A response to Chris Evans MP by Prue Plumridge
Just before the vote on the Fiscal Charter Chris Evans MP (who abstained) said:
“Labour should be proud that when we were last in government we ran a budget surplus for four years and achieved some of the lowest deficits both in UK history and in comparison to other economically developed nations.
There is nothing progressive about budget deficits. Every pound we spend on debt interest is one less we can spend on the NHS, on vital public services, on helping the poor and vulnerable.
Fiscal discipline allowed us to commit record funds to education and healthcare without damaging the public finances. This was the foundation of the trust people used to place in the Labour Party. We were seen as safe custodians of economy, delivering on the issues people care about.”
It seems from this, that Chris Evans is in urgent need of an economics lesson for dummies.* His statement shows dire ignorance of how the State finances and money system works.
He claims that there is nothing progressive about budget deficits and lauds the fact that Labour ran a budget surplus for four years whilst achieving some of the lowest deficits in UK history.
So is this something we can be proud of and does it fit with any sort of reality?
I would suggest that politicians should actually take some time out to learn about how our economy really works before they make such assertions.
Firstly a short lesson in deficits and surpluses. Government deficits sound bad, don’t they, when we are told that they are like of our own household accounts? Going into the red is something we avoid if possible – the consequences of doing so as a private individual or company could be ruinous. However we have been conned by the language used to describe our economy which equates it to a household budget and suggests that going into debt risks bankruptcy. Nothing could be further from the truth. A sovereign country issuing its own currency cannot go bankrupt unless we live in the Eurozone, a country like Greece, which does not control its own currency issue.
Equally, if a government aims to reduce the deficit it will take money out of the economy in the same way as going into ‘surplus’ does. It’s back to front to our understanding in terms of our own personal income/expenditure/savings.
Firstly, taxation is not income or revenue as we are told since a government which issues its own currency is not constrained by its tax take assuming it has idle resources available. A ‘budget deficit’ represents the money spent into the economy and is the way a government can add aggregate demand and influence output and employment levels. Whilst there is unused productive capacity the actual ‘budget deficit’ is of no relevance. The only legitimate goal that any government should pursue is the real goals of employment and output. In fact budget deficits are simply the mirror image of non-government savings. Government spending represents all those things we take for granted which make our country a better place to live and work.
As Professor Bill Mitchell puts it ‘The government deficit rose and generated higher levels of wealth for households and firms.’
The word ‘surplus’ is equally misleading as it implies savings. A ‘budget surplus’ does not represent national savings at all. Households save to increase their capacity to spend in the future. But a government cannot save in its own currency. It does not apply to the issuer of the currency who can spend at any time it chooses.
It seems that like many politicians, Chris Evans simply has no idea of how the macro economy actually works. They, like many of us, have been taken in by decades of neoliberal economic thought which declares categorically that deficits are bad and balanced budgets and surpluses are good. In truth they are neither good nor bad and are dependent on economic circumstances – the state of the economy, the trade account and the level of private debt.
The budget surplus of which Chris Evans is so proud was made possible by sky rocketing household debt.
As Steven Hail puts it:
‘the ignorance of this politician on the fact that government surpluses mean non-government deficits, and that countries without trade surpluses cannot run budget surpluses for long without a private debt explosion and growing financial fragility is beyond worrying. It is pure ignorance’.
Boom and bust had been abolished so said Gordon Brown as he put his faith in financial deregulation to facilitate an economic miracle which, in reality, actually encouraged household debt and asset bubbles. It gave all the appearance of a growing economy when in fact it was built on sand. Financial speculation replaced the solid foundations of a real economy which should be concerned with investing in the well-being of a country’s citizens and the protection of our natural environment.
So let’s get it right Mr Evans and all those who abstained from the Fiscal Charter vote it’s nothing to be proud of at all.
John McDonnell’s decision, if a little late, was the right one to make and let’s hope that the real story of how our economy actually works will start to see the light of day sooner rather than later.
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Great stuff, Prue!
Reblogged this on markcatlin3695's Blog.
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Well, if I can say I really have learned more than I knew before reading this, then some well-paid comrade MPs can learn something too. Thank you!
Good article , Prue. I might just add that the UK economy loses ££ to the value of some 5% of GDP annually to pay the net import bill. So, at the very least, the Govt needs to replenish, by deficit spending, those ££ which it gets back via the sale of gilts to overseas buyers to prevent the economy running out of money and into recession. I don’t hear that argument from politicians but It’s simple enough for even them to understand!
It’s also an essential counter argument to those who’ll argue that Holland, Sweden, Switzerland, or Germany and others have very small budget deficits or even budget surpluses. Yes of course that’s possible for any country which wants to run very large trade surpluses. But, there are sound arguments against doing that. For one thing, not everyone can run a trade surplus. The world economy needs the net importers like the USA and UK to take those exports.
Thanks Peter. As usual all interesting stuff to add to my knowledge
” I might just add that the UK economy loses ££ to the value of some 5% of GDP annually to pay the net import bill.”
It doesn’t. Any more than it loses ££s to the domestic net saving ‘bill’. It’s all just people saving.
Offering safe and secure financial savings to the rest of the world – because we have an ancient solid legal jurisdiction, relatively low corruption and a working democracy (just) – is one of the UK’s USPs.
Denigrating it doesn’t help.
There is no difference between a foreign financial saver and a domestic financial saver operationally.
There is a political argument that foreign financial savers should not be rewarded for saving, and that only individual domestic financial savers should be rewarded – and then only if they are saving for a pension.
That leads you to the conclusion that you should beef up National Savings and scrap Gilts.
Thanks for your comments. However, I wouldn’t have thought we were on different pages on this one even though our explanations are a little different.
As I see it, if we imagine everything that is for sale in the UK economy to be in a giant department store (as in Warren Mosler’s 7 deadly innocent frauds) then everyone who has earned any money making that stuff, including all profits, wages, capital gains etc has to spend it. If they save some of it, and so don’t spend it, then the stuff won’t clear. That’s where govt comes in with a requirement to deficit spend those savings to take up the slack.
The Chinese economy is like a giant dept store too. Chinese buyers are free to shop in the UK store and UK buyers are free to shop in the Chinese store. If both are equal there’s no problem. But, if UK buyers buy more in the Chinese store than vice versa the net spent ££ end up being saved in the Peoples’ Bank of China. So I’m agreeing that is saved money as you suggest. The way I put it was that this saved money is lost to the UK economy. Well isn’t it? It is if it isn’t spent. Maybe the “loss” is just temporary and the Chinese might decide to spend it in the next year or two by running a trade deficit with the UK themselves. It’s possible but unlikely IMO.
So, am I “denigrating” the Chinese for running a trade surplus? I didn’t say that. But we do have to remember that the only reason the Chinese need to park their surplus pounds with us, via the sale of gilts which are also denominated in pounds, is because of that trade surplus which is a deliberate policy choice of the Chinese govt. I would disagree that its anything to do with lower levels of corruption in the UK than China. The last time I checked the Chinese had a trade surplus of 2.5% which is quite modest by comparison with other big exporters and I’m perfectly OK with that.
If there is any denigrating, on my part, of the big exporters, I’d have to reserve that for Germany (a 7.5% GDP surplus) and Holland (11% of GDP surplus) and the impact that has on their trading partners in the EZ. Those surpluses, which aren’t recycled, suck euros out of the economies of their trading partners, causing them to run into debt in a desperate attempt to keep their economies functioning. They then have the gall to lecture them on their supposed profligacy and on the perils of deficit spending! So ‘denigration’ is too mild a word. It’s bloody disgusting IMO!