The riddle of the deficit (or deficits for Dummies)

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Riddle: When is a ‘deficit’ not actually a deficit?

Answer: When it’s a Government budget deficit.

 

 Dear [insert name of virtually any Journalist or Politician]

It seems that you’re still having a bit if a struggle to understand what a budget deficit is, and what it does.

Let me try and explain.

Imagine that I’m the ‘Government’ and you are the ‘Private Sector’.  I give you a bar of chocolate.  Now, I (the ‘Government’) am in deficit to the tune of one bar of chocolate… but you (the ‘Private Sector’) are in surplus to the sum of one bar of chocolate.

Are you with me so far?  The government sector and the private sector or non-governmental sector, are opposite sides of the same coin.  A deficit for the government means a gain in the private sector and vice versa.  (The private sector means everything in the domestic economy, which is not government – I’m leaving out exports/imports to keep it simple).

One way or another, Government spending all goes into the private sector … payments for the NHS, Education, the military, unemployment benefits, working tax credits, child benefit, the Police, the judiciary, pensions, motorways, new infrastructure, grant to local governments and much more, are each paid for out of government spending.

OK?   So government doesn’t just spend, it also taxes.

So I’ll be the ‘Government’ again, and I’ll give you (the ‘Private Sector’) a bar of chocolate and then take back half of it, as a tax.   Now both the ‘Government’ and the ‘Private sector’ have half a bar of chocolate each but the government has a budget deficit of half a bar of chocolate whilst the private sector is increased by half a bar of chocolate.

With that extra half a bar of chocolate you have a lot of options.  For example, you could eat it (i.e. consume goods and keep someone in a job replacing them); give it to someone to mend your bike (i.e. create employment); put it in the cupboard for another day (i.e. save) or repay your friend the chocolate you owe him (i.e. pay off debts).

The way to work out if the government has a budget deficit, a balanced budget or a surplus is simply to subtract the total amount collected in tax from the total amount that government spends.   At the moment, the UK has a budget deficit, which means that the amount spent is greater than the amount of tax collected.

However, George Osborne says this is absolutely ‘frightful’ and that under his new policies, the UK will be in surplus by 2020 (!)

So what does a surplus mean for those of us in the private or non-governmental sector?

Well, if I pretend to be the ‘Government’ again, and I give you (the ‘Private Sector’) a bar of chocolate and then take it all back again … the budget will be balanced. Government spent a bar of chocolate and collected a bar back again… but you in the private sector have nothing more than you had before the ‘Government’ started spending!   (How great does a balanced budget sound now?)

To be in surplus, I as the ‘Government’ would give you a bar of chocolate and then demand a bar and a half of chocolate back from you (the ‘private sector’).  Now you have the problem of how you are going to get me that additional half a bar of chocolate?  Maybe you have some saved bars of chocolate which you can use for a year or two but eventually you may have to go into debt or even sell your house to give me, the Government, that extra half bar of chocolate!

As J.D. Alt writes in his excellent US post:

 If [government] runs a “budget surplus” for long, the Private Sector will either have to diminish its economic activity in general (go into recession)—or plunge hopelessly into debt (borrowing bank money it can’t repay, possibly causing a banking crisis)—or both.

 

Instead of creating jobs by spending, paying off debts or saving, a surplus budget eventually leads to redundancies, greater household indebtedness and greater precariousness of the workforce.

Obvious questions are raised by this simple story, like where did I (the ‘Government’) get the money to buy the chocolate in the first place?   Answer: I created it – that’s what Governments do if they’re the sovereign issuer of its own currency!   This is an incontrovertible fact – only the UK government can create Pounds Sterling – anyone else is committing the criminal act of counterfeiting.

If sovereign governments can create as much money as they want, why does the UK government need to collect tax to fund public spending?   Answer: It doesn’t – there are many essential reasons* for the government to collect tax but taxes do not pay for anything.

Think about it, if government kept on spending into the private sector without having a means of also draining the economy, we would have rampant inflation. (Literally, if it was all in bars of chocolate!)  So tax is one of the means of keeping the amount government spends into the private sector equivalent to the number of goods and services available for people to buy… thus preventing price inflation.

That is probably enough for now. I would recommend this and this for more information but please don’t hesitate to contact me if you need further explanation as to how the economy really operates.

Kind regards

Yours sincerely

Syzygysue

* Tax is important for lots of reasons including giving value to the currency but it does not fund government spending.

PS.  We’re constantly told that the deficit means that future generations will have to pay off our debts. This is simply rubbish.  Which would your children really benefit** from?   Half a chocolate bar (deficit budget), no chocolate bar (a balanced budget) or increased household debt and a potential recession (a surplus budget)?  It would be no contest in my family!

(** Obviously, caveats re: inflation apply)

 

DIAGRAMS & DOLLARS: modern money illustrated (Part 1) 

DIAGRAMS & DOLLARS: modern money illustrated (Part 2)

 

The Motives behind Corbynomics – Tax Research UK

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The Motives behind Corbynomics

As seen by Economist Richard J Murphy, of Tax Research UK,

Previously published here

I had this article in the Islington Tribune (Jeremy Corbyn’s local paper) whilst taking a couple of days off:

RATHER like Jeremy Corbyn the economics that has in the last week or so, been dubbed Corbynomics is not new.

What’s new is that for the first time in years a politician who is willing to speak out for policies that might really change the wellbeing of most people in this country has hit centre-stage.

There are three key ideas at the heart of Corbynomics.

• The first is that austerity is not necessary. 

This sounds really radical when, for example, at the last election all three major parties competed to argue who could cut the deficit the most.

In fact though very large numbers of economists, including Nobel laureates Paul Krugman and Joe Stiglitz, have pointed out how bizarre this is.

There is, they say, no chance of a recovery if we deliberately reduce our government spending by enforcing government cuts.

And as they add, balancing the budget is not necessary, especially when right now government borrowing is so cheap that it would be crazy not to invest in our future.

Corbynomics in that case is what makes sense, revealing austerity as just bad politics.

• The second theme is that reducing inequality increases wellbeing for everyone, including the best off. 

Again, this is not radical.

The International Monetary Fund agrees with this claim, which is based on the logic that if you want to grow an economy fast the people who need money most are those who spend their incomes.

That’s the least well off, because the best off save, by definition. So redistribution pays when you’re recovering from a recession.

• The third theme is that it’s just not true that markets do everything well and the state does everything badly: the reality is that great people can do great work in either sector and the job is to pick the right organisation for the job that needs doing.

So how does this pan out? In four ways.

• The first is in ensuring that the money to pay for essential government services is available.

This would be done by increasing some taxes on those best off, and for large companies.

It would also come from investing heavily in HM Revenue & Customs to crack down on tax dodgers.

• Second, it would come from investing new government money to kick-start the economy by building schools, hospitals, transport systems and in creating sustainable energy systems.

This is called People’s Quantitative Easing because it’s a variation on the £375billion programme used from 2009 to 2012 to keep the financial system afloat, but this time the money is used to benefit ordinary people. Funding investment activity in this way makes it much easier to balance the government’s books in the long term.

• Third, where it is essential that to get best public service that the state co-ordinate an activity Jeremy Corbyn is not afraid to say so.

Rail services are the obvious example.

• And last, Jeremy Corbyn is committed to beating inequality, whether from unemployment, low pay, disability, or discrimination or from lack of access to education, housing and other needs people have.

What he’s quite willing to say is that if this requires a bigger state sector than we have at present, so be it.

He is saying that may be vital to all our wellbeing and we can afford it.

The UK is, after all, the sixth richest country on Earth.

What is more, the well off would really benefit: there would be growth for them too, while the risk of inflation is virtually non-existent until such time as people in the UK are as well paid and productive as the French, who beat us by 20 per cent right now.

It’s different so it seems radical. But I will give the last word to the Financial Times. Last week they said Corbynomics “could actually be a decent idea”.

As one of its authors, I can live with that.

Reproduced under a Creative Commons Attribution-Non Commercial 3.0 Unported License. –

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