The House of Lords Inquiry into Debt sustainability has just reported.

This article explains our serious concerns about the methodology that Inquiry adopted and the findings of its report.

The Chair of the HoL Economic Affairs Committee launched his Inquiry with the words,

“Our national debt stands at an incredible £2.6 trillion. A recent OBR report stated that the 2020s were turning out to be ‘a very risky era’ for the public finances. Our inquiry will explore if and how the UK can manage this level of indebtedness.”

Words which suggest that he had already decided the answer he was expecting.

The Inquiry invited submissions from concerned individuals and organisations. It also took oral evidence from carefully selected individuals.

The written submissions included some which should have had a profound impact on their conclusions.

So, let us just see what the Inquiry did with the top three submissions.

Marianna Mazzucato and Josh Ryan Collins made several vitally important points:

• There is no magic number (eg 100%) at which debt:GDP changes its importance;
• Investments which drive growth can reduce long-run debt:GDP;
• The UK runs a fiat currency (which enables governments to create money when needed) so it cannot be forced to default on debts and there are no limits on the ability of the Bank of England to buy UK debt;
• The “government finances ~ household finances” analogy suffers from the fallacy of composition problem. If I cut down my spending and pay off my debts, I may be better off and no-one else worse off in the economy. But if all households, or the state which is the size of many millions of households, cuts spending, the result is likely to be a collapse in economic activity.

The Inquiry report did not totally ignore their submission, but cited only the following technical-sounding phrase:

“Cuts to public investment due to short-run targets (including 5-years), can ironically cause the debt-to-GDP ratio to rise because the denominator does not grow, but also because failing public services are likely to cause an increase in automatic stabiliser-related spending and thus borrowing in the social sphere.”

They did not address the point.

The 99% Organisation made similar points and, most importantly, argued that since we have a fiat currency system, the Inquiry should make sure that they analyse the issue according to that system, not as if we were on the gold standard. We pointed out that the majority of commentators on this topic are not explicit about what kind of system they are assuming, but implicitly apply gold standard methodologies to their analysis.

We also pointed out that the Bank of England had created £895 billion in new money in recent decades whenever the government needed it. In fact, around 25% of our ‘national debt’ is money that the government ‘owes’ to its own subsidiary, the Bank of England. It is not real debt at all, and in a corporate setting would have been cancelled already.

We showed that the reason Truss’s so-called mini-Budget was a disaster was not to do with borrowing as most commentators have claimed, but with inflation and the Bank of England’s inevitable response.

Our key point was that attempting to address the issue of debt sustainability without analysing the implications of having a fiat currency would be like inquiring into the state of British waterways without considering sewage, or into in-work poverty without looking at wage levels. So we were more than a little surprised to see that the word “fiat” occurred precisely zero times in the Committee’s report.

We concluded, “In short, being driven by a no longer applicable notion of debt sustainability has led us to a situation in which our wider economic policy has become unsustainable on multiple dimensions.”

The Gower Initiative for Modern Money studies also made many of the same points and gave a detailed explanation of government accounting.

Their contribution was dismissed in the following disingenuous way:

“Some witnesses endorsed Modern Monetary Theory (MMT). It posits that governments with their own sovereign currency are not fiscally constrained as they can print money to finance expenditure. History tells us that public spending unconstrained by a fiscal framework is very likely to be inflationary.”

On the other hand, Liz Truss’s favourite economist, Gerard Lyons was quoted no less than 15 times. For example, the Inquiry uncritically quoted him endorsing the myth that there is something magical about 100% debt:GDP:

“According to Dr Lyons, a debt trap occurs when a country’s debt-to-GDP ratio exceeds 100 per cent and GDP growth falls below the rate of interest paid on debt. He said that “in such a situation the ratio of debt keeps rising.”

This would not be true even if we were still on the gold standard, as Professor Mazzucato and Dr Collins (and others) had pointed out.

In short, the Inquiry seems to have adopted an approach of cherry-picking the evidence that supported the chairman’s view that the UK faces a serious problem of debt sustainability and needs to rein in public spending, quoting such evidence widely and uncritically, while at the same time ignoring or ridiculing evidence which shows that this is not the case.

And even without this, wider tendency, ignoring the fact that we operate a fiat currency alone is a fatal methodological flaw.

Conclusion

The Inquiry report’s methodology is fatally flawed and its conclusions should not be taken seriously. There is however a grave risk that they may be – and if this constrains the government from addressing the serious real world challenges that the country faces – falling real wages, failing public services (even the NHS is on its knees) and growing hardship and poverty – the vast bulk of the population will suffer.

If you think your MP should be aware of this (particularly if s/he is a Labour MP) please tag them in and reshare this thread widely using the buttons below.

And please take a look at the 99% Organisation and join us: we need your expertise and energy!