Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 25 September 2015

The path from deficit concern to deficit deceit

I have always written that the arguments in 2010 for focusing fiscal policy on reducing debt were understandable. They were wrong, but you could understand why reasonable people might make those arguments. In particular at the time the problem of the recession appeared to be over, recovery was under way, and the Bank of England seemed confident in the power of unconventional monetary policy. It seemed reasonable to move attention to the deficit.

So when 20 economists and policy makers wrote in February 2010 apparently supporting George Osborne’s deficit reduction plans, I was not surprised. The majority of macroeconomists, like me, disagreed, and we were right, but I could understand where they were coming from. One of those signing that letter was Lord Turnbull, head of the Civil Service and Cabinet Secretary between 2002 and 2005. By August 2012 around half of those that signed the letter had the good sense and honesty to backtrack on what they had written. The Chancellor may also have (wisely) revised his original plan to end the current deficit within 5 years, but his zeal to bring down debt rapidly by cutting government spending had not disappeared. When he was re-elected in May, it was for a programme of renewed austerity.

But the story does not end there. A few days ago Lord Turnbull had the opportunity to question the Chancellor on his drive for further austerity. This is a part of what he said.
“I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can’t see the justification for it.”

A former head of the civil service, who had initially supported Osborne on the deficit, was now accusing him of deliberate deceit. Big news you might have thought. And quite a turnaround in just 5 years.

Yet it is not surprising. Osborne’s fiscal plans really have no basis in economics. That leaves two alternatives. Either Osborne is just stupid and cannot take advice, or he has other motives. George Osborne is clearly not stupid, which leaves only the second possibility. It is therefore entirely logical that Lord Turnbull should come to agree with what some of us were saying some time ago.

What a strange world we are now in. The government goes for rapid deficit reduction as a smokescreen for reducing the size of the state. No less than a former cabinet secretary accuses the Chancellor of this deceit. Yet when a Labour leadership contender adopts an anti-austerity policy he is told it is extreme and committing electoral suicide. Is it any wonder that a quarter of a million Labour party members voted for change.


  1. I watched the Lib Dem conference for any signs that they may have botched the economics 2010-2015 but not a sign of it.

    When Danny Alexander spoke of 'maxing out the nation's credit card' during his time at the Treasury and Farage went on the same slogan in his 2015 election campaign, you really could see how far mainstream politicians had disappeared up their own deficit.

    Who was it that said George Osborne puts the 'chancer' into 'chancellor', but whatever the girth of his brass neck he has been ably supported by many politicians from different parties, most of the media including the now shocked BBC, and the overwhelmingly proportion of the UK's business community.

  2. In your opinion if George Osbourne keeps making cuts (to welfare etc.) what is going to be the future of the economy?

    1. Well I'm not sure what SWL would say but at a guess (and ignoring the possibility of unexpected shocks) growth is likely to be a little depressed over the next few years (possibility of a mild recession) as the cuts bite followed by a recovery to more normal levels of growth leading up 2020 as the austerity eases off.

      The consequences for those at the sharp end of the cuts will be bad, the prospects for the overall economy will be reasonable although we'll have missed out on a good deal of potential growth.

    2. Andreas is close, but actually my 'main case' would be a little more optimistic - I wrote about the possibility of an investment led recovery, particularly after a Yes vote, here:

      I suspect growth might be a little faster without austerity, but not too bad with, because monetary policy can stay very easy. But this assumes no major adverse shocks.

      Austerity is bad because it means we are screwed if there are adverse shocks, because it depresses public investment at just the time we should be investing for the future, and under this government it hurts the poor when their living standards in absolute terms are already low.

    3. Is Osborne's pursuit of running a surplus not worrying? Or is he relying on foreign investment to keep economy growing? Surely rate of growth of private sector debt can't be sustained.

  3. To see Turnbull making his point in the Lords Economic Affairs committee hearing, go to 15.55.40 here:

    As for Osborne's reply don't watch too much of it: you might start throwing things at your PC screen...:-)

    1. Thank you for the link. Worth a look, and it's also interesting that the answer to the next question (about the potentially devastating effect of future high interest rates on mortgage borrowers) illustrates perfectly the drawback of an independent Central Bank - Osborne is able to wash his hands of any possible ill-effects of a future rate rise "it wasn't me, gov, it was the Governor."

    2. What he should say of course is that he is trying hard to keep interest rates low through austerity.

  4. Part of the problem is that the "left" or 99% have been losing the battle of ideas for the last 30 odd years back to Thatcher & Reagan and like an army that keeps losing the 99% needs something to turn the tide. From 2010 to 2015 Labour completely fled the field over the economy and the Tories presented them as the party of incompetent financial managers.
    So lets hope Corbyn starts the fight back, how about the following
    (you have to select MAX setting to get from 1956 to 2014)

    There are the 4 big recessions 1973-4, 1980-81, 1991-2 all Tory and caused directly by their policies and 2008 Labour caused by America and their offloading of their criminal activities to the Tory unregulated City.
    You are not going to overturn no-liberalism by working with it , but with a bit of heart. The Tories won last time through fear , as the add men say that's the best selling tool available, Labour needs to offer hope, to abandon for a while its overwhelming concern the bottom feckless 10% , concentrate on the middle 70% ,the young ,plan to build a lot of houses quickly and attack austerity daily for the next 5 years.

  5. I agree with you Simon.

    But for the sake of understanding the environment in early 2010- those who disagreed with the position taking by Lord Turnbull et al., were they complacent or mistaken?

    From my perspective (working at HMT at the time) I simply couldn't understand the deficit fetishism out there, and ascribed it to a game of one-upmanship played by Osborne. Frankly, I still do.

    1. No, those that disagreed with Turnbull in 2010 were simply right. But as I have sometimes said, the one thing to guarantee sleepless nights for policy makers is the market no longer buying government debt. And after a recession when the financial markets surprised everyone, many would worry. This worry is constantly encouraged by some City economists of course.

    2. Why the sleepless nights? The DMO can always sell Treasury bills to UK banks, provided they offer more yield than the BoE pays on reserve balances.

  6. The New Statesman article quizzing the original authors contains several references to "the markets", mostly fearful of their power to raise interest rates. Seems to me this fear has been endemic in government, or ambitious oppositions, all (40years of) my adult life.
    And yet, surely it was the zeal of the markets which lead to 2007/8?
    In my limited experience, the markets consist of a number of very intelligent people and a lot of greedy people, and there is an intersection between those two sets. Plainly it was in the interest of the intelligent greedy players to defend their role and position in the recovery, and many would have seen an opportunity, as they always do, to be exploited ruthlessly for their profit.
    At the same time, you (well, I) would have thought that government ministers and civil servants, who also often very intelligent, would have sought to exploit the opportunity to seize back power from the markets, for the public interest. Am I naive in newly thinking that our public servants, elected and/or career, now no longer have the public interest at heart, which caused them to respond to the crisis not in the public interest, but in some other interest?
    If our public servants were not able, or interested, to rebalance the power of the markets after an event like 2007/8, then when can we ever expect our government to act? Or is the progress of the markets too far gone already?

  7. If the labour party is serious about fighting the advocates of deficit fetishism, it will have to settle in for the long haul and co-opt people like Lord Turnbull who - and here I am guessing - are probably not dyed in the wool Corbynites. My fear is that the Labour Left have spent so long talking to no one but themselves that they are unaware that many who are not natural soulmates share some of their economic views.

    1. The other problem may be that Corbyn et al are so demonised by the chattering classes that many will not respond even if asked nicely.

  8. How come such a major change in position by someone so experienced as Turnbull has not triggered BBC programs about "How Big should the State be?". I did a quick Google search and found no hits anywhere - even the Guardian.

    It is now the core policy of the Conservatives and appears to be going unquestioned in any fundamental way.

    The Labour party could make it their central issue and come up with policies that are a sensible as opposed to a dogmatic response but I doubt they will.

    They are still apologizing for apparently mismanaging the economy and finances rather than explaining what they did and why (like reducing child poverty) and any lessons learned (like reserving/taxing in the good times).

    It is as if they have never heard of Keynes.

  9. Deceit is a very strong word.

    It would be easy to say almost all Keynesians are deceitful using deficit expansion as a cover for their desire to increase the size of the state. Evidence is that they never suggest tax cuts only more spending as fiscal policy.

    They never, ever, put a figure on what size of deficit might be a concern, either. It just seems like the bigger the better.

    Anyway, the US had a recovery with a massive reduction in the deficit. We've had a recovery with a flat deficit. Neither recovery was as quick as it could have been, but that's due mainstream macro (here and at the cen banks) thinking monetary policy was largely out of ammo at the ZLB.

    But none of this is deceitful, merely a normal political economy debate about priorities. Monomania about fiscal policy is just that, monomania.

    (No surprise that a senior civil servant doesn't like cuts. An observer with a lot of self-interest.)

    1. James actually agree with you here. The size of a deficit is an ex post accounting construct. "Large" and "small" dosen't matter what matters is total SPENDING.
      The deficit is neither good nor bad and is a total RED HERRING.

    2. "No surprise that a senior civil servant doesn't like cuts. An observer with a lot of self-interest."

      So, according to that logic, a civil servant is only to be trusted if they propose cuts. How convenient.

    3. Oh dear.

      1) "It would be easy to say almost all Keynesians are deceitful using deficit expansion as a cover for their desire to increase the size of the state." Keynesians have no desire to increase or decrease the size of the state. The size of the state has nothing to do with Keynesian economics. So I guess by Keynesian you actually mean parties of the left.

      2) So lets take the last Labour government. "They never, ever, put a figure on what size of deficit might be a concern, either. It just seems like the bigger the better." So you were asleep in 1997 when Brown implemented his fiscal rules.

      3) When Labour did want to significantly increase the size of the state, to provide more funding to the NHS, it raised taxes. In this sense they were honest, unlike the current lot.

    4. Those appear to be straw man arguments to me.

    5. This comment has been removed by the author.

    6. Gastro George. It's axiomatic on the left (and correct) that business lobbies for its own interests. It's a massive blind spot on the left to ignore, or condone, state employees and trades unions lobbying for their interests. All lobbyists arguments' need to be treated with extra scepticism.

      1. I'm still waiting to see some deficit-loving, but tax-cutting Keynesians.
      2. 1997 is history. What about a discussion on the optimal size of the deficit today? 100%? 150%?
      3. "This lot" are spending more on the NHS, but demand for NHS services is rising faster, as most people know, leading to some dull, but necessary, prioritisation debates.
      It's so easy to be morally outraged all the time, like Corbyn, but it's not enough.

    7. Oh dear (continued).
      The short, inaccurate paragraph beginning "anyway, the US..."
      No mention of the ARRA (2009) or indeed TARP in aiding the US recovery.
      For the UK, we had a recovery UNTIL deficit reduction policies (should that be 'shrinking the state policies' via osbornes fiscal consolidation kicked in, then there was no recovery and little deficit reduction, until 2013 when the recovery once again took hold...only after deficit reduction measures (austerity) had been significantly eased up. Neither recovery was as quick as it might have been, not only due to exogenous factors (eurozone crisis, oil price surges etc) for the UK especially, but also due to austerity measures imposed as many empirical studies have shown. Monetary policy wasn't "largely out of ammo" at the ZLB. Beyond the life-support of ongoing ultra low interest rates, it is completely out of ammo...unless you have evidence to the contrary, as there is no clear evidence that QE or indeed additional QE greater than that deployed has or would have had a significant impact and led to a stronger recovery.
      What additional monetary policy measures (ammo) would have helped the economic recovery to be significantly better?

    8. Interesting, none of your responses (1,2,3) address or are consistent with the original points raised (by you) and smacked down by SWL.
      James, the deficit for the UK wasn't and isn't a concern...just check out the 10 year yields on uk treasuries from 2007-2015...the 'markets' certainly had no concern in 2008-10 as the deficit was sharply rising, and prior to austerity measures of course. Yields continued to fall to very low levels during the whole period. The markets saw no risk or danger from the rising deficit at all. There really is no need to obsess and focus on the size of the deficit for a country like the uk.

    9. Still waiting for some names for (1) and some numbers/percentages for (2)

    10. Of course yields fell, there was a buyer, never previously in the market, for £375 billion of Gilts from 2009-2012.

    11. «the 'markets' certainly had no concern in 2008-10 as the deficit was sharply rising, and prior to austerity measures of course. Yields continued to fall to very low levels during the whole period. The markets saw no risk or danger from the rising deficit at all. There really is no need to obsess and focus on the size of the deficit for a country like the uk.»

      Just like in Spain up to 2007 :-).

    12. The bigger question is how to bridge the enormous gap between public political discourse and technical knowledge about complex issues, in this case macroeconomics. It's easy to see how public discourse oversimplifies, e.g. by treating the economy like a household. But the other side is that technical specialists may have a tenuous grip on reality as they deal with abstractions, and hence often disagree. We need better ways to improve public debate. I was about to suggest that Corbyn & McDonnell should set up a Council of Economic Advisors, when I broke off to listen to the news, and heard that they apparently have done exactly that, and on googling it found that it was one of the suggestions Owen Jones made in August. Another step in the right direction, for me.

    13. Actually, the moment someone purports to be asking about the optimal size of a deficit and asks about 100%, you need not take any of the writings seriously.
      Really, someone who cannot make the difference between deficit and debt has no job making comments on an economics blog. Asking respectful question in order to further his understanding maybe, but any opinion provided should be studiously ignored.

  10. Mr. Alexander "They never, ever, put a figure on what size of deficit might be a concern, either. It just seems like the bigger the better." In contrast, I suppose, to never defining the 'smaller' part of 'smaller government.' My view is that government has been about 20 percent, give a point or two either way, of GDP for centuries. Even when we were in feudal times (hardly an era of large government), I believe that was about the real percentage. Back then, of course, the royal class and their immediate lieutenants of various classes, was the government more or less. Everyone else was just dirt poor. It is not likely coincidence that as cries for 'smaller' government persist, the government does not really shrink much, but the wealth of the new royals does increase proportionately. As does poverty spread below. My conclusion. We're going to ruin, a condition Adam Smith correctly explained happens to rich countries where outsized profits are enjoyed by the ownership class.

  11. Do I detect a move towards MMT thinking on this site? Perhaps, now would be a good time for SWL's students to get familiar with Wynne Godley's "Sectoral Balances" and Abba P. Lerner's "Functional Finance". Both are the foundation of Modern Money Theory (MMT), not Keynesianism.

    Then work your way through Neil Wilson's

    By then you will understand why "monetary policy" is far to broad, a sledgehammer of a tool, to finely regulate an economy with multiple business sectors; and that "fiscal policy", particularly with sector based, demand side, "bubble control" taxes, would be a far superior way to run an economy at its maximum output. Taxes should be recognised as being brake pedals on the various sectors of the economy that need them; taxes have nothing to do with raising revenue for government spending.

    1. You can draw those conclusions from within Keynesianism. MMTers just refuse to acknowledge that monetary policy is better than nothing.

    2. So far I have come across two aspects of MMT that seem to make it different from mainstream macro. The first is the preference for fiscal rather than monetary stabilisation - a very old debate, but worth having every so often, The second is to make silly statements like 'taxes have nothing to do with raising revenue'!

    3. Perhaps SWL, you could explain to those assembled on this site, how the Treasury spends into existence, its fiat "unit of account" it calls the Pound Sterling? What happened on day one, who spent first, the Treasury or the tax payer?

      Also you could explain how the Treasury gets all those "units of account" back eventually, as taxes, when the private sector stops hoarding them as "savings"; or as neo-liberals call them, the "national debt".

    4. "The second is to make silly statements like 'taxes have nothing to do with raising revenue'!"
      Simon, do you agree as a point of logic that if the government spends and there is no saving in the spending chain, then the government will get all of its money back, even with a very small say 0.5% tax rate?
      (Saving = assume no one pays back bank loans too.)
      Maths progression - some money is spent, that gets taxed, spending becomes income and the money is spent again.
      Don't make this about MMT and Keynesian debates, just as a point of logic?
      So it might be very honorable to raise taxes to balance the budget, something I have heard left wing voters say they would be willing to do, but if that money was spent it would generate tax revenue further down the line.
      MMT sees deficits as being caused by private sector decisions to save and so not under control of the govt. If you want to cut the deficit you have to get private sector entities to save less and/or borrow more.

    5. SWL: it's a bit uncharitable to dismiss the MMT observation "taxes don't raise revenue" as silly. It may be technically inaccurate based on the UK's existing institutional arrangements (Consolidated Fund etc), but it reminds us how flimsy these arrangements are. They can obviously be suspended at the drop of a hat in wartime; a permanently different approach could be envisaged.

    6. I feel it's kind of bad form to ask Neil directly but does anyone know his background? Sometimes he uses a jargon that sound like he must have worked in finance...I know it's not massively important but I find myself flailing somewhat if I can't build up at least a vague image of someone.

    7. @Anders...."taxes don't raise revenue" as silly. It may be technically inaccurate ... It is technically accurate in our sovereign fiat currency system. Every Pound the Treasury spends (reserves) is a brand-new one, created as a number from thin air. Taxes are not recycled, they disappear back into thin air the moment they get back to the Treasury.

      On big tax collection days, large quantities of "reserves" are extracted from the non-government sector of the economy, this can impact on commercial bank liquidity and daily clearing in the inter-bank settlement system. So taxes and NI payments stop off on there way back to disappearing in the Treasury in TT&L accounts, Government current accounts at the commercial banks to keep the reserves in the system. This makes it look like taxes are paying for things. As our government spends more than it gets back, it continually tops-up its TT&L accounts with numbers it creates with its keyboard, out of thin air. The top-ups are increasing the net fiscal assets in the economy and become the savings of the non-government sector.

      That's the beauty of a country having its own sovereign fiat currency system; tell the Greeks if you see them; and, the Shadow Chancellor because his Krugmanite advisers think this is "silly".

    8. I was shocked to read Warren Mosler's assertion that when you pay your taxes in cash, it goes directly to the shredder. Talk about cognitive dissonance!

  12. "In particular at the time the problem of the recession appeared to be over, recovery was under way, and the Bank of England seemed confident in the power of unconventional monetary policy."

    No, the time to deficit reduction is after the recovery is over, not before. As Keynes said, the time to do it is during the boom. Once the economy hits full employment and wages are sharing in productivity gains, then do deficit reductions.

    I think you are too kind to Lord Turnbull and the others.

    Also I don't see how MMT is different from regular Keynesianism. They sound like they're saying the same things.

  13. The cuts agenda reflects Osborne being a consummate politician - welfare cuts read well with the household economics and hysteria of mass media and most people's understanding.

    However Osborne is always finding new outlets for subsidy with utilities,oil, gas, farmers, banks, corporates and pensioners all backing it with votes or donations to the cause. If we clear the deficit I would bet it will be because of growth not cuts. Osborne learned from 92-97 when they got no credit for any economic recovery from Lawson boom bust.

    Squeezing a few poor and having hand on the spigot of key voter donating groups is good politics. Don't bet on real Austerity over the full 5 years - other than the semantic version people claimed for last parliament. He certainly regardless of size of state believes in state patronage and power and votes.

  14. "Is it any wonder that a quarter of a million Labour party members voted for change."

    Yes. Yes indeed.

    "It commits the government to delivering an overall surplus by 2019-20 and to running an overall budget surplus in “normal times”. The shadow chancellor said: “We will support the charter. We will support the charter on the basis we are going to want to balance the book, we do want to live within our means and we will tackle the deficit.”"

    Good thing he is listening, eh Simon?

    After all, it would be so sad if the new Labour leadership had no real clue what they were doing.

    1. Read this:

      and read the complete Guardian article. I suggest targeting a zero current balance, which appears to be McDonnell's position too.

      It is true that the new Labour leadership do need all the help they can get, but sniping from the sidelines and saying I told you so at every mistake is just pointless. Particularly when you get your facts wrong.

    2. So you too would have no problem signing up to Osborne's fiscal charter?

      A surprise to me, but I am happy to admit if so that got my facts wrong.

      I think McDonnell has an entirely different conception of what 'austerity' means from you. For him, it is all about spending cuts.

      This is very good

    3. It may not be deceitful to say you will "balance the budget", the current budget, but it is certainly slippery.

      I look forward to a new Labour Government picking the winners for its investment projects, ably assisted by Mick Cash and the other trade union barons. Worked out well last time. The RMT should definitely be put in charge of running CrossRail. The £15bn project, both now and when operating, would obviously run smoother and more to time as a result.

  15. Simon, how would you tackle the (technocratic) problems of targeting a zero current balance shown here:
    Seems one hell of a square to circle, although it could be done. Any thoughts?

  16. Doesn't Lord Turnbull actually make himself look weaker with this comment?
    One could be for austerity for two reasons:
    1) to shrink the state (SWL doesn't agree but many of us wouldn't find that argument absurd by itself, merely wrong); or
    2) to reduce the deficit (most macroeconomists apart from Alessina and friends - and maybe not even them anymore - would strongly disagree with that).

    Now if Turnbul is upset with Osborne for pursuing austerity for reason 1), he has apparently pursued austerity for reason 2) alone. Smart?

    1. The problem with 'shrinking the state' is that there doesn't seem that much left to shrink. By the time you've accounted for the NHS, Schools, Pensions, debt interest and general admin, there isn't much left; it's not like there is a BP or British Telecom to privatise. Even NHS privatisation would have to involve some form of state insurance (I'll start a sweepstake on if such a system would be more or less expensive).

      This is why we've had a pattern of small-but-nasty cuts.

  17. Problems with balancing the current budget:
    So I thought I'd dig into the numbers to show what it is all about and point out the issues.

    The numbers come from the Public Sector Finance report from the UK's Office of National Statistics.
    For the financial year 2014/15 the current budget deficit stood at £48,876mn. So that is the amount you have to generate from somewhere to get it to zero.

    However before we do that it is useful to understand how you get that figure. What actually is the current budget deficit?

    It is defined as:

    Net Current Expenditure + Interest Paid + Depreciation - Current Receipts
    so using the figures from 2014/15 (In £ mns) you get:

    634,317 + 47,222 + 37,306 - 669,969
    To get the current budget deficit to zero you have to conduct extra investment spending - which then gets taxed away at the tax take percentage (which is 1 - the saving percentage) creating the extra tax receipts to cover the current budget deficit. Effectively you move the deficit from the current budget to the capital budget.

    There are a couple of things to note from this calculation.

    The first is that the depreciation figure is a transfer from the capital budget and adds to the current deficit. The more investment you do, the bigger the depreciation figure gets which then means you have to do ever more investment spending every year to cover the growing current deficit.

    The second is the interest paid figure which similarly adds to the current deficit. The more investment spending you do at interest the bigger this figure gets. The higher interest rate you pay the bigger this figure gets. And the bigger the figure gets, the more investment spending you have to do in subsequent years to clear the current deficit.

    You can already see that there are two unfortunate positive feedback loops inherent within the calculations.

    Net investment spending (Gross spending less depreciation) for 2014/15 was £30,328mn. If you express receipts as a percentage of total expenditure you find the tax take is 89.4%. So for every £100 spent, £89.40 came back as tax and £10.60 was held as financial savings.

    The tax take percentage varies as the tax side auto stabilisers allow people to save. In the post crash era where people are generally saving it has been as low as 82%.

    So to clear the current budget deficit at a conservative tax take of 80% you'd need to make £61,095mn of extra investment spending (i.e. the capital net spend needs to be three times what it currently is). That will vary up and down depending upon the actions of the automatic stabilisers. In 2009/2010 you would have needed £107,684mn of investment spending.

    There is of course lots of talk within Corbynomics of closing tax gaps, changing rates and the like. All of that is largely distributional. If you take tax off one person, they can't then spend it with somebody else and you potentially deprive somebody of an income. Only where you defer or offset saving behaviour, somehow, is there an impact on the total tax take percentage. Really you're relying on the old balanced budget multiplier to work its magic - which likely isn't that effective in an open net importing economy like the UK.

  18. Besides the complexity issues, balancing the current budget has clear issues.

    you are limited to fixed capital formation and capital transfers. So you can build universities and hospitals, but you can't staff them.
    eventually you run out of stuff to build. This leads to the old Labour problem of building roads to nowhere just to keep 'investment' going.
    you neglect items because of the current budget restriction. The only effective investment a government can make is in its people. But that is all current spend and is therefore difficult to do.
    you have to raise taxes to make the books balance. Nobody likes tax rises. Raising taxes is far more unpopular than explaining that budget balances are not really significant. It seems strange to take a political hit on taxation when you don't need to.
    Fixed capital investment targets a small section of the country's supply chain. Only a small section of the population is engaged in building things. The UK is 80% service based and people are trained for services. So you are quickly going to run into supply side capacity constraints, and potentially start to limit other capital development in the private economy.
    the action of the auto-stabilisers pulls the current budget out of balance as a matter of design. If the economy contracts social security payments go up and tax take declines. You then have to do more investment spending to counter that. Yes there is more slack at that point, but is it the right sort of slack. Is the supply fungible enough?
    the more investment, the more depreciation and interest paid. That leads to a positive feedback spiral between the current budget deficit and the level of required investment (and is another reason why Gilt Issues are harmful)

    Overall it seems a strange political choice, when you can easily get away from adjusting taxes and allow yourself more freedom to improve direct services (the National Education Service for example) with a functional finance (MMT) approach.

  19. «"the real argument is you want a smaller state and there are good arguments for that and some people don’t agree but you don’t tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen."»

    But to me there is a much bigger deceit in framing this discussion in terms of size of the state: because my long standing impression is that "size of the state" is for most participants just dissembling, where the real matter of contention is redistribution, under the assumption that currently the state budget has a downward redistributive bias, so a smaller state implies less downward redistribution, and a bigger state more downward redistribution.

    But when the state redistributes upward then conservatives amazingly love big state "interference", such as bailing out the very rich financial sector, or funding huge foreign wars and ever bigger resources for the surveillance of subjects.

    So presenting G Osborne and D Cameron as "small state" advocates rather than "austerity" advocates seems to me deceitful too, because it seems apparent that what motivates them is the desire to first stop and then revert the downward-redistributive bias of the current state organization, and it is not the size of the state that they care about.

    Because for example when it comes to redistributing upwards via asset-price boosting policies they are very willing to greatly enlarge the role of the state, with massive and expensive handouts from Right-to-Buy updates, Help-to-Buy credit boosts, "tory pensioner bonds" at many times the "market" interest rates. Plus the enormously increased spending on policing and spying their subjects.

  20. Simon, is it true that you have joined Corbyn's economics advisory panel? Curiously, you're named as a member of the panel in some media reports and not in others...


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