We are regaled endlessly with the message that fiscal discipline is vital if we are to maintain a healthy ‘bank’ balance, save for a rainy day or avoid bankruptcy. Of course, that would be true if the State’s finances ran like our own household budgets where our expenditure is limited by our income. However, this may come as a shock to some but in a post gold standard world government spending is not constrained by the taxes we pay.
For an explanation, we must look at how a sovereign, currency issuing government like ours actually operates. As Professor Bill Mitchell points out:
“The fact is that the current government has as much ‘money’ now as it had yesterday and the same amount, it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there have been deficits in the past.“
“Borrowing” doesn’t take any money at all from the pockets of future taxpayers and baby boomers (like myself) have never been asked to pay back a single penny of the public ‘debt’ accumulated by their parents’ generation. Indeed, those fiscal deficits created public assets and infrastructure from which we have all benefited. Those terms debt and borrowing are loaded words which fit very nicely with our understanding of how our personal finances operate in practice in a Wilkins Micawber sort of way. However, in terms of a sovereign state issuing its own currency it bears no relationship to our own household budgets. The funds that pay for bonds or what is called ‘borrowing’ began life in government spending. So, when economic experts and politicians refer to debt clocks claiming that we are sinking under its weight and we cannot afford to burden future generations we need to take a step back and look at it rationally.
If the government is the currency issuer then as Professor Mitchell points out, it is in fact, only ‘borrowing’ its own spending back. So how on earth can we be said to be ‘borrowing’ from the future?
As Paul Segal, a senior lecturer in economics noted, the debt is ‘the money the government owes us, not money that we owe to anyone else. […..] What is called the ‘national debt’ is our own savings, looked at the from other side of the balance sheet”. And how does it get there? We put our savings into banks and pension funds which are then invested by those same banks and pension funds when they buy interest bearing government bonds, which include premium bonds by the way,from which investors and retirees then enjoy a return as income which is either saved or spent into the economy. In short, if you’re worried about the national debt then you should do the decent thing and stop enjoying the proceeds of your investment savings.
Furthermore, and fundamentally, as Bill Mitchell highlights ‘Every generation chooses its own tax rates. That is, the mix of public and private sector involvement in the economy is a political choice’ The key word here is choice. Governments make policy choices related to the particular politico/economic ideology they espouse and for the last forty years and more that choice across the political spectrum has been neoliberal and market driven.
The result has been more about redistribution of wealth upwards than ‘trickle down’ and this has been at the expense of ordinary working people. As the economist, Ellis Winningham recently noted: ‘The rich have been robbing us’.
Oxfam reported in January that runaway inequality has created a world where 62 people own as much as the poorest half of the world’s population.
The idea that government policy should serve public purpose aims as it did during the post war years for the economic well-being of a nation has largely been abandoned in favourof the rise of a deregulated corporate driven state whose hallmark has been excessive greed.
When those on opposition benches take the government of the day to task for rising debt and increasing deficits as if these were signs of poor economic management, the public are quite understandably horrified at government’s apparent wastefulness – how that suits the orthodox agenda! The debt and deficit are, however, largely misunderstood by the public, and politicians either take advantage of that confusion to be better able to justify ideological austerity, cuts and privatisation or simply don’t understand that their own knowledge is flawed.