What’s wrong with the Chancellor’s Autumn Statement?

There are three huge defects in the Chancellor’s autumn statement

1 Technical

The Chancellor fundamentally believes that the government budget can and should be balanced, or even run in surplus. This basic accounting assumption drives his whole thinking. But facts prove him, and the traditional thinking of the whole financial establishment, wrong on this. He has been unable to eliminate the deficit. He will not be able to eliminate it. In modern high technology, high productivity economies, deficit is inevitable, and manageable.

There’s a huge problem in thinking here. The Chancellor approaches economic policy like an accountant, rather than as an economist. Books should balance. He talks about what we can afford, purely in financial terms. But it’s not money which gives value to the real economy, but rather it’s real economic activity which gives money its value. Economic activity creates financial value, and not the other way round. What we can afford has to be measured in real resources of people, skills, natural resources, technology and capital assets. A thought experiment demonstrates this. If it were possible to plug a machine into the earth to produce the whole GDP without labour and therefore without wages, then the money vouchers the government would have to allocate would all be a total financial deficit each year. Money does not have to be backed either by gold, or by the sale of government bonds, but only by output GDP. Deficits are here to stay. Facts support this hypothesis.

2 Practical

In seeking to eliminate deficit and balance the budget, the Chancellor feels forced to either increase taxation, or reduce spending. He has largely chosen the latter, and proposes a £12bn reduction in welfare spending, even though this is now to be taken not by tax credit reduction now, but by universal credit reduction later. This will nevertheless feed straight through to an equally large reduction in demand in the economy. This is the last thing the economy needs, since deficient demand continues to be the problem, as output growth exceeds wage growth in economies with increasingly automated production.

3 Moral

The burden of these welfare cuts will fall unequally on lower income earners and families. The distribution of the national income will yet again be skewed in favour of the rich and against the poor.

There is an alternative – a basic income

The only ultimately viable economic solution is a basic Citizen Income payable to all, funded by overt money financing, ie outside the public sector borrowing requirement. I argue these points more fully in a paper published by the Centre for Welfare Reform ref ‘The Economic Necessity of Basic Income

* Geoff Crocker is a professional economist writing on technology at http://www.philosophyoftechnology.com and on basic income at www.ubi.org. His recent book ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy’ was recommended by Martin Wolf in the FT 2020 summer reading list.

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  • I totally agree with your first point. If I have savings then, thinking in double entry bookkeeping terms, who has the other side of that – the corresponding debt?

    In the first instance it’s my pension fund or my bank but they are only intermediaries so I must look further. If I follow the daisy chain it takes me ultimately to a mix principally comprising (a) companies that have borrowings to support their business, (b) individuals with mortgages and/or student debt and/or consumer debt and, (c) biggest of all, government debt.

    So, if Osborne wants to reduce government debt he is saying by inescapable logic that he wants to either (1) reduce the nation’s overall savings, or (2) push the majority into taking ever increasing loans of one sort or another. (This works because shrinking public debt is offset by growing private debt).

    For Osborne, option (1) simply isn’t viable. It would mean a nation with fewer public assets (e.g. infrastructure), which are the tangible expression of the public debt and endless recession. Equally for Osborne option (2) is only politically acceptable to his backers if they personally don’t have to take on more debt – if they can in fact continue to increase their assets. That’s doable only if the full burden of shouldering ever-increasing levels of debt falls on others.

    That in turn is a question of differential resource allocation and hence a political choice but one that depends on being able to hoodwink the majority and their political leadership. Fortunately for Osborne that’s been pretty easy in recent years.

    In short, this is a programme for plutocracy for the few and debt serfdom for the majority. Hence, anything that helps increase the private debt burden of ordinary folk is good in Osborne’s world. Welcome to the wonderful world of student loans (now getting on for double the GDP per capita for the current student cohort). Welcome also to Help to Buy.

    Of course, it’s not sustainable; at some point the camel is asked to carry one too many straws.

  • “This is the last thing the economy needs, since deficient demand continues to be the problem”

    How can anyone possibly argue that the UK is suffering from “deficient demand”? Retail sales are growing at 4% per annum in volume terms, unemployment is 5.3% and still falling and we have a huge balance of payments deficit because of all the goods we keep importing. Excluding oil, our imports have risen by 3% in the past year. The UK may be suffering from lack of external demand for its exports, but internal demand is certainly not the problem.

    “He talks about what we can afford, purely in financial terms.”

    The UK has to borrow to finance the deficit “purely in financial terms”. Our interest bill on the debt is payable “purely in financial terms”. You can argue about his priorities in bringing down the deficit, which for the Tories involve lower spending and cuts to things that the Lib Dems believe are worth investing in, but arguing that the deficit and debt levels don’t matter is pure magic money tree economics.

    What we can say, and should be saying, is that you can reduce the burden of debt/GDP by investing in things (infrastructure, research etc.) that drive faster growth of GDP, so focusing on increasing the denominator rather than cutting the numerator. That is how the UK brought its debt level down in the post war period, rather than by running a surplus.

    As for the Citizen Income, payable to “all”, who is this “all” of whom you speak? And at what level should it be set? And under what criteria should it be payable and, more importantly when should it be withheld? As for overt money financing – does that mean basically printing money? – of an ongoing and potentially unlimited expense, this seems highly irresponsible, particularly in a situation where we do not have a problem with deficient demand and the money is not going to be invested in the productive potential of the economy.

    The problem the UK faces is not lack of demand, it is lack of productivity and output to satisfy that demand. Our businesses do not invest enough in capital and skills to fulfil that demand and the outcome is the massive balance of payments deficit and consequent continued sale of assets to foreign buyers to finance our spending.

  • Simon McGrath 27th Nov '15 - 7:14pm

    “In modern high technology, high productivity economies, deficit is inevitable, and manageable.”

    Why ?

  • Just a few thoughts, probably random ones –
    – we just about drove the party into disaster in order to put the nation first and tackle the deficit, it seems contrary to resile from that position now,
    – notwithstanding, the deficit persists and our monstrous national debt is barely scratched,
    – the government perhaps could look at re-arranging its borrowing in order to get costs of servicing the debt down (eg while interest rates for it are cheap, and through issuing bonds?),
    -underwriting other nations’ investment in our infrastructure is at least as bad an idea as pfi.

  • Richard Underhill 27th Nov '15 - 8:38pm

    Robert Chote was on Friday’s abbreviated Daily Politics explaining where the extra money came from. Lower debt interest is part of it and understandable, Despite the continuing increase in the size of the debt, the UK government has been able to borrow at lower interest rates.
    The bit about VAT in government looks a bit technical. The government does not pay VAT or gets it all back, so what is happening here?

  • Simon McGrath 28th Nov '15 - 10:38am

    Geoff – thanks. i have read your answer several times and am afraid i have no idea what it means.

  • Geoff – I am slightly bemused by your reply to my earlier comment because I was agreeing with the underlying point of your opening paragraph and restating it in an alternative form that will, I hope, be more accessible to many people. I say ‘underlying point’ because your phrasing suggests a confusion between accounting balances and budget balances. The English words may be similar but they are wholly different things.

    Every bank, every company and every government has kept balanced books (bookkeeping incompetence excepted) for centuries. That’s how accounting records work. But that doesn’t mean they’ve all kept balanced budgets; clearly they haven’t and don’t. So, if an individual, company or government doesn’t balance its budget then its accounts record that somewhere is a growing debt. Who holds that debt and what it corresponds to in the real world of the company or government is crucial. If a debt is for productive investment – no problem; if it’s for consumption then there’s a big problem down the track because it has created no income to pay off the debt.

    So, it’s perfectly possible to model the economy using double entry to track where the assets are and where the debt is at each point in time. The advantage of doing so is that it enforces a sense-check on the workings because the accounting records no longer balance if you leave something out . Prof Steve Keen, now at Kingston, has a model of the economy that does just this.

    Hence when Osborne deficit-spends the public debt increases – but the government books still balance.

  • Simon – in relation to your question a government deficit is perfectly acceptable if it corresponds to something valuable in the real world. In accounting terms (see above) it is the double entry counterpart of worthwhile assets – tangible ones like infrastructure or intangible ones like education and training.

    I therefore sympathise with the instinct of many to bear down on the deficit because too much of it is being incurred on spending with NO useful assets created. Far too much is on welfare related to the failure of the economy to create adequate affordable housing and well-paid jobs or educate and train people to do them etc.

    The problem is that bearing down on the deficit addresses precisely NONE of the underlying problems that create those failures. Conversely, the siren danger and attraction to some of deficit spending is that it can paper over those failures for a limited time – that is until the accumulated debt becomes unsupportable.

    So, if we assume that government spending is productive (bear with me here!) then there is no problem with deficits. Moreover, in creating those deficits it also injects money (i.e. debt-money – see above) into the economy and those who want to save towards retirement can do so by buying government bonds (this is mostly done by pension funds in reality). If Osborne managed to shrink the deficit to zero this source of savings would no longer be available and, with foreigners increasingly owning UK firms, corporate bonds, the next best alternative, are also increasingly scarce.

    Fortunately, in practice, a growing economy means ever-expanding need for infrastructure etc. and hence a proportionately growing public debt and corresponding savings vehicle for people.

    Of course the fly in the ointment is that too much government spending is NOT productive although ultra low interest rates helpfully lower the bar. However, obsessing about the deficit will NEVER cure that. We need instead to think about how government works – why it has to spend so much on housing, why so many employers prefer to hire foreigners, how it appraises the likes of HS2 and so on.

    That’s something no-one is doing in a remotely organised way. And that is a BIG problem.

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