    Finally I would say that the money supply must increase to support economic activity, and the main responsibility for increasing the money supply lies with private banks. The main economic failure of private banks has been to be more ready to advance loans that have facilitated the purchase of current existing assets rather than facilitating production of new goods and services and thereby generating the income streams to pay-off those loans.

  • Anonymous

    Hi JW

    Merry Christmas to you and your family too. I have not finished for the year yet and will be back tomorrow plus at least one in the Xmas/ New Year gap. I wonder if we might see developments in Japan as its been a while since they have used this period to catch us out…

    As to your question yes I have been considering this area and am waiting now for the result from the RPI “improvement” consultation. The National Statistician will let us know his “independent” decision in January

  • Anonymous

    You have completely missed the point and your sarcasm is misplaced. I suggest you go and read up on rational expectations, Ricardian equivalence and the importance of signalling. Signalling that people’s incomes will fall and taxes will increase in the future discourages spending and encourages saving. When an economy is experiencing very low growth due to deficient demand despite interest rates being on the floor, discouraging spending and encouraging saving is the last thing you should be doing.

    For the record, in the UK private debt is a much bigger problem than public debt. John, further up this thread, attempted to explain the sectoral balance but it seems to have been lost on you. However, perhaps you can understand this: if the private sector is saving (or deleveraging) and there is a trade deficit, reducing government spending and increasing taxes pushes the economy into recession – at which point automatic stabilisers cut in, forcing up public spending and increasing the deficit. Trying to cut the public deficit when the private sector is intent on saving is doomed to failure unless you can magically create a trade surplus.

  • Anonymous

    Sean, JW

    ONS figures for public debt are book value, of course. Because gilt prices have been rising, the marked-to-market value is higher – around 80% of GDP. And as Shaun points out, ONS doesn’t include financial interventions. So if you prefer your debt figure to include financial interventions and be marked to market, I think it would be around 160% of GDP.

  • Anonymous

    No thanks. I’m not interested in dancing to your tune.

  • JW

    Frances, yes plus a lot of unfunded liabilities that in impolite terms would be classified as ‘ponzi’. Future health and pension costs are unsustainable , Its not nice but true.

  • Anonymous

    Yes, they are actually poorer because of private sector austerity, as John notes. But they also believe they will become even poorer, because the government is telling them that their real incomes will be squeezed more through benefits withdrawal and tax rises. It’s been telling them this for the last two years – but without implementing much in the way of real cuts except in certain high-profile areas that have nicely generated enough public unrest to convince people that the government is being tough on public spending. It’s all spin, really. But the economic effect is that people are cutting spending not just because they are poorer but because they are worried about the future.

  • Andrew Finney

    So as soon as George Osborne is back to tell him what it is then?

  • JW

    Frances, perhaps you didnt read my post further up this thread that commented on John’s sectoral balance post. It was not ‘lost on me’.

    Its only common sense that people will reign in spending when they are faced with great uncertainty.

    Total debt is the problem for most western nations. The UK has high public and private debt and unfunded liabilities. Increasing that total level of debt is madness. Of course people need to be able to spend which is why taxes have to be reduced at the same time as public expenditure is cut. New productive investment in new assets has to be made which is why banks need to be made to come clean and if necessary go bankrupt. Real supply-side reform needs to be instigated, and it will be painful. Labour needs a bigger slice of the pie at the expense of Capital.

    Unless these are all enacted we will drift into ‘zombie’ status for decades.
    However I do not believe that the current UK problems are particularly caused by the current government any more than all the governments preceeding them over the last 30 years. Differences between Tory and Labour policy is the ‘noise’ in the bumps along the bottom. We are and have been for a long time poorly served by politicians of every hue . ‘We’ is defined as the 99%.

  • JW

    Frances, but I wonder how many want to dance to yours?

    ”Completely agree with you about the inflation scare crippling us. Randy
    Waldman (Interfluidity) argued recently that inflation targeting is
    effectively a subsidy to savers. Personally I think we should be
    targeting NGDP, not inflation. And I agree with you that savings are as
    much a bubble as debt and need to be allowed to deflate. Though they are
    already doing so, of course, through negative real interest rates.”

    Interesting views; no savings, everyone indebted to the State? At last we have someone on here arguing ‘for’ Brave New World.

  • Anonymous

    You can’t include future liabilities in current debt, because they aren’t due yet. They aren’t in any sense “debt”. And you can’t compare them to current GDP either. You don’t know what GDP will be at the time they fall due. Apples and pears.

    That’s not to say they aren’t a problem, just that you shouldn’t confuse current and future liabilities.

  • Anonymous

    I don’t defend the record of previous governments either. I was only talking about the behaviour of this one. Where are the tax cuts that will enable people to spend? This government has increased taxes for the majority, not cut them, and has further increases planned. Cutting benefits is actually a tax increase rather than a spending cut, remember, if people pay more in tax than they receive in benefits – as most recipients of in-work benefits do.

  • Anonymous

    I’ve moved on a bit since that comment – not so sure about NGDP, mainly because of the constant revisions to GDP. I’m beginning to think that targeting any specific indicator is a bad idea and the MPC should look at the balance of risks overall.

    You’ve demonstrated here that you don’t understand how debt is related to savings. We have excessive private and public debt – you’ve acknowledged that elsewhere on this thread. Therefore we must also have excessive private savings. I’m sorry, but that’s how it works. One person’s debt is another person’s savings. You want savings, someone else must have debt. Therefore to deflate debt, savings must also deflate. We can argue about whose savings should deflate, of course – how about corporations that since 2002 have been saving excess profits instead of distributing them to shareholders and workers? how about the people in the financial sector who have been skimming investments for their own benefit for the last 25 years? And here’s a controversial one – how about the older people who have benefited hugely from massive inflation in house prices? Unfortunately the deflation that is currently happening doesn’t affect any of those. But savings, somewhere, must deflate if debt is to reduce.

  • Anonymous

    1 ) lower interest payments mean more of my tax can be spent on schools, hospitals, roads, defense (and preferable not spent on dubious neocon wars) etc. It means lower taxes.

    2 ) This remains to be seen. But the baby boomer generation had free university tuition and wants more out of the pension system than they contributed. The younger generation is getting priced out of the housing market – they pay tuition fees – they certainly cannot afford to buy houses and have children in their early 20s. I don’t know if this was possible in the early 70s in the UK, but it certainly was in the USA, Canada, Australia and New Zealand.

    On inflation – Andrew Sentance writing in the telegraph claims UK inflation has risen at 3.3% PA. Looking at the BBC’s economy tracker – GDP has fallen by 4.5% between Jan 2009 and now.

    Hence 103.3 ^ 4 = 1.138 cumulative inflation added to a nominal GDP drop of 4.5 suggests a real GDP decline of roughly 18% over 4 years. This should show that even modest stagflation is a nasty cocktail. We are already suffering large economic loss from inflation. This assumes the official statistics report inflation accurately – some people think official statistics under-report inflation.

    The bond investors are “earning” less interest than inflation – they are losing money in real terms. The purchasing power of their principle (money invested) is shrinking faster than their coupon (interest paid). History suggests that future interest rate rises are probable, the timing unpredictable and the action may be sudden. Bond markets can be very cruel.

  • JW

    I am not confusing them. And I didn’t mention ‘current’ debt. And they are most definitely a problem.

  • JW

    Yes and tax is merely retiral of money in circulation. Why do you feel the urge to try to sound ‘superior’ in your posts?

  • JW

    Again a ‘statement as fact’ rather than an opinion. I haven’t ‘demonstrated’ anything. Are you incapable of discussion without trying to demean anyone who doesn’t automatically agree with you?

    I am also sorry, but your very simplistic view of savings being an equal and opposite to debt is flawed. In a very simple ‘closed box’ system that might be true. But a real problem with ‘classical economics’ is its inability to deal with dynamic open-ended systems. Both debt and savings can be held in a myriad of different vehicles across the globe, and that is before hypothecation or securitisation effects are considered. You would struggle to find any tenuous link between savings held by a UK national in say dollars in Luxembourg and a debt in the UK, and that is a very simple example.
    I await to be told how ignorant I am.

  • Anonymous

    The other comments on this thread were about current debt. I pointed out that the usually-quoted debt/GDP figure doesn’t include financial interventions and isn’t marked to market, so arguably should be a lot higher than ONS’s 60% of GDP. I was still only talking about current debt. You then included unfunded liabilities – which aren’t current debt. You added possible future debt to actual current debt and claimed that’s what we “owe”. No we don’t, at the moment, though we may do in the future. So you confused current and future liabilities.

  • JW

    I repeat, I did not say they were ‘current debt’ in accounting terms. Nor did I say we ‘owed’ them. However they most assuredly are liabilities. You are just being silly with words to try to ‘prove’ a point.

    You are perfectly entitled to live in ‘la la land’ with the rest of the emus if you want to, but don’t try to come across as ‘superior’ .

  • Anonymous

    And I repeat, we were talking about current debt, not future liabilities. There is a big difference between money we actually owe NOW – so it must be paid – and money we MIGHT owe in the future if we don’t do something to prevent it. I did not say that future liabilities weren’t a problem, just that you can’t confuse them with current debt.

    Being rude does not advance your argument.

  • Anonymous

    The world as a whole is a “closed box” system. We don’t trade with Mars, yet. I did not say where the excess profits saved by corporations, or the investments skimmed by the financial sector, were held – did I? Of course they are in Luxembourg, or Switzerland, or Cayman, or some other low-tax jurisdiction. But that doesn’t mean they don’t relate to debts in the UK. It just means that attempts to deflate debt in the UK will hit other savers, not those who have squirrelled away their surpluses. You seem to live in a fantasy world where we can reduce debt without also reducing savings somewhere. That is impossible.

  • JW

    I am being somewhat more polite than you.

    I have looked back to the start of this sub-thread with a post from Midge. I don’t believe I have ‘argued’ any particular point.

    However I freely admit to reacting to the assertions made by you, Sean and John. All three of you seemed to have suddenly appeared on this blog to argue a particular Political ( deliberate capitals) line. Your arguments are no more ‘correct’ than those of say Drf who clearly follows an opposing Political view.

    The beauty of Shaun’s blog is that whilst there are clearly large interactions between economics and politics, he and the majority of posters try to comment on the ‘big’ topics without recourse to petty squabbling over political hues.

    And we all try very hard to be polite and definitely not appear ‘superior’ although obviously people will have different levels of knowledge and understanding. Personally I find it objectionable when someone tries to be ‘smart’, its usually a sign of insecurity.

  • Anonymous

    Retiring money in circulation is not exactly a bright idea when economic activity is at a snail’s pace due to deficient demand.

    This thread is read by others, not just by you. And many people don’t realise that when government cuts benefits for people who are paying tax, it is actually increasing their taxes. Those who suggest that government should cut spending rather than increasing taxes should be careful what they ask for.

    You should develop a thicker skin.

  • JW

    Impossible is a very strong statement. Prove it.

  • JW

    Where do I say its a bright idea. Indeed I advocate reducing taxation.

    I see now that you are posting merely to ‘educate’ the poor fools who populate this blog. How very good of you, we all feel so humble.
    I don’t suffer fools gladly!

  • Anonymous

    You have been rude to me from the start, actually – your sarcastic slapdown of my comment about signalling was really quite objectionable, especially as it was my first appearance on this post and the comment was addressed to Shaun, not you.

    I don’t have any particular political agenda. But it seems if I contribute something from my own knowledge that doesn’t square with your beliefs, you feel threatened. It’s not me who is insecure.

    I don’t really care whether you, personally, agree with me or not – but because these comments are read by others, I am going to argue if you say things that are simply wrong, or if you misunderstand something I say. If you take exception to that because you wrongly think I am trying to “appear smart”, frankly that is your problem not mine.

  • Anonymous

    You do advocate cutting government spending. I merely pointed out that what appear to be spending cuts can actually be tax increases.

    I am no fool and neither is anyone else on here. You are oversensitive.

  • JW

    Yes you are quite correct, reading it over it was a overly sarcastic comment. I apologise for that.
    I see/read so many commentaries which boil down to the Politics of power; small G versus big G. Its so irrelevant to the macro issues facing us. In the main this blog steers clear of that ‘trap’. I have probably over-reacted to some clearly Politically inspired comments over the last 48 hours.

  • Anonymous

    Assets=liabilities. If liabilities reduce, so do assets. That’s an accounting identity. It is not possible to reduce debt (liabilities) without also reducing savings (assets) – in the broad sense, of course, not just liquid assets. So, if you want UK debt to decrease but you don’t want UK savings to decrease, savings held elsewhere must decrease instead. Sadly the UK government has little ability to tax savings held elsewhere.

  • JW

    Please see my response above just posted. I apologise for any sarcasm.
    I advocate both tax reduction and expenditure cuts, together with proper bank overhaul, productive investment and significant supply side reforms. Only a combination of all these will help lessen the reduction in living standards for the majority which the western world faces.

  • JW

    I have a problem with equating ‘assets’ and ‘savings’ , I think that is where we differ.

    For instance debt forgiveness would require ‘asset’ write downs from banks and non-banking institutions. But in many many cases because of securitisation and hypothecation these financial ‘assets’ are multiples of ‘real assets’. Balancing this equation would maybe effect the viability of such institutions, but I have difficulty in equating this to real world savings.

  • Patrick, London

    Mark Carney’s salary and housing allowance? :)

    I know Christmas is a stressful time, but this seems like the first time in ages that the comments section responding to a Shaun Richards article has veered into standard internet feedback discourse. We got to the Weimar Republic pretty quick, but pretty much managed to avoid WW2 and references to Hitler.

    Oh bugger.

    Happy Christmas to all. Here’s to a better 2017.

  • Anonymous

    If bankrupting banks were the only consequence of writing down the value of assets in order to write off debt, I would agree with you. But that’s not the case. The ownership of financial assets is very widespread among ordinary people – through their pensions and other forms of saving. Large-scale debt write-off would therefore wipe out the savings of ordinary people. That’s the reason why Steve Keen’s debt jubilee proposal envisages replacing financial assets with central bank money, rather than simply writing them down. The hit for ordinary people would be too great.

    There is a different problem in the housing market. Debt forgiveness without asset revaluation is effectively a massive transfer of money from people who don’t own houses to those who do. It would leave house prices where they are – too expensive for most young people – while removing the mortgage burden from older people who bought when houses were less expensive and are already notionally benefiting from house price inflation. I can’t think of a single reason why this would be a good or fair thing to do, especially as the greatest beneficiaries would be those with the most expensive houses. And it would also be highly inflationary.

  • JW

    I would not envisage debt forgiveness on housing, I agree its totally without logic.
    QE has already monetised about 40% of the non-financial public debt. It will just be left to expire never to go back to the market. In principle it may be worth doing more specifically for the task you describe. However the risk is that it also unleashes high inflation which will have the same effect of transferring wealth from ordinary people to the very rich, just at a slower pace.

    Even if all the ‘improvements’ were put in place that I would like to see its clear that inflation is and will be used to deflate the debt, especially the non-banking financial debt that is being absorbed by public debt. The amounts are so large there does not seem to be an alternative that doesn’t include severe risk of social breakdown.

    But we must be aware this is very sub-optimal for the 99%. It will impoverish over time. Sadly it looks like the future is either a slow lingering reduction, or a rapid highly disfunctional adjustment perhaps as a result of the usual way over history, war.

  • Anonymous

    No, UK GDP in current prices has not fallen 4.5% since January 2009. It has risen.

    The headline data set for GDP is “ABMI”: Chained Volume Measures – seasonally adjusted.

    End of Q4 2008 GDP (unadjusted for inflation): £355,193 m

    End of Q3 2012 GDP (unadjusted for inflation): £360,937 m

    CPI Deflator for the same period: (123.5 – 109.6)/109.6


    Therefore End of Q3 2012 GDP in Dec 2009 prices:£360,937 m / 1.1268 gives £347,443 m

    Or a 9.9% fall over the whole period, in real terms.

    Other measurements of GDP would give a -2.5% fall over that period.

    As well as demonstrating that some entities in the economy have pricing power (I wager – pun intended – not people whose main income stream is wages) it also suggests that it is a moot point which is the greater concern: inflation and GDP.

  • Anonymous

    Thanks for the statistical correction – it’s a warning against lifting numbers from news websites.

    In 2005 – 2006 I was in the UK and suffering large council tax rises and SW train rises well in excess of official inflation – that reduced my discretionary spending (spending after unavoidable bills). Official inflation statistics were much lower than my purchase basket – so I have reason to suspect inflation is under-reported, but not proof.

  • John

    Yes, I agree with you; any of us may be wrong. I am totally fallible.

    The out-turn after several years of George’s stewardship, makes me think his ideas could be wrong. I simply look for something better.

  • Anonymous

    Frances is that 160% including gilts held by the Bank of England? Gilts purchased with newly created currency for which there is no corresponding liability to created.

  • Anonymous

    The issue of big government and little government is separate from the issue of government deficits.

  • Anonymous

    Yes, it includes the APF’s holdings.

    Sean, the newly created currency IS the liability. It sits on the liability side of the central bank’s balance sheet and is balanced by the assets purchased. The only difference between that and a commercial bank’s purchases of gilts is that a commercial bank would also have a funding transaction, whereas the central bank, as currency issuer, creates the means to purchase assets “ex nihilo”.

    APF makes notional profits from marking to market its gilt holdings. However, as the Bank of England is not required to remit these to the Treasury until they are realised, these notional profits can’t be used to reduce the marked-to-market debt/GDP figure.

    In the consolidated whole-government accounts the APF’s holdings are eliminated at book value.

  • Anonymous

    Thinking in terms of economics rather than accounting conventions – which was the spirit in which I wrote the comment – to what extent is “the only difference” between central banks and commercial banks you’ve pointed out there actually quite a big difference? In the days of gold and silver standards a £ was a promise to deliver the bearer a pound of silver. All that the BoE owes today is another £ in exchange for your £.

    And isn’t that makes cash a unique instrument: it is an asset because it grants purchasing power to the holder, but it is not a liability. Central banks can create assets without creating liabilities.

  • Anonymous

    I think it is quite wrong to think of cash as a central bank asset. It’s a government IOU and therefore quite clearly a liability. The fact that it is in no sense “redeemable” as anything but more of itself doesn’t change the fact that it is essentially a liability of the public sector to the private sector (and therefore of course a PRIVATE sector asset).

    Personally I regard cash as being essentially the same as perpetual debt, with an embedded call option since it can be withdrawn by the central bank. However, others regard it as being more like equity – a share in the productive assets of the country.

  • Anonymous

    To be clear what I was trying to say was that cash is an asset of the holder.

    I will have to think more about this. That cash (notes, coins, bank reserves) are only redeemable for themselves as opposed to say gold or silver – may very well not be significant for economic policy, but instinctively I’m not so sure.

  • John Sydenham

    Cuts versus public spending, which is right? The simplest way to answer this question would be to look at the relationship between public spending and GDP in the UK since the war. We have had plenty of booms and busts so increased spending should precede recoveries and decreased spending precede downturns. I have plotted the data at:

    Does public spending stimulate the economy?

    What I found surprised me. Increasing public sector spending seems to
    be bad whenever it exceeds private sector growth. Take a look at the
    graphs in the link above. It happens every time over the past 70 years. If you want to improve the economy, in the UK at least, your simplest action is to cut public spending, or so it appears. Any comments?