EVERYTHING YOU EVER WANTED TO KNOW ABOUT HOW OUR MONEY SYSTEM WORKS BUT WERE AFRAID TO ASK

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EVERYTHING YOU EVER WANTED TO KNOW ABOUT HOW OUR MONEY SYSTEM WORKS BUT WERE AFRAID TO ASK

by Prue Plumridge

At a time of great political and economic uncertainty you may be scratching your head and asking what on earth has this article to do with you as you’ve enough trouble just keeping your job and your finances in order let alone worrying about getting the government deficit down and paying the national debt back! What a temptation it is to shake our heads and defer to the experts who, we believe, must know better. The subject of economics might seem a little tricky but the basic concepts are simpler to understand than you might think at first glance and, rather than being a dull and arcane subject, it has everything to do with your life and your well-being.

So let’s start with a short economics quiz. No cheating now just answer the following questions with a yes or no without peaking further down for the solutions.

  • The state money system operates like our own household budgets
  • Government spending relies on taxation and borrowing
  • The government needs to reduce the deficit, balance the books and save for the future
  • The government must learn to live within its means
  • The government has to cut public services like the NHS, education or welfare because we can no longer afford to pay for them

If you answered YES to all of those questions you might be surprised to learn that you have fallen into the mainstream trap. This is what mainstream economists and politicians want YOU to believe. But what if everything you ever thought you knew about how the money system works wasn’t actually true but was being used to justify an ideology which includes austerity and cutting the public services we all rely on?

Well that’s exactly the case! YOU have been deceived.

WHAT YOU NEED TO KNOW:

  • The UK government issues the currency out of thin air via keystrokes on a computer – yes really! Banks create money out of thin air too when a customer takes out a loan but that debt must be repaid with interest.

 

 

  • The UK government is not like a household or a business where its finances are concerned
  • When the UK government spends it creates money by crediting the reserves of commercial banks held at the central bank – the Bank of England. A monetarily sovereign government like the UK can never run out of money and can always meet its liabilities as long as they are designated in the local currency, in this case our British pounds
  • The government as the currency issuer spends money into existence and doesn’t need to tax or borrow on the markets to fund its expenditure. Think about it:
    • What sense would it make for the government to borrow money it had issued in the first place?
    • How can the government spend tax before it has received it? Your tax obligations can only be paid once the government has issued the money and it is deducted at source by the taxman from your salary. (And just to shock you a little bit more do you know what happens to your tax? It gets extinguished from existence.

So, tax is not funding government expenditure. We have just been conditioned to believe it does.

  • Tax does, however, have a number of specific functions which include:
    • Ensuring that the economy does not exceed its productive capacity and lead to inflation – taxing more if the economy starts to overheat and taxing less if it is slowing down.
    • Enabling wealth to be distributed more equitably. So, yes, the rich SHOULD pay the tax they owe but not because it is funding healthcare, education or public services. It does not.
  • If our expenditure exceeds our income we will be in debt and it may cause us financial concern. However, a government deficit is far from being the bogeyman it is presented as by experts and politicians. (Just to be clear a government deficit is difference between tax received and the amount government spends and the national debt is the accumulation of those deficits). Deficits are, in fact, normal and necessary. They represent YOUR income. The politicians won’t tell you this (perhaps they don’t know) but in historical terms governments have run fiscal deficits for most of the time and have hardly ever run balanced budgets. Indeed, when it has happened they have occurred just before economic downturns. Think about that. What conclusions might you draw?
  • Budget surpluses are not the equivalent of saving to fund future government expenditure no matter what the politicians tell you. As the currency user you can save for that holiday you’ve always wanted but this does not apply to a sovereign government which is the currency issuer, cannot run out of money and can spend when it chooses. When a government chooses to pursue a public surplus what it actually means is removing wealth from the non-government sector -in other words you and me, the currency users. When that happens poverty and private debt increases instead. And that is exactly what has happened.
  • When you borrow money from the bank you have to repay the debt with interest. If you don’t the debt collector will be round pretty sharpish. This does not apply to a monetary sovereign government which cannot go bankrupt so the debt collectors won’t be knocking on the door of the treasury ready to haul off its assets any time soon.
  • Government funds public services like the NHS through creating money not by borrowing or taxing to pay for it.

But won’t ‘printing’ money create inflation I hear you gasp. After all you’ve heard about all about hyperinflation in Germany and Zimbabwe and politicians keep telling us all about the evils of ‘printing’ money and hyperinflation. As with everything there are caveats – nobody is suggesting for a moment that a government could carry on spending ad infinitum. Money may be infinite but resources are not.

The UK government may not be constrained financially but it is limited by availability of real resources – people, skills, technology, equipment, infrastructure, natural resources and ecological constraints. It is NEVER constrained by money.

We often hear journalists and politicians talk about a government’s financial credibility suggesting that an increase in the debt or deficit is an indicator that a government cannot be trusted to manage the economy effectively. However, this is the wrong measure of effectiveness. We should judge a government on the economic choices it made and whether it advanced public purpose. Did it create the necessary infrastructure to sustain a healthy economy? Did it invest in the health of the nation, in education, transport, food and farming security, renewable energy infrastructure or research and development? Did it ensure that citizens were protected in the event of illness, unemployment and disability or provide good pensions? Did it pursue full employment policies? Did it spend enough during economic downturns and offer a job guarantee for all those who wanted to work? And lastly did it use the available resources in the most effective way possible for the benefit of all?

If the answer to any of these questions is no then a government has failed to deliver in its primary purpose as a servant of the people. “The Government is us”.

Remember, a good government is one which:

  • deficit spends enough in relation to the prevailing economic conditions.
  • makes choices aimed at ensuring the well-being of the many and not just the few using the available resources as effectively and equitably as possible.

So, when people ask you as they invariably will ‘‘can we afford it’ the answer is yes.  The government creates the money and when it spends it benefits the private, non-government sector. In economic parlance, a government deficit equals a private sector surplus.

In short, spending equals income to someone – you, me, public service employees, pensioners, sick and disabled people receiving benefits all of whom will spend that money in the local or national economy not to mention businesses who will invest if they are confident in the government’s handling of the economy.

While we focus on the question of whether we can afford it in money terms we are ignoring the more important question of what the consequences are for the health and economic well-being of the nation if governments don’t spend adequately.  Austerity and cuts to public services have been presented as a financial necessity (however erroneous that argument is) and yet at the same time this government has had no problem at all with magicking up money from thin air to purchase weapons, fight wars, repair the Royal Estate, hand out tax breaks to the already wealthy or give public money to private corporations to run public services. It turns out the government is a real handy cash cow for the corporate sector.

Economic well-being depends not on money but governments making good choices which benefit us all and, given the record of the Conservatives over the last seven years, this is the question that should be on our lips not can we afford it.

 

Credits to:

https://era-blog.com/2016/12/05/paying-for-public-services-in-a-monetary-sovereign-state/

https://www.thepileus.com/economics/jeremy-corbyn-does-not-need-to-borrow-to-pay-for-his-policies/

https://www.thepileus.com/economics/labours-economic-alternative-to-neoliberalism/

http://bilbo.economicoutlook.net/blog/?p=25961

https://www.theguardian.com/commentisfree/video/2015/feb/04/another-economic-crash-is-coming-how-did-this-happen-video

https://www.theguardian.com/money/2017/apr/08/consumer-debt-loans-credit-cards-bank-of-england

 

 

 

 

 

 

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)

 

Austerity is a Political Choice not Economic Necessity

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By Prue Plumridge

Last week Matthew Lyn (a columnist for Bloomberg) wrote in an article published in Money Week that, “the policies on offer under Corbynomics would quickly ruin the economy”. This was followed shortly afterwards with another written by no less than a Labour councillor and published on Labour List which assured us that Cutting the deficit, healthy public finances, running a budget surplus, fiscal responsibility, and prudence [..] are not Tory ideological dictums but sound economic strategies that had served Labour well in the past. Embracing these goals and persuading Britain that we can be trusted on economy is a key to winning power.”

However, if were to take the trouble to understand how our economic and money systems actually work we would soon learn that such statements are either born of economic illiteracy or wilful deceit in order to pursue specific political agendas. This can largely be attributed to the decades of ‘conditioning’ which has done its job and led to the belief amongst the general population that there is no alternative to austerity, that we have to live within our means, and pay back our debts in the best Micawber tradition. You would think listening to politicians, many mainstream economists and the media that there is only one economic model in town – the household budget one.

Jeremy Corbyn has set out a clear and achievable plan for the future, and yet, Lyn believes that his proposals are a recipe for disaster. In fact he calls it delusional and complains bitterly that the success of the Greens and the SNP is based on a crazy idea that we can wave away our economic problems by recklessly printing money, getting into more debt and increasing state intervention.  Matthew then exposes his ignorance on economic matters by confusing deficit with debt when he writes “by any historical standards the UK is running a huge budget deficit”. The reality is that whilst George Osborne has reduced the deficit he has also increased the debt significantly* so by any standards, if you accept the household model of state budget accounting and that the debt is debt in traditionally accepted terms, the Chancellor hasn’t been doing that well given that he promised to balance the books by 2015.  To  he is now promising a £23bn surplus by 2020 that he says will not only eliminate the deficit, allow us to pay back some of our debt but also reduce our taxes.

*2015         £1.36 trillion (forecast)

2014          £1.26 trillion

2013          £1.10 trillion

2012          £1.10 trillion

2011          £0.91 trillion

2010          £0.76 trillion

2009          £0.62 trillion

2008          £0.53 trillion

Most people readily understand the word budget in terms of their own income believing, quite rightly, that they go into the red when their spending exceeds their income and that saving is spending less than they earn. It is easy to be fooled into thinking that our economy and money system works in the same fashion.  The on-line UK national debt clock which is ticking at a mind-boggling speed is a good example of how we have been conditioned to believe that we have been profligate and it is time to get control of our expenditure, balance our books and pay down our debt. Our understanding is, in fact, back to front. Deficits in state terms represent our savings i.e money that is issued by a sovereign government and spent into the economy to increase the financial assets available to the private sector i.e. to make the economy go round. On the other hand, achieving a surplus, as economically ignorant politicians are promising with some pride, will simply have the opposite effect by removing those said assets from circulation and putting the private sector into deficit.   One man’s surplus is another man’s deficit as it were. And, furthermore, the idea that a government can ‘save’ money is simply wrong as Professor Bill Mitchell, the respected Australian economist explains:

“People get very confused about the concept of national saving. They assume that saving is spending less than you earn and then apply that to budget surpluses and conclude that the surpluses add to national saving. But this view is erroneous. A sovereign government does not save. What sense does it make to say that the government is saving in the currency that it issues? Households save to increase their capacity to spend in the future. How can this apply to the issuer of the currency who can spend at any time it chooses?”

The subject of the national debt is also one where there is public misunderstanding.  Television is awash with programmes which picture debt collectors carting away the assets of someone who has got into arrears with a loan or following the lives of people whose financial situations are so dire that they are forced into bankruptcy.  Most of us quite erroneously, think this applies to the State too.  Who wouldn’t when prominent politicians say things like ‘We have taken our country back from the brink of bankruptcy’ (George Osborne October 2010). We were told then that if the country didn’t rein in its expenditure the debt collectors would be knocking on the door of the Treasury demanding payment or threatening bankruptcy if it didn’t pay up.  A simplistic picture yes but one which would chime with many people’s personal experience these days.  Worse still, we were compared to Greece and next in line to be affected by a sovereign debt crisis. Both lies and about as far away from the truth as it could get.

Here is how Paul Segal described the reality in an article published in the Guardian in 2010:

“Cameron argues that within five years the national debt will rise to “some £22,000 for every man, woman and child in the country”. This may be true, but what he doesn’t tell us is that it is money the government owes to us – not money that we owe to anyone else. That’s right: 80% of our government debt is owed to the British people. What is called “national debt” is our own savings, looked at from the other side of the balance sheet.”

It seems extraordinary that the economic model advocated by mainstream, neoliberal economists is one that is promoted as if there had never been another and also denies the accounting realities which are the basis for how the economy and money system actually works. It’s as if Wynne Godley, Hyman Minsky, Abba Lerner, Michal Kalecki, and of course Keynes and Marx to mention a few, never existed.

So if the money system doesn’t work as we’ve been led to believe by deceitful or economically illiterate politicians and media hacks, how DOES it actually work? Quite simply:

“A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER (as a household or private business is). This issuing capacity means that the government does not face the same kinds of constraints as a private sector user of money, which in turn exposes the fallacy of the household analogy, so beloved in popular economics discourse.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent!”

It is astonishing to learn that whilst most of us think that government has to raise money from the capital markets to finance the deficit and refinance maturing debt this is not how it works at all.  It is simply a convenient smokescreen behind which neoliberal politicians (Conservative and Labour alike) hide in their justification for pursuing austerity and public sector cuts. In fact, as Professor Mitchell points out “the continued issuance of public debt is a form of corporate welfare which makes the task of making profits through trading financial assets in private capital markets that much easier…… the Treasury [issues] securities not because it needs cash, but because market participants need securities.” 

The truth of the matter is that in 1971 when the Bretton Woods system collapsed (which tied currency to a gold standard) and fiat currencies were introduced governments were freed from those revenue constraints.  We have been led to believe that raising cash from the market is to fund government spending when tax revenue is insufficient.  But in a fiat monetary system even tax revenue is unnecessary.  The constraints on government spending are not financial but those linked to productivity and available resources and this is what puts the brakes on government spending not being in debt.

So how can we make sense of the motivation of our politicians to justify austerity and cuts on the back of what is not only plainly untrue but has also proved so destructive during the last five years? Jeremy Seabrook wrote in the Guardian in 2010.

Today’s detestation of “big government” stems from this same source, and the affection of Cameron and his colleagues for the “big society” is a euphemism for the reduction of public funds in assisting the poor: rolling back the state, leaving the market to distribute its rewards in accordance with the natural order of things … the market mechanism is as flawless a creation as the earth, and should remain untouched by the hand of meddlers, whose only effect is to upset its power to enrich us all … Once more, the state shrinkers, the advocates of vanishing government, the cutters of red tape and regulation, the liberators of a humanity constricted by statist straitjackets, believe they have a mandate for freedom. But it is freedom under the law of an imagined jungle; by a savage irony, at a time when the smoke from the stumps of felled trees in the real jungle darken the horizon of a used-up future.”

We are not as neoliberal politicians want us to believe  ‘living beyond our means’ and the austerity drive which manifests itself as the necessity for draconian cuts in the public sector and the privatisation of publically funded services is really about reducing the size of government and restoring the ‘primacy of the market” as Professor Mitchell has remarked.

Deficits and debt are, in truth, the biggest red herrings of all in this debate.  In fact as Lord Macaulay wrote in ‘The History of England’ published in 1849:

‘At every stage in the growth of that (national) debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt kept on growing; and still bankruptcy and ruin were as remote as ever’

The real issue is how we plan for the future.  How productive can we be, will there be sufficient resources at our disposal to meet demand? These questions have to be debated in the context of climate change and the devastation which we are seeing all around us, both human and in nature, whose roots lie in the capitalist desire for untrammelled growth and the search for profit.  Equally we are not the ‘machine men’ of Charlie Chaplin’s speech in The Dictator and as such we need to give those that want it and are able the dignity of employment which meets their financial and physical needs.

It is time to reassess the capitalist pursuit of profit through the downward spiral of a low paid economy and the maintenance of unemployment as a neoliberal necessity. It is time to challenge the neoliberal agenda which successive governments have embraced over decades. Such blind adherence or maybe not so blind has led to increasing inequality, a wealth gap of extraordinary proportions, an unstoppable drive for unsustainable growth and a situation where corporate power is replacing the democratic framework as it subverts democracy through politicians and trade deals.

So what sort of society do we want to live in and how might we achieve it? The entry of Jeremy Corbyn into the leadership race has revitalised that political debate in a very public way.  Do we want to continue with a political framework where there is not much to tell between the parties and a status quo future or do we strike out for a completely new paradigm? That debate must be held in terms of an economic model that will best deliver our aims.  Professor Bill Mitchell has set out some broad principles which could serve as the basis for that discussion.

 

1. The Government is Us!

2. The government is our agent and like all agents we cede resources and discretion to it because we trust that it can create benefits for all of us that each one of us individually cannot achieve. We understand scale.

3.  Governments invest in our immediate well-being by providing essential services without the need for profit.

4.  Governments invest in the next generation’s well-being through building productive infrastructure that delivers services for decades.

5.  We empower governments with unique characteristics so that it can pursue our interests without the constraints we face ourselves.

6.  We understand that a deficit for us means we have to find funds to cover it, whereas a deficit for our agent, the currency-issuing government means it is funding our spending and saving choices.

7.  A government deficit enhances our freedom because it boosts our income and allows us more options.

What next?  The choice is most definitely ours.

 

Sources:

http://ineteconomics.org/ideas-papers/interviews-talks/demystifying-modern-monetary-theory

How to discuss Modern Monetary Theory: Bill Mitchell.

http://bilbo.economicoutlook.net/blog/?p=25961

Deficits are our savings: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=10384

Budget Surpluses are not savings: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=961

The National Debt is money the government owes us Paul Segal

http://www.theguardian.com/commentisfree/2010/jun/17/fiscal-deficit-threat

Market participants need public debt: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=10404

Jeremy Seabrook: The specter of laissez faire haunts Britain.

http://www.theguardian.com/commentisfree/2010/jun/20/spectre-laissez-faire-haunts-britain

The Debt Delusion: Exposing Ten Tory Myths about Debts, Deficits and Spending Cuts: Mehdi Hasan.

Ed Miliband wants a new economic paradigm – this graph does just that.

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Liberal Conspiracy report ahead of Ed Miliband’s ‘major’ speech on the economy:

‘The Labour leadership is clear about a few things:

The last Labour government mistakenly bought into Thatcher’s neo-liberal framework for the economy, and they need to find a new way that genuinely grows real incomes, provides skilled jobs and is not part of a global race to the bottom.- New Labour were too benign to those at the top and not worried enough about those at the bottom. They recognise their way of distribution did nothing to stem inequality, and that the economy needs fundamental change to stop inequality growing.

“We are taking a shot at the paradigm of the past.”

Liberal Conspiracy also write, that the Labour leadership considers both the short term challenge, which is to get demand back into the economy and get growth back; and the longer term challenge, which is to move away from the artificial property-driven boom of the last 20 years.

This sounds very encouraging but as always the caveats will be in the detail.  The Guardian reports Ed Miliband as saying:

 “The squeeze on working people started a long time ago. In the figures going back to 1979, the top 1% have got every 24p of every extra £1 that has been earned, and the bottom 50% have got just 15p that has been earned. Even if growth is rising in 2014 and 2015, for most people living standards will remain stuck, and is unlikely to recover for a decade.

“The next Labour government has got to go much further in dealing with the roots of this – that is about productivity and skills, vocational education for the bottom 50%, and the creation of high-wage, high-skill jobs. What I am doing is bringing together the arguments we have made, all of which remain right – cutting too far too fast, helping the squeezed middle and responsible capitalism.”

My problem is with the Labour Party’s assertion ‘cutting too far too fast– why are they still talking about ‘cutting’ when they’ve just said that ‘the last Labour government mistakenly bought into Thatcher’s neo-liberal framework’?

It is George Osborne and the Thatcherite neo-liberal framework that insists, against all reason, that the deficit is about too much government spending … but the graph below tells another story.

The graph shows the relationship between unemployment and the budget deficit/surplus and whether unemployment spikes or recedes, the deficits/surpluses follow the same pattern.

(Note: The blue line shows the surplus-or-deficit-as-share-of-GDP inverted, and the red line shows the unemployment rate).

Picture 19

‘Unemployment isn’t just a human disaster. It’s a fiscal one too. Higher unemployment means lower tax revenue, and higher spending [on benefits] — that is, bigger deficits. And that means bringing down unemployment is the only way to bring down the deficit. Trying to slash the deficit during a depression — in other words, a liquidity trap — will only make unemployment worse, and hence leave the deficit little, if at all, better (and perhaps worse). This is hardly a novel insight….John Maynard Keynes said as much all the way back in 1933, when he said policymakers just need to “look after unemployment, and the Budget will look after itself.”
 In other words, when employment increases, the deficit decreases so Ed Miliband’s new paradigm should focus on job creation and a jobs guarantee for all of the 8.5m unemployed and underemployed, who are willing and able to take one.  There is only one good cut that Labour needs to make and that is to cut the neoliberal ‘austerity-speak’
The only way to close the budget deficit is to close the jobs deficit.