What we should have been saying in our response to the budget

On Thursday I received an email from Dan Schmeising giving me a link to an “exclusive budget briefing” setting out our reaction to Wednesday’s budget.

The budget briefing states:

  • Provide at least the full recommended £15 billion to fund the catch-up needed in Education over three years.
  • “Double the Warm Home Discount on energy bills and extend it to everyone on Pension Credit and Universal Credit”.
    Why haven’t we included extending it to the legacy benefits? The Warm Home Discount is currently a £140 refund on a person’s energy bills if they receive particular benefits.
  • Implement (it is implied) our 10-year plan to insulate homes.
  • “Invest £150 billion into a Green Recovery Plan to promote active and zero-emission travel, protect our countryside and clean up our air. This will be paid for by taxing the wealthy and frequent fliers – not the less well-off”.
    We don’t say we want to do this over three years and if we want to split the money evenly into £50 billion a year or invest £30 billion in the first year, £50 billion in the second and £70 billion in the third. We don’t say how much the extra taxes will raise.
  • Restore spending 0.7% of our Gross National Income on Overseas Development Aid.

The budget briefing includes, “The Local Government Authority projects councils will be facing an £8 billion black hole in their budgets by 2024. The Tory Government has responded with… £4.8 billion.”

This £4.8 billion is £1.6 billion a year. But we don’t say we would provide the £8 billion and we should.

Then we should go on to say that we would abolish the Income Tax Personal Allowance freeze and instead we would increase it by just over 3.1% to £12,960. Followed by saying we would abolish the National Insurance increases of 1.25% and instead we would increase Income Tax. Also we should say we would increase pensions by the increase in average earnings and not the 3.1% for inflation.

We don’t say we would restore the Universal Credit £20 a week uplift and extend it to the legacy benefits (agreed in September).

The budget briefing declares, “Education should be lifelong, so we’d also invest heavily in re-training for adults – to make changing careers much, much easier.”

But again we don’t say how much we would spend compared to the extra being provided in this budget. We don’t say how much this extra is. Excluding the extra for apprenticeships its seems the government announced an extra £1.6 billion over three years for 16-19 year olds education in England and £1.22 billion over three years for adults.

In September we agreed to have Jobs Guarantees and a Training Guarantee for the unemployed. We should be telling people about this and this is our opportunity to state how much we would allocate to these schemes to help the unemployed update their skills and experience so they can apply for the estimated 1.1 million job vacancies there are in the UK. In my recent article I suggested we could allocate £11.7 billion a year to provide one million places a year. The £900 million in the budget for extra work coaches could be used towards funding this. Within four years we could offer a place to all the unemployed and those receiving Employment and Support Allowance.

The government has increased net spending from the baseline by about £25.3 billion, but the above excluding our Green Recovery Plan increases this by about £46.67 billion.

* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.

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  • Katharine Pindar 4th Nov '21 - 10:38am

    I suppose the question which arises from studying your excellent suggestions of further spending we could recommend, Michael, is what level of extra tax we would think necessary to pay for it. Do you think the 1p on general taxation we have recommended in the past for education or for health would meet the needs? I suppose not, and we would be looking for taxing wealth as well as income, as we have proposed before now, though I don’t know whether there has been much calculation of receipts if this happens.

  • Please add tackling social care to your list, Michael.

    Social care in the UK is in crisis with a race to the bottom under present contract tendering systems which lead to staff shortages (currently shortfall at 120,000 post Brexit) where breadline wages are propped up by local food banks.

    Two recent examples in Katharine’s Cumbria….. Barrock Court in Carlisle has closed because it cannot recruit staff….. as did Maudes Meadow in Kendal (in my old Council seat of many years ago – to Tim’s credit he has taken this up). Not only is it dreadful and frightening for the elderly who need care (both residential and at home) but it leads to what is horribly described as ‘bed blocking’ in the NHS during a pandemic..

    Last week, in Oban, I noticed an advertisement for staff outside a Fish & Chip shop……. £ 12 per hour. How can a for profit social care system get a staff on the current National Living Wage of £8.91 per hour when wrapping up chips with salt and vinegar pays 25% more than looking after the sometime difficult and sensitive needs of people in the twilight of their years ?

    Out of sight should not be out of mind.

  • Peter Martin 4th Nov '21 - 11:36am

    @ Michael,

    One big problem with the Budget is in its name. You and I have personal and family budgets. Our local councils too. We all have to balance up our spending with our earnings and borrowings which comes first. Spending comes second.

    Not for the Westminster govt though. Their spendings create the money in the economy which provides for the later borrowings and spendings. Extra spending creates its own revenue so you don’t necessarily need to add 1p to income tax to “pay for it”. The Government applies taxes to control inflation and not to raise spending money. A better name for Budget would be Fiscal Review.

    So from that POV it is arguable, and leaving out the politics, that the ‘Fiscal Review’ isn’t too bad, but I would expect that Rishi Sunak has taken a slightly over pessimistic view about future inflation. If you ask a mainstream economist the argument would be that he shouldn’t be taking any view at all. His job being to balance the accounts and the BoE has the job of controlling inflation. This is clearly absurd. And also highly dangerous.

    The danger to the economy isn’t in anything RS has done particularly wrong or could have done better. There can always be a correction next year. The danger is that the unelected and unaccountable monetary committee of the BoE will crash the economy by raising interest rates – just as happened in 2007. A crash can’t be easily corrected.

  • Demographic trends coupled with tighter immigration controls will see an increasing dependency ratio and correspondingly greater needs for healthcare and social care services.
    Cost-push inflation driven by imported energy, food and commodity prices and demand pull inflation driven by currency devaluation and monetary and fiscal policy is driving down living standards.
    Rapid technological advances and disruption of traditional labour intensive business is continuing to greatly reduce the need for workers in many industries. Germany has already rolled-out the first 3d pinted house https://www.gira.com/en/en/inspirations/references/3d-house-germany#. Robotics are moving from car and electronics manufacturing into areas such as social care and nursing. Self-driving lorries will resolve the HGV driver shortage over time. MacDonalds is to open a fully automated store operated by artificial intelligence with no staff required emulating Amazons fully automated grocery stores.
    The exponential advance of technology will leave large numbers of workers unemployed, underemployed or engaged in lower value service activities while the aforementioned inflationary forces continue to drive-up the cost of living.
    Keynes in the 1930s envisioned such a future where technological innovation would produce an abundance of goods and services. He did not of course forsee the massive build-up private and public debt that keeps the entire world economy on an inflationary treadmill to service an ever growing accumulation of financial assets in the hands of a small elite and threatens the very existence of the planet.
    Keynes insights are simple – smooth our business cycles that cause unemployment in a trough and overheating at its peak. This is done by borrowing to support spending during recessions, repaying what he called unproductive debt as the economy approaches full employment and maintaining a stable level of public investment throughout the cycle.
    Keynes understood the law of diminishing returns and the appropriate use of fiscal stimulus at the right time. Like Giles Wilkes https://www.instituteforgovernment.org.uk/blog/rishi-sunak-plan-growing-economy he understood ” What any economy can produce is a function of solid, hard-to-shift characteristics like business investment, the number of workers available, their skills and technological development, and access to markets. These factors do not change much in response to announcements in any one budget.”

  • Somewhat depressing that the LibDem budget briefing that the article links to prominently repeats the outright falsehood that the banks are getting tax cuts. I’d like to think the LibDems were better than this pushing of misinformation.

    More generally, the article calls for massive increases in spending – and yes, they are all very good causes which individually I can’t disagree with – but we can’t keep responding to every need with ‘let’s spend more!‘. £150 Bn into a green recovery plan? Personally I think the protecting environment should be one of our highest priorities, but that is a truly eye-watering sum. For comparison, total proposed UK Government spending on everything was £842 Bn in 2019-20 (I’m taking the last year before Covid knocked out all the figures). You can do the sums yourself on how big a % increase in total spending £150Bn represents, depending how many years it’s amortised over. What would that money be spent on? Do we have the supply chains in place and enough people with all the right skills to actually use that budget efficiently? (I’m guessing, we don’t). Is there even a proposed breakdown of what that sum would be spent on?

    @Katharine Pindar is absolutely right to ask about what tax increases would be needed to pay for this. Yet astonishingly, combined with these spending increases, the article is actually proposing tax cuts!

    I’d feel a lot happier if instead of just saying ‘spend more’ we started looking more at how the money we do spend could be used more effectively.

  • Katharine,

    I have included increasing income tax to pay for the extra money for the NHS and Social Care in the article. One penny on all of the income tax rates will not raise the same amount as that being raised by increasing National Insurance. It is not easy to determine the right answer to your question. Rishi Sunak is planning on reducing the deficit by £107.1 billion. What I have listed above including increasing all the income tax rates by one penny reduces this to £60.4 billion. The increase of £46.67 billion is 1.9% of GDP (assuming GDP = £2483 billion in 2022/23). The OBR are predicting economic growth of 6% in 2022 down from 7.3% in their March forecast. If households do spend as much as the OBR believe and we assume that the UK economy could grow at 7.3% in 2022 then we could increase all rates of income tax by a further two pence to 23%, 43% and 48% and we should not have a huge increase in inflation. However if the economy could grow by more than 7.3% we could increase taxes by less. Also if as I believe the OBR has over estimated how much households will spend next year from their savings then we wouldn’t have to increase taxes by so much.

    A more cautious approach would be to not increase spending by so much and keep it under £40 billion and hope no further income tax rises would be necessary and that inflation doesn’t get out of control.

    David Raw,

    In the £46.67 billion extra is £1.1 billion for local government for next year on top of the government’s £1.6 billion a year. I would expect the majority of this £2.7 billion to go into social care.

  • Lorenzo Cherin 4th Nov '21 - 10:07pm

    Michael of course champions the priorities too few do, on economics.

    But basic income is the most basic form of lifting people out of the indignity of being “workless,” a status, too often, made, by Tories and their supporters, like that of outcast. As someone for many years self employed, only the willfully unthinking, would see a basic income as an incentive, not to work, when, as Oscar Wilde favoured, in his book, akin to fantasy, “the soul of man under socialism,” only the rich can afford to be idle!

  • Peter Martin,

    I agree with you that increasing interest rates is likely to be a mistake when the economy is not at full capacity. Therefore it might be better if the government reduced the deficit to remove demand from the economy while hoping that business will invest in their businesses.

    Simon R,

    It seems that Ed Davey, was the one pushing the idea that banks were getting a tax cut. (See Hansard for 27th October https://hansard.parliament.uk/Commons/2021-10-27/debates/89CC24D0-0460-44E0-860F-C3B115D1A867/BudgetResolutions#contribution-457E91A7-BE49-4B85-B353-3B65B1178CAB and the LDV article https://www.libdemvoice.org/davey-on-budget-bankers-get-twice-catchup-for-children-68949.html.) I agree with you and hope our MPs would not push misinformation.

    I agree that £150 billion is a huge amount and even if we just consider £40 billion for next year this is still a large figure. However, government spending for 2022/23 is forecast to be £1045 billion. Therefore £150 billion is about 14.4% of government spending and £40 billion is about 3.8%. We do say we will increase taxes for the wealthy and frequent fliers to finance it. The policy paper, “A Fairer, Greener, and Caring Society” states, as I wrote in the article, that the £150 billion is to be spent over three years. Then the policy paper goes on to state that the plan includes:

    “Retrofit(ing) all UK homes in the next ten years, eliminating fuel poverty, cutting fuel bills and reducing carbon emissions, and introducing standards to ensure that new homes are zero-carbon.
    Generat(ing) 75% of electricity from renewables by 2030.
    Complet(ing) the electrification of the rail network, support cycling and walking, and speed up the introduction of electric vehicles” (page 11).

    The only tax cuts included in the article are the scrapping of the National Insurance increase and replacing them with a lower Income Tax increase. I don’t consider increasing the income tax personal allowance in line with inflation as a tax cut.

  • Peter Martin 5th Nov '21 - 7:20am

    @ Michael BG,

    The decision of the BoE to avoid putting up interest rates is more significant than anything Rishi Sunak has come out with in his budget.

    It is the right decision but, at the same time, the question arises why such an important control of the economy is in the hands of an uncountable and unelected group of bank officials. Why not have done with the democratic process completely and hand everything over to the BoE? Let them decide how much tax there should be on a pint of beer or a bottle of wine.

    @ Lorenzo,

    You’re too focused on the money aspects of poverty. Yes, money is important but it is only worth something if it will buy something. That something invariably involves the product of human labour. The key to removing poverty is to create things to remove that poverty by ensuring that everyone is gainfully employed. Once they are then we share out the products of our labours more equitably.

    @ Joe,

    So the robots are coming to take our jobs? That’s fine by me. I’m not going to get rid of our washing machine and dishwasher just to give family members something to do to pass the time. If we could get a robot to do the other jobs I’d seriously consider buying one. If you come across one that’s any good at painting and decorating, can you let me know?

    Automation can be a good thing. Do you want to have to go back to sending out cheques in the post and queuing up to get cash from a bank teller? Not me. There’s plenty of better things to do. Just as there’s plenty of better things to do than work for 40 hrs per week in a factory. So why can’t we share out the benefits of automation by everyone working fewer hours rather than some working no hours at all and being expected to live off a UBI?

  • Lorenzo Cherin,

    In my submission on to the UBI consultation I pointed out that to increase UBI by £20 a week would cost £40 billion while it only costs less than £12 billion to increase Universal Credit and the legacy benefits by the same amount.

    In the consultation paper we say a Universal Credit of £71 would cost £152.7 billion and with the tax changes we propose this nets down to a £30 billion shortfall. If we wanted to increase the UBI to £136 a week this would cost a further £130 billion (there would be some Universal Credit savings). A couple on £136 a week each would have an income just above the poverty line of £271 a week and under the party’s proposals the couple would receive no Universal Credit. However, single people would still be £21 a week below their poverty line income.

    These figures demonstrate that while we might want to find further tax increases to pay the £30 billion with a UBI of £71 a week, it wold be difficult to find a further £130 billion in tax rises to make it a living amount for a couple. But even then it isn’t enough for a single person.

    Peter Martin,

    I agree with you monetary policy (including the setting of interest rates) should be a political decision. I suppose the government could keep an independent committee to give advice, but instead of the decision being made by the committee (as at present) the government could do it and still publish the committee’s advice.

    Poverty is when someone doesn’t have enough money to live on. So it is all about money.

  • Lorenzo Cherin 5th Nov '21 - 12:15pm


    No way. I am concerned about what I say here, is the solution, I am, in favour of.
    Dignity and autonomy is what. I do not think basic income has or should have anything to do with sharing or creating. I favour enough merely to survive. At present people are having to beg for their basics. Sorry Peter, New or old Labour are obsessed with dignity equals, labour, literally the name of the party is the priority of the socialist. I prioritise dignity in survival.

    And i think, again, unlike many, as i believe in social markets, you are right, wealth creation, and the shared proceeds, is important. I have ideas on this, but it is more important to focus in the beginning, on giving everybody the basic ability to survive, then deal with their capacity to thrive!

  • Lorenzo Cherin 5th Nov '21 - 12:20pm


    A basic income of a hundred pounds for every individual, is what ought to be the policy.

    Whatever it takes to do it, it must be now, possible. It need not be universal. It could be removed in gradual tax, or what might be possible, is a point, say, when up at the top tax bracket, where then, it is clawed back.

    But for most on , yes, the basic tax rate, the basic income needs to be enough to survive. It needs to be far less about equality, more about , humanity.

  • David Evershed 5th Nov '21 - 12:39pm

    We should be more concerned with measuring outputs rather than inputs.

    Cash can be allocated to certain areas but little improvement made. We need to improve productivity in public services so that we get more and better outcome from the money that is spent. Emphasising outputs rather than inpts is part of this.

  • Peter Martin,

    you ask “So why can’t we share out the benefits of automation by everyone working fewer hours rather than some working no hours at all and being expected to live off a UBI?”
    The simple answer is money creation and debt as this article points out Deflationary technology: Disruption and its impact on your money
    “…$223 trillion of public, private and corporate debt, perverse incentives to sell us more of it, and the ardent religion of inflation. If our money system is one big debt balloon, then it seems that technologists are deflating it and bankers are filling it right back up.

    It wasn’t always this way. Modern academics have shown that before centrally managed inflation became the norm a century ago, there were benign periods of both natural inflation and natural deflation in our economy. Other economists have also found that we should not be automatically scared by deflation and that “… concerns about deflation may seem to be somewhat overblown.”

    One way out may be new deflationary currency options like Bitcoin — yes, prices have been volatile, but volume is steadily growing.

    And while central banking still remains outside of our control, maybe we are all unconsciously sandbagging humanity’s best chance to advance to the next stage of social evolution due to our misunderstanding of money — despite our love of deflationary technology.”

  • Peter Martin 5th Nov '21 - 4:32pm

    @ Joe,

    Your answer is neither simple nor is it good enough. Money and the economic system generally are meant to serve us all rather than vice versa. Your argument is that the ruling class would like a high level of unemployment for disciplinary purposes. ie The majority of the workforce being fearful of losing their jobs and joining the large minority who have no job at all. The best the Lib Dems can come up with is some sort of so-called UBI which is just another form of unemployment benefit. Anyone who has a reasonably well paid job will be lucky to end up breaking even.

    Human beings are communal creatures and the system needs to recognise that. We share out what we have equitably and equally we expect everyone to make a contribution if they can. Some Lib Dems are keen enough on the first part but have some kind of mental block about the second which the average voter does not.

  • Peter Martin 5th Nov '21 - 4:44pm

    @ Michael BG,

    “Poverty is when someone doesn’t have enough money to live on. So it is all about money.”

    Perhaps you haven’t read the Ragged Trousered Philanthropists by Robert Tressell?

    In the book, Owen points out to his workmates that they’d be better off being shipwrecked with a trunk full of biscuits than a trunk full of gold coins. He also explains how capitalism works by his “money trick”.


  • Lorenzo Cherin 5th Nov '21 - 5:16pm

    Peter that is not good .

    I favour everybody making an input. But destitution must not thrive, people must. Your precious attitude towards the idea of someone getting the dignified position of not begging to govt appointed automotons, is why the Labour party under Cooper came forward with Atos!

    You think you dislike the politics of Rachel Reeves but sound more obsessed with judging individuals who are workless than she did!

    People have talents they bring to life. Your govt bureaucracy need not see that, but it is so.

    UBI does no more than stop people having to beg.

    And many Lib Dems, like me, are partly social democrats, who were in the Labour party of neil kinnock, easily then a party that could relate to the humanity of people rather than the mentality of paymasters!

  • Katharine Pindar 5th Nov '21 - 7:58pm

    Peter Martin, Michael and I believe that everyone who wants a job should have one, but you seem to insist that everybody must have a job. There are those who can’t work, and must be supported. We want a guaranteed minimum income, as Lib Dems, and Michael and I want everyone to be lifted from poverty.

  • Lorenzo Cherin,

    Hopefully, we will agree to have as our policy introducing a UBI of about £71 a week at our next autumn conference (or the conference after that). I support our proposal to keep the other benefits. Once a UBI has been introduced I hope that it is increased at least in line with inflation and sometimes above inflation as has happened to the income tax personal allowance. I would like us to concentrate on increasing the benefit levels so when someone receives benefit the amount they receive (benefit plus UBI) is enough to remove them from living in poverty.

    David Evershed,

    Are you saying that we shouldn’t be increasing all departmental income so it is restored to its 2009 real value?

    Are you saying there is no need to increase government spending?

    Which of the government spending or tax changes outlined in the article do you oppose (and why)?

    Joe Bourke,

    Do you agree with David Eraker who wrote the article you link to, that the money created by quantitative easing should be given straight to the people rather than the banks? And that we should use Bitcoin rather than national currencies managed by central banks?

  • The 2015 article David Eraker links to discuses the issues with helicopter money https://www.spiegel.de/international/business/economists-say-handing-out-cash-could-help-euro-zone-economy-a-1011352.html
    It is an emergency measure to combat deflation. Central banks can issue money without limit when the economy is deflating as was done during the pandemic.The problem as the article notes “…is that monetary policy often cannot be adjusted with any degree of precision. Many experts say that inflation is like a bottle of ketchup: when you whack on the bottom, nothing happens at first — but then it all comes out in a gush.” It is inflation not deflation that is the problem at present, so helicopter money would only make matters worse.
    Bitcoin has the potential to act as a store of value but is not a useful medium of exchange. It could act as an international reserve much in the same way as gold or IMF special drawing rights form part of international bank reserves
    The big problem now is financial stability. Capital markets are very highly leveraged with global debt at three times global GDP and derivative markets running into the quadrillions on top of that debt leverage.
    When the next financial crisis hits (a virtual certainty in the next couple of years) what should central banks do? Print trillions to bail out crashing stock markets and failing banks around the world exacerbating current inflation or allow inflated asset prices to fall and instead focus efforts on the needs of the real economy. It will be a fine line to tread.
    That is the constant tension. Loose monetary policy generates inflation or counters deflation. . When Quantitative easing it is contained in the banking and financial sectors it inflates asset prices. When debt monetisation is extended to the real economy it creates consumer prices inflation if not offset by countervailing deflationary forces that reduce prices. To end the inflation monetary policy has to be tightened bringing asset prices down with it. Taxes cannot be increased when inflation is eroding living standards. It is not politically feasible.
    Maybe Joanna Lumley is right and we should go back to wartime rationing to help ease the climate crisis https://www.bbc.co.uk/news/av/uk-59049720. It appears that the health of the population actually improved during WW2 and the conflict was ultimately paid for by sacrificing excess personal consumption of non-essentials in favour of needed war production.

  • David Evershed 6th Nov '21 - 2:39am

    Miichael BG

    I am saying that value is measured by the achievements of government departments, their outputs – not the input of cash into them.

    In the long run our wealth, in the form of the quality and quantity of government services provided to the population, can only be increased through the increased productivity of the health, education, defence, etc departments.

  • Peter Martin 6th Nov '21 - 10:22am

    @ Katharine @ Lorenzo

    “Michael and I believe that everyone who wants a job should have one, but you seem to insist that everybody must have a job”

    No. If someone doesn’t want or need a job there is no compulsion for them to have one.

    “There are those who can’t work, and must be supported.”

    That’s OK. If they can’t work but need support they will be supported. I’d just call it sick pay. But maybe others would prefer the benefits system to continue. This would only apply to the working age population. Child benefits and pensions would remain as they are.

    “……but sound more obsessed with judging individuals who are workless than she (Rachel Reeves) did!”

    Not at all. I accept that many people would like to be able to work but for one reason or other they cannot. For example many people who are disabled, and would like a job, continually miss out in the jobs market when they are in competition with able bodied workers.


    We end up wasting a valuable resource if consider that being in a wheelchair, or whatever other disability they may have, is a reason to keep them out of the workforce. There is usually/often something that a disabled worker can do equally well with an able bodied worker.

    The system does require most of us all to work to have a decent standard of living and your UBI won’t change that. The system also expects us to find our own jobs. This is fine if we can but many cannot. So the alternative to a guaranteed unconditional basic income is to have a guaranteed basic job which will include a large element of training. The objective will be to get unemployed workers back into the mainstream and prevent long term unemployment leading to unemployability.

  • Peter Martin 6th Nov '21 - 10:46am

    “Maybe Joanna Lumley is right and we should go back to wartime rationing to help ease the climate crisis”

    And maybe she isn’t!

    I wasn’t alive during WW2, but according to my father the rich could relatively easily get around wartime restrictions by a combination of being customers on the black market, which was technically illegal, and simply eating out at restaurants which was perfectly legal. The middle classes had large gardens to grow their own food.

    In any case the capitalist system wouldn’t survive if consumption wasn’t matched to available production. Which some may think a good thing, but a somewhat surprising argument to be made on a Lib Dem website.

    The tricky bit is going to be in reducing CO2, and other GH gas emissions, at the same time as looking after the environment but not squeezing the living standards of everyone to what they were during a war of 80 years ago.

    Ms Lumley might be able to afford to eat out several times a week but probably not the rest of us.

  • @Peter Martin – absolutely spot on correct when you say “Human beings are communal creatures and the system needs to recognise that. We share out what we have equitably and equally we expect everyone to make a contribution if they can“.

    There’s also the practical aspect that the only reason the things we consider necessities (food, houses, education, healthcare, a pleasant pollution-free environment, etc.) exist in the first place is precisely because people step up and make the effort to create those things. If we don’t expect people who are able to contribute, then we won’t have those things to give to people in the first place!

  • Peter Martin 6th Nov '21 - 11:33am

    @ Joe,

    “….global debt at three times global GDP”

    It will be 36 times GDP if we measure it monthly but only 0.3 times GDP if we measure it by decade which is a more typical repayment time for those taking out private debts.

    In any case these particular “Gee-Whizz” type numbers aren’t particularly helpful to understanding the problem. That is if there is a problem. The whole world can’t be in debt. We don’t owe huge amounts to the Martians! We just lend it out between ourselves. Often we aren’t aware we are doing that. Any spare money we have in a bank account is a loan to the bank. Any gilts, or even Premium bonds, is a loan to the Government.

    There’s no gold involved any longer. Money is an IOU. An IOU is debt.

  • @Michael BG. Thanks for the info from the document, A Fairer, Greener and Caring Society. Unfortunately, even with that breakdown, it still looks to me like what’s being proposed amounts to, throwing money at problems without any thought for whether what you’re trying to do is practical, achievable, or the best way to go about it.

    The doc proposes, £150Bn over 3 years. That’s about £2500 for every individual person in the UK. And yes, things like insulating houses, electrifying rail, and more cycling facilities are great causes, but does anyone really believe we have enough people with the right skills and the supply chains set up to spend so much money efficiently? Those kinds of things take time. A goal of – say – insulating most UK homes in – say – 30 years might be do-able. Every UK home in 10 years is ridiculously over-optimistic and likely to be completely unachievable.

    Or, as another example, the doc proposes complete railway electrification. Good idea? Well, that’s about 9855km of route. To electrify, you have to demolish almost every road bridge over the tracks so you can build them higher to allow for the overhead wires. Tunnels have to be either completely rebuilt or the track lowered, which then brings in issues of flooding and drainage – and the work may require means months of line closures, pushing people back onto cars. Power supplies need to be set up, station canopies rebuilt to keep them away from wires, and new trains ordered. To do the whole lot will take absolute minimum several decades. Yet battery train technology is now advancing so rapidly that we may well find in 10 years time battery trains will be good enough that there’s no longer any point electrifying many of our branch lines.

    I’m taking railways as one example, but the more general point is that, unless you start thinking about these kinds of issues, then you don’t have a sensible plan for Government. Full marks for setting noble aims and having hearts in the right places, but for Government it’s just not good enough to make a vague aspiration, and then make up a random amount of money to throw at the aspiration.

  • Peter Martin,

    to understand debt you need to have some understanding of the asset side of the balance sheet. The assets financed by this debt are principally inflated stock, bond and real estate markets. If and when these asset values crash because they are not supported by sustainable income streams, the liability side of the balance sheet remains. That is a classic debt deflation. It is what Minsky calls ponzi finance or Richard Koo a balance sheet recession.
    Gillian Tett has written about the issue of soaring global debt in the FT https://www.ft.com/content/be32e263-0d55-4df4-a214-855bcad2c60d
    ” The IIF calculates that total global debt hit a record $296tn at the end of the second quarter of 2021, up from $270.9tn a year earlier. Government, non-financial corporate, financial sector and household borrowing represented, $86tn, $86tn, $69tn and $55tn respectively.
    “… 353 per cent [of debt now] is much higher than the 333 per cent level seen before the pandemic, when governments embarked on crisis-driven fiscal loosening. Moreover, at the start of the decade, the ratio was near to 300 per cent — and in 2008 it was 280 per cent. Yes, you read that right: since the world suffered the Great Financial Crisis, which prompted hand-wringing about the dangers of excessive leverage, global borrowing has grown by more than a third.”
    “Thus we face a long-term existential question: will governments eventually be forced to unleash sky-high inflation to reduce that debt? Will there be widespread debt forgiveness in the future to avoid a political or social explosion? Or will there be mass defaults and a financial crisis?
    Or could the 21st century instead turn into a period when interest rates remain so low for so long that we learn to accept eye-popping debt numbers as the inevitable corollary of high asset prices, expanded money supply and a frenetic financial system, and ignore them?
    “…the fact that our global system is three-times leveraged, and rising, deserves far more debate even if you are an optimist about the implications — which I am not.”
    Japan has been in this high debt, low interest, low growth, stagnant wage situation for three decades and has been living off the overseas investments accumulated during its economic miracle years. Not all countries have been able to acummulate foreign investment on the scale of Japan and will have to turn to other solutions – perhaps the vegetarian diets advocated by Joanna Lumley.

  • Joe Bourke,

    You didn’t give a straight answer. Perhaps people should conclude that you don’t think that the money created by quantitative easing should be given straight to the people rather than the banks except in exceptional circumstances. If it is fine for the government to print money to give to people during exceptional circumstances such as the pandemic then do you think that it is fine that the government could fund part of its deficit from printing money when there is more than enough spare capacity in the economy to meet the extra demand created by increasing government spending and the money supply?

    You said that fiscal policy couldn’t have an affect quickly. Now you seem to be saying that monetary policy is not precise enough.

    The Bank of England disagrees with you, they don’t think inflation is a problem at the moment but believe it will be soon!

    As Liberals we should not support rationing! I don’t think the government should ration what I can eat and buy.

    David Evershed,

    It is disappointing that you didn’t answer any of my questions. Output can be increased by employing more people. For example if there were more teachers and class sizes were reduce to about 14 or 16, then children would be better educated. If there were more doctors and nurse and places in hospitals, then more people could be treated and waiting lists reduced. It has been said that the UK lacks spare capacity in the NHS and so this is why it always has a problem during winter. And hospital productivity with the current resources has reached its limit.

    Please can you answer my specific questions?

  • Simon R,

    I agree that our party’s plans need to be examined to see if they are practicable and if they can be carried out in the time scale we want them to be. Plus we need to include providing the training so we have the workers to do this work.

    You are correct it is important to ensure that we have the trained workers to carry out the environmental work we want done.

    I am suggesting we should provide £11.7 billion next year to finance jobs guarantees and training guarantees for the unemployed to be trained to do the jobs we want them to do and either keep their skills up to date or gain the relevant experience after training for them to be employable.

    It is estimated that about 25 million homes need insulating, but it doesn’t take long to do it. If we include installing double glazing I would expect most houses could be done in a week and some will take less time. I think this means just under 50,000 homes would need to be completed each week, if it is to be done over 10 years. I don’t know how many double glazing installers there are in the UK, nor how many people work in the insulation business. According to the government 3.1 million work in the construction industry (https://www.gov.uk/government/publications/construction-sector-deal/construction-sector-deal).

    Your 9855km figure is from 2019-20 (https://dataportal.orr.gov.uk/media/1842/rail-infrastructure-assets-2019-20.pdf ). Electrification of the railways can be done with the addition of a third rail. According to Network Rail, “Nearly half of the UK rail network is now electrified – and more than 30 percent uses a third rail to power the train” (https://www.networkrail.co.uk/running-the-railway/looking-after-the-railway/track/third-rail/). Half is about 7952km.

  • Michael BG,

    Quantitative easing is a swap of one liability (Government bonds) for another liability (Central bank reserves. It is a tool used to lower interest rates https://www.bankofengland.co.uk/monetary-policy/quantitative-easing. QE does not increase the broad money supply (i.e. the supply of money circulating in the real economy). It increases base money within the banking sector with a view to encouraging more private sector lending.

    Counter-cyclical fiscal policy is short-term debt-financed government stimulus spending into the economy during downturns and may be delivered by direct spending on goods and services or direct spending on transfers (helicopter money. Alternatively or additionally, stimulus may be delivered in the form of tax cuts or tax refund cheques.

    The only conditions in which it may be appropriate for the government to fund part of its deficit by debt monetisation is when it is attempting to counter a severe debt deflation. To do otherwise undermines the stability of the financial system on which the functioning of the economy is reliant.

    As Liberals we support restrictions when justified by the greater good. That includes lockdowns and mask wearing during the pandemic, restrictions on smoking in public buildings, driving under the influence of drugs or alcohol and may also extend to restrictions on carbon emissions from beef production and/or damage to marine eco sysytems from over-fishing.

  • @Michael BG: OK that’s starting to sound more reasonable and like we’re more in agreement. I don’t know too much about insulating homes but a quick google suggests your figures are not too far out, with suggestions of 1-2 weeks to insulate a home.

    I realise this is getting a bit technical/off-topic, but as I understand it, new rail electrification does need to be overhead wires: 3rd rail can’t deliver the same power that overhead lines can, which limits speeds/acceleration. It loses more energy in transmission, and has rather obvious safety issues with a high-voltage rail on the ground where people can walk over it, plus various other technical problems. The ORR, which regulates national rail, has a policy that states, “There is a presumption against the reasonable practicability of new-build or extended DC third rail” In fact, the 2010 coalition Government initially even made plans to convert some existing 3rd rail to overhead wires (if I recall correctly, between Basingstoke and Southampton/Bournemouth, to allow higher speeds and give enough power for electric freight trains), but those plans got dropped when other electrification plans started going way over budget/time.

  • Peter Martin 6th Nov '21 - 9:49pm

    @ Joe,

    “The assets financed by this debt are principally inflated stock, bond and real estate markets. If and when these asset values crash….”

    “This debt” is private sector debt. If the asset values crash the economy will also crash due to defaults on this debt. There is no default risk on Govt debt. If the economy does crash, it can only be rescued by Govts taking on the responsibility itself. The system is not self correcting as was all too evident in 2008.

    A crash in asset values is quite likely, even inevitable, if the Government / BoE raise interest rates sharply. The bubble in asset prices shouldn’t have been allowed to occur in the first place but this is what happens if there is too much reliance on monetary policy to regulate demand in the economy.

    The best hope of avoiding a crash is to keep interest rates as they are and allow the bubble to deflate slowly and with the help of a little inflation in the system.

  • Katharine Pindar 7th Nov '21 - 12:07am

    Peter Martin. Referring back to your comment to me at 10.22, I was glad to read of your defence of people with disabilities being potentially a valuable resource in the work place, though often missing out in competition with the able-bodied, and I think we agree about the need to provide training and job opportunities for unemployed people such as the disabled.

    But it is not I maintain a suitable alternative, that ‘a guaranteed basic job’ should be provided instead of a ‘guaranteed unconditional basic income’. Though you want understandably to prevent long-term unemployment leading to unemployability, it seems to me basically illiberal to, virtually, try to force everyone of working age to have a job, regardless of their individual circumstances. Your suggestion of calling necessary support for an unemployed person of working age ‘sick pay’ rather gives the game away as to your attitude.

    We Liberal Democrats want everyone to have the chance to fulfil themselves and live freely, so long as they harm nobody and do not try to take undue advantage of the state provision. No, ‘our’ UBI won’t of itself provide a decent standard of living, and therefore we support also continuing welfare benefits to enable workless people to be freed from poverty.

    Personally, I never want there to be a division of our society where people living perforce in future only on a UBI, no matter how generous, become a kind of underclass disregarded by the rest of society. No, let us aim for a society in which every citizen has a share of freedom and the chance of personal fulfilment, with personal dignity and the right to the respect of others.

  • Peter Martin,

    It is ultra low interest rates that create highly leveraged positions. Pensions funds and insurance companies hold government debt to meet their future liabilities. Increased interest income is highly beneficial for these kind of institutional investors that hold bonds to maturity. It is investors that borrow on margin to speculate in stocks and bonds (both private and public) and highly leveraged corporations that have leveraged capital structures to buy back their own shares that are principally at risk from capital losses and higher debt service costs arising from higher interest rates.
    Higher interest rates affect the housing market less than they used to. Today only around 37% of Britons live in a home with an outstanding mortgage and floating rate mortgages are now less than 20% with most fixed rate terms set at 5 years. Additionally, regulatory changes since 2014 have forced lenders to allow for a rise of 3% within five years in assessing eligibility for mortgage loans.

    On the one hand you say “the bubble in asset prices shouldn’t have been allowed to occur in the first place” and on the other hand you say “The best hope of avoiding a crash is to keep interest rates as they are “, which is what has created the bubble in the first place. That is why President Truman once said “give me a one handed economist”.
    Bubbles don’t typically deflate slowly they crash relatively quickly (sometimes overnight) and there is already more than a little inflation in the system. The higher they get and longer they are sustained the greater the economic disruption when the bubble bursts.
    Nor has there been too much reliance on monetary policy to regulate demand. It has been used in an unsuccessful effort to maintain financial market stability, inflating markets instead. There has been no need to stimulate demand while much of the economy is in lockdown and output cannot be increased. There has been for emergency relief measures and a need to sustain businesses and their employees to enable a recovery to take hold as the supply shock of the pandemic comes to an end. A significant element of the fiscal support provided has accumulated as private savings rather than being immediately spent on consumption i.e, reducing the velocity of money as the quantity of money has been increased by deficit spending. The deficit spending will have to paid for at some point either by increased taxes or by allowing increased inflation to erode real incomes.
    The BofE has announced it is ending QE this year and has signalled that interest rates are likely to increase in the coming months https://news.sky.com/story/bank-of-england-resists-pressure-to-raise-interest-rate-as-inflation-spike-looms-12459602?dcmp=snt-sf-twitter

  • Peter Martin 7th Nov '21 - 8:20am

    @ Joe,

    It is more the lowering of interest rates, rather that the low rates themselves that encourages the build up of asset bubbles. In mathematical terms the first derivative wrt to time. In everyday terms it means that when potential buyers see interest rates fall they will expect asset prices to rise further. Therefore, even if they consider those assets to be already overvalued they will still want to get in on the deal before there is an even higher price to pay. We’ve all see this thinking at work in the housing market.

    The borrowing and spending involved does have an effect on aggregate demand. For every buyer there is a seller who receives the ££. A rising asset price will give the owners of the assets confidence to borrow more for everyday spending purposes. New bathrooms. New cars etc.

    You’re making the same mistake as the New Keynesians in ignoring the rate of change.

    Looking at it the other way a slight increase in interest rates will be a signal to expect falling asset prices so the smart decision will be to hold off buying. If everyone does this then we will have a crash. We still could have, even without an increase in interest rates if the market expectation is for one. Perhaps this was always going to happen anyway once interest rates reached such a low level that no further lowering was possible.

  • Joe Bourke,

    The Bank of England creates new money to buy the bonds (mostly government bonds). I am glad we can agree this increases the money in the economy.

    The Bank of England in the link you gave yesterday at 2.08pm, state that the aim of Quantitative Easing is to increase the value of bonds. It also shows that nearly half of QE (£445 billion) was before March 2020.

    If interest rates increase asset values should decrease. With interest rates at 0.1% any change is likely to be 50% or 100% to 0.15% or 0.2%.

    I don’t think the government should ration what people can eat each week and if it rationed what people could spend on things this would collapse the economy. It is not possible for the government to control the economy (purchases and output) successfully. I would expect you to agree with me on this. I am surprised that you seem not to agree!

    Simon R,

    I still think one week is more realistic for the time to insulate a home. One day for the loft, one day for the walls and two days for new windows and doors.

    I expect Network Rail would make the case for a third rail to cope with low bridges and tunnels.

    Peter Martin,

    I agree if assets values fell considerable this would cause a crash just like in 2008. Therefore we should not be calling for asset and property prices to fall.

  • Peter Martin,

    there is already a market expectation for increased interest rates,probably as the BofE has given forward guidance that this is its intention. It is true the bank does not actually need to do anything if the markets expects increase as market rates will rise anyway.
    Markets have to be able to deal with corrections and the risks of falling asset prices. That is what financial markets where securities are traded are for. Stock prices go down as well as up.
    Inflated financial and real estate asset markets are the principal source of wealth inequality and extract enormous rents from the real economy. The trickle down effect is virtually non-existent.
    When we look at the real world experience of countries like Japan in keeping interest rates at zero for decades, we see the outcome is a low growth, low productivity, stagnant wage, deflating economy weighed down with debt and zombie companies with large numbers of savers/investors seeking overseas rather than domestic investments to generate returns.
    The lessons of Japan are that countries must not give up on the quest for growth, and do whatever is necessary to raise it to levels that keep employment high, wages rising and inflation from sinking to zero https://www.ft.com/content/da9086f7-bfa5-4d1c-83d0-bea5fe41945d
    “There were two things that we recognised over time. One is how important financial stability is and the second is the importance of a growth strategy,” says Mr Nakaso. “Policies to address both the demand and the supply side of the economy are important. Raising Japan’s potential growth rate remains essential.”
    In the UK the biggest issue for most people is the inflated housing market and the virtual impossibility for too many of home ownership. The housing market ties up enormous swathes of capital in unproductive assets accounting for around 2/3rds of all lending and forces people into taking on big debts that absorb a large proportion of their disposable income over the course of their working lives.
    Zero interest rates and subsidies like help to buy exacerbate the problem. The issue of land supply has to be addressed and investments in productive assets have to be able to offer real rates of return to attract capital.

  • Michael BG,

    When the government borrows money from the UK residents via Treasury bonds, the money is extracted from the domestic economy, and redeployed elsewhere in the economy. Money itself is neither created nor destroyed.
    The government can extend its reach by borrowing from international lenders. This lets them spend money on the domestic economy without first extracting it from the domestic economy. Eventually, we run out of foreign lenders that are willing or able to lend to us.
    The Bank of England has always created new money in the form of central bank reserve liabilities to buy bonds, but this does not of itself increase broad money (bank deposits or currency) circulating in the economy. If commercial banks simply hold excess reserves to earn interest and do not increase their lending, little new money is introduced to the broader economy. This is why QE generated little by way of stimulus after the financial crisis, Banks were recapitalised but new lending remained sluggish, government deficits were reducing and there were counter deflationary pressures on wages and prices that contained inflation.
    Since the pandemic both QE and government deficits have been ramped up while output has been constrained. The combination of QE and government deficit spending does expand the supply of broad money in the economy and is potentially inflationary if the velocity on money remains unchanged. However, if the velocity of money falls because household savings and debt repayments are increasing, inflationary effects are muted.
    Ultimately, the government ran out of natural buyers for its debt, both domestic and foreign, and so the BofE began funding increasing deficits with QE during the pandemic. It can continue to do so while deflationary forces counter the inflationary aspects of currency debasement, but not indefinitely.
    The purpose of the economy is to improve the quality and standard of living. Over fishing is a major source of damage to the marine life and eco systems that we are all dependent on around the world and beef production has a severe ecological impact The meat industry.
    Reducing our consumption of fish and meat products is one of the most effective means at our disposal of combatting destructive climate change.

  • Peter Martin 7th Nov '21 - 9:00pm

    @ Joe,

    “Eventually, we run out of foreign lenders that are willing or able to lend to us.”

    When you or I want to borrow money we ask the bank nicely if they’ll grant us a loan. On the other hand when the bank borrows money from us they don’t ask. We might have to sign a deposit slip and get it stamped but that’s about it. When we buy a gilt or even a Premium bond from Govt the same procedure applies. The Govt isn’t asking anyone for a loan. There might be some exceptions such as when they ask the IMF for a loan but it’s highly unusual for them to do that.

    The big net exporters have a fundamental problem. They want to sell us more than they buy from us. They can only continue to do that if they recycle their surplus pounds back into the UK economy so that we can continue to buy their goods and services. They have to put their surplus money back into the UK bank also known as the UK govt or recycle it through the capital market.
    Using the usual notation for M (Imports), X (Exports), G (Gvt spending), I (Private Investment) and S (Savings) we have

    (M – X) = (G-T) + (I-S)

    For the UK M > X This shows up as a combination of G>T and I > S.

    One thing we could do is be more restrictive on what the the big net exporters can do with their surplus pounds. If, for example, we don’t want them spending their money on buying up Newcastle United and other football clubs we should just say no.

  • Joe Bourke,

    I wrote, “The Bank of England creates new money to buy the bonds (mostly government bonds)”, and you wrote about government borrowing which is a different thing, unless the Bank buys the new government bonds. Then later you agree with me about increasing money supply again when you wrote, “The combination of QE and government deficit spending does expand the supply of broad money in the economy”.

    Indeed Quantitative Easy didn’t result in much increase in demand because the banks used the extra money to “recapitalise” as you call it.

    Of course the Bank of England should not fund increasing government expenditure if inflation is rising because of this action. However you seem to be saying that if it doesn’t produce inflation then it is fine for the Bank of England to fund part of the government’s deficit. Is this what you are saying?

    Are you saying that the Liberal Democrats should have a policy of rationing the amount of beef and fish people can eat each week? (Eating oily fish is good for people and we are often encouraged to each more!)

  • Peter Martin 8th Nov '21 - 5:40am

    @ Joe,

    “Ultimately, the government ran out of natural buyers for its debt, both domestic and foreign, and so the BofE began funding increasing deficits with QE during the pandemic.”

    The reason for QE is to lower longer term interest rates. Long term rates on gilts are determined by their price at auction. They will always fetch some price but if the Govt decides this isn’t enough, (ie the effective interest rate is too high), then it instructs the supposedly independent BoE to enter the market as a buyer to force up the price. The US Fed, the E.C.B, the Bank of Japan etc all do the same thing.

    “If commercial banks simply hold excess reserves to earn interest and do not increase their lending, little new money is introduced to the broader economy.”

    You’ve already explained, often enough, how banks create money when they lend. They dont need reserves to then lend out. It doesn’t make much difference to the bank if they hold gilts to pick up a tiny amount of interest or if they hold excess reserves to do the same. They will naturally choose the option to give them the slightly better deal.

    You then do seem to appreciate the real reason for QE when you say:

    “BofE has announced it is ending QE this year and has signalled that interest rates are likely to increase in the coming months”

    I don’t know if the mainstream genuinely does think that Banks need more reserves to be able to then lend them out. Perhaps you’d like to point them in the direction of what the BoE say about the lending process? Banks will lend if they assess potential loans to be acceptably risky and with suitably provided collateral. If the consensus of opinion is that asset prices have peaked and will be more risk averse and deny loans to customers they would otherwise allow.

    The feedbacks are all positive. Not a good thing! In this respect the system is highly unstable. In other words, banks overlend when the going is good and underlend when they need to be lending more to support a flagging economy.

  • Michael BG,

    you have asked- Do you agree with David Eraker who wrote the article you link to, that the money created by quantitative easing should be given straight to the people rather than the banks? I have answered no, I do not agree and pointed out that money created by QE is central bank reserves within the banking system and does not of itself increase money supply in the broader economy. The increase in broad money as a consequence of QE, only comes if banks increase their lending in response to a greater quantity of reserves and lower interest rates in the banking system as a whole.
    I think the use of central bank reserves (debt monetisation) for direct settlement of debts is likely to push to the edge of inflationary boundaries and increase instability in the financial system. That risk of financial instability is only appropriate in countering severe deflationary shocks like wars and global pandemics.
    The LibDems should encourage participation in International efforts to curtail overfishing and excess consumption of both fish and beef products.

  • Peter Martin,

    banks overlend when the going is good and underlend when they need to be lending more to support a flagging economy” Businesses also want to borrow when the economic outlook is good and not to borrow when it looks bad. That is why we need the government to use fiscal measures to stimulate the economy when economic growth is low as well as when we are in a recession.

    Joe Bourke,

    Thank you for answering one of my questions clearly. To make a statement without directly answering the question does not answer the question in my book.

    Your answer to another question of mine is again not a direct answer, but it seems that you accept that Quantitative Easy can increase the money supply. I suppose you would say that decreasing interest rates can increase the money supply. However, it is recognised that these two ways are the normal ways central banks increase the money supply. I think you do recognise this, but you have got hung-up on the idea that they don’t always work.

    We know that the financial system was unstable before 2008. This had nothing to do with the amount of government debt held by the country’s central bank. If the central bank holding government debt could cause the financial system to become unstable should the Bank of England state at what percentage of government debt this is likely to happen?

    Are you distancing yourself from your earlier comments, “Maybe Joanna Lumley is right and we should go back to wartime rationing to help ease the climate crisis”, “As Liberals we support restrictions when justified by the greater good” and “may also extend to restrictions on carbon emissions from beef production and/or damage to marine eco systems from over-fishing”?

    Fishermen and women recognise the need to preserve fish stocks. Where there is over fishing of course the UK should participate in international efforts to stop this happening. 83 countries have pledged to reduce methane emissions by 2030. Perhaps the government should encourage people to eat less beef and lamb and instead eat pork and chicken to reduce methane produced by animals. Perhaps the government should encourage farmers to feed sea weed to their cattle to reduce methane produced by them. What the government should not do is ration the amount of beef and fish a person can eat in a week.

  • Peter Martin 8th Nov '21 - 2:13pm

    @ Joe,

    “That risk of financial instability is only appropriate in countering severe deflationary shocks like wars ….”

    A war is anything but deflationary. The economies of all the countries involved in WW2 produced more than ever was previously thought possible. Aircraft technology improved more in 5 or 6 years than it had done in the previous 20. There was a ‘permanent arms economy’ in place for the 40 years afterwards to support the Cold War and the ‘Space Race’ with the USSR that which again produced enormous technological advances.

    It’s a pity that capitalism isn’t quite so responsive when there isn’t a war to be fought. When £ hundreds of billions are earmarked for the development of a new jet fighter we are told how many jobs the project will support. When it is just a fraction of that for the NHS we are asked where the money will come from!

    We should treat the development of fusion power as we treated the need to develop the A bomb in WW2. Just do what it takes to get the job done.

  • Peter Martin,

    governments don’t import and export, it is businesses that do so facilitated by International banks. Overseas investors have choices of how and if they invest capital or alternatively exchange earned surpluses for more stable currencies.
    Investment in Newcastle FC is a example of foreign direct investment i.e. long-term direct investment rather than short-term portfolio investments in securities (so called “hot money”).
    If there are insufficient domestic and/or foreign investors that want to hold savings in gilts, then the government must create new reserves that will soak up those bond issues to maintain their target interest rate. There will always be excess reserves in the banking system if there is deficit spending. However, persistent deficit spending (outside of counter-cyclical fiscal policy and longer-term productive investments) has two problems – inflation and currency depreciation. The possibility of high levels of inflation becomes a matter of money velocity (consumption vs saving) and confidence in sterling. As inflation increases, confidence in sterling investments ebb away, shorter-term portfolio investments are reallocated to safer currencies (capital flight) and foreign buyers of gilts start to dry-up. Once financial stability is reestablished, foreign buyers of gilts return to the gilt market if the yields on offer are attractive relative to the risk of currency depreciation and alternative investments in other developed country markets around the world.

  • Peter Martin 8th Nov '21 - 8:36pm

    @ Joe,

    “However, persistent deficit spending…..has two problems – inflation and currency depreciation.”

    It’s actually only one. Currency depreciation and inflation are actually the same thing.

    I’ve always said that inflation, and potential inflation, is the ONLY limitation on what a government can spend. All these silly fiscal rules can be dispensed with if we accept this.

    “governments don’t import and export” ??

    What about when they import military equipment? What about when BAe exports to the Saudis? Like the British govt takes a hands-off approach? The Chinese Govt owns most of the big players in the Chinese economy. What about when they are twisting arms to secure contracts for Huawei? The same in Singapore. The Govt owns a large chunk of the Singaporean economy. It’s a quaint notion that world trade just somehow happens without a high degree of government involvement.

    “Once financial stability is reestablished, foreign buyers of gilts return to the gilt market if the yields on offer are attractive….”

    So what do they do with their spare ££ if they don’t think the yields are attractive? Sure, the big exporters can swap them for a different currency but someone else will still have to end up with them. In any case this could cause them a problem if the £ slumps. They won’t want to sell us stuff in exchange for lower value pounds. They still have to recycle their surplus pounds into the UK economy. They could hang on to their pounds, possibly, but this isn’t any different to lending them back to the UK govt. The alternative is to spend them on UK goods and services. But if they do this they cease to be net exporters.

  • Peter Martin,

    There are two general types of inflation. Demand-pull inflation when demand outstrips supply, resulting in a rise in prices and cost-push inflation when the cost of business increases, resulting in firms’ passing along those costs to their consumers. A common cause of inflation is an increase in the money supply. This is generally a benign occurrence in a credit-based monetary system because the demand for credit will usually rise over time in a healthy credit-based system. In other words, when the economy is expanding, firms and households will generally be borrowing to consume and invest. This will result in an increase in the broad money supply as banks create more loans, resulting in more deposits, leading to more money chasing (more or less) goods and services, higher wages, etc. Whether this is a positive or negative development depends on whether credit expansion is increasing or reducing our living standards.
    Currency devaluation is a relative measure. It is determined in part by International competitiveness as expressed in the terms of trade (the average price of exports / by the average price of imports).
    The MOD procures equipment from private firms that do the importing or exporting. The large imports – food and energy – are generally paid for in euros and dollars, manufactured goods increasingly in Chinese Yuan.
    While exchange rates are determined in part by the terms of trade far greater volumes of currency than those needed for international trade are bought and sold in FX markets.
    Ultimately it is the supply and demand for sterling in FX markets that determines the exchange rate. If there is consistent demand for sterling based investments then the value of the pound remains relatively stable. If supply increases faster than demand then the pound begins to fall against other traded currencies. Depreciation in purchasing power is the correcting mechanism for surplus currency in the FX markets and ultimately the means by which trade imbalances self-correct over time, albeit long periods of time.

  • Joe Bourke,

    It is good to see you set out why you think persistent deficit spending is a bad thing – it leads to inflation which leads to a reduction in confidence in sterling and the value of the pound declines. I am not aware of a strong correlation between government deficits and the value of the pound over the period between 1997 and 2007. During this period the pound’s value was quite stable while the surplus/deficit ranged from a surplus of £31.8 billion (2001) to a deficit of £54.3 billion (2005). I assume this is because turning the surpluses into deficits did not cause inflation to increase much (it was caused by other things). Therefore you should conclude that running those deficits was not a problem.

    I note you wrote, “A common cause of inflation is an increase in the money supply”. It is good to see you write such a clear statement.

    It seems that if inflation is ‘cost-push’ there are limited options to reduce it – increase productivity or deflate the economy by reducing the government deficit, or by reducing the money supply by such measures as increasing interest rates. The correct policy often seems to be to do nothing in the hope that the factors causing the inflation are only temporary and they will work their way through the economy.

  • Peter Martin 9th Nov '21 - 2:06am

    @ Joe,

    I’m not sure how you ever got on with Uni exams! Would there be a question about one thing, say what net exporters need to do with their surplus pounds and did you write about the differences between cost push and demand pull inflation?

    Oh well. At least we now know you think that when the UK govt wants to buy some US planes a private company correctly anticipates the number and model of planes the Govt has in mind. Often there are other modifications to the specs too. Like the communication and radar equipment to be fitted. And they get that right too! So they just have to ship them out of their warehouse, add their mark up to the invoice and everyone is happy.

  • Joseph Bourke 9th Nov '21 - 3:10pm

    Michael BG,

    there is nothing wrong with deficit spending (planned or automatically) at the right time to stimulate a recovery in investment and consumption spending during a downturn and almost all countries will finance their major capital expenditures with long-term borrowing rather than current taxation.
    There is enough historical and empirical evidence from economies across the world to know what the dangers are of artificially reflating property and stock markets after a crash such as the 2008 financial crisis.
    The government cannot control every aspect of a capitalist economy regardless of what pundits claim. What it can do is endeavour to maintain financial stability.
    Spending, taxation and capital investment should be regular and maintanable in real terms throughout the business cycle with borrowing rising and falling in troughs and peaks of the cycle in response to automatic stabilisers.
    Interest rates should be sufficient to allow savers to utilise the currency as a store of value i.e. interest on national savings accounts should be at least equivalent to the target inflation rate of 2%.
    That is what financial stability looks like. Relatively constant public spending as % of Gdp, borrowing for investment of circa 3% of GDP based on average inflation of 2% and average growth of 1.5%, Interest rates at circa 2%. Higher borrowing levels during downturns.
    Welfare should be underpinned by a guaranteed minimum income floor equivalent to the current level of JSA/UC basic allowance and job guarantee programs for longer-term unemployed to provide both social security and adequate stability in labour markets.
    The third aspect is land markets where reform of the 1961 Land compensation act, proportional property tax and macro-prudential regulation of mortgage lending can go a long way to addressing inequality and the housing crisis.
    Bring stability to land, labour and capital markets and government will be doing its job of managing the economy for the benefit of all participants rather than any one individual interest group over another.
    On meat and fish consumption there are various methods to reduce consumption as is currently done with minimum alcohol pricing, tobacco tax and sugar taxes on soft drinks.

  • Joe Bourke,

    It is good to see that you have finally come round to the idea that deficit spending is a good thing “to stimulate a recovery in investment and consumption spending during a downturn”.

    It looks like you have just accepted the current economic consensus. You seem to think that stability is more important than ensuring unemployment rates are low and economic growth is close to the maximum that can be sustained in the UK. A growth rate of 1.5% is not high enough and not very stable. When it is about 1% unemployment increases.

  • Michael BG,

    as I commented above “…persistent deficit spending (outside of counter-cyclical fiscal policy and longer-term productive investments) has two problems – inflation and currency depreciation”. That has been my consistent view and remains so or as Keynes put it “The boom, not the slump, is the right time for austerity at the Treasury.” Even in a boom investment spending is still financed by borrowing so there is almost always budget deficits even as debt as a % of GDP is declining.
    I am repeating myself, but unemployment has to be distinguished between cyclical, structural and frictional causes and policies adapted accordingly. I think financial market stability is an essential component of full employment policy.
    As to the longer-term growth rate, that is a function of the structure of the economy, global trading conditions and technological advances rather than short term monetary or fiscal stimulus as noted above with the link to the Giles Wilkes article where he writes ” What any economy can produce is a function of solid, hard-to-shift characteristics like business investment, the number of workers available, their skills and technological development, and access to markets. These factors do not change much in response to announcements in any one budget.”

  • Peter Martin 10th Nov '21 - 8:14am

    @ Joe,

    “That has been my consistent view and remains so or as Keynes put it “The boom, not the slump, is the right time for austerity at the Treasury.”

    Of course. Austerity is a counter inflationary policy, to be applied to cool an overheating economy during the boom time, and not a policy for reducing deficits.

    I know I’ve said this often enough but I don’t remember you ever agreeing the point. So a ‘consistent view’? I don’t think so. Can you show us some examples of where you were being critical of the coalition or even the Tories for their austerity policies?

  • Joe Bourke,

    I think it has already been pointed out to you that the issue is an inflation problem and it is this problem which leads to currency depreciation. I think both Peter Martin and I agree that inflation is the issue. We agree that when the economy is being stimulated too much, inflation will result and therefore it is important for the government not to over stimulate the economy. I don’t believe we have had full employment in the UK since the 1960s. I agree the government has to do different things to reverse cyclical and structural unemployment.

    I have stated that I don’t believe your criteria are correct for there to be a stable financial system. I pointed to the period 1997 to 2007 as evidence of this. I have often stated that when there is spare capacity in the economy the government should be active in trying to bring the economy to full capacity and this should be done when economic growth is poor (below 2%). It should also be possible to do it when economic growth is between 2 and 2.5% but the government has to be very careful and target their spending towards regions with high unemployment rates and to resolving structural unemployment.

    I think we define “the boom” differently. For me it is where the economy is close to full capacity. Is it when economic growth is 1.5% or higher for you?

    To rely on the structure of the economy to achieve full capacity will mean that the economy will not be at full capacity most of the time and some people who would like to work are denied the opportunity to do so.

  • Peter Martin,

    economic austerity comes automatically in the form of increasing tax receipts and reduced numbers of benefit claimants during economic expansions. These automatic stabilisers were not so significant in Keynes day but they are now. There is rarely a need to either increase tax rates or reduce benefit rates for automatic stabilsers to do their work of smoothing troughs and peaks in demand. Tax rates have to rise to transfer a greater proportion of national income for public purposes not for demand or inflation management.
    The cause of recessions is almost always excess demand and supply of credit within the commercial banking system that leads to debt build-up and then a period of retrenchment . Counter-cyclical policy seeks to dampen excess credit creation with interest rate increases and greater tax takes (not rate rises) during expansions and lower tax takes and interest rates during downturns.
    Tax increases are not a useful counter-inflationary policy. Indirect taxes like VAT increase prices directly as do business taxes that increase costs of production. income tax increases reduce disposable incomes at a time when real incomes are already being squeezed by inflation. It is excess credit creation (too much broad money being introduced to the economy) that is the principal source of inflation, not too much income being earned by households and spent . A house today has the same value to a family today as it did 20 years ago. The value of the land and buildings is no greater. What has changed is the unit of account we use to measure value (the currency) has itself fallen dramatically in value.
    The coalition reduced taxes with big hikes in personal allowances and cuts in corporation tax. Overall spending increased year on year in real terms principally as a consequence of healthcare and pensions costs. Historically large deficits were run throughout the coalition years and unemployment reduced to pre-crisis levels. That is not a definition of economic austerity i(tax rises and overall decreases in public spending or a spending squeeze that increases unemployment).
    We may see actual economic austerity in the coming years (tax increases not tax cuts) as tax rates have to rise to meet the growing pensions, healthcare and social care needs of an aging population and a reinforcing of the social security safety net.

  • Michael BG,

    it is not inflation that typically causes depreciation in the currency, It is more often the other way around and as with many economic variable one feeds on the other i.e. a devaluation will normally see import prices rise. As we import more than we export this generally results in an overall increase in prices
    The big falls in sterling in recent years have not been preceded by general inflation, but rather came about due to loss of confidence in the international competitiveness and stability of public finances of the UK . The first was in the 2008 financial crisis and the second big fall was after the Brexit referendum.
    Inflation is caused principally by too much money chasing a restricted supply of goods. In the period 1997-2007 excess money creation in the banking system was principally directed at the housing market both for house purchases and remortgages. There was an over-reliance on financial services as an engine of growth and source of income that evaporated during the financial crisis.
    I agree with the points you make about regional investment, but would re-emphasise the issue of structural and frictional unemployment. This is particularly pertinent in London which has the highest levels of unemployment in the country at present London unemployment
    The NiESR is highly critical of economic management in the UK Niesr
    “There is a persistent problem over many years of economic growth disappointing on the downside,” he said, which he blamed on low levels of public investment to raise the level of workers’ skills and improve productivity.”
    “…a hard Brexit had made the situation worse. “Short-run supply problems will persist and are likely to be exacerbated by Brexit.
    “Our problems are not insurmountable, but prompt and consistent interventions by the state to support training, labour mobility, house building may act to alleviate some of the costs of adjustment to that high wage-high skill economy for which we yearn,”
    These are all recommendations that I would support – public investment to raise the level of workers’ skills and improve productivity and interventions by the state to support training, labour mobility and house building.

  • Peter Martin 10th Nov '21 - 6:16pm


    You seem to be in denial that either the coalition or the Tories, later on their own, indulged in unnecessary economic austerity.

    This is indicative of an ultra right wing mindset.

  • Peter Martin,

    it is indicative of objective economic analysis rather than political rhetoric. There is nothing wrong with political rhetoric in the right place like here, but it is not of much help in formulating economic policy.
    As Giles Wiles notes in his piece “What any economy can produce…does not change much in response to announcements in any one budget”.
    The coalition was initially impacted by a spike in oil prices and other commodities that drove inflation from 3.5% in mid 2010 to over 5% in the autumn of 2011 as well as the Eurozone debt crisis. These factors were much more of a drag on growth than anything announced in the budget. Osborne’s plan A for cutting the deficit was dropped within 18 months and economic growth had returned by 2013. pretty much as a result of a rebound in consumer confidence rather than any budget measures.
    Overall government spending could not fall despite cuts in welfare, local government etc because spending had to increase in healthcare and pensions. Unemployment fell from a peak of 8.5 per cent in 2011 to its pre-crisis level of 5.5% in mid-2015 with wage increases running at 2% and inflation at 0.5%.
    There is a lot to criticise about coalition policy particularly around welfare and local government cuts, but the Labour argument about undermining economic growth through economic austerity does not stack up any more than the Conservative argument that Labour profligacy was a cause of the financial crisis.
    LibDems will be developing a manifesto for elections in a couple of years time based on the economic conditions that the country faces.
    As the OBR, Niesr and IFS analyses shows those economic conditions are quite likely to be challenging, against a backdrop of higher inflation, higher interest rates, subdued growth and growing needs for large scale green investment, state and public sector pensions, NHS and social care spending, investments in education and training, local government financing and greater welfare provision including childcare. That requires a thought through long-term strategy for tax, spending, investment and borrowing that does stack-up against what other parties are putting forward. That is where the LibDems come in with policies based on real empirical evidence of what works in improving general living standards rather than ideology.

  • Peter Martin 10th Nov '21 - 9:35pm

    @ Joe,

    Vince Cable managed to acknowledge the austerity of the coalition years. He expressed regret that it had led to Brexit.


    Theresa May also. She promised that it had ended.


    I really don’t think it can be at all possible to have a sensible discussion about the austerity of the last decade with someone who has placed themselves economically well to the right of Theresa May by denying what she was obviously accepting.

    I may disagree with Michael BG and Katharine Pindar over some issues but I do acknowledge their hearts are in the right place. They often, for example, refer to the Alston report on UK poverty. I don’t remember you doing that. Economics cannot be separated from politics. The politics have to come first then we work out how we can achieve our objectives by applying the correct economic policies.

  • William Francis 10th Nov '21 - 11:59pm

    @Peter Martin.

    May did not end austerity in any meaningful way, any more than she introduced workers’ representation on company boards or created lists “naming and shaming” businesses that employ the highest proportion of foreign workers.

    Much like with Johnson’s “big state conservatism” or Osbournes “northern powerhouse” rhetoric has largely been used to hide the inadequate reality.



  • Peter Martin,

    austerity in current use is a term that is used to denote cuts in parts of public spending over the past decade (particularly in welfare, local government and investment spending) or increases in NHS spending that are insufficient to keep up with demand on the services. Those are indeed political choices based on tax cuts or keeping taxes at a low level in an effort to spur growth.
    You point to these policies as the reason for low economic growth during the coalition years despite the UK having the highest growth of the G7 economies in the period 2013 to 2016 before the Brexit referendum and continue to ague that leaving the EU is a long-term benefit to the UK economy. I think you are wrong.
    We need to accept that post-Brexit, taxes need to increase to provide sustainable public services and a satisfactory social security safety net, to levels commensurate with Northern Europe.
    It is very difficult to increase taxes when inflation is reducing the real incomes of the population, so inflation must be brought under control first and that is only partially within the control of the government. Until that simple fact is accepted no progress will be made.

  • Peter Martin 11th Nov '21 - 1:48am

    @ William Francis,

    “May did not end austerity in any meaningful way……..”

    Who said she did? My point was she acknowledged its existence.

    @ Joe Bourke,

    “austerity is a term that is used……”

    Or do you mean misused? If I understand you correctly you are reserving the term, or “actual economic austerity”, for significant tax rises at the same time as significant cuts in public spending. You don’t make any provision for a rising population so if you can claim it is just about level you’ll also be claiming no austerity.

    Or if there is an decrease in certain rates of some taxes, even though there are rises in others, you’ll also be saying the same. ie No austerity.

    The Alston report says (and plenty more besides):

    “Policies of austerity introduced in 2010 continue largely unabated, despite the tragic social consequences. Close to 40 per cent of children are predicted to be living in poverty by 2021. Food banks have proliferated; homelessness and rough sleeping have increased greatly; tens of thousands of poor families must live in accommodation far from their schools, jobs and community networks; life expectancy is falling for certain groups; and the legal aid system has been decimated. The social safety net has been badly damaged by drastic cuts to local authorities’ budgets, which have eliminated many social services, reduced policing services, closed libraries in record numbers, shrunk community and youth centres and sold off public spaces and buildings. The bottom line is that much of the glue that has held British society together since the Second World War has been deliberately removed and replaced with a harsh and uncaring ethos. ”

    So who’s right? You or Philip Alston?

    I could also make a more technical argument about why you’re wrong in your approach and definition. But that’s not particularly important. Your argument is motivated by a very rightwing viewpoint and this of course is.

  • Peter Martin,

    Philip Alston made a lot of important points in his UK report around the false economy of cuts in benefits and an over-reliance on getting people into work as a means of reducing poverty. He also opined on the effects of inflation and Brexit on the lowest income households.
    What he did not do is offer an opinion on the UK’s tax and borrowing policies or monetary policy. His remit was focused on rising poverty and the ability of the welfare system to cope with the economic circumstances prevailing in the aftermath of the financial crisis. He was at pains to point out that welfare cuts were a political choice rather than an economic imperative and may not save much overall anyway.
    The Conservative party today has finally come to the realisation that taxes as a proportion of national income will need to rise as we come out of the pandemic to meet higher demands on public services going forward.
    I expect the Labour party will catch-up with that realisation at some point. The Libems have been calling for higher tax and spending, particularly around welfare and childcare provision, for some time and have adopted a policy of introducing Universal basic income or a guaranteed minimum income. In common with Philip Alston, LibDem policy does not place an over-reliance on getting people into work as a means of reducing poverty.

  • Joe Bourke,

    The automatic economic stabilisers are not sufficient to bring about a recovery during a downturn or balance the budget during an upturn. I am not sure they ever could be, but I support increasing benefit payments to ensure no-one on benefits is living in poverty to test your hypothesis.

    What evidence do you have that most recessions are caused by excess demand?

    Increasing income tax reduces the amount people have to spend and so of course it reduces demand. It should also decrease consumer lending because banks should be less keen to lend money to people who have a reduced net income.

    Indeed, a devalued currency will cause inflation because imports are more expensive. Now you are saying that currency devaluation is caused by a lack of confidence in the economy and I agree. A high level of inflation will cause a fall in confidence as will low forecasts of economic growth. If the government stimulated the economy so economic growth was forecast to be around 2.5% for the next three years then confidence in the British economy would increase.

    I note that you don’t see the 2008 recession being caused by too much demand but being caused by loss of confidence and debt deflation. You need to differentiate between inflation and asset inflation.

    Do you support my idea of allocating £11.7 billion to finance (on top of the cost of benefits) the cost of job guarantees and training guarantees for one year?

    I think the Thatcher government is an example of where a government deflates the economy and increases unemployment to control inflation. I expect you meant to write, that it is difficult for governments to control inflation unless that inflation is caused by the economy being at full capacity.

    It almost looks like that you believe that increasing benefit levels is a good way to remove people from living in poverty. I look forward to you saying that benefit levels coupled with a Universal Basic Income should rise to the poverty level for each household type.

  • Peter Martin,

    What you quote from Philip Alston plus, ‘Key elements of the post-war “Beveridge social contract” are being overturned’ are what led Katharine and me to call for a new Beveridge type social contract to end today’s social ills. (Examples are Katharine’s article https://www.libdemvoice.org/the-time-is-now-for-planning-beveridge2-66667.html or our joint one https://www.libdemvoice.org/a-new-social-contract-putting-flesh-on-the-bones-63391.html.)

  • Michael BG,

    automatic stabilisers are normally sufficient to smooth the peaks and troughs of demand but will not offset all of the fall.They can be assisted by job support programs like the job guarantee, but fine tuning rarely works as intended.
    Additional major intervention is only required in a severe downturns at the end of a long-term debt cycle like the financial crisis or in the event of major disasters like the pandemic. The evidence that most recessions (but not all) are caused by demand and supply of credit within the commercial banking system that leads to debt build-up and then a period of retrenchment is contained in Hyman Minsky’s hypothesis. Excessive private debt build up over multiple cycles leads to financial crises and retrenchment.
    GDP falls when inflation is high Inflation and economic growth. This is what happened in 2010 to 2012 when inflation spiked in those years. The recovery began in 2013 as inflation receded.
    The government cannot sustain long-term growth growth with stimulus – fiscal or monetary. Japan provides three decades of evidence for that. Excessive public debt build-up leads to stagnation. The drivers of long-term growth are structural – investment in productive infrastructure, technological innovation and skills development.
    Inflation starts with assets – financial assets and property – but then moves to prices unless there are sufficient deflationary forces keeping prices low like offshoring of production to cheaper labour countries.
    Job guarantees need to be financed for more than one year. They should be part of the automatic stabilisers in the economy.
    The Thatcher government deliberately induced a recession to address inflation that has been building since the mid 1960s and left a legacy of long-term unemployment in coal mining regions.
    i wrote earlier where I think LibDem economic policy should be focused – bring stability to land, labour and capital markets and government will be doing its job of managing the economy for the benefit of all participants. And the Niesr recommendations for public investment to raise the level of workers’ skills and improve productivity and interventions by the state to support training, labour mobility and house building.
    Increasing benefit levels should be tax financed and not conflated with economic policy.

  • Peter Martin 11th Nov '21 - 9:01pm

    @ Joe Bourke,

    “What [Alston] did not do is offer an opinion on the UK’s tax and borrowing policies…….”

    Of course he did. You’re suggesting that when he used the word austerity, as he often did, he didn’t understand the meaning of the word. The Financial Times defines economic austerity as “official actions taken by the government, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts and tax rises.” Anyone who read the newspapers or even articles in LDV a decade ago would know that Govt policy was all about deficit reduction

    Deficit reduction was explained as the Govt having to borrow less.

    You’re trying to rewrite to rewrite history to suit yourself.

    There are other definitions of austerity which aren’t at variance. Prof Mark Blythe calls it people with lots of money telling others who have far less money that they have to get used to even less.

    You might be interested to take a look at Mark Blythe’s book:


    I must confess I haven’t read it but I like the title!

    You are possibly right that we’ll need higher taxes if an inflation problem develops. But what you need to realise that Govt spending creates its own revenue. So if the government spends more on the NHS that additional spending will come back as revenue regardless of the level of taxation. Increased taxes simply speed up the process of its return. So they don’t generate any extra revenue but they do dampen down inflation which is only legitimate reason to make those increases.

    @ Michael BG,

    I understand why you and Katharine like the Alston report and why it causes Joe some difficulty. It causes me some difficulty too but, hopefully, for a different reason. The difficulty from a left perspective is that he doesn’t did deep enough with his explanations of why there are such problems as he describes. He doesn’t mention the loss of effective Trades Unionism in preventing falling wages, with much of the poverty he highlights being in-work poverty.

    So his answer to the problem, like yours, is to call for higher social benefits whereas what we really need is a genuine shift in the balance of power towards working people.

  • Joe Bourke,

    The coalition practiced austerity economics (including increasing VAT by 2.5%) when it first came to power, which resulted in it being reported at the time that we had a double dip recession. The welfare cuts brought in 2012 to be implemented from April 2013 were austerity measures. In our 2010 manifesto we stated that the economy was too weak to start reducing the deficit and we stated we would stimulate the economy in 2010-11. This was the correct policy, not deflating the economy which the coalition government did, while the Bank of England was using quantitative easing to stimulate the economy.

    Japan is not the UK. The government since 2010 has not tried to get economic growth high enough. It hasn’t been 3% or above excluding since Covid, since 2005. There was continuous economic growth in the UK from 1993 until 2007. Between 1997 and 2000 UK economic growth was above 3%.

    We agree that the government should be doing more to re-train people and encourage businesses to train their staff. To focus on the £11.7 billion being only for next year and not assuming it would run on for future years is a way for you to avoid the question. Do you support the idea that the government should spend £11.7 billion next year and at least this amount for the following years for job guarantees and training guarantees?

    The Keynesian view is that economic growth is demand led. Knowing this demand will exist will build business and financial confidence which leads to increased investment, production and productivity.

    It is good to read that you agree with me about the Thatcher government’s economic policy aims.

    I am not sure anyone reading your comments would conclude that you “wrote earlier where I (you) think LibDem economic policy should be focused – bring stability to land, labour and capital markets”.

  • Peter Martin,

    Having read the Wikipedia article on Mark Blyhte’s book, it does look like an interesting book about how austerity does not work.

    I am not convinced that the decline in the power of Trade Unions is as much a factor as you think it is. I think having a large pool of unemployed people and access to foreign workers are more of an explanation. I also wonder what effect the introduction of Tax Credits had on low pay. Before then the only help people received when in work was housing benefit and council tax benefit. Having benefit levels at the poverty level are not likely to increase wages but will ensure no-one in the UK in work or not in work will be living in poverty. Increasing the National Living Wage will increase wages. I wonder if a London Living Wage set higher than the national one would move some work out of London into the poorer regions.

  • Philip Alston in his report writes “But in the area of poverty-related policy, the evidence suggests that the driving force has not been economic but rather a commitment to achieving radical social re-engineering –a dramatic restructuring of the relationship between people and the State.” That’s his conclusion as the Special Rapporteur on extreme poverty. He was not here to assess UK economic policy but rather the state of poverty and welfare provision in the UK.
    One of the key aims of LibDem policy in coalition was reduction in the level of the structural deficit with a view to restoring financial stability and to invest heavily in financing productive capital investment in infrastructure, social housing, science, and innovation as outlined by Vince Cable in 2015 https://www.libdemvoice.org/vince-cable-writes-osbornes-deep-cuts-are-damaging-and-ideological-44123.html.Ultimately, the structural deficit is a residual of household spending and borrowing and was reduced principally by economic growth from 2013 to 2016.
    Higher taxes now would be counter-productive as they would add to serious household cost pressures across the board this winter, at a time when support for living costs not more taxation is required. The BofE will begin to address inflation once the data has confirmed that it is not likely to be transitory.
    Taxes will need to increase in the future when inflation has been brought down to maintain increased and ongoing spending on public services and welfare provision without reigniting inflationary pressures.
    Saying that Government spending creates its own revenue is a tautology. All spending in the economy is someone elses income whether its by the government or private parties.
    Most of the money supply is created in the commercial banking system for commercial purposes and is taxed by the government to transfer resources to the state for public purposes and redistribute income. The money supply circulates in the economy and is continually being created and destroyed by new lending and repayments expanding and contracting to meet the demand for new money and credit.
    When the government spends it creating liabilities that have to be met by taxpayers at some point in the future. It is what the government spends on that is important. Governments can spend wisely to improve living standards or spend wastefully at taxpayers expense. How much they spend and how wisely they use the resources put at their disposal will ultimately determine if they are able to retain the confidence of the electorate.

  • Peter Martin 12th Nov '21 - 3:55am

    @ Joe,

    “Saying that Government spending creates its own revenue is a tautology”

    No it isn’t. The Government spends into the economy by creating its own IOUs and removes some of its own IOUs during the process of taxation. It always will leave more in the economy than it creates. The danger is that it will leave too many, giving the rest of us too much spending power and so create inflation. If so, taxation levels need to be increased. The problem with the word ‘revenue’ is that it doesn’t describe the taxation process from the POV of a currency issuer. If it issues currency why does it need revenue? It doesn’t but it does need to control inflation.

    Another way of looking at taxation is that it gives the Govt its own fiscal space to spend without causing inflation. But it isn’t the only way that space is created. The savings accrued by the private ad overseas sectors have the same effect.

    “Most of the money supply is created in the commercial banking system for commercial purposes”

    Commercial banks create IOUs denominated in ££ in the UK. As with all IOUs there are assets and liability elements which net to zero. They aren’t the same as Govt pounds. The pound is monopoly issue, the IOU, of the UK govt. In the USA it is the $, in Japan it is the Yen etc. When any govt taxes it wants its own IOUs back. These are held by the banks in the form of reserves. It doesn’t want commercial bank IOUs.

    “When the government spends it creates liabilities that have to be met by taxpayers at some point in the future”

    This is like saying the National Debt has someday to be repaid by taxpayers. IF somehow this was done there would be no net overall credits in £ in the UK economy. We’d be reduced to a barter economy. The National Debt only goes one way, except with the rarest exception, ie upwards!

  • Peter Martin 12th Nov '21 - 3:56am


    “Most of the money supply is created in the commercial banking system for commercial purposes”

    The commercial banking system may be able to create money but it cannot create net credits. They have to come from Govt. The Govt can hold as many liabilities as it likes and no-one can do anything about those. This is why every country usually has its own currency which is effectively all the net credits created by Govt.

    “The money supply circulates in the economy and is continually being created and destroyed by new lending and repayments expanding and contracting to meet the demand for new money and credit.”

    The money created by commercial banks is largely cancelled by the process of contra during the clearing system. If Barclays, for example, receives Lloyds credits, and vice versa at the end of the working day then they are cancelled against each other. They will always do this approximately but there could be a residual imbalance which needs to be settled by a transfer of Govt IOUs.

    The Govt itself is effectively a bank and will cancel off its own IOUs with commercial bank IOUs and this is the main way that they are destroyed. If the Govt spends more into the economy than it receives back in taxes there will inevitably be an excess of reserves, ie Govt IOUs, in the hands of the banks. The banks can then ‘lend’ these back to the Govt by purchasing gilts and possibly other Govt securities.

    So what does this mean practically? It is that a Government deficit is a natural state of affairs that shouldn’t be a cause of concern unless there is a potential inflation risk. The difficulties we have in our economies, and which lead to the effects that Philip Alston describes, are largely caused by a failure to understand what is a relatively simple arithmetic system of plusses and minuses. Credits and liabilities.

    It just needs a little lateral thinking. It’s not on the same level of difficulty as Quantum Mechanics!

  • Peter Martin,

    the government is the monopoly issuer of currency and bank reserves, not the monopoly issuer of money. Private banks and other financial institutions do not need government or even a central bank to able to create money (bank deposits) or credit (other financial instruments) for settlement of debts.

    A national debt and deficit is a natural state of affairs until it begins to deviate from its typical pattern of expanding and contracting with the business cycle.. Then it become a source of drag on economic activity and stagnation.

    Raising taxes to address inflation is a terrible idea that any trained economist would advise against in the early stages of a recovery. The likely result of withdrawing demand from the economy in the early stages recovery is to stall the recovery and create stagflation i.e. slowing output with rising unemployment and continuing inflation.
    Interest rates will need to be raised slowly over the course of time to cool inflationary pressures in the domestic economy. Neither tax or interest rate increases will do anything to cool imported energy and food cost inflation.

    i would forget about the pseudoeconomics and leave the economics to those who have been there and done it in the real world. Economists like Vince Cable have seen the damage done by naive economic models in the developing world and have the experience of guiding the country through to economic recovery after a financial crisis.

    Struggling households need hard cash for food and shelter that is not given with one hand and inflated away with the over. The way to ensure financial and price stability is to cover currency spending with tax financing and use the nation’s borrowing capacity to invest in developing the capacity of the economy for production of useful goods and services.

    It does not require any lateral thinking. It just requires getting your head out of the sand at looking around to see what works in other countries and what does not. There is no shortage of examples of what not to do (Japan, Turkey) and what delivers sustainable quality public services (Norway, Denmark, Sweden).

  • Peter Martin 12th Nov '21 - 12:11pm

    @ Joe,

    “the government is the monopoly issuer of currency and bank reserves, not the monopoly issuer of money”


    “Private banks and other financial institutions do not need government or even a central bank to able to create money (bank deposits) or credit (other financial instruments) for settlement of debts.”

    In principle no-one does. Theoretically, you or I could write out IOUs in Vietnamese Dongs, even though we might not have any at the time, which could serve as money. This is providing we were trusted to make good on them on demand. In practice, commercial banks tend to work very closely with their central banks who will guarantee their activities, up to a point, providing they adhere to the rules. So UK banks will work with pounds. Australian banks with Aussie dollars etc It wasn’t always like this. The banking system in the 19th century suffered from a lack of stability. Even rumours of problems could derail sound banks.


    “A national debt and deficit is a natural state of affairs until it begins to deviate from its typical pattern of expanding and contracting with the business cycle.”

    A deficit will follow this pattern but even a reduced deficit will still mean an expanding debt. Whether or not it is a problem depends on the net savings made by both the private and overseas sectors. If they want to save the Govt needs to accept their deposits or make saving sufficiently unattractive to deter them.

    “Economists like Vince Cable have seen the damage done by naive economic models in the developing world…”

    Not just VC ! And not just in the developing world! We’ve all seen the damage done by naive models followed by the mainstream in the last few decades! The post 2008 model followed by EU economists has been much worse than in the UK which in turn has been much worse than in the USA.

  • Peter Martin 12th Nov '21 - 12:12pm


    “The way to ensure financial and price stability is to cover currency spending with tax financing.”

    You can’t say this without knowing the savings requirements of the overseas and private domestic sectors.

    “…and use the nation’s borrowing capacity to invest in developing the capacity of the economy for production of useful goods and services.”

    Are you suggesting the Govt should become actively involved in this process by directing investments?

  • Joe Bourke,

    The idea of structural deficits is generally seen as a meaningless term which it is impossible to estimate accurately.

    I have pointed out why tax increases reduce demand in the economy and so inflationary pressure. However, if the inflation is caused by external factors then the government and the Bank of England are doing the correct thing by doing nothing. Hopefully, after April we will see inflation falling. Economic growth is forecast to be in the region of 1.5% after next year, so there will be spare capacity in the economy and there should not be internal inflationary pressure. There will be a need to continue to address the unemployment problem over this period. This will need the government to spend money in the poorest regions and to re-train the unemployed. This is why I suggest allocating £11.7 billion next year to this task.

    Are you really saying that you don’t believe that when the economy grows, the government’s income increases?

    Are you really saying that the UK government has to repay the national debt and to reduce it in monetary terms? It is rare for the UK national debt to contract in monetary terms. I am surprised you can suggest otherwise.

    It seems now you are recognising that increasing taxes will withdraw demand from the economy. Neither Peter nor I have ever suggested increasing taxes during the early stages of a recovery. We both say it should be done if the economy is overheating.

    It seems we agree that “Neither tax or interest rate increases will do anything to cool imported energy and food cost inflation”. Therefore I wonder why you keep suggesting that interest rates will need to be increased to deal with this type of inflation.

  • Peter Martin 12th Nov '21 - 3:34pm

    @ Michael BG,

    “I have pointed out why tax increases reduce demand in the economy and so inflationary pressure.”

    It’s probably fair to concede that there is a problem with putting up taxes like VAT, fuel duty, alcohol duty etc. The tax increases are also price increases which adds to at least the perception of inflation. Income taxes and increases in capital gains, corporation tax etc on the other hand don’t.

    Raising interest rates has the same problem. Mortgage and other loan repayments are then higher. Even reducing them can cause the same effect if property prices increase.

    So maybe we do need a better measure of inflation than the CPI.

    @ Joe,

    As usual, you’re holding up Norway (5.1% CA surplus), Denmark (7.6%) , Sweden (3.2%) as model economies for us to follow. I notice Finland has dropped off your list. Is this because of their Euro troubles?

    So we all should export more than we import to have a successful economy? Maybe we could create a fictitious country of Atlantis for the sole purpose of buying up the output from our factories. We’d be paid in Atlantean dollars for stuff we’d ship over to a point over a deep ocean trench and then dump it all overboard.

    Or perhaps you can come up with a similar list of Current Account deficit countries?

  • Katharine Pindar 12th Nov '21 - 4:10pm

    It was good to read part of the conclusion of the Alston Report of April 2019 being quoted here by Peter Martin – well done, Peter – as the country faces post-Budget new falls in living standards with the fuel price rises, and increased taxes including council tax rises from next spring. There is the likelihood of increasing poverty and no compensating benefit rises or enhanced council services.

    It seems to me that we need reform of capitalism itself. As our party has said, in companies there should be commitment to all stakeholders, not just the shareholders. Directors’ pay and shares should become proportionate to workers’ remuneration, as I think the Labour party seeks. Wealth should be taxed as well as income, as we hold, and particularly wealth used for speculative purposes, such as acquiring property as investment rather than for providing accommodation or useful job opportunities, should surely be targetted.

    Government here must be deterred from continuing as in the decade of austerity to make paid work the only means it intends for the 14 million poor people still with us to have any chance of rising from poverty; and those in work must be protected from such exploitation as zero-hours contracts. Those who cannot work must be protected with higher welfare benefits as well as guaranteed minimum income measures, and housing costs must be reformed, to lessen the structural inequality that is so entrenched in this country. We need a radical programme.

  • Michael BG,

    a structural deficit problem implies that even allowing for cyclical fluctuations in the economy, current government spending (not capital spending) is being financed by borrowing. A structural deficit problem implies that borrowing is becoming increasingly unsustainable or expensive. It is based on estimating the output gap or as you refer to it – spare capacity in the economy. At near full employment (circa 4%) current spending should be matched by tax receipts and borrowing should be funding capital spending and debt rollovers i.e. debt to GDP should be stable or falling.
    The fiscal stimulus in the 2008 financial crisis came almost entirely from automatic stabilisers with the bulk of borrowing being utilised to shore up loss of tax receipts (which fell precipitously despite government maintaining spending) and bank recapitalisations. The only significant change in tax rates was a VAT reduction to 15% on 1st December 2008 that was reversed by AlistairDarling 13 months later from 1st January 2010. It did not seem to have much effect with many retailers just pocketing the difference to shore-up profits.
    In a letter to the economist James Meade in April 1943, Keynes said,” A remission of taxation on which people could only rely for an indefinitely short period might have very limited effects in stimulating consumption.”
    Darling increased VAT to 17.5% in January 2010 and reduced capital spending in the March budget. Osborne increased VAT to 20% from January 2011 while simultaneously increasing personal allowances to reduce income taxes and corporation taxes neutralising and fiscal effects at a macro-economic level.
    Neither tax measure had any significant impact on economic recovery, being dwarfed by other factors outside of the control of the UK Chancellor including global commodity inflation and the eurozone debt crisis.
    As Philip Alston wrote in his report “in the area of poverty-related policy, the evidence suggests that the driving force has not been economic”. He is correct.
    Katharine is correct to suggest that “Wealth should be taxed as well as income, as we hold, and particularly wealth used for speculative purposes, such as acquiring property as investment rather than for providing accommodation or useful job opportunities.”
    Poverty campaigners that are unwilling to face the fact that increased benefit payments must be paid for with higher taxes will not be taken seriously.

  • The BofE will almost certainly need to raise interest rates in the NewYear to address the domestic element of inflation i.e. excluding imported food and energy prices. That is a positive move as it puts money in the hands of private savers from government spending into the economy and serves to slow excess credit creation and asset price inflation.
    Increased interest rates are not the problem they once were in the housing sector. The number of homeowners with outstanding mortgages has fallen to 37% of households as the average age on homeowners increases and of these less than 20% have variable rate mortgages with many have taken out 5 year fixed rates. Regulatory changes since 2014 have included affordability tests to ensure that mortgage borrowers could cope with interest rate increases of up to 3%.
    Taxes on income and profits will not be increased further by this government anytime soon. Nor should they be. There are already sizeable increases in employer and employee national insurance coming in from April to fund the NHS together with dividend tax increases and big increases in corporation tax from 19% to 25% scheduled for the following April.
    Tax reform needs to be focused around the recommendations of the Mirrlees review and proportional property taxes in particular.

  • Peter Martin 12th Nov '21 - 9:29pm

    @ Joe B,

    “A structural deficit problem implies that borrowing is becoming increasingly unsustainable or expensive.”

    No it doesn’t. We’ve been hearing about “structural deficits” for well over a decade now and during this time interest rates have fallen making so-called govt “borrowing” ever cheaper.

    Any country importing more than it exports will run what is termed a “structural deficit”. So if you want the Government to run a reduced deficit, structural or otherwise, you’ll need to lower the exchange rate, making imports, including food, less affordable.

    That’s not going to give Mr Alston anything more positive to say about us the next time he visits.

    Neither are promises to lower the pound and raise taxes to suppress domestic demand to make room for exports going to do much for Lib Dem electoral fortunes.

    Bill Mitchell explained it all as long ago as 2009 in his usual style:

    “Structural deficits – the great con job!”


  • Peter Martin,

    The cost of structural deficits is not simply interest on debt it is the devaluation of the currency that can come with it. We all might want to think like Bill Mitchel that we could do a better job then Gareth Southgate as manager of the England team, but if you want to understand why structural deficits are important read an explanation from someone actually working at the coalface like Vince Cable https://www.theguardian.com/politics/2011/may/20/vince-cable-economy
    “We have had a very, very profound crisis which is going to take a long time to dig out of. It is about the deficit, but that is only one of the symptoms. We had the complete collapse of a model based on consumer spending, a housing bubble, an overweight banking system – three banks each of them with a balance sheet larger than the British economy. It was a disaster waiting to happen and it did happen. It has done profound damage and it is damage that is going to last a long time.”
    He predicted the impact on people’s lives will not come primarily from government spending cuts, but the squeeze in living standards caused by world prices and a 20% devaluation of sterling against other major currencies.
    “The danger is over-confidence — the belief that the government can control everything in the economy. Governments cannot. Economic management is difficult.”

  • Peter Martin,

    Indeed, increasing some taxes do increase inflation. The 2.5% increase in VAT under the Coalition Government did this, but it also removed demand from the economy and helped cause the reported double dip recession (later was it discovered not to have been so bad).

    As you say increasing interest rates also have the same problem.


    In the 1920s the Liberal Party as part of its industrial strategy wanted to reform capitalism including making workers capitalists, having worker directors and worker councils, and for workers to share in the dividends of companies. These ideas are still current in Liberal Democrat policies.

    Joe Bourke,

    If the Bank of England increases interest rates this will remove demand from the economy because those with variable rate mortgages (20% of households you say) will have less money to spend as well as reducing the amount consumers can borrow. It will also reduce new business investment as increased borrowing costs always do. Any increase in income that savers receive will be small compared to these and savers are unlikely to spend their extra income into the economy.

    Indeed, there are “increases in employer and employee national insurance coming in from April to fund the NHS together with dividend tax increases and big increases in corporation tax from 19% to 25% scheduled for the following April”.

    Structural deficits are not mentioned much today. This is because it is generally recognised by economists that they are almost impossible to estimate accurately and are not a useful tool for anything. If Vince Cable was a great economists he would have known this in 2011, but he went along with the economic consensus. This economic consensus of 2010 is now generally recognised by economists as being wrong and the world economy suffered from government pursuing the wrong economic policies at that time.

  • Peter Martin 13th Nov '21 - 9:22am

    @ Joe,

    I know it is often hard for you to answer a direct question but would you agree that any country running a current account deficit will also run what you term as a ‘structural deficit’?

    If so, why tackle what you and Vince Cable perceive to be a problem by fiscal measures?
    With all due respect to Vince Cable, he was instrumental in creating the conditions that Philip Alston has been critical of. If you want to introduce an “argument from authority” you are going to have to do better than invoke someone who happily sat in a Tory dominated cabinet.

  • Peter Martin 13th Nov '21 - 9:50am

    @ Joe,

    “Regulatory changes since 2014 have included affordability tests to ensure that mortgage borrowers could cope with interest rate increases of up to 3%.”

    I’d say you’re missing the point. The price of housing is determined by recent sales. In a rising market, borrowers will usually find a way to make the repayments. If they have trouble lenders will take a more relaxed view knowing their loan is supported by adequate collateral. if the worst comes to the worst there is always the option, for the borrowers, of selling at a profit to clear any debt.

    This all changes in a falling market. There is a much reduced incentive to make the payments. Lenders will be more nervous about the smallest of arrears. There’s probably no option to sell to clear outstanding liabilities. Even those who aren’t in arrears won’t be able to move if their debt is more than the reduced value of their property.

    Of course we all want more affordable homes for younger people but the problem is that the UK economy is built on a sea of private debt with unaffordable homes used as collateral. If that bubble bursts, as it well might, and even if interest rates don’t rise much at all, then a severe recession will surely follow.

  • Michael BG,
    This is the House of Commons research report published 2021 that is the basis of advice to Parliamentarians on budget deficits https://commonslibrary.parliament.uk/research-briefings/sn06167/
    “What is the structural deficit?
    A distinction is often drawn between the cyclical and structural elements of the budget deficit. The size of the deficit is influenced by the state of the economy: in a boom, when the economy is above its potential, tax receipts are relatively high and spending on unemployment benefit is low. This reduces the level of borrowing. The reverse happens in a recession when borrowing tends to be high.
    The structural deficit is that part of the deficit that is not related to the state of the economy. This part of the deficit will not disappear when the economy recovers. It thus gives a better guide to the underlying level of the deficit than the headline figure. The structural deficit cannot be directly measured so it must be estimated.”
    The structural deficit has to be estimated as the output gap (i.e. spare capacity in the economy) has to be estimated.
    MMT economists talk about modelling spending program to see if they will lead to increased inflation as a test of viability. This is what budgets effectively do. Planned budgets deficits that do not increase debt to GDP ratios are a model. The planned budget deficit is limited in two ways (1) The overall budget deficit is limited to a combination of expected growth and target inflation i.e. around 3.5% (2) The spending is focused on investment that will grow the productive capacity of the economy not excess consumption that will drive inflation.
    Some economies have greater fiscal space than others. The USA has virtually unlimited space due to the reserve status of the US dollar. Argentina has virtually none due to its fiscal mismanagement and hyperinflation. Theoretically, Argentina can just print pesos to buy US dollars on the FX markets to pay off its Dollar debts, but that just further debases its currency and accelerates its hyperinflation.
    The UK lies somewhere between the US and Argentina. Some currencies will strengthen in a global financial crisis (US Dollar, Euro, Japanese Yen, Swiss Dollar, Chinese Yuan). Other currencies will depreciate relative to these stronger currencies as sterling did in the 2008 financial crisis and after the Brexit referendum.
    Vince Cable is an Internationally recognised economist. He does not make the mistake of thinking that you can sustain long-term economic growth simply by increasing fiscal stimulus year on year, anymore than Keynes did. That is not Keynesian economics.

  • Peter Martin,

    “Of course we all want more affordable homes for younger people but the problem is that the UK economy is built on a sea of private debt with unaffordable homes used as collateral. If that bubble bursts, as it well might, and even if interest rates don’t rise much at all, then a severe recession will surely follow”

    The problem is we have too much fear of correcting housing bubbles and not enough politicians with the intellectual calibre (like Vince Cable with Mansion tax) and willingness to do something to address it.

    The wealthy elite don’t save money. They borrow to invest in assets that will appreciate in value – Stocks and bonds, commercial and high-end residential property, commodities etc. The lower the interest rates the more wealth those at the top accumulate. The losers are small savers that keep their money in banks and building societies and national savings accounts. Low interest rates are a massive transfer of wealth from tens of millions of all small savers to a wealthy elite that can access capital for investment. It is the reason why pensions are insufficient for retirement and so many older people are stacking supermarket shelves and the like well into their seventies and eighties.
    Low interest rates drive inflation. This is good news for wealthy investors with large debts as the real value of the debt is eroded while asset values continue to increase creating enormous capital gains. The people that pay the stealth tax that is inflation. Well that is the lower paid, those on benefits and pensioners on fixed incomes.

    The housing issue can be dealt with via Proportional Property Tax and land reforms. Those on low incomes can be given some relief from escalating rents and the falling value of housing benefits that can’t keep up with inflation. That is far more important than propping up an inflationary housing bubble with artificially low interest rates. The 5 year fixed rate of interest on mortgages has gone up about 0.5% since the end of September.

  • Peter Martin 13th Nov '21 - 3:16pm

    @ Joe,

    1) Just a reminder about my question of 13th Nov ’21 – 9:22am which is stlll unanswered.

    2) Argentina made the mistakes both pegging its currency to the US dollar and borrowing in US$. Both to be avoided.

    3) There’s nothing special about the dollar. The US and UK’s trade balance, govt budget deficit, inflation levels, and amounts of QE have been comparable for the last ten years or so. The Americans don’t have “unlimited fiscal space”. They have no more and no less than everyone else.

    4) “The problem is we have too much fear of correcting housing bubbles” You can say that probably because you aren’t in the position of having just bought your first home on a 90% + mortgage. Those that have will be very worried at the moment.

    5) “Low interest rates drive inflation.” On the one hand you hand out such advice as “It just requires getting your head out of the sand at looking around” but on the other you obviously don’t do this yourself. If you did you will have noticed that as interest rates have fallen over the last decade, to almost zero, that levels of inflation followed. The pandemic has changed the picture but its been the extra spending to support the economy, coupled with a fall in available things to buy, which has caused inflation (as measured by the CPI) to jump. It’s nothing to do with low interest rates.

  • Peter Martin,

    We have been consuming more than what we are producing as a country for decades and we sell assets to pay for that consumption i.e. overseas assets held by UK residents, ownership stakes in UK companies, high-end real estate, corporate and government bonds etc. The major public utilities – energy, railways and water – are all to a significant degree foreign owned.
    An excess of imports over exports represents a leakage of demand from the economy as represented by GDP figures that is made up by these capital and financial asset sales.
    A net inflow of foreign financial investment always accompanies a trade deficit, while a net outflow of financial investment always accompanies a trade surplus. When government creates a budget deficit with some combination of tax cuts or spending increases, it will increase aggregate demand in the economy, and some of that increase in aggregate demand will result in a higher level of imports. A higher level of imports, with exports remaining fixed, will cause a larger trade deficit. That means foreigners’ holdings of sterling increase as Brits purchase more imported goods. Foreigners use those pounds to invest in UK assets, which leads to an inflow of foreign investment. One possible source of funding for the UK budget deficit is foreigners buying Gilts that are sold by the Treasury. So a budget deficit is often accompanied by a current account deficit i.e. the so called twin deficits. However, China and Japan run a trade surpluses and large budget deficits, so it does depend on the where savings are directed. Japan invests a large amount of its savings overseas Twin deficits
    Whether foreign investors buy UK Gilts is dependent on the interest rate relative to other opportunities (e.g UK rates are more attractive than negative rates in Europe and Japan), the prospect of capital gains and the risk of inflation/exchange rate losses.
    Rachel Reeves, the Labour shadow Chancellor touched on these issues in her recent budget response :”I would also put in place measures to help us buy, make and sell more in Britain, boosting British business while filling the gaping holes in the government’s Brexit deal, especially in financial services, creative industries, farming and fishing. These plans are crucial because lower taxes and higher spending on public services is only sustainable when it goes hand in hand with growing our economy.”

  • Peter Martin,

    (2) A century ago, Argentina was among the 10 richest countries in the world. From the mid 1970s to 1990 they experienced hyper-inflation (averaging 325% a year) as a consequence of unsustainable growth of the money supply to finance the large fiscal deficits maintained by successive governments. The Convertibility plan was a plan by the Argentine Currency Board that pegged the Argentine peso to the U.S. dollar between 1991 and 2002 in an attempt to eliminate hyperinflation and stimulate economic growth. It did bring about a stabilisation for a time but the government was never able to get its budget deficits under control. In 2001, the government resorted to restricting withdrawals from bank accounts to 250 Argentine pesos per week and forcibly exchanged all dollar deposits (that had not yet been transferred out of the country) into virtually worthless Argentine Pesos. The country has continued to go though successive debt defaults and bouts of inflation ever since.
    (3) The US dollar is not simply used in the US economy. A number of counties either use the dollar as their own country or peg to it. The petrodollar system means virtually all oil trading is conducted in dollars as is much of other commodity trading around the world. As the world’s reserve currency there is always demand for US dollars and US treasuries along with German and Swiss bonds are the ultimate safe haven assets in times of turmoil. Of course overspending on consumption will drive inflation up but there will always be a large pool of foreign buyers for US treasuries.
    (4) Regulatory changes since 2014 have been designed to ensure that mortgage borrowers on low cost variable rate deals can cope with a 3% interest hike. The entire economy will benefit from taking the steam out of the housing bubble not least the current generation of renters that have no prospect of getting on the housing ladder without a big loan from the bank of mum and dad.
    (5) There has been persistent inflation since the financial crisis. This has been clearly seen in the housing and stock markets. CPI inflation has been contained with wage suppression, offshoring of production to cheaper wage locations, freezing of public sector salaries, freeing of benefits, the elimination of savings income on bank and building society accounts, eurozone deflation etc., to counteract the inflationary effects of low interest rates on consumer credit and prices.

  • Peter Martin 13th Nov '21 - 10:01pm

    @ Joe,

    You’re still reluctant to give me a straight answer on the relationship between a continued structural deficit and a continued trade deficit. It sounds like you aren’t disagreeing too much. However, it sounds also like you expect the trade deficit to shrink or even disappear if the Govt squeezes hard enough fiscally and monetarily. A monetary squeeze, ie higher interest rates, will make for a higher pound and therefore make exports less competitive and imports cheaper. Both squeezes will depress the economy and create mass unemployment. They are counterproductive.

    The only way to avoid this is to deliberately hold down the value of the pound, as do nearly all the big net exporters with their own currencies. Then you can raise taxes, to ‘balance the books’, without causing a recession or even a depression. But is it ever going to be Lib Dem policy to depress the pound and raise taxes to depress domestic demand? I doubt that very much.

    You’re still also not explaining how we can have a healthy world economy if success can only come with a trade surplus. We can’t all be Germany and run huge surpluses. Someone has to run the deficits to counterbalance the surpluses.

    Argentina, ( plus Venezuela, Turkey) etc might have got themselves into economic difficulties but they haven’t come about by listening or consulting with MMT economists. As I’m sure I might have mentioned, MMT considers a Govt requirement that taxes be paid in the in their issued currency gives a value to that currency. Therefore it follows that an effective tax collecting system together with low levels of official corruption is an important requirement.

    This is not to say that the collection of taxes, in a fiat monetary system, is to fund spending. MMT doesn’t say it’s always OK for Govt’s to run a deficit. It might surprise you to know that we agree with Vince Cable. “Governments cannot control everything in the economy”. Particularly they can’t control their deficits/surpluses which are equal to the penny what everyone else wants to save/borrow.

    So if everyone else wants to save the pressure is on Govts to borrow. If they resist doing that the economy will only slump.

  • Peter Martin,

    There is no reason why foreign financing of a trade deficit should lead to a structural budget deficit if these recycled savings are directed into useful investments that generate economic returns, as Rachel Reeves implies. Current account deficits at levels consistent with nominal GDP growth are perfectly sustainable and borrowing for investment will sustain that growth and demand in the economy. Trade deficits are neither good or bad of themselves. However, persistent surpluses or deficits at high proportions of GDP are generally an indicator of undesirable imbalances.

    Mexico ran sizeable current account deficits in the 1970s as it borrowed liberally in international markets. In the early 1980s, higher interest rates reduced its ability to fulfill its obligations to repay principal and interest on its outstanding dollar loans to US commercial banks. Their effective default precipitated the third world debt crisis of the 1980s. During the 1980s, the country ran sizeable current account surpluses that forced a substantial reduction in living standards. Lebanon is currently experiencing something similar as a consequence of a balance of payment/currency crisis that precipitated a sovereign debt crisis, and a banking crisis https://www.moneyweb.co.za/news/economy/lesson-for-sa-red-flags-that-signal-a-countrys-pending-fiscal-doom/

    Conversely, Japan did not experience any decline in living standards as a consequence of running trade surpluses. Japan, along with most other developed nations is experiencing a dramatic demographic shift. Its retired population is growing as a percentage of the total population as the baby boomers reach retirement and people continue to live longer. The size of Japan’s working population is declining as a percentage of the population. This places an increasing burden on Japan’s pay-as-you-go social retirement system as a smaller number of workers are available per retiree to fund retiree benefits. Japan is able to draw down its accumulated foreign savings and can begin to run trade deficits. It is able to boost the average consumption level of its population while reducing the need to raise tax burdens to fund its social programs.
    Japan’s economy today, faced with a potentially severe recession, is certainly in a stronger position by virtue of its accumulated foreign savings than it would be if it had run trade deficits during the past decades. The same rationale around demographics is applied by Germany in maintaining its large trade surpluses
    This is why net investment positions are important. As demographics increase the dependency ratio and the labour participation rate declines, developed countries are likely to become increasingly reliant on overseas income streams from past investments to subsidize their consumption and maintain living standards until the boomer generation eventually dies off.

  • Peter Martin 14th Nov '21 - 6:47am

    @ Joe,

    Politicians like Rachel Reeves are always coming out with similar remarks about exporting more, encouraging British industry, creating new export led jobs etc etc. It’s intended to sound good and pick up votes but nothing more. It doesn’t mean anything. It never comes to anything because the Govt doesn’t have the political will to do what it takes. Like deliberately exporting capital to reduce the value of the pound.

    The government could at least try to influence what the big net exporters do with their surplus cash but it doesn’t. There’s no reason to allow expensive London properties to be bought up just to be left empty for starters. Other countries don’t allow this. There are other controls which could be applied. The Germans don’t allow their football clubs to be bought up by foreign interests for example. Rachel Reeves wouldn’t change anything.

    She’d still huff and puff about “structural deficits” at the same time as money left the country to pay our net import bills. A government deficit is needed to replenish that. Any attempt to reduce the deficit by fiscal measures would simply plunge the economy into recession. Just as it did when your “Internationally recognised economist” was part of the Coalition government which tried and failed with the same policies. All he did was help create the social conditions which led to Brexit and the Alston report.

    If Rachel Reeves tries the same thing she’ll get the same results. It’s madness to expect anything different!

  • Peter Martin,

    Rachel Reeves comes across as a well informed graduate of the LSE with an MSc in Economics. She worked as an economist for ten years before entering parliament. At the Bank of England (where she analysed Japan’s QE program), the British Embassy in Washington, D.C. and for HBoS. She and her sister helped Barack Obama’s presidential campaign, working in New Mexico. She was elected as the MP for Leeds West in 2010 and wrote an article on deficit reduction at that time https://renewal.org.uk/wp-content/uploads/2020/09/renewal_autumn_2010_reeves_deficit-1.pdf
    “There are choices facing this government about how to reduce the deficit, and the previous government demonstrated an alternative, fairer way to make the adjustment. In March 2010, Alistair Darling introduced a budget that included £19bn of tax increases and £38bn of spending cuts. Of those tax increases, the bottom 10 per cent of the income distribution saw absolutely no change in their weekly income. Those in the top 10 per cent saw their incomes fall by 6.8 per cent”.
    “The budget deficit in the UK needs reducing… This requires a government that actively intervenes: it means investment in infrastructure; apprenticeships; long-term commitment to renewable energy; tax incentives for small and innovative businesses; a graduate tax; and much greater demands on the banks to support the jobs and industries of the future.”

    I have never been particularly worried about letting foreign investors buy expensive London properties and leaving them empty. It may possibly contribute to house in inflation in Central London, but probably not too much outside London and it provides work for the construction and property services sector. The properties should of course be subject to Land Value Tax. I would be more concerned about private equity firms buying up lower cost family housing for rent.
    As to other countries not allowing this, almost all do. Chinese investors have been buying up property all over the world in Sydney, London, Vancouver, San Francisco, New York, Paris and many other cities including in China itself where there are tens (if not hundreds) of thousands of empty luxury apartments. The Chinese property company Evergrande has just defaulted on its interest payments. This is a company with $300 billion of debt outstanding. Much of the savings of the up and coming Chinese middle classes is invested in this massive Chinese and global property bubble running into the tens of trillions of dollars.

  • Peter Martin 14th Nov '21 - 2:09pm

    @ Joe,

    “Rachel Reeves comes across as a well informed graduate of the LSE with an MSc in Economics. ”

    She probably would to you. There would be lots of even higher qualified economists who ran the world’s major economies, including the UK, EU and USA , leading up to the 2008 crash and still stuffed up badly. Otherwise there wouldn’t have been a crash! The crash then led to the recession that followed and the economic conditions that brought about the consequences that have troubled the more socially minded of Lib Dems ever since.

    I’ve got an M.Sc. in electronics. But that’s not going to count for much if there’s an acrid burning smell whenever I power up something I’ve developed. This hasn’t happened too often but when there have been problems I’ve learnt from them. I don’t see too much of “where did we go wrong?” from the Economic mainstream. They simply kept their heads down for a while and popped up again when they though it was safe. To put it more unkindly, as some have, they slithered down into their slime holes.

    She did her best to defend the record of Blairite labour which meant some explanation, but not too much, of why the criticism of Labour was largely unjustified.. But apart from that she’s still full of, er, ‘nonsense’. (Not the word that immediately sprang to mind!)

    For example in her recent Labour conference speech we had:

    “Where the Tories have brought us ballooning debt, supply chain mayhem and spiralling inflation, we embrace fully our role as the party of long-term economic stability, of secure public finances and of economic growth.”

    This is exactly the criticism a Tory would make, and indeed the Tory right have made about their own party too. It shouldn’t be coming from a Labour shadow chancellor. She can’t complain the Govt should have been giving everyone more support that they did, then go on to further complain about the large deficit and possible inflationary consequences the support that was forthcoming did cause. What’s the point of having an M.Sc. if you can’t grasp simple spending realities?

    It looks like the choice at the next election will be Tories or Tory-light. Or maybe not so light!

  • Peter Martin,

    the 2008 recession was inevitable in the wake of a peak in Land values. The Florida land bubble preceded the 1929 Wall Street Crash. The warning signs are usually there, but central banks and governments will do their utmost to prevent a decline in consumer sentiment from becoming a self-fulfilling prophecy.
    Professor Hanke of the Cato Institute https://www.cato.org/publications/commentary/great-18year-real-estate-cycle
    quotes Prof. Mason Gaffney – “Bank credit swells and shrinks in synch with the land cycle. The two interact in a positive feedback process: swelling bank credit raises land prices; buyers need more credit to purchase the land; the appreciated land then serves as collateral for more bank loans, and so on.”
    Land prices eventually peak and then construction activity peaks. This is followed by a peak in the general economy. In short, land prices are a leading indicator of both construction activity and general economic activity.
    “.. every 18 years we can expect the culmination of a credit-fueled real estate and ensuing business cycle. This, of course, doesn’t imply that all recessions are preceded by a real estate cycle. It only says that all real estate cycles have spawned economic downturns.”
    This knowledge has allowed for some prescient forecasts. The prize in that department goes to Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”
    Amar Manzoor, author of “The Art of Industrial Warfare” and creator of the 7Tao training system for manufacturing standards, has come to the same conclusion. He said “This 18-year cycle has resulted in the massive decline of industry and has been the Achilles heel in the performance of Western economies.”
    We might not get to 18 years this time. It will be more like 14 or 15 years, if the problems in the Chinese property market sets off a contagion to financial markets around the world.
    That will take some talented economists to construct a sustainable economic recovery strategy from a global property and stock market crash in the next election.

  • Peter Martin 15th Nov '21 - 10:38am

    @ Joe,

    The Cato Institute is a very right wing / Libertarian organisation with odd economic views to match. They’d have us all back on a gold standard if they had their way. Many pundits can be right for the wrong reasons. There’s all sorts of theories based on 7, 15, 18, 35 , or whatever number of year, cycles. Sunspot activities cycles are approx 11 years. Maybe it’s the sun or something to do with the position of the constellations?

    There’s no reason why there has to be a cycle of boom and bust every N years if an economy is correctly regulated. But, if there is too much emphasis on trying to do that by monetary means then a boom and bust cycle, of whatever length, is what is likely to happen.

    There’s too much euphoria in the up cycle as everyone tries to make, rather than earn, money. This translates into the creation of bubbles in asset prices. The motivation to buy the asset isn’t to make use of it but to make money from it. Maybe this isn’t so bad with lumps of gold or stocks and shares but it creates huge social problems if housing is viewed in this way.

    The economy is supposed to benefit us all. If it doesn’t, we need to get a grip. It doesn’t have to be something outside of our control.

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