Same old Economic Orthodoxy

In 1997, the Labour Party inherited a balanced budget from the Tories and for well over ten years we had Gordon Brown telling us that he had got rid of the boom and bust cycle. By 2009 the deficit had ballooned to £171 billion, higher than during the recessions of the 1980s, the 1990s and even when the Labour party went to the IMF, cap in hand, in 1976 (another fine mess they got us into) put together.

Economic orthodoxy maintained by Labour and and the Tories for the last forty years or so ensures the same economic models: over reliance on an unbalanced economy, poor regulation with over reliance on the financial and service sectors, and failure to manage the housing stock, leading to increased personal debt.

Both Labour and the Tories have ignored manufacturing which meant it slowly dwindled over the decades. Rarely have we seen from the mid-1980s ‘Made in Britain’, and we have increasingly relied on imports that has further contributed to unbalancing the economy. All this failed spectacularly in 2007. This was followed by under capitalised banks who then stopped lending to small and medium sized enterprises (SMEs) which have always fueled true growth in the British economy.

Other than under Tony Blair, no Labour Government has ever reduced unemployment in their term in office. Eventually they revert to high borrowing and high taxes to pay for it. This is Labour’s orthodoxy. The Tories are no better. Their answer seems to be to cut costs/taxes against market led recovery and relying on the trickle-down effect. This is the Tory orthodoxy.

We as a party need to be more pragmatic. The government are still borrowing about £1 in £7. My view is that this gives us the flexibility to borrow to invest especially when borrowing is done at such low interest rates. Investment in infrastructure, manufacturing, housing and transport will generate revenue for the Treasury that will help us to rebalance the economy, especially if an investment-led recovery through investment is pushed regionally. The regional imbalance has significantly and adversely effected this country.

To reduce the deficit, the economy needs to grow, and in growing it will generate revenue that will clear the deficit. Once we clear the deficit, we can reduce the debt. We as Liberal Democrats need to move away from the traditional cyclical economic orthodoxy of the Tories and Labour and focus on investing to make our economy grow and expand our export base.

I would also add that we as a party need to push more for regionalisation. Glasgow at one time was the second city of the Empire (let alone this country). In the 1990s I travelled the UK as a young auditor and saw what a bad state industry was in the North East, North West, Wales, Scotland and going east from Manchester.

Scotland and Wales have shown that since they have been given devolved powers (and I am very sorry that Scotland feel they need independence, because I don’t believe in that) both economies have grown. Scotland’s GDP in the last 6 years has grown by 15% to £150 billion. Scotland is richer, per capita, than the UK: its access to oil pushes its GDP per person to 115% of the UK’s. Would that have been achieved if Scotland was still under the tight control of Westminster? The Welsh, have not fared as well as Scotland, but they have still improved their economy.

Greater investment in regions that are more independent must be what we as a party should be pushing for as it allows regions to focus development in areas where they are strong and compete for business. Such an approach I believe breaks the old economic cycle based on tried and failed orthodoxy.

* Tahir Maher is a former Chair of South Central Liberal Democrats and lives in Wokingham.

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  • Michael Cole 5th Mar '18 - 12:26pm

    Dear Tahir, Labour governments have always ended in economic failure – I am trying to think of any instance when this was not the case.

    But you state “… Investment in infrastructure, manufacturing, housing and transport will generate revenue for the Treasury that will help us to rebalance the economy, …” This is precisely the line that Labour is currently peddling. This is inevitably their panacea – to throw money at any problem.

    Accordingly we need to differentiate ourselves from them. We must be more specific as to the nature and areas of such investment and to stress that it needs to be wise and economically viable.

  • There is a lot in there, Tahir.

    I think you are right to focus attention on the imprtance of regional investment. We need to be supporting the call by Metro Mayors and devolved authorities for devolution of powers to direct investment in their regions and loosen the grip of cental treaury control.

  • Peter Martin 5th Mar '18 - 4:01pm

    @ Tahir,

    “In 1997, the Labour Party inherited a balanced budget from the Tories”

    Not true. The Govt sector was still in deficit in 1997 and was falling. It didn’t hit a surplus until a few years later.

    It wasn’t necessarily a good thing that the budget was in surplus as it can also be seen from the sectoral balance graph that this was only achieved by the private sector going into deficit.

    “To reduce the deficit, the economy needs to grow, and in growing it will generate revenue that will clear the deficit”

    Not necessarily. And probably not. A growing economy will also attract more imports. The Government probably won’t have too much success if it sends the Volkswagen company a tax bill. Imports aren’t a revenue raiser for the UK govt. If the revenue from those imports is spent on our exports it might generate some tax revenue. But it will probably just add to our trade deficit. In which case the budget deficit will be higher too. Again it’s the principle of sectoral balances.

    “Once we clear the deficit, we can reduce the debt.”

    Why do you want to reduce the debt? I’ve got quite a few Premium bonds. I won £175 last month! Not bad eh? So, I hold Government debt. If the Government reduces it I’ll have to hand over my Premium bonds for cash and I’ll have no chance of a big win. 🙂

    We as Liberal Democrats need to move away from the traditional cyclical economic orthodoxy of the Tories and Labour and focus on investing to make our economy grow and expand our export base.

    It’s not just the Tories and Labour who get it wrong! There was quite a lot of macroeconomic nonsense in the last two Lib Dem manifestos. If you want to expand exports you need to manage the exchange rate. It’s probably better not to do that and just concentrate on growing the economy. If deficits rise, its actually quite a good sign. It means that someone, like me, is trusting the Govt with their money. If we didn’t trust them the Govt would be able to sell their bonds and they wouldn’t have a deficit.

  • Tahir

    The UK government current spending budget is in surplus – £3.7bn for 2017! As it was last under a Labour government in 2001-02 (

    There has been an economic orthodoxy since 1979 and that is it is OK to control inflation by having at least 5% of the working population unemployed (NAIRU). It is this economic orthodoxy that we should reject. When we were in government we fell victim to another economy orthodoxy that we need to reduce the deficit. This was the wrong thing to do at the time and nearly drove us into a double dip recession. If an economy is growing faster than the size of the deficit there is no real need to pay off the National Debt and we haven’t done it in any meaningful way all the way back to 1694.

    If you read our 2017 manifesto you will find lots of talk of capital spending on infrastructure including in the regions. What we also need are regional policies which encourage businesses to set up in the poorest regions; the regions with the highest unemployment.

  • 1. My understanding is that the Government can borrow at essentially negative real interest rates – the best policy therefore is to borrow today and definitely not to reduce the debt. Using figures via Wikipedia it seems the cost of servicing Government debt is 50% less than inflation. So we should if anything be INCREASING the debt – as the cost of money today is cheaper than tomorrow.


    2. The ANNUAL deficit does not have to negative i.e. a surplus for a fall in the TOTAL debt to fall as a percentage of GDP (i.e. “affordability” of the Government debt) i.e. if nominal GDP grew by 4% (inflation plus growth) and the deficit was less than 4% of the total debt – i.e. some £80 billion a year it would fall as a percentage of GDP.

    3. There has been TOO MUCH concern on what is technically on the Government books and what is not e.g. PFI contracts, student debt etc. which doesn’t really matter too much – other than we pay more for PFI contracts, student debt etc.

    SO – we should not be concerned about decreasing the annual deficit. In fact probably the opposite.

    Plus – and this is the most important consideration @Peter Martin can keep his premium bonds 🙂 !

  • Michael 1.

    negative bond yields are not an indicator of economic health or a normally functioning world economy. Pensions funds and insurance companies rely heavily on the income stream from these securities to meet future payouts for a rapidly increasing number of retirees.

    It has taken ten years for the current budget to come back in balance and capital investment has been muted in that period. Stability in the public finances needs to be restored in advance of the next econmic downturn.

    While current government policy is to allow the GDP to debt ratio to fall as a consequence of nominal GDP growth, it does not address the need for substantially increased government spending to restore pubic services to acceptable levels of provision.

    Public services are clearly underfunded across the board – in health,education and local authority services particularly adult social care. With the economy growing at a slow but steady pace and unemployment at a 40 year low, there is a strong case for moderate tax increases to support the required increases in current spending.

    Deficit financing should be justified on the basis of capital investment in productivity enhancing economic infrastructure and housing. Debt has to be rolled over and interest rates are set to increase in the future as the US fed tightens its policy.. There needs to be adequate economic growth to meet increased levels of debt service payments in the future as bond yields normalise, as well as meeting the demographic costs of maintaining baby boomers in their retirement years.

  • Peter Martin 5th Mar '18 - 10:01pm

    It has taken ten years for the current budget to come back in balance and capital investment has been muted in that period.

    It’s not good news at all! The sum of the Government deficit and the private sector deficit has to equal the external deficit (current account).

    In other words, if the UK, as whole, imports more than it exports, someone in the UK has to borrow to fund the difference. Simply lowering interest rates to move the borrowing requirement from the public sector to the private sector is no solution at all and will only create a debt deflation in the next year or so.

    It’s much safer for the Government to shoulder the debt than create a credit boom with associated asset bubbles in shares and property prices.

  • With inflation at 3% we should not expect any large increase in money supply. I imagine the Bank of England to aim for about 4%. With economic growth of 1.8% down a little from 2016 now is not the time to try to slow down economic growth by raising taxes. It should be remembered that if economic growth falls to 1% we should expect unemployment to increase. In the three months ending December 2017 unemployment rose and the Guardian state it is the fastest rise in 5 years (

    So yes to more capital spending financed by borrowing but the government needs to stimulate the economy to keep unemployment low and economic growth above 1%. Therefore running a surplus is still not the correct policy and so the forecasted surplus can be used to finance increased spending on public sector pay, ending the benefit freeze, the NHS and social care.

  • @JoeB

    “address the need for substantially increased government spending to restore pubic services to acceptable levels of provision.”

    Well from borrowing – there is a saying that borrowing is taxation on the future generations – well – education will mean that the future generations will be more skilled, more productive and richer.

    So how about having student debt on the government books rather than individuals – we as individuals are collectively the Government, substantially increase non-university 18+ education/training and the pupil premium? Investing in “human infrastructure”

    £20 billion (student debt, 18+ training, pupil premium, schools) plus £20 billion for physical infrastructure is £40 billion – plus £10 billion of that is already being “borrowed” by people repaying student debt.

    Arguably if you have borrowed £20 billion for physical infrastructure then you are no worse off – you now have an asset and the Government has the advantage that hopefully the economic activity has generated further economic activity.

    And yes – I would also put up taxes – 1p on income tax to pay for the NHS, increase higher earners’ NI, a “health and social care” tax so that pensioners contribute to the NHS, and an inheritance tax at 10% to pay for a generous Dilnot Commission implementation on social care.

    “unemployment at a 40 year low”

    Well it’s 1.44 million – the level at which the Tories told us “Labour wasn’t working” and I suspect 1.44million is equivalent to 2 million plus in 1970s statistics.

    “Stability in the public finances needs to be restored”

    um why??? Say real interest rates were to be 1% (probably quite high in historic terms for the Government) that is a whopping interest of £100 million – £400 million on a yearly government budget of £800,000 million – less than a round error -as I say at the moment we make 1% so we would be quids in.

    And premium bonds to boot 🙂 !!!!!

  • Peter Martin 5th Mar '18 - 10:37pm

    @ Micheal BG,

    “What we also need are regional policies which encourage businesses to set up in the poorest regions; the regions with the highest unemployment.”

    Well yes. It’s not too difficult to work out a suitable policy if you go by the principle that Govt spending isn’t limited by taxation revenue but it is limited by the undesirability of higher than acceptable levels of inflation.

    Spending in the more prosperous regions, like London and the SE of England can soon cause inflationary pressures, whereas the same spending in the less prosperous regions will have the more desirable effect of bring unused resources in economic operation. So targetted Govt spending needs to be an integral part of the policy.

  • Michael 1,

    stability in the public finances needs to be restored so we are not left in a position where 50,000 scheduled operations have to postponed in a single month as this report outlines The report recommends creation of a dedicated health and social care tax, which could help deliver the long-term funding that services desperately need.

    Vince Cable in his budget response floated the idea of “a learning account of up to, £18,000”, available to every young person when they turn 16 or 18, as a way to help rebalance intergenerational inequality. The proposal would cost £14bn a year, or around 0.3 per cent of net household financial and property assets.
    He said : “It is not difficult to see how a modest tax on personal net wealth, above a certain threshold, could generate substantial sums. We shall investigate how best to do this.”
    He also spoke of cancelling several tax cuts made since 2015, notably to capital gains tax and inheritance tax.

  • @JoeB

    People here and elsewhere have differing views on borrowing, from an accounting mechanism, a policy mechanism to have countercyclical Keynesian boosting or contracting of the economy and so on.

    But “restoration of stability in the public finances” – has little to do with being “in a position where 50,000 scheduled operations have to postponed in a single month”

    If only because even 50,000 operations is very very small change in the scheme of things.

    That is a question of the Government raising enough money through tax or borrowing and then spending the money on specific things. It has no problems doing either if it so wishes – clearly it could borrow more if it wanted – investors are very keen to buy gilts, and it could raise more taxation.

    Obviously will make a case for more money for a service and for that they have to say the service needs it. In general if you were to teleport someone from the 1920s or 30s or even 50s they would be generally astounded at the level of service in our hospitals, schools etc. – that is not say that I don’t think it should be better – it should be.

    My view is Government spending should be around 40% – less than half. It peaked at just under 44% under the coalition and is heading down. But even at that 40% you are working one hour for the Government for every one hour you work for yourself.

  • Michael 1,

    “If only because even 50,000 operations is very very small change in the scheme of things.”

    It is not if you are among the people needing an operation or a parent who’s child is being taught in a PortaKabin or a pensioner in need of help at home that the council can no longer give you.

    Economic credibility is one of the key areas that distinguish Libdem policy from Labour and should not be given up lightly.

    Economic growth cannot be taken for granted. The early post-wars were a time of great austerity. Living standards increased significantly in the 1950’s and 1960’s. In the 1972 budget the Chancellor, Anthony Barber, thought he would make a dash for growth – with large tax cuts against a backdrop of steady economic growth. He crashed the economy and started an inflationary spiral (exacerbated by the 1973 oil price shock) that reached an inflation rate of 25% by 1975.
    Mrs Thatchers economic gurus tried Money supply targets and doubled unemployment to 3m in the recession of 1981.
    Misguided economic policy causes great damage to those least able to bear it and we would do well to heed the lessons of previous attempts to bypass the fundamentals of any economy in a globalised world – productivity and international competitiveness.

  • Tahir Maher Tahir Maher 6th Mar '18 - 6:18am

    Thank you all for your comments. I am always so impressed with the knowledge members have especially when commenting on economic matters. The point I wanted to get to – maybe didn’t- was that recovery, growth and sustainability is best done regionally. The more economic independent the regions the more robust will be the British economy

  • John Roffey 6th Mar '18 - 6:45am

    @Tahir Maher “The point I wanted to get to – maybe didn’t- was that recovery, growth and sustainability is best done regionally. The more economic independent the regions the more robust will be the British economy”.

    I think you made this point clearly. I have suggested elsewhere that a unique policy that might help the Party – and the nation – is for Wales, NI and the English Regions to be upgraded/created with exactly the same powers as the Scottish Parliament [why should they be any different?]. This change should also provide a basis for the economic development you suggest. This concept would replace that of a ‘Northern Powerhouse’.

    Apart from being good for the nation and the Party – I do believe it would be a popular development particularly if Anglo-Saxon name such as Wessex, Mercia and Anglia were used, where possible, rather than points on the compass.

  • Peter Martin 6th Mar '18 - 8:06am


    ” ………..recovery, growth and sustainability is best done regionally. The more economic independent the regions the more robust will be the British economy”

    I’ve heard the argument that regionalism works well in Switzerland, therefore it should work well in the UK too. But we have to be careful. Switzerland is a net exporter. Its regions aren’t losing money to pay for net imports in the same way the UK regions are.

    If Germany, or anyone else, decides to run an export surplus against the UK it ends up with lots of unspent ££. Sometimes this ends up back in expensive London real estate but often the Bundesbank, or another central bank, will buy gilts to obtain some small amount of interest on those ££. The capital and current accounts always have to balance. If they tend towards being out of balance the pound will move accordingly in the forex markets to force the correction. The UK central government therefore cannot take a “hands-off” approach. It has to recycle the inflow of capital towards the regions and target it’s spending towards where its going to have more benefit and be least likely to cause higher than desirable inflation. It should aim to bring in underused resources rather than putting existing strain on already utilised resources.

    There is an obvious danger with regionalism. I would say we see that to some extent, for example, with Wales. It that adds another tier of government. One tier of government will inevitably ‘pass the buck’ to another tier. The lower tier is given the responsibility but isn’t in the same financial position as central government. It’s borrowing costs are higher. So it doesn’t have the power.

    The voters don’t usually understand what going on. Problems will arise. They’ll get fobbed off. This can only add to a general disillusionment with the system.

  • @JoeB

    ““If only because even 50,000 operations is very very small change in the scheme of things.”
    It is not… ”

    Of course! – my point was that it was a Government CHOICE on spending (and tax and borrowing) – nothing to do with “stability of finances”

    “The early post-wars were a time of great austerity. Living standards increased significantly in the 1950’s and 1960’s”

    Immediately post-war was a time of big budget surpluses which got relaxed according to

    “the 1972 budget [made] a dash for growth – with large tax cuts against a backdrop of steady economic growth… crash[ing] the economy and start[ing] an inflationary spiral (exacerbated by the 1973 oil price shock)

    The early 70s were a time of high budget surpluses too, inflation had more to do with the price of oil increasing FOUR times – 400%.

    “Misguided economic policy causes great damage to those least able to bear it ”

    Yes – but may be counter-intuitively borrowing in the present can lead to LESS borrowing in the future.

    1. Even on the “household” model of government finances. People borrow to finance mortgages to buy houses. Companies borrow to invest in machines and productivity enhancements

    2. But the Government can affect and is affected by the whole economy. A growing economy leads to bigger tax revenues. Even Keynes’ counter-cyclical burying of money in the ground (and yes it was only to make a point) MIGHT be better – if you believe that growth is below trend and the economy below capacity

    3. Better – especially for the poorer who benefit most – to have in the future – investment in education – that leads to increased productivity.

    4. Better to have a construction project that is on the government books than an expensive PFI contract that is technically off it. Or as a whole – student debt financed by negative real interest rates rather than high ones.

    Personally I am only advocating a minute £10 billion net of borrowing for an education “human infrastructure fund” – 1% of Government spending. Another £30 billion of borrowing would be £20 billion of capital infrastructure (for which you get an asset back) and £10 billion of student debt (which is already borrowed).

    ” the fundamentals of any economy in a globalised world – productivity and international competitiveness.”

    Absolutely – and investing in those – education and capital infrastructure

  • Michael 1,

    The post war years had budget surplus with trade surpluses, war times rates of taxation reaching 99% and rationing continuing to the early 1950’s to keep imports down – that is austerity.

    In 1969. Nixon inherited a recession from Lyndon Johnson, who had simultaneously spent generously on the Great Society and the Vietnam War. Nixon continued to run large deficits to fund the war, and increased social welfare spending.

    Nixon’s deficits made dollar-holders abroad nervous. There was a run on the dollar and In 1971, Nixon broke the last link to gold, turning the American dollar into a fiat currency. The dollar was devalued, and millions of foreigners holding dollars, including Arab oil barons with tens of millions of petrodollars, saw the value of dollars slashed.

    The devaluation of the pound in 1967 saw the acceleration of inflation in the UK and Barbers reflating of the economy accelarated it further. The oil shock of 1973 (in response to dollar revaluaton) and Arab/Israli wars added to problems that were already built up over several years.
    Inflation in Germany spiked after the oil shock but returned to 2% by 1977 while we were still trying to reflate the economy and experiencing double-digit inflation.
    Monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause. This mess was proof of what Milton Friedman said in his book “Money Mischief: Episodes in Monetary History”, inflation is always “a monetary phenomenon.” The great inflation and the recession that followed wrecked many businesses and hurt countless individuals.
    We need about 100 billion of capital spending every year in the Uk – 50% for planned infrastructure and 50% for housing i.e. around 5% of GDP that can be largely deficit financed with a balanced current budget and as Peter Martin notes approximates to the current account balance of payments deficit.
    Current expenditure on health, education, local authority services etc should be covered by taxation.
    It is important that investment of savings by the state and pension funds produces future returns to meet the needs of savers when they reach retirement..

  • Peter Martin 6th Mar '18 - 2:15pm

    @ JoeB,

    I’m not sure where I note what you claim I did. But, nevertheless, the distinction between current and capital spending is useful insofar as it gets us slightly away from a budgets-have-to-be-balanced dogma.

    But I do have to say that there are times when govt budgets do have to be balanced. And I mean properly balanced and not fudged by a capital/current distinction. To take the argument further there are times when the Govt needs to aim for a real surplus.

    So I’ll take the distinction between capital and current for now, but it would be far better if everyone understood when a deficit was allowable and when it wasn’t.

  • Peter Martin 6th Mar '18 - 2:24pm

    PS Friedman was wrong to say that inflation is always a monetary phenomenon. The quantity of goods available to be purchased is also a big factor. Any country like the Weimar republic or post revolutionary Zimbabwe is going to end up with hyperiflation if there’s nothing much to buy with the currency.

    It’s just about impossible to define “the money supply” in any case as the early Thatcher govt found out in a practical way. So what was initially monetarism quickly gave way to interest-rate-ism. That’s was really nothing new. Interest rates had always been a lever of control. They shouldn’t be the only lever of control.

  • @ Peter Martin

    It is possible to have regional governments which spends and invest the money the national government allocates to stimulate economic activity and decrease unemployment. For them to in effect run a deficit paid for by the national government rather than borrowing.

    @ JoeB
    “Economic credibility is one of the key areas that distinguish Libdem policy from Labour and should not be given up lightly”.

    What you mean is that we have gone along with the economic orthodoxy and so we failed to make the UK more liberal. The economic orthodoxy is not working for those “left behind” and the nearly 5% of working age people who have to be unemployed to ensure inflation is kept under control. It is not working for the majority either because since 1979 economic inequalities have increased.

    I think you are wrong about the need for a current account budget balance. Government spending to stimulate the economy does not have to be only spent on “investment”. The important thing is that more people are employed in the UK and these people spend their money creating more demand.

    @ Tahir Maher

    Indeed you were not clear getting bogged down in supporting many aspects of the failed economic orthodoxy. You could have been advocating separate currencies for the regions and the power to run their own economies and that would have been radical and would solve their economic problems. The alternative is for the national government to finance regional investment in creating jobs which they can give to regional governments to decide how to spend as I wrote above.

    @ John Roffey

    I would like to see regions named after Anglo-Saxon kingdoms.

  • Tahir,

    “The point I wanted to get to – maybe didn’t- was that recovery, growth and sustainability is best done regionally. The more economic independent the regions the more robust will be the British economy”

    You are undoubtedly right Tahir with respect to regional regeneration, but I would point out that the housing crisis is at its worst in London and the SE. London also has some of the most income deprived areas in the country.

    The London Mayor’s data on deprivation notes:

    “The most deprived areas within London are still in parts of Inner London. While 22.5 per cent of London LSOAs fall within the most deprived 20 per cent of England, more than two thirds of LSOAs have above average deprivation.

    London has some of the least income deprived LSOAs, but more of the most income deprived LSOAs. In particular, some of the LSOAs with the very highest rates of income deprivation among older people are in London.

    So regional investment in housing and public services includes every area of the country where there is an urgent economic need and that includes London. This kind of targetted investment is best delivered by regional authorities on the ground as City Mayor’s and Chairs of Combined Authorities have argued.

    The PM’s call to housing developers to ‘do their duty’ won’t make a blind bit of difference to the former residents of Grenfell Tower and their neighbours. Only investment in public housing and radical policies to tackle poverty at its roots (like Land Value Tax) will.

  • Peter Martin,

    aplogies if I have misquoted you. I would back much of what Tahir has written in his article. As per previous discussions and in common with Tahir, I support the maintance of a balanced current budger that includes depreciation of existing capital stock and deficit financing of new investment in physical infrastructure and public housing. That would equate to a regular overall deficit of 2 to 3% over the course of a business cycle and a slow gradual decline in the debt to GDP ratio that would bring it in line with the value of publically owned infrastructure and housing stock.
    For the reasons previously stated, I reject fiscal or monetary stimulas as a means of tackling unemployment below the estimated Nairu rate of around 4.5 to 5%, but would support targetted measures aimed at addressing long-term unemployment such as the job guarantee, leaviing a level of frictional unemployment of circa 2.5.
    I belive that economy wide fiscal and monetary stimulus (that may be necessary during severe recessions) are crude approaches to economic management that have signifiant distortionary effects and exacerbate inequality. Targetted taxation of accumulated wealth and in particular land offers a much more effective approach in my opinion.

    I don’t this this is inconsistent with the Libdem policy approach to management of the economy. If the approach is economic orthodoxy or neo-iberalism then so be it. My interest is in pragmatic policy that has been demonstrated to work. I think Keynes, Hayek and Friedman have all contributed to improving our understanding of economics without any individual necessarily having all the answers – but then who does.

  • Peter Martin 6th Mar '18 - 8:56pm

    @ JoeB,

    “That {the Govt Deficit} would equate to a regular overall deficit of 2 to 3% over the course of a business cycle …..~

    You can’t possibly know that. The Govt Deficit will be what everyone else wants to save.
    If everyone wants to save more the deficit will be higher. If they want to save less it will be lower. That’s all there is to it!

    The title of this thread is “the same old economic orthodoxy”. I took that to mean Lib Dems were looking to move away from it. But maybe not.

  • @ Peter Martin
    “The title of this thread is “the same old economic orthodoxy”. I took that to mean Lib Dems were looking to move away from it. But maybe not.”

    It wasn’t. As I have stated Tahir in his article supported lots of the economic orthodoxy. It is surprising that Liberal Democrats don’t recognise that the economic orthodoxy has failed. It is also disappointing. We should be a party of new ideas and one which challenges the orthodoxy and conformity.

  • Peter Martin,

    “If everyone wants to save more the deficit will be higher. If they want to save less it will be lower. That’s all there is to it!”

    There you go again, assuming savings cannot be influenced by government fiscal policy and tax policy in particular or that external surpluses are not impacted by currency devaluation.
    As I have argued many times, the savings ratio is an outcome not causation. Savings increase during a recession (the paradox of thrift) and decrease as confidence about the future increases.
    Household savings are mainly in pension funds and housing equity. Pension funds are being added to by current savers and depleted by the consumption of current retirees. Pensions are transfer payments not measured by GDP.
    Housing equity is increased by capital repayments that are recycled into new mortgage lending. Only the construction of new houses are measured in GDP not conveyances of the existing housing stock or house price appreciation.
    Increases in household wealth are driven to a large extent by asset appreciation in pension funds investments or in house price inflation. GDP is value of all goods and services produced in these country. Capital gains are not included in GDP and therefore not in sectoral balance analysis. Net financial assets as defined in sectoral balance analysis is an accounting construct not a real measure of household wealth or purchasing power. Increases or decreases in aggregate net financial assets does not mean that household wealth as measured by market value of assets is decreasing.
    As household wealth in pension funds and housing increases the propensity to consume increases.
    Accumulated external trade surpluses are depleted by currency devaluation. Japan can tell China all about dollar surpluses.
    Like Tahir I have made a living as an auditor and accountant for many years. Powerful as it is Peter, not everything in life can be explained by double-entry bookkeeping and the balance of payments – especially not human behaviour.

  • Peter Martin 7th Mar '18 - 7:44am

    @ JoeB,

    There you go again pushing the “same old economic orthodoxy” that you supposedly want to get away from. The LVT isn’t going to change anything if you don’t get the basics right.

    Saying the savings ratio is an outcome is just an assumption and wrong assumption at that. Sure, the government can influence it. It can hold down the value of the pound so that trade balances. But it won’t necessarily balance, as experience shows, if the currency is allowed to float. The countries with the highest external deficits, the USA, the UK, and Canada, all have genuinely floating currencies. Not “managed floatations”. They all nearly always have budget deficits too. The extent of the US budget deficit isn’t something that the US, the UK or Canadian govt can easily control. The one follows on from the other.

    Govts can push the economy into deep recession so the domestic population can’t afford to save so much or buy imports. We all know they can do that. There’s no disagreement there. But, Is going to be offered as a serious policy option? We had enough of that under the Tories. Sorry the Coalition. The people of Italy have had enough of EU imposed austerity there too. It’s not a solution to anything because there’s not even a problem to begin with.

    The supposed problem of government deficits being too large if they exceed the SGP 3% limit, and your similar limit over the cycle, is just a phantom in the minds of neoliberal/ordoliberal economists who are also unable to get away from the “same old”.

  • Peter Martin 7th Mar '18 - 8:10am

    @ George Kendall,

    Yes Gordon Brown behaved in a neoliberal manner prior to the GFC. He ran the economy on the basis that monetary policy alone was enough to control the economy. In other words, if it needed a boost, interest rates are lowered to encourage everyone to borrow more and thereby create asset bubbles. Then everyone wonders why house prices are so high!

    Even worse, the level of private debt builds up, which the banks start to get nervous about. They slow their lending, known as a “credit crunch” and the asset bubbles then deflate leading to a 2008 type crisis. He might have got away with it but the same thing, and worse, was happening in the USA so the crash was inevitable. After the crash, he stopped being a neoliberal, at least to the same extent, and introduced sensible fiscal measures like the reduction of VAT to 15% to try to stimulate domestic demand. Later to be undone by the coaltion of course who then did what it took to re-inflate the asset bubbles.

    And that’s where we are now. Desperately hoping they don’t deflate again and offering little more than condolences to the younger generation who’ve been priced out of the housing market.

  • @ George Kendall

    Until the 1970’s all governments after the Second World War were Keynesian in that their aim was full employment. During this period economic inequalities declined more than at any time. After 1979 all governments have been monetarist running the economy to control inflation and not believing unemployment can fall much below 5% of the working age population and that having people unemployed is an acceptable way to control inflation. Neo-liberalism is believing in a light-touch government and that the free market is always the better way to run any industry than the government getting involve with alternative policy aims. According to Wikipedia the Labour government continued the neo-liberal policies of the Conservative government, it “finished off a variety of uncompleted privatisation and deregulation measures”. The running of budget deficits or increasing government spending are not an indication that a government is not neo-liberal. It is what is, is the policy aim of running a deficit? For the Labour government not to be able to be described as neo-liberal it would have achieved full employment and used nationalisation as a policy tool and not supported PFI. After the financial crash the Labour government did run a deficit to stimulate the economy in a Keynesian manner. It is to our everlasting shame that we didn’t in coalition which nearly caused a double dip recession at the end of 2011 and beginning of 2012.

  • Arnold Kiel 7th Mar '18 - 10:23am

    I am afraid of a new wrong economic orthodoxy: politicians (and parties) under pressure from populists overestimating their economic clout, and wasting money. The affordability-question mostly discussed here is, IMO, driven by the answer to the question what to spend on.

    Governments can directly create jobs and GDP by founding companies; often a bad idea, especially if these companies continually require more public support. It follows that they are a success, if they have stopped being an opportunity to spend public money.

    Leaving this aside, Governments can spend money to enable private investment. There are two broad categories: education and physical infrastructure. The first one is exhausted: few real talents are being overlooked nowadays, many institutions produce marginal graduates, and many of them struggle to find adequate jobs. Notably, this human capital stock is fully mobile, meaning that this kind of investment cannot target regions, but will gravitate towards the centers, esp. London.

    That leaves physical infrastructure like transport, which is immobile, i.e. a bet on one or several specific place(s). Their biggest problem is time-lag, usually taking several Governments to complete, and therefore hard to sell.

    This kind of investment also only matters to industry where physical transport of products is a competitive factor. The problem is: even the best motorways and fastest trains do not turn the UK’s north into a logistically attractive place from a geographical viewpoint. Continued single market membership is what British manufacturing most urgently needs.

    Infrastructure that merely allows more distant commutes might ease housing-pressure but usualy just produces a different housing-transport cost-mix, and hardly addresses regional imbalances.

    Besides, let’s be careful with terminology: not every expense is an investment; affordable housing, healthcare…are essentially consumptive. They don’t drive economic growth.

    Wrecking public finances for white elephants would be the worst possible policy.

  • Peter Martin 7th Mar '18 - 10:29am

    @ Michael BG,

    I nearly agree with you! You haven’t got it quite right, though, when you say ” After the financial crash the Labour government did run a deficit to stimulate the economy in a Keynesian manner.”

    The implication is they deliberately ran a deficit. In reality they didn’t have any choice. If the external sector (trade) is in deficit and the domestic sector is in a state of fright and so stops borrowing and starts saving then the Govt’s deficit is inevitable as its tax revenue falls away. The sectoral balances compel it. It’s just arithmetic.

    This is where the difference between Keynesianism, or Post Keynesianism if we bring the theories up to date, and neoliberalism comes in.

    A neoliberal will fight against the increasing deficit by trying to reduce spending and increasing taxes. This is unlikely to succeed and, instead, will send the economy into recession. A more enlightened PK economist recognises that the increased Govt deficit is just the automatic stabilisers at work. Something to keep an eye on but not lose any sleep over.

  • Peter Martin,

    when you talk of savings you are referring to net savings (savings less borrowing) less investment. Government policy can influence both. Having a small section of the population or large firms accumulating surpluses that are held as financial assets and not invested in productive assets, while the majority of the population is borrowing to acquire inflated land or relying on credit card debt for consumption is not a healthy situation. Neither is foreign central banks accumulating sterling reserves that are not reinvested as foreign direct investments in productive assets in the UK.

    The mantra that excess savings is good for everyone is a fallacy. It has led to a global glut of excess savings looking for higher returns wherever they can be found and exacerbated inequality across the world. International capital is highly mobile and can undermine domestic policy very quickly if investors lose confidence is a countries fiscal management.

    When there is insufficient investment in the economy the government can both invest itself in infrastructure and housing and use tax policy to redistribute accumulated surpluses to where they will be spent into the economy. This is particularly relevant to the accumulation of capital surpluses in inflated land values that can be addressed with policies such as Land Value Tax to prevent consumption being reduced by the absorption of an ever greater proportion of income in rents and mortgage payments.

  • Peter Martin 7th Mar '18 - 1:23pm


    You mean S-I in the following equation? Some would say identity:

    (S-I) + (T-G) + (M-X) =0

    Incidentally I usually try to avoid algebra, not because I’m scared of it, I have a Physics degree, but I find its usually better to put ideas into words.

    As George Irvin explains:

    “the ‘deficit’ cannot be cured simply by cutting expenditure (G) and raising taxes (T) as some politicians would have us believe. Any attempt to do so will have repercussions on other variables—including on the level of national income itself. This in not ‘Keynesian economics’; rather, it follows from basic national accounting principles.”

    But, no matter which way I put it, I can’t seem to get people like George Kendall and Arnold Kiel to even understand what I’m talking about! Maybe that’s a failing of mine or maybe they are just determined not to understand.

    So, yes, Governments can act to influence, but they can’t control. If they ‘manage’ their currencies they can usually get M-X to do what they want it to (usually be negative) but that means M-X for other economies has to be positive. If that’s the case, and S-I is positive too, then T-G has to be negative. ie the Government runs a deficit.

    I really can’t understand why anyone finds this at all difficult! I would probably make a hopeless maths teacher. I do have seem to have some difficulty empathising with slow learners!

  • Peter Martin,

    none of that is difficult and of course you are quite right to say the ‘deficit’ cannot be cured simply by cutting expenditure and raising taxes or at least not without the danger of precipitating a serious contraction in output.
    Understood to that government action can influence but not control. What government can and should do however, is set targets over the course of a business cycle for the management of public finances (or the variables in the stocks and flows of GDP and public/private sector indebtedness.) Some years deficits may be much greater than anticipated as automatic stabilisers respond and some years much less. Public investment in Infrastructure and Housing needs to be planned over a longer timeframe than a budget year or even a parliamentary term – typically ten years or more. The important thing is to maintain investment and public service provision and plan tax levels on the basis of deficits that are comparable with International competitors. Fiscal policy in the form of tax and monetary policy in more normal conditions can be utilised to address issues like excessive household debt, asset bubbles and redistribution of income and capital; as well as regulatory curbs on destabilising levels of bank lending ( i.e. what Minsky called the accumulation of insolvent debt in lending to hedge borrowers, speculative borrowers, and Ponzi borrowers.

    What I would not do is to repeat the mistakes of the 1970s and simply ramp up spending and hope to be able to increase taxation or cut spending in the future to curb inflation – that led to stagflation in the 1970s

    The government uniquely has policy levers that can influence any of the variables in the equation you cite [(S-I) + (T-G) + (M-X) =0], including the level of firms capital accumulation, household borrowings, Investment levels and reserve accumulation by central banks. It is for this reason that I claim (S-I) and to a lesser degree (M-X) is an outcome of or correlated with (T-G) rather than causation.

  • @ Arnold Kiel

    Government can invest in training so people have the skills needed for the jobs. Government can cut taxes and so stimulate the economy by creating more demand and this should lead to less unemployment. The government could pay people to do things and so stimulate the economy by creating more demand and this should lead to more being needed and produced and more people needed to be employed.

    If you truly believe that regional imbalances cannot be reduced you should believe in regional currencies to deal with those regional imbalances.

    @ Peter Martin

    As you say the automatic stabilisers are applied, increasing the deficit during a downturn and reducing the deficit during an upturn. However the Labour government decided to stimulate the economy after the financial crash by cutting VAT and increasing public spending. They took action; it was not automatic. So yes the Labour government did deliberately increase the size of the deficit over what it would have been without them taking action.

    The coalition government took action to bring the economy almost into recession by cutting public spending and increasing VAT.

  • Peter Martin 7th Mar '18 - 5:30pm

    @ JoeB,

    Right maybe we are getting closer to some agreement? I’d go along with the idea that a government can “influence” any of the variables But so too can foreign governments. It must , ultimately, be a Chinese and German Government decision to run a large export surplus against the UK. Other Govts too. Like Denmark.

    So for the UK: (M-X) is going to be positive unless we retaliate via currency wars, which I don’t believe we should. Although I could be easily persuaded!

    Normally the Private sector has to be in surplus as you might remember Stephanie Kelton explaining. (S-I) is going to be positive too. And it should be positive for a healthy economy.

    Therefore (T-G) has got to be negative. For the UK. For example if (S-I) is 3% of GDP, or less than half of German (S-I), and (M-X) is 4% of GDP, then (T-G) will be 7% of GDP which I would imagine you might consider excessive.

    And the question is: can the Govt “influence” the parameters enough to keep (T-G) within what you may consider acceptable limits? You might think it can. I would say only at the cost of imposing unnecessary strains on the economy.

    PS I hope George Kendall and Arnold Kiel are managing to follow this.

  • Peter Martin 7th Mar '18 - 5:32pm

    PS I should have said (T-G) = -7% of GDP

    That negative sign makes a big difference.

  • Michael BG,

    Alisatair Darling in 2010 – “we will cut deeper than Margaret Thatcher.”

  • Peter Martin 7th Mar '18 - 5:46pm

    @ Michael BG,

    Possibly the Labour Govt did increase the deficit. But as George Irvin points out, in the link above, there are always “repercussions on other variables”. In other words you can’t change one or two parameters and expect everything else to remain the same. If the Labour Govt increased spending that would stimulate the economy and increase the tax take. Similarly by reducing VAT. A lower rate can bring in more revenue.

    There were also other things going on. The exchange rate fell sharply. That would affect (M-X). Interest rates were slashed. That probably had the effect of reducing savings.

    So the upshot is we can’t say for sure unless we have access to a parallel universe and can run some experiments!

  • Peter,

    there is good economist article here from 2015:

    A current account deficit has to be paid for with a corresponding capital account surplus. In other words, the UK has to finance its current account deficit.. The artiicle makes some salient points:
    Britain’s current account is not just determined by the trade deficit, but also by the balance of overseas income and returns to foreign investors. From 2001 to 2007 this improved our position: Britons reaped more in interest and dividends from elsewhere than they paid out. This helped offset the country’s excess of imports over exports, and held down the current-account deficit.

    But the returns are vanishing. Britain’s net investment income fell from a peak of 3% of GDP in the second quarter of 2005 to minus 2.8% at the end of 2014. That has caused the current-account deficit to swell to 6% of GDP— a level last seen in the 1980s—even as the trade balance has improved.

    In 2000 Britons held international assets worth 301% of GDP. As globalisation accelerated and finance surged, the nation’s balance-sheet swelled. By the collapse of 2008, Britons had amassed overseas assets worth about 750% of GDP. In 2015, following a post-crisis retrenchment, overseas investments amounted to just over 560% of GDP. .

    Ultimately, a current-account deficit represents a country selling its assets (such as shares in UK companies, UK bonds, or property), or incurring overseas debts.

    That makes sense if the spending is on investments that will pay off in future. And imports can be important for the economy. But Britain has been on a consumption binge. The household savings rate is negative, according to one estimate, and household debt continues to balloon. Growth in consumption is being achieved at the cost of running down national wealth. That’s not a good place to be in.
    According to the article, there are three ways to get out of this situation. Britain could consume and thus import less, hope its investments improve or export more. Normalising interest rates and higher capital requirements in the banking sector could encourage more household saving and less borrowing for consumption of imports. The other two options are dependent on a strong global recovery i.e. outside of our control.

  • Peter Martin 7th Mar '18 - 6:51pm


    “A current account deficit has to be paid for with a corresponding capital account surplus.”

    It would be just as valid to say a capital account surplus had to ” be paid for” by a current account deficit. Yes I appreciate that the CAD does include other than the trade deficit but the difficulty is that many don’t know what the CAD is unless the word ‘trade’ is used.

    I understand both sides of the argument about the problems of the CAD. Maybe we should manage the pound to make sure trade (plus the other factors) does balance. But we can’t have it both ways. We can’t let the pound genuinely float and then start fretting that the CAD is too high. It’s our call on that.

  • Peter,

    this report from Reuters quotes Mark Carney as saying that Britain’s dependence on around 100 billion pounds a year of foreign financing left it reliant “on the kindness of strangers”..

    The value of UK assets in the rest of the world is now less than what the world owns here — and that would seem to limit the possibility for net investment income to recover to past levels.

    If, as suggested, it is not going to recover, there is nothing to fill the trade gap and finance our current standard of living. So clearly the situation is unsustainable in the long term.

    We can hold the line for a while by borrowing the money needed to fill the gap and by selling even more of British businesses but that merely prolongs, rather than halts, the slow erosion of living standards. Running perpetual cuurent account deficits leaves us at the mercy of the bond markets. Something more needs to be done.

    That brngs us right back to back to the start of this conversation yesterday – the need to address the fundamentals of any economy in a globalised world – productivity and international competitiveness.

  • Peter Martin 7th Mar '18 - 8:14pm

    @ JoeB,

    You must be able to guess that I’d regard Mark Carney as one of the ‘high priests’ of the neoliberal establishment. I’m not going to be too impressed by anything he might say.

    But leaving this aside, its just a nonsense to say that those who move billions of ££, or $$, or euros, around the world’s economies are motivate by “kindness”. If they buy gilts or US govt bonds they are are only motivated by their own self interest.

    These guys don’t do “kindness”. Or, if they do, they make sure the TV cameras are there to make sure everyone knows the size of their donations to various charities!

  • @JoeB

    Thanks for your comments they are interesting and thought provoking!

    As regards our discussion a little while back – you can clearly have large Government deficits and low inflation because countries like America have been running a deficit for example and have had low inflation.

    So you clearly could borrow – run a deficit – without inflation. written by an Oxford economics graduate FWIW states: “inflation from a budget deficit is rare in developed economies”


    While the coalition had the largest ever Government spending and borrowing. There is I think in retrospect the question that it should have cut the deficit less than it did – although as has been pointed out Labour would have cut it more. There is a question if you have a big Government stimulus as there was at the end of Labour Government and the beginning of the coalition when is the right time to cut the borrowing down again. Hopefully a large Government stimulus will have multiplier effects – economic activity causing more economic activity and so on that takes months and years to work through the system. Unfortunately a national economy is rather like steering an oil tanker – it takes time for a tilt on the wheel for it to change direction and one may over- or under-correct.

    There is also the question of whether you can run the economy with unemployment under in the headline rate of 5%. There is a large amount of friction in the system – people moving jobs etc. but there is also under-employment and many not counted in the stats as well as “overemployment”. Having unemployment benefits and minimum wages puts a floor on it as people can’t price themselves into work – not that I am against either.

    Governments in the 60s and the 70s did run economies with much lower rates of unemployment and it has to be said of employment – as women in particular were much less likely to be in the labour force. But they also run a prices and incomes policy which came to an end with the winter of discontent.

    It was also a different era in that there was fixed exchange rates and more of a “command” economy – much more nationalised industry for example. There was no minimum wage but also more generous unemployment benefit. And far less of a global economy – today many jobs can be done over the internet outside the UK.

  • Peter,

    I think Carney is using a figure of speech there to emphasise that sterling exchange rates are determined by volatile forex markets .

    In the Reuters article, Sam Hill, an economist at RBC Capital Markets, said a big current account deficit did not automatically put further pressure on sterling. But it did raise the risk of a slide if something went wrong.

    “Markets don’t necessarily care too much about current account deficits all the time, but when they choose to … it is pretty much the only thing they care about,” he said.

    A shock (like a disorderly Brexit) can set off a stampede to dump sterling assets and a sudden and precipitous devaluation. That kind of sharp correction may help in closing the trade gap (although the 2016 10% devaluation appears to not have made much a dent); but at the cost of higher interest rates on UK debt in comparison to International competitors in a better trade position and a signiificant fall in the purchasing power of sterling.

  • @Arnold Kiel.

    Things move back and forth in policy terms and hopefully we over time in a democracy get it about right. And arguable things moved too much against Government borrowing.

    But take an two scenarios:

    SCENARIO 1: The Government borrows £100 and spends that on educating a student. That generates further economic economy as the teacher spends the money in the economy and so on. The student earns more in the global economy. On the downside the Government has to pay interest on the £100.

    SCENARIO 2: the Government doesn’t borrow the £100 – it saves the interest on the £100. But there is less economic activity directly. There is also less economic activity in the long term because the student can’t earn as much in the economy. It and the country is in a worse situation than in Scenario 1.

    The other downsides for scenario 1 is that the interest rates paid by the Government if it is borrowing more MIGHT go up and therefore the interest rates paid by individuals and companies MIGHT go up. But there is little sign of this at the moment – indeed if anything the opposite.

    There is a debate on which spending falls into category 1 and which doesn’t. The other disadvantage is that for politicians borrowing is “pain free” in the short term as you are not having to raise tax. An independent central bank helps mitigate some of this risk as the Government doesn’t want it putting up interest rates.

    Keynesians would argue that if there is “slack” in the system – unemployment or below trend growth then you should increase the deficit as there is slack in the system that is not being met by the private sector. Keynes argued that at the time of 1930s depression that even burying bank notes in the ground would be better than nothing as the private sector would then (getting permits) come along and dig them up again – generating economic activity and further economic activity and so on.

    So borrowing is or can be “prudent” – indeed more “prudent” than not borrowing and not just “capital” expenditure but on human capital and many other items of what is classed as “current account” expenditure. Just as it is for households buying a house if a mortgage or a company investing in machinery or the skills of its workforce.

  • Peter Martin 7th Mar '18 - 9:22pm

    @ Joe B,

    I’m not quite clear on what you want. You seem to want the pound to be high because that gives us increased purchasing power. But a high pound inevitably creates a CAD which you don’t like because that is mirrored by a capital surplus, which relies on overseas “investors”. If we lose their confidence the pound will fall. In other words, because the pound is high you are worried it might fall.

    So how about having a lower pound which we know can’t fall? Then we can all sleep easier in our beds! Which, incidentally, we might have to make in the UK rather than import from Sweden. 🙂

  • Peter martin,

    the pound has been free floating since 1971/72 and has halved in value against the dollar in that time. Sterling is no longer a major reserve currency in the way that the dollar or Euro are.

    I think we need to focus on productivity and international competitiveness to halt the inevitable decline in living standards that a decline in the purchasing power of sterling implies.

    The territory of Hong Kong is a good example of how focusing tax policy around the collection of land rents and relieving the deadweight effect of taxes on productive activity can boost both productivity and competitiveness and finance the provision og high quality public services

  • David Evans 7th Mar '18 - 10:16pm

    Michael 1 – Of course if you take your logic as gospel, government would always borrow and never tax (The G Brown solution – “an end to boom and bust.”), because as we all well know, to government politicians, all spending is investment. Just as to opposition politicians all government spending is waste. Ultimately the markets take fright and you end with interest rates rocketing because of the risk of default – Greece 25%+ in 2012.

  • @ Joe Bourke

    Your link to Alistair Darling is evidence that he was not a committed Keynesian and was happy to cut the deficit before full employment was achieved or within sight.

    @ Peter Martin

    Keynesian economies tells us that a change of one factor changes other factors.

    @ Michael 1

    I don’t think there is any doubt the deficit was cut far too quickly in 2010 and 2011 almost putting us back into recession.

  • Michael 1,

    good points. I think it is true that “inflation from a budget deficit is rare in developed economies”. Developed countries and the US in particular tend to manage inflation quite actively and dampen inflation when it is expected to exceed targets. Having said that, when the Chair describes low US inflation as a mystery it is hard for the rest of use to figure out exactly what to expect.
    There is no reason why budget deficits should engender inflation if there is spare capacity in the economy. Both the US and UK keep a careful eye on the levels of wage growth when labour shortages begin to appear in sectors of the economy.
    Historically high budget deficits that increase demand in excess of the capacity of the economy to meet that demand clearly have caused inflationary problems in the past.
    I don’t disagree with you conclusion re: prudent borrowing, although I think if borrowing is exceeding planned capital expenditure when the economy is operating under normal conditions, it is an indication of an under-investment problem and/or an inadequate level of taxation that needs to be addressed.

  • Peter Martin 8th Mar '18 - 7:59am


    Sterling is no longer a major reserve currency in the way that the dollar or Euro are.

    A reserve currency is one which is held by others. In the same way as a central bank can hold reserves of gold, it can hold reserves of other currencies. The £ is a monopoly issue of the UK govt/BOE. The $ is a monopoly issue of the US government/Fed Reserve. So to get ££ and $$, which can be used as reserves, countries have sell stuff to the UK and US. That’s not too much of a problem as both the US and UK run external deficits and relatively liberal trading regimes.

    It’s not so easy to accumulate euros. The trading philosophy of the EU is very much set by Germany with its attachment to running trade surpluses. So the EU can’t have it both ways. It can’t want the Eurozone to have a trading surplus and that the euro should be a reserve currency.

    The pound is still a reserve currency. If it weren’t – we wouldn’t be able to run a trade or current account deficit ourselves. The only reason anyone would want to hold pounds, even for a short time, would be to buy something from the UK. Current Account deficits then translate into Govt deficits for reasons previously explained.

    So its quite a positive sign that the UK is able to run twin deficits. The time to start worrying is when we can’t do that. We’re just like a bank to everyone else in the world and its down to them to decide if they want to park their money with us. All we can do is keep inflation under control and keep the economy in a healthy state to keep our bank looking a safe place to do business.

  • Peter Martin 8th Mar '18 - 9:58am

    “My profession creates this fantasy world as it’s a reality”

  • Peter,

    the savings ratio (the % if disposable income that is saved) in the UK has been very low since 2012 (1.7% approx. in 2017). By contrast the average savings ratio over the last 50 years has been circa 9%.. A low savings ratio indicates that there are insufficient savings to fund domestic investment, even when business investment is at current low levels. So it does not appear to be excess domestic savings that have been driving government deficits since 2012 (under-investment may be the problem).
    The external surplus is only party funded by government borrowing in the form of gilts. A large element of the surplus returns as foreign direct investment (the capital account).
    I think it is important to be clear about the interpretation of these flows. FDI in job creating industries is generally welcomed as a positive even though dividends leaving the UK in the future may exacerbate the current account deficit.
    Hong Kong runs a trade deficit but a current account surplus and a budget surplus. As a major financial centre, like the UK, it attracts a high level of FDI. It maintains a high standard of living (even with the Chinese tradition of relatively high saving levels). One of the reasons I believe is the legacy of the tax system left by British governors and its basis in the collection of land premiums on state owned land that enables to maintain high levels of productivity and International competitiveness.

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