Deficit Fetish: Just say “No!”


Balancing Budgets: The Austerity Dogma

By John Weeks, previously published here on Piera

Twitter: @johnweeks41

Austerity NO

The Austerity dogma of George Osborne asserts that a negative balance between public revenue and overall public spending (deficit) is a problem requiring immediate policy measures to eliminate it.  He has gone further, asserting that the fiscal balance should be positive (surplus) when the economy is at or near its capacity.  His invariant form of “correction” is expenditure reduction (aka “austerity”).

He and his supporters give three justifications for this dogma.  There is the reductionist argument that compares public sector budgeting to households, so obvious to the austerity-advocates that it requires no explanation  Households must balance their books (“cannot spend more than their incomes”), and the same applies (or should apply) to governments.

Anyone who believes that households must spend no more than current income has never bought a house, sent an offspring to university or found her/himself between jobs (due to redundancy, firing or voluntary employment shift).

Statistics refute the like-households argument. Households across the income distribution spend more than their incomes, early and often.  That is why PwC projects average UK household debt to reach £10,000 at the end of 2016 excluding mortgages.  The very limited truth in the false comparison comes at the bottom of the income distribution, where households have no choice but to engage in desperation borrowing (see study by Johanna Montgomerie).

The more fundamental falsifier of the household-equals-government argument is that the UK government can borrow from itself and a household cannot. The government of a country that has a national currency is not constrained in its spending by revenue flow alone.  However, macroeconomic conditions can impose binding constraints to public spending, which I discuss at a later point.

Superficially more serious is the argument that public sector deficits put upward pressure on market interest rates.  Government bond sales compete with private borrowing, interest rates rise and private debt become more expensive and investment declines (“crowded out”).  Whether this represents an important macroeconomic interaction in general remains subject of empirical debate.

At the moment it is obviously irrelevant because the Bank of England rate is below one percent and money market rates hardly higher.  Indeed, a rise in interest rates could bring benefits, such as higher returns to pension funds.  Were the UK government concerned about “crowding out” it has an obvious way to avoid it, borrowing directly from the Bank of England (“monetizing” the deficit).

Another frequently encountered assertion is that the Chancellor should avoid public sector deficits because they generate inflationary pressures.  There exist concrete circumstances when this would happen, but at the moment the overall rate of inflation in the UK is slightly negative, and the “core inflation rate” is barely over one percent.

Finally, the deficit has been falling (albeit slowly), and for fiscal year 2014/15 was less than £60 billion (below 5% of GDP compared to over 10% in mid-2012).  With inflation at zero, government borrowing falling, and no empirical or theoretical basis for the dangers of deficits, further budget cuts would qualify as gratuitous and ideological.

Balancing Budgets: Anti-Austerity Variations

Among critics of Chancellor Osborne’s policies appear two counter proposals for fiscal policy guidelines, 1) borrow only for investment, and 2) balance the budget “over the economic cycle”.  Close inspection of these suggests that they are variations on the austerity argument rather than refutations.

The first would maintain balance or a surplus for current expenditure, and fund public investment through borrowing by sale of government bonds in the financial market or borrowing from the Bank of England.  In mainstream economics the former has no impact on the supply of money, while the latter increases it by the amount of the borrowing.  The qualifier “in mainstream economics” is necessary because a considerable portion of the economics profession rejects the implicit assumption that the supply of money is independent of the level of output.

We need not wade into the money supply argument to see that the “borrow only to invest” position accepts that deficits are a problem, though limiting the problematic role to the current budget, total revenue flows less non-investment expenditure.  In practice the distinction between current and capital (investment) expenditure is far from black and white.

By usual definition investment includes all expenditures that increase the capacity of the economy, now or in the future.  There should be no argument that much of education and health spending does exactly this, which explains the origin of the term “human capital”.  However, all but the building and equipment component of health and education fall into current expenditure.  This arbitrary definition treats activities of doctors, nurses and teachers analogously to those who repair and maintain capital equipment rather than improve human health and skills.

Finally the borrow-only-to-invest policy encounters a serious problem.  When economic contraction causes public revenue to fall below current expenditure, should a government cuts in public services and social support?  If so, this policy becomes a variant on the Chancellor’s austerity dogma.  And not making cuts implies that the policy cannot be implemented.

The second approach also considers deficits as problems needing correction, over the economic cycle rather than continuously.  The concrete guideline is that the fiscal balance can be negative when the economy falls into recession, then moves into surplus as it recovers.

In practice this policy framework flounders on several empirical and analytical flaws.  First, defining the length of the period over which the sum of deficits and surpluses sum to zero defies consensus.  Without clear definitions of the beginning and end of a cycle this framework cannot be implemented without arbitrary guidelines.

Both approaches offered as a counter to austerity suffer from the same fallacy as the dogma itself.  Any rule requiring a fiscal balance must apply arbitrary assumptions and definitions in order to define when the outcome conforms to the rule.  Supporters of budget cuts have attacked critics of austerity as “deficit deniers”.

The meaning of this accusatory term remains elusive, but it carries the implication that opponents of expenditure cuts “do not care” about the deficit and/or do not consider it a problem.

The counter proposals might be seen as being “semi-denials”.  Those advocating balancing the current budget deny the need for revenue to cover public investment.  The cyclical balancers deny any necessary to correct deficits in the short run.  Arriving at sensible and rational fiscal rules requires abandoning budget balancing as a goal and converting it into an outcome derivative from effectively achieving macroeconomic stability and high levels of employment.

The Role of Taxation

The various versions of deficits-are-a-problem might be epitomised in the cliché, “governments must live within their means”, with disagreement arising as to whether “their means” refers to the current or overall budget and/or the relevant time period.

Aversion to deficits comes from an analytical confusion, the commonsense generalization that the purpose of taxation is to fund public expenditure.  For the government of a country that is part of a currency union (e.g., the euro zone) or a regional or local government the generalization is valid.  These governments do not control the monetary system in which they operate their fiscal policy.  The generalization is not true for a government of a country with a national currency over which it has control either directly or via the central bank.  I call the former shared currency countries (SCC) and the latter national currency countries (NCC).

A SCC government has two methods of funding expenditure, taxation and selling bonds to the private sector (typically to banks and other financial institutions).  The SCC government must pay the debt service, interest and principle, to private bond holders from taxation for the life of the bond.  For SCC governments borrowing is similar to what households and businesses do.  The cliché “living within means” could be applied, meaning precisely that the combination of current outlays and debt service must be consistent with revenue flows.

NCC governments operate within quite different fiscal constraints, possessing an additional funding option and a quite different goal for fiscal policy.  The core purpose of fiscal policy for an SCC government is to provide necessary and discretional public goods, and fund these in a sustainable manner.  The core purposes of fiscal policy for the NCC government are to maintain macroeconomic stability and increase productive capacity for the medium and long term.  The NCC government uses current expenditure to achieve stability and capital expenditure to enhance capacity.  Any expenditure by an NCC government, current or capital, obtains its funding from taxation, bonds sales to the private sector, and/or borrowing directly from the country’s central bank (“monetization”).

The defining characteristic of borrowing from the central bank is that in practice the debt need never be repaid;  for example, the Treasury could sell the Bank of England 100 year bonds (though in practice the maturity period is much shorter), or “roll over” the bonds (issue new ones to replace those that reach their redemption date).  The Bank of England holds about 25% of UK public debt.

The short run goal of macroeconomic stability determines the mix of these three funding alternatives.  If the economy falls into recession with deflationary price pressures the NCC government increases expenditure to compensate for the fall in private demand, covering the increased outlays through monetization.  As the economy approaches full capacity with inflationary pressures, monetization ends.  Rising tax revenue from the expanding economy replaces bond sales.

Whether the public budget is in balance should be of no concern for the NCC government.  If economic activity is declining or stagnant, public borrowing should increase.  Whether this results in a deficit on current expenditure is little importance, for the policy purpose is recovery not hitting a fiscal target.  An overheating economy calls for increased taxation, perhaps generating an overall surplus.

Balancing Policy rather than Budgets

For the British government, and all other NCC governments, expenditures and taxation have different policy functions and motivations.  Current expenditure delivers public goods and services to the population, and regulates the short term stability of the aggregate economy.  Simultaneously achieving those two goals represents the main challenge of a rational fiscal policy.

The capital budget, public investment, enhances capacity and only in extreme circumstances such as the threat of high inflation would be adjusted for short term policy goals.  How our government funds any part of public expenditure is derivative from the overall goals of short term stability and long term capacity enhancement.

The rational approach to fiscal decisions is to balance policy not budgets.  The fiscal balance in itself is neither a target nor an indicator of successful policy.  Whether the fiscal balance is positive, zero or negative reflects the outcome of this rational approach.  This is not deficit denial.  It is rejection of deficit fetish.

Why everything is now different – the Sneerage Coefficient is off the scale.


Why everything is now different – the Sneerage Coefficient is off the scale.

By life-long Labour Party supporter,

Jim Moores

I have been a Labour Party member for 35 years. I almost left when Blair took us to war with Iraq on a lie.

I have never been to the Party conference and in recent years saw no reason to do so given that no front bench Labour MPS were offering anything different and the whole conference seemed to be a bland, stage managed affair – not quite as bad as the Tories’ marketing exercise which is their excuse for membership engagement.

I have pounded the streets for decades (on and off) and got absolutely sick of trying to convince decent working class people that what Labour offered was different to the Tories while at that very moment our Parliamentary “leaders” were cozying up to corporations and milking their power for all it was worth. Blair and Mandelson have made themselves a nice, comfortable, even rich existence out of “serving” the people. And both Blair and Mandelson have sneered at the pathetic Labour membership and have even suggested we get new hearts.

But this time I thought, “it feels different”, even before Corbyn won the leadership contest. So I booked my place, not as a constituency delegate but as an ordinary member. I wanted to be there to see history made – and history was made. Indeed everyone there felt it, speakers and delegates alike. From all sides the sneerage coefficient could be discerned, by all of us. Inside the conference the mood was fantastically upbeat; outside, in the mainstream media, we were all at war with each other.

How do I know that it is different this time? Because of the Tories and the stream of bile they have been pouring out. Despite all of the attacks against him, Jeremy Corbyn – and John McDonnell and other supporters – has stayed calm, respectful and has answered every charge thrown at him with dignity.

THAT is the difference, the dignity, and everyone I speak to tells me “he’s a decent man” or “I have never been interested in politics but Corbyn has convinced me”. Whenever a Mail journalist sneers about “scruffiness” dignity comes straight back them; or when we get a sneaky sneer from our “supporter” Polly Toynbee, of the Guardian, she is answered with dignity.

Just the simple change to Prime Minister’s Questions sums it all up. The Tories sneered, as did all of their press lickspittles – and that includes the BBC who have disappointed me more than anyone during this last year or so. And the Tories (and in particular David Cameron) were completely disarmed. They had to answer the questions or admit that they did not care a jot about “the public”. But Jeremy Corbyn read out those questions from members of the public. More than 40,000 such questions were submitted – 5 of them were picked which covered the main themes raised.

And as to my fundamental assertion that everything is now different. The eureka moment came at a fringe event hosted by, of all people, Tim Montgomerie (@montie) of the Times and the, splendidly named, Legatum Institute – and most importantly Chief Sneerer on Twitter. He was “interviewing” Nick Cohen of the Observer (@NickCohen4). It was a fantastic sneerathon and all but me and two other people in the room were on the right of the Party. They had obviously come to hear their heroes. However the Eureka moment was when Tim asked us all to put our hands up if we thought Jeremy Corbyn and Labour would win in 2020. I of course put up my hand and there were peals of raucous laughter – or crowd sneerage – from all those present (except my likeminded, two colleagues). But it was not the laughter of happiness; it was that nervous laughter that is heard when the laughers are not quite sure how to react.

Just before then Tim had asked, sneeringly, if there were any “raging Corbynistas” in the room and I had proudly waved my hand. I advised however that I was a Corbynite not Corbynista. Tim and Nick sniggered and asked why the distinction. I explained that the term “Corbynista” had been hijacked by the right  and used in a derogatory way to infer South American revolutionary. Not that I object to the comparison but it plays well to the Tory-floater types – whatever they may be. Yet more laughter but Nick did explain that in times past a Trotskyite would be affronted if referred to as Trotskyist.

So Corbyn, McDonnell and the new Labour front bench have been announcing radical changes like a complete review of the Treasury’s role; a panel of economics advisers comprised of Thomas Piketty, Joseph Stiglitz, David (Danny) Blanchflower, Mariana Mazzucato, Anastasia Nesvetailova, Ann Pettifor and Simon Wren-Lewis; a massive social house building programme; scrapping tuition fees; a people’s bank; major infrastructure projects; a proper living wage; reversing the NHS privatisation; and much, much more.

And what have the press done – raised the sneering level to a crescendo and talked endlessly about Corbyn’s unelectability. The day after his marvellous speech the Times, Telegraph, Express and Mail had no mention of it on their front pages. A silent sneer.

We have even had international sneerage from Sir/Lord Sugar who has recently advised that we should all emigrate to that bastion of democracy, China. This from the man who said in 2008 : ‘Next Christmas the iPod will be kaput’.

Final confirmation came when the Telegraph conducted its own sneer poll and its loyal readers got all confused and came out almost unanimously in support of Jeremy on the Nuclear issue :

1_JC_NuclearNo copy

And perhaps better still when Sky asked if Corbyn could be next PM they sneered :

2_47percentCorbynPM copy

Until someone pointed out, in their own organisation :

3_53percentCorbynPM copy

The world has changed – just ask Bernie Sanders.


Jim Moores can be contacted at:



A tax that could raise billions without upsetting UK voters


Proposal: 5% annual property tax levied on all property owned by those not registered to pay tax in the UK. 

By Henry Stewart :  @happyhenry

The best taxes are those targeted at behaviours we want to deter. Apart from a small number of property companies, the purchase of UK property by overseas investors brings no benefit to any British voter. Indeed it reduces the number of homes available for people in this country and increases the prices.

I work in Aldgate in central London, where a succession of residential towers are being erected. For One Aldgate, the first to go on the market, I was told by a local estate agent that 40% of the flats were sold in one weekend in Hong Kong. Many of these flats will be left empty and only used occasionally, if at all, by the owners.

A report from Savills in 2013 ( suggested that 70% of all newly built property in London is bought by overseas investors, with Hong Kong and China purchasers being responsible for 27%. Ironically one of the reasons for the London investment is “increasing restrictions on property speculation and multiple ownerships in many key [Chinese] cities”. There are currently no restrictions on property speculation in London.

There is an acute shortage of property in London and competition from overseas investors helps to ensure prices continue to rise. A targeted property tax, affecting only those not registered to pay tax here in the UK and thus not making any contribution, would either raise substantial revenue for the government or deter such investors altogether, thus reducing demand for property and hopefully reducing prices. Foreign-born individuals who are resident in the UK and pay taxes here would not be affected by the proposal.

There have been some moves even by the current government. In 2013 a special stamp duty rate of 15% was levied on property bought for over £2 million by a company. This April Capital Gains Tax (at 18% or 28%) was extended, for the first time, to non-UK residents that sold UK property at a profit. A Barclays report suggested this might lead to overseas investors selling in advance of the April deadline, but this does not seem to have happened. (

The exact level of the tax could be debated. If the main aim were to raise revenue then a rate of 1% or 2% might be best. However if the aim is to deter overseas investment in UK property, then a 5% rate (maybe introduced gradually, starting at 1%) would be preferable. If we agree that we want more UK property to be available to those who choose to live in the UK and pay taxes here, and that we want less demand increasing prices to unaffordable levels, then this new tax is surely common sense.

Contact Details Henry Stewart can be contacted on,

or on Twitter: @happyhenry

References and Further Reading:

Midwives Standing Together – When We Have Had #ENOUGH


There are many good people  in working reponsible roles in society. They are not earning a fortune; they are doing jobs because they care, careers they are proud of – because they want to make a difference.

But caring is not enough. Everyone derserves a life, a family, a home. The government’s treatment of our skilled health professionals, on whom we depend for our lives is appalling.  Staff are working long shifts with no mealtimes, with wages frozen and no prospects of improving conditions. Remember this is in  one of the richest countries in the world, one where where bankers have bonuses, where  global corporations hold democracy to ransom, and where they seek to silence dissent. We should be ashamed. Now it is time to say, “Enough”!

This plea from Hayley, a midwife,  is calling time on this government’s treatment of our workers, on the erosion of our public services. We will take no more.

A Midwife’s Call for An End  to Abuse of Good Will

By Hayley Huntoon

Twitter: @hayleyhuntoon

Yesterday a man came to me livid with frustration ‘this is not good enough’. He told me ‘my daughter has been waiting hours to be seen’ . He went on to tell me, ‘it isn’t you. It isn’t the other midwives – the care has been impeccable but the situation just isn’t good enough.’

I know. I agree. I have shed too many tears over a career I could not love more because there is nothing I can do. What he didn’t know was that heartbreakingly this is a daily occurrence in my life as a midwife. What he didn’t know was that actually yesterday was a rare Saturday off for me yet I had come into work so that my amazing colleagues could have a break from their 13 hour shift. A break they won’t be paid for whether they take it or not, but that they physically need as human beings. I had come into the unit so that women like his daughter could be seen. So that our unit could be open to women who needed our skills as midwives, doctors, health care professionals. Women who were in labour. Women who’s babies weren’t moving much. Women who were concerned about their own wellbeing.

5 maternity units in the north-west have been closed over the weekend. These women need our care. We are literally being worked to the ground. I am watching amazing midwives leave a profession they love because the workload and stress is too high.

Today is a rare Sunday off for me. But I will be spending it supporting our rights as workers. The NHS is run on good will. But there is only so much we can take. We joke at work that midwives don’t need to eat. To rehydrate. To empty our bladders. To sleep. Let us look after ourselves so that we can look after our women. Our future generation of children.

Earlier this year, our country voted for a government that said no to more midwives. The Conservative party have demonstrated five years of austerity, falling living standards, pay freezes and huge cuts to public services. They have threatened to make cuts to our night shift and weekend enhancements. Over the past 4 years I have missed Christmas days. New Years days. Family’s birthdays. Countless nights out. I had a good education and did very well at school. I am 22. I have held the hands of women through the most emotional times of their lives. I have dressed Angels we have had to say goodbye too. I have supported women to make decisions that empower them. I have been scared myself. Tired, stressed, emotional every day. Yet I am not and will not be paid well like my friends who have chosen business careers. I am not offered pay rises for my efforts or successes. I don’t care because I get something more valuable than that from what I do. I love what I do. I’m passionate about what I do that’s why I do it. But I do care that we are the ones who are being threatened with further cuts. Further strain.


So today I stand with doctors, midwives, nurses, teachers, firemen and many other amazing people to spread awareness of a situation that has gone too far. To share information that the general public are oblivious to because as midwives, we will not let these women be failed. I am regularly met by stunned responses from women and their partners to the situation they watch me working under. But Hayleytoday I say no. Enough is enough.

I have shed too many tears over a career I love. Missed too many meal breaks. Not physically been able to care for too many women the way I wanted to. Spent too many days off in work. Lost too much sleep over the stress I am under. Watched more of my colleagues than I could count (myself included) be signed off work with stress in the early years of their career. Watched too many good midwives leave careers they love. This is not humane.

Please let’s end this. Protect your NHS. Your children’s future. Your education system. The core foundations of Great Britain.

I have recently learned the world is a selfish place. But I have also learned that there are a lot of very good people in it. The NHS is run on good will and because of this we have been pushed too far. Let’s change this.

Further Reading: