Theresa May – Austerity is Over

Austerity wasn’t because of economic necessity but a political choice. The economic argument was that if you save your money/reduce your spend, you can clear your debt otherwise we were told we would end up like Greece. This view was accepted by Osborne resulting in this long period of austerity. It should be noted that in 2012 a report by IMF said that austerity had been a mistake. A better approach would have been to reflate the economy which would have left it in a better place to pay off the deficit. The report also said that the UK couldn’t end up like Greece because the debt was in its currency. The UK could raise loans through UK bonds (the problem with Greece is that they are in the Eurozone and share their currency with a number of countries, but there isn’t a euro bond. Each of the Eurozone countries still uses their own market to raise loans from bonds. External institutions who want to buy eurozone currency bonds are attracted to countries like Germany (although the interest rates are very low) while Greece has to significantly increase their interest rates to attract investors to buy their bonds, although it’s for the same currency.  The consequence of this is that Greece has youth unemployment near 50 per cent and Germany has youth unemployment close to 3 per cent because the bonds have to be serviced and interest paid on them).

This has been the most prolonged period of austerity post-war. The UK’s deficit peaked at 10% of GDP and Osborne in 2010 unveiled cuts of  £110 billions of fiscal cuts – public service cuts and tax increases (VAT). It wasn’t wholly a success as growth stagnated and unemployment rose. The Bank of England couldn’t reduce interest rates any further to stimulate the economy. Austerity measures did what austerity does, it contracted the economy, and this was the choice accepted by Osborne.

The consequence has been severe. Homelessness doubled since 2010, and over half a million are now having to rely on food banks. The NHS has had more funds but the increase in a growing population means it hasn’t kept up with demand, local authorities have had cuts of 40 per cent and effectively no pay rise in public services for nearly ten years. This and more has been the price of austerity. The main reason the economy grew (when it did) during this period of austerity was due to missed targets and when austerity was eased.

We haven’t cleared the deficit, and it is not unlikely to happen until 2026, although it is now about 3% of GDP. The Tories want us to believe that austerity is nearly over and the Tories no doubt fear the attraction of the Labour message to increase public spending significantly, and they will be considering easing up on cuts. However, this is a dilemma for the Tories especially with an EU bill of near £40 billion, botched EU negotiations that will come at a cost and an ageing population demands on public services. The Tory mindset will continue to manage such fiscal pressure by reducing the size of the state. I don’t see how things are going to get better over the next few years.

Continuing austerity won’t be because of economic necessity but a political choice.




* Cllr. Tahir Maher is a member of the LDV editorial team

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  • Tahir Maher, If austerity was a political choice it was one enthusiastically accepted and supported by our leadership. Danny Alexander spent more time in the media defending successive austerity measures than did Osborne.
    As late as 2015 Nick Clegg was still claiming that, without austerity, the UK would have gone the way of Greece. I remember several radio 4 interviews and at least one Daily Telegraph article praising the actions you now condemn.

    Your article has written the coalition years out of history; let us hope that the electorate have as selective a memory!

  • William Fowler 24th Oct '18 - 2:20pm

    The bit the OP did not mention was the further ruination of Sterling if austerity hadn;t happened and that if not for Brexit we would now we running a surplus, Sterling would have recovered to a more reasonable level and the Conservatives would be high on promises of tax cuts etc… if not for Brexit which no-one in govn expected. It is not exactly austerity either for the BOE to be printing money like there is no tomorrow… and, again, QE was supposed to be a short term measure to get us over the hump in heading towards two trillion in debt and subsequence ever heavier debt servicing costs. This is not down to the Coalition, it is down to the Brown/Blair years and the economic mess they left behind.

  • Tahir Maher Tahir Maher 24th Oct '18 - 2:36pm

    @expats – It was the IMF report that I was quoting. They were very much of the opinion we would not go the way of Greece. I try to explain that with countries raising funds via bonds. Greece was scuppered because of being in the Eurozone and Germany being a lot more attractive to place your surplus funds as compared to Greece. The thing with the UK they could use the interest rates to attract funds and also manipulate the exchange rate (this is something Greece could not do as it was fixed). In Tories defence I suppose the general approach (which had worked in Canada) was severe cut back on the state. We tried to follow that example – not very well. Once we accepted the policy we tried to sell it the best we could – but in hindsight (20 / 20 vision) it wasn’t the best alternative !!!

  • Lorenzo Cherin 24th Oct '18 - 2:44pm

    I am saying this with real desire to help, and as ever, be constructive.

    What is the point of an article like this when it just asks for the response it above, gets.

    Labour were committed to austerity. This party was not. The Conservatives were.

    Any party this one went into government with, invariably meant a degree of austerity.

    I believe the reflation argument would have been good if limited to important spending, not unnecessary waste.

    Greece was a disgrace, early retirement at fifty in areas we work till sixty five, government spending therefore without enough revenue, plus the usual reason the EU now has trouble, the nonsense of a one size fits all, ie the euro, itself not a good currency, too big, a house of cards, like the banks, the real cause of the credit fiasco.

    This article, like the EU, policies, like the austerity, does not help us move forward nor does the responding comment.

    I relate to and support both, but what can we do when they are both arguments for criticism of this party , both for slavish enthusiasm for the flaw that is the euro, and that which is austerity.

    My notion of a patriotic Liberal social democratic party, is as unsupported as are the great presidents I admire, FDR, JFK, whose policies would not have got us into this mess, either side of the Atlantic, but might have got us out of it.

  • Essentially the broad pattern of spending was that after 1997, the Labour government followed the Conservative spending plans for its first term and indeed there wasn’t much increase in its second term. We then got Blair’s commitment to increase NHS spending to the EU average. And especially after about 2007/8 they did increase public spending and then the financial crash hit.

    It means that actually the coalition was a bigger spender than for the first 11 years of the Labour government. It means that if you accuse the Coalition of austerity then you have to accuse the Labour government of austerity as well. I think it fair to say that a deficit of £100 billion a year was unsustainable – as it was the debt doubled and you can’t keep on doubling it. It means that the last year of Labour and first years of the Coalition was a big Keynesian re-inflation. I think there is an argument that the deficit was cut too soon but broadly Labour would have cut it as much and as quickly.

    Obviously the coalition made the choice to maintain real terms spending on the NHS. It also significantly increased international aid which was good of it but I think arguably – at least politically – we should have postponed that. Obviously also the benefits bill went up with more people unemployed or earning less. Overall this did mean that other departments had bigger cuts. I think clearly also that local government suffered too much with a double whammy of not being able to put up council tax and a big cut in the central Government grant. And social care has been a particular casualty.
    I think we do have to view the coalition as coming immediately after a massive financial crash and a big global recession. This was the legacy that Labour left us with – after promising to end “boom and bust”. And I know that I am not allowed on LDV to say that was Labour’s fault and it is fair point that they weren’t running the banks (even if they were regulating them). But they were the captain on watch at the time. But I think we are a little too minded to beat ourselves up over the coalition which started with a very difficult financial backdrop.

  • Tahir Maher Tahir Maher 24th Oct '18 - 4:48pm

    @Simon you are right I should have said deficit. Off course the debt went up because we borrowed more

  • David Evans 24th Oct '18 - 6:03pm

    Jo – I agree 100%. Just remember that extensive use of PFI contracts also left an onerous (I would say excessive) burden of lease rental payments on parts of the Schools/LEA sector also.

  • Steve Trevethan 24th Oct '18 - 7:42pm

    Perhaps one of the achievements of “current” economics, especially neo-liberal economics, has been to persuade the majority into accepting that “economics” can be separated from the social and the political.
    “Austerity” (for the many but not the few) was wrong/mistaken because it is cruel.
    How can a set of economic theories and practices be considered sound when that set seeks and uses the further impoverishment of the already impoverished?

  • John Marriott 24th Oct '18 - 8:13pm

    The Germans have a saying; ‘die Briten leben auf Pump’ (rough translation ‘the British live on tick’). I tend to agree. While it would be unfair to blame the 1997-2010 Labour Government for the 2008 financial crisis, the fact that it courted the City and Bankers with such enthusiasm gave it precious little wriggle room when the whole thing went belly up and it had to bail them out. Isn’t it hypocritical. We ‘nationalise’ debt and, at the same time, we ‘privatise’ profit.

    Deciding to reduce our nation’s massive debt was one which met with general approval back in 2010. It’s just a pity that the burden for this was disproportionately loaded onto the shoulders of Local Government, which central government – both coalition and, since 2015, exclusively Tory – has used as a massive human shield to deflect the opprobrium which inevitably came its way.

    Of course, as I said in an earlier thread, our so called ‘Leaders’ could have exhibited the same courage as FDR did in the USA during the Great Depression and gone for a programme of public works, à la Maynard Keynes; but they didn’t. Equally, the Lib Dems could have politely turned down Cameron’s “generous offer” of a Coalition and stopped at ‘Confidence and Supply’; but they didn’t.

    So here we are, still beating ourselves over what might have been, while those whose judgements we bought into have left the scene, with a few notable and, in some aspects, honourable exceptions. Not only do a small army of bankers appear to have been let off the hook, but a few politicians have as well. And then there’s Brexit. Oh dear.

  • Will always remember the Warrior like stance Danny Alexander took on Austerity..his full blooded commitment and total support was crucial to Tory strategy…Dannygave 100% to the cause can’t fault him for that.

  • The Lib Dems went down with a bad case of Orange Booker Flu but thankfully it seems the virus has moved on and is now mainly to be found in think tanks, the Far East and America, thankfully very few of the carriers appear to have remained active in the party.

  • Peter Martin 25th Oct '18 - 9:58am

    “Austerity wasn’t because of economic necessity but a political choice.”


    ” A better approach would have been to reflate the economy …….”

    Right again

    “………which would have left it in a better place to pay off the deficit.”

    Well no. You don’t actually ‘pay off’ a deficit. There’s a difference between a debt and a deficit. The Government’s deficit has to equal everyone else’s surplus or net saving. To the penny. Therefore once the economy is running along in better way, there will be a natural inclination for everyone else to be less cautious with their money and will therefore save less. The Govt deficit will then fall.

    Note: Everyone else does include our overseas trading partners.

  • Well, I’ve seen more ‘strawmen’ on this thread than at a scarecrow’s convention.

    It seems that the knee jerk response, to any criticism of the coalition, is, “Labour”, “Labour”, “Labour”. Perhaps we should deal with our own history and let ‘Labour’ deal with theirs?
    As for the notion that “There wasn’t any REAL austerity”; tell that to those that I, and David Raw, encounter. The real growth in our towns and cities are the ‘payday loans’ and ‘betting shops*’, where the desperate try to borrow or beat the odds in order to survive.
    I note that, on another thread, Vince Cable is giving yet another airing to the, “UC’s practical problems are being ignored”, line; ignoring the LibDem involvement. For the benefit (no pun intended) of Vince perhaps he might cast his mind back to Dec.2012 when the DWP admitted that 2.8 million households would be worse off and how, even earlier in October 2011 (when officials first considered how the changes would affect claimants)., 2 million were expected to be adversely affected.
    It wasn’t a minor matter, even then, as about 800,000 households were forecast to see an average loss of £137 a month, while the 300,000 hardest hit families would experience a loss of as much as £300 a month. About 200,000 lone parents were also to receive lower awards under UC than the old system.

    Hardly “Not on our watch”

  • Peter Watson 25th Oct '18 - 10:53am

    @frankie “The Lib Dems went down with a bad case of Orange Booker Flu …”
    I often wonder to what extent the result of the EU referendum can be attributed directly to that.
    It looks like the Brexit vote was bolstered by a lack of trust in and a lot of cynicism towards the UK political establishment, and disappointment in Nick Clegg and the Lib Dems seemed to epitomise that in the years immediately before June 2016.

  • David Evershed 25th Oct '18 - 12:28pm

    In 2010 the UK government deficit was unsustainable, brought about by the Labour government assuming the boom would continue for ever without any bust.

    The government would not have been able to borrow at sensible interest rates on the markets without a programme to bring government spending under control. Putting the whole burden of reducing the deficit through higher tax rates would have resulted in far less tax being raised.

    Any government would have had to slow the expansion of government spending. The coalition in fact did not reduce government spending but slowed its expansion so I am not sure that the ‘austerity’ term is any more applicable to the last eight years than any other period.

  • Sue Sutherland 25th Oct '18 - 2:34pm

    Steve, not only do we divorce economics from the political and social but, in common with Marx, we see economics as the driving force behind society as a whole. John Marriott, I think the Germans are correct because our economy seems to require either private debt or public debt to thrive. When we are on an upward trend governments encourage us all to borrow to keep that upward trend going and when this inevitably crashes we need governments to borrow to fuel a recovery. Austerity is definitely not the answer because then no one is borrowing money to invest in the economy but borrowing to keep public services going but at a greatly reduced level.
    Socially we have seen the development of a new aristocracy, people who’s wealth can’t really be imagined by most of us, and this was supposed to result in a better life for all of us. It hasn’t. History, sociology and a quick glance at China and India should show us that what is required for an economy to develop is a rise in the bourgeoisie: those who have money to spend on goods that aren’t essential for survival but are essential for conspicuous consumption, for keeping up with the Jones’s. Instead of developing a larger and larger middle class with money to spend on goods that are mass produced we have allowed wealth to be grabbed by a relatively few individuals whilst relying on the middle classes for our tax take. Those people who might have become middle class under a more positive regime are instead having to do several jobs and turn to food banks to make ends meet.
    It is a dire and gloomy situation which is why, I believe, so many of my generation voted Leave. We can remember a time when life seemed more equal and a lot of people had more money in their pockets. During the 60s and 70s ordinary people saw their wages increase so they could afford to buy what seemed like luxuries in those days such as fridges, cars and washing machines. Life really was better in those days for more people.
    Yes, we participated in austerity just like everyone else did. It’s a good job we have woken up to the fact that it doesn’t work. Now we can take positive steps to create a thriving economy.

  • Peter,
    Tis a sad fact that by jumping into bed with the Tories the Lib Dems under Nick Clegg did indeed act as the handmaidens to severe austerity and by default ushered in a Tory government and Brexit. No amount of hand washing will change that fact. The sad thing is many people saw this but the leadership chosse to ignore them, they knew best until they didn’t and the bill came due. After that well let’s say few of the Orange Booker cheerleaders felt inclined to hang about their talents where needed elsewhere to fix important problems rather than to rebuild a party they had shattered with their delusions. I suspect Brexit will end in a similar way, unfortunately in this country we have too many leaders who love the power but reject the responsiblity that comes with it.

  • Peter Martin 25th Oct '18 - 5:34pm

    @ Joe @ Sue,

    “The Conservatives base their arguments on the valid point that you cannot have good quality public services without a thriving economy. Labour accepts the point…..”

    The Tories think, or they pretend to think, that the increased taxation revenue as GDP grows received enables us to be able to ‘afford’ to employ more Doctors and Nurses etc. On the other hand, however, an increased GDP means that the Doctors and Nurses may have to be paid higher wages and salaries.

    Now I’m not saying that we shouldn’t have a thriving economy but neither should we assume that an increased GDP will enable us to afford more of everything. Cuba, which doesn’t have a thriving economy, has pretty good public services with literacy levels, life expectancy levels, child mortality levels on a par with or better than the USA.

    I can’t remember exactly where I read it now but I first came across this point in connection with orchestras. When musicians were quite poorly paid it was more economically viable to run an orchestra than it is now that musicians have more economic bargaining power and other possible sources of employment. So an increased GDP end up meaning we can afford fewer orchestras.

    In other words, we should be wary of right wing politicians who say that an increased GDP has to come first and a better public services will naturally follow later. GDP growth hasn’t reduced class sizes in the past and there’s no reason to expect it to reduce them in the future.

  • Peter Martin 25th Oct '18 - 6:11pm

    @ David Evershed,

    “In 2010 the UK government deficit was unsustainable, brought about by the Labour government assuming the boom would continue for ever without any bust.”

    The 2011 Govt deficit level was 10.9%, as a % of GDP, in the USA. As far as I know there hasn’t been a Labour Govt in the USA. The USA recovered better from the 2008 GFC because Obama didn’t panic and didn’t assume that the Govt deficit was unsustainable. He knew that the Govt deficit equals everyone else’s net saving.

    As the US economy recovered everyone else naturally started to be more confident and spend more and save less. The US Govt deficit fell.

    That’s all there is to it.

  • Peter Martin – and the Obama administration would have pumped a bigger and longer stimulus if the Republicans hadn’t seize control over the Congress in 2010.

  • David Evershed,

    During Labour’s time in government there was a surplus not a deficit 1998-2001. The deficit increased by £40 billion a year (on average) from 2001 to 2008. The large increases in the deficit were the result of the financial crash, not bad management. The UK led the world with our correct response to the crash in 2008 and 2009. We as a party in our 2010 manifesto promised to have an economic stimulus in the first year of government and that we would only cut the deficit when the economy could cope with the cuts. In government as already pointed out between 2010 and 2012 we had the wrong economic policy. It almost caused a double dip recession (and at the time it was reported that we had as a double dip recession).

    By trying to reduce the deficit between 2010 and 2012 we just increased it by removing demand from the economy and increased the number of people unemployed. As the party of Keynes all of our MPs should have known this would happen.

  • Peter Martin 26th Oct '18 - 9:32am

    @ Thomas,

    Good point about the 2010 Congressional elections.

    @ Michael BG,

    Yes, Labour did have a Govt surplus around the turn of the millenium, There was quite a bit of boasting about that. A surplus meant they were taking more money out of the economy than they were putting back in. At the same time the UK was running a current account trade deficit which means that there is more money leaving the country than coming back in.

    So, why was that a good thing?

  • Peter Martin 26th Oct '18 - 10:50am

    @ Simon Shaw,

    “I would assume that most economists would regard a UK budget deficit of £120 to £150 billion a year (that’s borrowing £2000 to £2500 a year for every man, woman and child in the UK) as a fairly strong Keynesian stimulus.”

    Well you’d be wrong.

    The mainstream is heavily influenced by people like Robert Barro who say silly things like:

    “a network of intergenerational transfers makes the typical person a part of an extended family that goes on indefinitely. In this setting, households capitalize the entire array of expected future taxes, and thereby plan effectively with an infinite horizon.”

    In other words if the Government runs a deficit now we’ll all be worried that our descendents will have to pay more taxes in the future and therefore start to save money to leave them in our wills. It’s nonsense as Steve Keen points out in the link below.

    The Keynesian approach is to look at the overall ‘temperature’ of the economy. If underemployment (which is probably becoming a better indicator than unemployment now) and unemployment is too high then the Govt needs to reflate the economy to reduce it. If inflation is too high then a touch of deflation is required. Its important to never let inflation get out of hand to avoid the problem of both high inflation and high unemployment which is a difficult situation to recover from.

  • Surely the main reason for austerity is to save money spent on public services to enable the Conservatives to give their supporters tax cuts, or at least not increase them. Before 2010 they often spoke amongst themselves about using the financial crisis as a smokescreen for this – the phrase never waste the opportunity given by a crisis to reduce spending was sometimes heard by those who were listening. Now even their own supporters are complaining hence the claim that austerity will soon end.
    Unfortunately they could justify some cuts because of the obvious waste of money on some services and schemes.

  • Simon Shaw,

    My language was imprecise. You are correct the deficit did decline from £152 billion to £116 billion before it was increased to counteract the reported double-dip recession. What I meant was that the deficit did not decrease as planned because demand had been removed from the economy. If the deflation had been smaller the deficit might also have been smaller.

    From the graph you post the link for unemployment was 7.9% in May 2010 and rose to 8.5% in November 2011, an increase from 2.5 million to 2.7 million. Perhaps you think 200,000 people insignificant.

    Having a deficit is not a Keynesian stimulus. A reduction in the deficit of between £20 and £10 billion a year is the opposite of a stimulus; it is deflationary because it removes that amount of spending from the economy. To judge if the government is deflating the economy or giving it a stimulus you have to compare the year with the previous year, not the size of the deficit.

  • Peter Martin 26th Oct '18 - 7:27pm

    @ JoeB,

    “Keynes made two things clear that are often ignored. He said, after a recession when private economic activity picks back up, the government should pay down the debt …..”

    You often throw out these kinds of comments without explaining why in your own words. If you don’t understand why then it really doesn’t matter who said what. If you do understand why then you should be able to explain in your own words.

    Keynes probably had most influence during WW2 in the application of economic policy and the debt was never ‘paid down’ then. So what he actually did and what he may have written doesn’t quite match. Keynes in is earlier years was doing any other intelligent person was doing. He was learning as he went along. Therefore some of his earlier writings don’t quite match up with his later thinking.

    He was also trying to convince very conservative politicians to try to run budget deficits, at least some of the time. So he knew he had to temper his approach to get at least some of what he wanted accepted. The other factor that tends to be overlooked was that Gold mattered then. It doesn’t really matter at all now.

    So the question of running a surplus has to be looked at in the wider context of the economy. Net importing countries like the USA and the UK very very rarely run budget surpluses. As money is leaving the economy to pay for imports. The Government has to keep things topped up by deficit spending. The other factor is what the private sector wants to do. If they are in saving mode then the Govt is in borrowing mode.

    Governments tend to react against this by lowering interest rates to discourage saving and encourage more private sector borrowing. That’s really not such a smart move!

  • Peter Martin 27th Oct '18 - 8:58am

    @ Joe,

    “Keeping your powder dry”. What does that mean? This, with all due respect to Keynes, isn’t a proper explanation. Reducing debt as a proportion of GDP simply means making debt smaller and/or GDP larger. That’s all there is to it. It’s just arithmetic, or algebra if you prefer. Nothing to do with capital spending.

    Not that Debt/GDP ratio matters much anyway. If Japan runs 220% then so can anyone. If people want to save then why not just let them? The govt doesn’t owe the money to Mars. Why run the economy into the ground in deliberate attempt to make everyone too poor to save? The already poor suffer the worse.

    That’s what austerity economics is.

    Controlling inflation and keeping the economy going as best we can is all that matters. Fiscal rules are an unnecessary concession to the neoliberals.

  • Simon,

    When engaging in debate it would be useful if you tried to understand what I had written. I didn’t claim that unemployment was higher in May 2015 than in May 2010. I stated we had the wrong economic policy in the early years of the coalition. We should had tried to keep to our own economic policy which was to have an economic stimulus in at least the first year. That would mean increasing the deficit. The reason we wanted this was because we recognised that the recovery was fragile and we wanted it to be bedded in before we reduced the deficit.

    Once it was reported that we had a double-dip recession the coalition government had a tiny economic stimulus and increased the deficit by £6 billion (see the graph you provided a link to). Having the wrong economic policy increased unemployment from 7.9% to 8.5% which is about 200,000 more people being unemployed (as I stated above).

    When demand in the economy is rising the government can deflate to ensure that the economy does not over heat. However, if they try to reduce the deficit by too much this increases unemployment and so reduces the tax take and increases the amount paid in benefits thus increasing the deficit above what was planned.

    Looking at the unemployment rates you posted it would seem that 2014 was the year that the government should have started to deflate the economy. As some economists think the economic cycle is going into recession and the economic effects of Brexit are likely to be bad for our economy it can be argued that the time is right to plan to increase the deficit slightly for the year 2019-20.

  • Peter,

    the whole framework of the policy analysis you advocate is based on a spurious assumption that governments must run deficits to accommodate the desire of people who want to save. Australia has not has a recession in 30 years and has seen strong wage growth over that period unlike the US and UK. The Howard government ran budget surpluses in 8 of the 11 years from 1996-2007 – a period that included the Asian financial crisis of 1997 and put it in a position to spend freely when the financial crisis of 2008 came. Gross government debt in Australia remains at a relatively low 41%. The net debt of Japan (net of public sector financial assets and bonds held by the BoJ) is around 65% of GDP and falling. Japan has no public sector debt problem.

    The non-government sector you refer to as “people who want to save” is comprised of households, firms and the foreign sector. Imports are paid for with exports and/or transfer of real property or financial assets (claims on the assets and earnings of UK firms) to foreign producers. Firms don’t save they distribute profits to households and utilise retained earnings and borrowings to invest in tangible and intangible assets and stockbuilding. Households save principally in property assets, stocks and pensions. Firms create financial assets by issuing equities and bonds just as governments create financial assets by spending (equity) and borrowing (bonds). Pension funds and banks place a small part of household savings in risk free government debt based on their portfolio risk profiles.
    If private sector investment opportunities for savers are insufficient government debt is a fallback.
    Standard of living is determined by the productive employment of the resources of a country, most particularly its land, capital assets and labour force. It is necessary to employ all three factors of production efficiently to develop and maintain a thriving economy.

  • Peter Martin 27th Oct '18 - 3:18pm

    @ Joe,

    I’m not going to go through it all again on here which will surely just annoy everyone else on this thread.

    Look, the economics you push is the economics that got the UK and the EU into the mess that we’re all in – in the first place. All your talk about ‘ what any prudent Chancellor or treasury minister will do’ is just code for more austerity.

    You can’t get rid of austerity economics unless you rid yourself of conventional neo-liberal economic thinking. And you obviously can’t.

  • Peter Martin 27th Oct '18 - 4:13pm

    Apologies to everyone else, but after saying I wouldn’t, I remember my wife, who was a teacher, telling me that I shouldn’t just give up on slow learning pupils.

    Joe seems to have a problem understanding that the Government’s deficit = Everyone else’s surplus. If we split everyone else up according to where they are we get

    Government Deficit -= Net Savings of Private Domestic Sector + Net Savings of Overseas Sector

    Net Savings of Overseas Sector = Current Account Trade Deficit.

    So if everyone else wants to SAVE the Govt HAS to run a deficit. If we have a trade deficit someone has to be borrowing (desaving) to cover that.

    Look if you can’t see it now, I really can’t help. Get some beans, or counters or have a play with a spreadsheet. Do some simple double entry bookkeeping. Just remember that on the spreadsheet every asset (+ve) has to have an equal and opposite liability (-ve). So every line has to sum to zero.

    It’s really no more difficult than quadratic equations. But I know some people do suffer from Dyscalculia, which is the mathematical equivalent of dyslexia. So perhaps not everyone is going to get it.

  • Peter Martin 27th Oct '18 - 8:00pm


    We’ve already been accused of the ‘Joe and Pete’ show so we should try to find somewhere else. But, yes , you’re right about defining whatever sectors you wish.

    But you’re not right about it being meaningless. Most people want the Government to run a surplus. They also want to encourage everyone to build up their level of savings. They probably understand that the best we can hope for is to balance our trade or even run a small deficit.

    However, the Govt can’t run a surplus even with balanced trade unless everyone else is desaving. The bigger the current account trade deficit the harder that is. On the rare occasions it does happen it means the Private sector is borrowing far too much So it’s one of these ‘impossible trinities’ (ie Govt in surplus, PS in surplus, balanced trade) that everyone needs to know is impossible.

    All this talk of running a surplus in the good times to offset the deficit in the bad is simply not possible for the UK economy.

  • Joe,

    I find your reluctance to accept the principle of what Peter writes very strange. I am sure that in the past you have accepted:

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

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

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

    My dispute with Peter is that I only believe this is true when the economy is in equilibrium, and when not in equilibrium the forces within the economy are working to make this true.

  • Peter Martin 29th Oct '18 - 10:41am

    @ Michael BG,

    I think you’re right that the economy hardly ever is equilibrium but I can’t see why a snapshot of the economy at any one time wouldn’t confirm that the equation you quoted was true, regardless. Bit I’m open to being convinced otherwise!

    The disagreement that I have with both those who think along similar lines as myself and others, is that the Govt can choose to run any deficit they like. That’s assuming a level of causality which probably doesn’t exist. The Govt can only run a deficit if others are also saving. So being able to run a deficit is actually a good thing. It shows we are credit worthy.

    The time to be worrying is when we can’t run one even if we really want to.

  • Peter Martin 29th Oct '18 - 3:00pm

    @ Joe,

    The usual way of looking at it is:

    From the sources perspective we write:

    GDP = C + I + G + (X – M)

    which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

    From the uses perspective, national income (GDP) can be used for:

    GDP = C + S + T

    But if we modify it slightly, to accomodate your criticisms we could say that from a users perspective national income can be used for investment too.

    So GDP = C + I + S + T

    This then means that both C and I cancel and we get

    (G – T) = S + (M-X)

    This intuitively makes more sense to me because it is very hard to say just exactly what is investment spending and what is consumption spending. If I buy a computer for my business its an investment but if I buy one for myself its consumption. Does this make any real sense?

    It really doesn’t matter if we get rid of I in the sectoral balances!

  • Peter,

    the point made by Wynne Godley is that “Although the three balances must always sum to exactly zero, no single balance is more a residual than either of the other two. Each balance has a life of its own, and it is the level of real output that, with minor qualifications, brings about their equivalence.”

    Yes, government spending is not split between current spending and investment spending in the national accounts equation and all household spending is treated as consumption expenditure not investment spending, regardless of the type of spending. It is assumed that firms distribute all earnings to households and borrow back household savings to fund investment. These are the simplifications inherent in the sectoral balance equations.

    Investment spending (including government investment spending) is required to maintain the physical operating capacity of the economy. How much firms and government allocate to investment spending impacts on consumption, savings and deficits just as the trade balance, capital flows and interest rates impact on the exchange rate of the currency.

    Government’s budget policy will have a corresponding impact of the other sector balances i.e. the balances are fluid and interdependant on the savings and investment decisions made by each sector. One sector cannot be said to be a residual of the other as Wynne Godley makes clear.

  • Peter Martin 29th Oct '18 - 4:28pm

    “It is assumed that firms distribute all earnings to households and borrow back household savings to fund investment”

    I’m not sure about that. There’s no reason why firms can’t save too. In which case they aren’t distributing earnings. Borrowing is the process of banks creating loans rather than acting as intermediaries bewteen savers and investors.

    But this doesn’t invalidate the sectoral balances.

  • Joe,

    you quote Wynne Godley as stating, “firms distribute all their earnings to households”. This is just wrong. Firms often accumulate surplus funds for various reasons – i.e. they save!

    You then quote him again as stating, “Although the three balances must always sum to exactly zero”. Therefore he is agreeing that (I – S) + (G – T) + (X-M) = 0 is true. As you agree with Wynne Godley then you must agree that the equation is true too. So why couldn’t you just have posted that you agree with the equations?

    You then state that “Government’s budget policy will have a corresponding impact of the other sector balances”, which implies that the balances are not independent of each other.

  • Michael,

    it is not Wynne Godley who developed the system of national accounts, Godley used the national accounts system developed by Simon Kuznets in his work on developing the sectoral balances as a analytical framework.

    The system of national like all economic models make generalisations and simplifications to model the economy. The expenditure equation for totalling up GDP adds together the four traditional expenditure categories – consumption, investment, government and net imports/exports.

    In the national accounts GDP equation, consumption expenditures are made only by households on goods and services, whether domestically produced or produced abroad. Investment expenditures are made by firms on new capital goods including buildings, factories, equipment and stockbuilding (increased investment in inventories). Government includes public spending on goods and services (excludes transfer payments to households). Net imports/exports is the trade deficit/surplus.

    These four expenditures give us GDP because as a group, they buy up all output produced in a country.

    Savings have a specific meaning in the national accounts. They are defined as income (GDP) less consumption (including consumption of goods produced abroad) +/- government surplus/deficit i.e savings equals investment.

    All savings are invested with financial institutions that in turn intermediate investment in private sector firms or government securities.

    Movements in the sectoral balances will necessarily impact on the other balances. If investment by firms is deemed too low tax incentives may be increased as happened with today’s budget to encourage investment spending. As changes in one sector occur that may generate changes in other sectors including feedback impacts on the original sector from which changes originated. That is the nature of the circular low of income and spending in the economy.

    I agree entirely with Wynne Godley when he says of movements in the sectoral balances ” neither the knowledge that this is the case nor the perusal of any list of econometric equations will, on its own, impart any intuition as to why output moved as it did over any set period.”

  • Peter Martin 30th Oct '18 - 4:16pm

    @ Joe,

    But do you also agree with Wynne Godley when he wrote about the USA in late 2005?

    “But private debt and borrowing cannot continue to provide the motor for expansion for more than a couple of years, particularly if interest rates go on rising. The growth in private debt must eventually slow down, causing net lending to fall and thus threatening recession, exactly as happened in 2000.”

    The recession he was forecasting was the one caused by the GFC!

    I don’t believe he got it totally right though. He goes on to say:

    “But there can be no remedy this time in the shape of a fiscal expansion. A repeat of the 2000–2003 stimulus would take the budget deficit to 9 percent of GDP!

    But that was pretty much what was needed in the Obama stimulus. There was a remedy in the shape a fiscal stimulus.

    So here we have an economist actually predicting big trouble ahead for the US economy and using the principle of sectoral balances to do it! So they aren’t quite as meaningless as you might like to make out!

  • Peter Martin 30th Oct '18 - 4:17pm

    Forgot to include this link:

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