A recent article in the Scottish Newspaper The National accused the BBC of defending Tory austerity and their Chief Political Correspondent, Laura Kuenssberg of talking twaddle and promoting economic illiteracy.
This makes a good headline of course – but is it fair?
It is harsh, and Kuenssberg is far from alone, so it is unfair to single her out, but the critique is reasonable.
Their point is that Kuenssberg, and many other commentators, repeatedly describe the finances of the UK government as though the UK were a household – and this is nonsense.
When Kuenssberg claimed that the government had “no money left,” this was a claim which was not even metaphorically true.
The National quoted her:
“Speaking on the BBC’s Politics Live, Laura Kuenssberg said there was ‘absolutely eye-wateringly enormous’ levels of public borrowing, adding: ‘This is the credit card, the national mortgage, everything absolutely maxxed out.’”
We have previously written about the nonsense of debt hysteria. This article focuses on the dangers of the misleading analogy between a normal household and the UK government.
As the diagram indicates, there are at least four fundamental differences between a typical household and the government:
- a household does not have a licence to create money;
- a household earns for only a few decades;
- a household has limited control over its earnings;
- a household does not have responsibility for the entire economic system.
The first three pionts mean that the government does not need to run like a normal household; the last point means that it should not.
A Licence to Create Money
For a typical household to create money for its own use using a convenient printing press in the basement would of course be a serious criminal offence. And the fact that we are not allowed to do it affect the way that we manage our finances.
For the UK government, of course things are a little different. Both the Royal Mint and the Bank of England are offshoots of the government, and both can create money. The Bank of England can do so particularly easily – at the stroke of a key – by means of what is called quantitative easing (QE).
And the amount that it can create is staggering: since the Global Financial Crisis, the bank has created £895 billion through QE. By the end of this year, the figure may well be close to £1 trillion. That is approximately 50% of GDP.
If I had the ability to create £1 trillion – even over a 10 year period – I would manage my household finances rather differently.
Perpetual Earning Power
A normal household might expect something of the order of five decades of earning power – if all goes well – from around 20 to around 70.
As a result, lenders take age into account – a 25-year-old earning £30,000 a year (there are some) would be able to take out a larger mortgage than a 65-year-old approaching retirement whose in-work earnings are £30,000 a year. The lender knows that pensions are typically far lower than in-work earnings, and they want to be sure that they will be repaid before pension age.
But the UK government has had many centuries of ever-growing earning power, and lenders also take that into account. Although UK government bonds nowadays have a finite duration, when it matures, the debt is in effect ‘rolled over’ (i.e. replaced with new debt) rather than paid back. And in the past, the UK government has successfully issued perpetual bonds known as consols, the last of which were only cancelled in 2015.
So when The National quotes Kuenssberg again, on this point about paying back the debt, this is yet another misleading analogy:
“If you think about the debate we had really all the way through from the late noughties all the way through to the 2015 election, it was defined by ‘how is the country going to pay back what we had to borrow in the credit crisis?’. This is that, and some, okay?”
Control Over Earnings
Not only do they not have a printing press with which to supplement earnings, typical households have little to no control over their earnings – in fact, the real (inflation adjusted) earnings of the typical earner are lower now than they were in 2007. It is fair to assume that if wage earners had control over their earnings, they would be rising.
But for government, there is some control, via the tax system. And indeed the government’s real income is higher than it was in 2007.
If a household has a shortfall, it has to trim its earnings. If the government has a shortfall, it can increase taxes, borrow more or even just create more money.
Responsibility for the Entire Economic System
But the most fundamental difference is that a household does not have responsibility for the entire UK economy whereas the UK government does.
And this really matters, because if the government did manage as though it were a household and seek to pay down the national debt, that would do irreparable damage to the economy.
We all have experience of buying things. And every time we do that, cash changes hands. If I buy a bottle of beer for £1.25 in a shop, there is a cash-flow with two ends: at my end of the transaction the cash is -£1.25 and at the shop’s end the cash is + £1.25, and the two ends sum to zero. And this is true for every purchase that I have ever made, and indeed for the sum of all purchases made in the UK during the last year.
This has two simple but very profound implications:
- each person’s expenditure somebody else’s income;
- if you add up both ends of every transaction in the whole economy, the total is zero.
The first point implies that a society in which everybody is trying to cut their own expenditure is a society in which everybody is trying to cut everybody else’s income. And of course, if they succeed, the result is economic contraction.
The second point implies that if you split the economy up into different sectors, for example a domestic UK sector and a foreign sector, the total of all activity (again adding up both ends of each transaction) will be still be zero. If the foreign sector is showing a surplus, the domestic sector will show a deficit of the same absolute value.
And if we split the economy three or more ways, the same principle will hold. Usually we split the domestic sector into two and talk about a public sector, a private sector and the foreign sector. For these three sectors, the total of the surpluses/deficits will again be zero.
In the UK, we run a persistent trade deficit, which means that the foreign sector has a surplus. If the government were also to run a surplus or even just ‘balance the books,’ that would condemn the private sector to a deficit. So one thing we can be sure of is that if the UK government tries to run a permanent surplus, prudent housewives and businesses will be condemned to a deficit. And if they respond by cutting their own expenditure as prudence would suggest, economic contraction will be the result.
Governments really should not run like households. And in practice, they do not. Although politicians quite often talk about running a balanced budget or a surplus, it is rare that they do so – and when they do the result is usually an economic slowdown or a recession.
So if the government took Kuenssberg’s advice and attempted to pay back the national debt, it would have to do that by running a long-term surplus. And that would mean a long-term deficit for the private sector and economic catastrophe for the UK.
If this matters to you, please write to the BBC about their coverage of economic issues. Although, as we said above, it is unfair to single out Kuenssberg, BBC complaints require specifics:
• Programme name: Politics Live
• Broadcast date: 25/11/2020
• Incident time: From 2:10:00 onwards in the programme
And do sign-up and join the 99% Organisation.