The economic impact of cutting the deficit

Some people write to this site or in other publications to tell us that as sector balances in an economy have to sum to zero, attempts to cut the public sector deficit are damaging to output and activity as something else has to give to keep the sector balance. Let me explain why their view is likely to be wrong.

First, we need to grasp that there are conventionally four sectors with balances, not just the balance of payments and the public sector deficit they like to concentrate on. There is the private household sector, the private business sector, the public sector and the foreign sector or balance of payments. Turning their argument around, we have only been able to run a large public sector deficit because the business and household sectors wished or were required to stop net borrowing and generate a savings surplus, and because the overseas sector was prepared to let us buy more than we could afford, with substantial inward movements of money for loans and investments to balance the excess purchases. Whilst reining in the private sector a bit may have been necessary after the large borrowings of the pre crisis period, running a large balance of payments deficit and encouraging a lot of new foreign claims over our assets may not be such a good long term strategy.

Getting the public sector deficit or borrowing down can be balanced by any one of the following, or some combination of them. It could be facilitated by a movement out of balance of payments deficit, by making more of the things we want to buy here at home and or selling more abroad. It could be enabled by the private household sector borrowing more to facilitate more home ownership for example. It could be enabled by businesses borrowing more to invest, or generating less profit and cashflow if conditions become more competitive. More borrowing or less saving by either part of the private sector could be a good thing if it leads to more productive investment, better housing or other stores of value. If it is just a question of which brings more satisfaction, borrowing to spend on what you want or the government borrowing to spend on your behalf to buy what you want, it does not mean public sector borrowing is always the best choice.

The range of changes is considerable. There is no simple identity between the public deficit and the balance of payments. Curbing the public borrowing requirement as the balance of payments deficit on trade is coming down or as the private business sector has some profitable investments to undertake is a good thing, not a bad thing and can take place with growth occurring.


  1. Lifelogic
    August 20, 2015

    State sector workers are remunerated (when pensions are included) at about 50% more than the private sector (with better working conditions, more sick days, earlier retirement and more sociable hours). The public services they deliver are largely misdirected and usually or exceptionally poor quality. Much of what the state sector does is just to inconvenience (or render uncompetitive) the private sector. The result is exported jobs and it makes the country much poorer in the process. Look for example at the huge pay levels for tube drivers. A job that clearly should be mechanised anyway.

    This largely non productive (net on balance anyway) state sector can only be funded by borrowing or taxation of the productive. Both clearly reduce the efficiency of the far more productive private sector hugely. Borrowing is just deferred taxation after all (unless they later default).

    Given this, how on earth can it not be good to hugely reduce the bloated, largely unproductive – indeed actually anti-productive – state sector?

    What is needed is austerity in the state sector and a similar release of the private sector from its state imposed ball and chain (of over taxation, over complex taxation and huge over regulation. It is a win, win situation. Release the private sector and you will have a far larger economy and far fewer living off benefits. Far more will be learning how to work too.

    1. agricola
      August 20, 2015

      Agree with the general flow of your argument.

      One of the things government could do, but seem to fail miserably at, is to curb the excesses of the private sector. The payday loan companies who are still praying on the vulnerable at in excess of 1000% APR. The landlords who see fit to house thirty plus immigrants in a couple of semis. The pension companies with their miserable annuity returns. The banks that give nothing in interest but charge a fortune for well secured loans. One begins to ask what is government for, and can we afford the luxury of it.

      1. Lifelogic
        August 20, 2015

        I agree fully on payday loans, APRs much above about 25% almost always benefit no one but the lender and often cause misery. There are already strong controls on landlords but often non enforced or often enforced mainly the wrong targets. To see APR of 1000% plus advertised on TV is absurd. Mind you I find most of (especially daytime) TV adverts are a complete rip off, hugely expensive loans, no win no fee lawyers, over priced life insurance (with a free pen) or rather questionable charities.

        The miserable annuity returns are the direct result of government rules dictating that they largely lend to governments for very little interest. In affect yet another tax. The solution is not to take the money out of the control of the beneficiary (the pension investor) in the first place and let them invest it directly.

        1. agricola
          August 20, 2015

          Quite right on pensions, much better to invest in reducing , in volume, items of quality. I have in mind property, selected vintage cars, and vintage aircraft. As a sixteen year old Tiger moths were around £25 and even Spitfires not that much more. I can remember being able to roam through Wellington Bombers, parked by the hundred, worth no more than the aluminium they contained at the time. I would not touch Art, there are just too many fakes about. I am surprised I managed to survive all the traps the pension industry and government set for one.

          1. Lifelogic
            August 20, 2015

            You can just use a pension scheme just as a tax vehicle to defer & save some tax and invest in say commercial property, trading companies and other things through the pension. But the rules are far too restrictive and the cost of running it can be too high unless you have a large pension pot. Furthermore Osborne being a socialist has further tightened the contribution rules and pot cap rules -this on top of Brown’s outrageous pension muggings.

        2. APL
          August 22, 2015

          Lifelogic: “To see APR of 1000% plus advertised on TV is absurd.”

          And don’t forget that other utter failure of the state, education.

          Anyone who has basic arithmetic ability would understand that an interest rate of one thousand percent is financial suicide.

          That there is a market for such rates among the lower orders is an indictment of the state education system.

    2. Cheshire Girl
      August 20, 2015

      You could have fooled me! I have a close relative working in the public sector and because the system is so chaotic, they are working several hours a day of unpaid overtime. This is supposed to be compensated for by extra time off. But because tbey are so stretched, no annual leave has been agreed until September. The summer will be over by then !
      I dont wish to offend, but when you talk about how great things are, I dont think you have a clue what it is really like out there. Unless one is in the upper echelons on the Civil Service I would’nt advise anyone to take a job working for the Government!

      1. Lifelogic
        August 20, 2015

        That is what the figures clearly show. It is true that most of the difference is in the far better pensions that the state sector receive. So the benefit is often not felt until retirement.

        MP’s pensions, for example, can be worth almost as much as the actual salary each year.

        1. Jerry
          August 20, 2015

          @LL; “MP’s pensions, for example, can be worth almost as much as the actual salary each year.”

          Hardly the average “public sector” employee remuneration arrangement, not even the average in the civil service as Cheshire Girl points out. How about giving an example of the average pay arrangements within say the NHS, always assuming that your ran, sorry, claims actually stand up.

          1. Lifelogic
            August 20, 2015

            There is plenty of published data on state sector and private sector remuneration. Very many in the private sector have no pensions at all they often cannot afford to contribute.

          2. libertarian
            August 20, 2015


            Here you go, as LL said the public sector wage is topped up by all the extra benefits


            Oh and Jerry if you don’t like people being rude or abusive to you, how about you stop being rude to them. LL was making a point and right or wrong it wasn’t a rant.

          3. Jerry
            August 21, 2015

            @libertarian; That site proves nothing with regards the reality of public sector pay, as Cheshire Girl and Margaret have been pointing out, it is a career recruitment page for that sector and thus will obviously paint the best possibly picture, which is not always the hard reality.

            Oh and as for rants, of course those so engaged are “making a point”, it is the style in which those points are made that makes a rant – often also going off on a tangent away from what our host wished to be debated, without even an apology.

          4. Edward2
            August 21, 2015

            If you simply Google public sector pay and pensions Jerry, you will find endless articles, even in the Guardian, so it must be right, talking about the gap between public and private sector pay, pensions, conditions, redundancy offers, other perks and early retirement options.
            How you can argue the opposite is a mystery to me.

          5. Jerry
            August 21, 2015

            Edward2; “How you can argue the opposite is a mystery to me.”

            You are asking the wrong person that question, why don’t you ask Cheshire Girl and Margaret why they are (apparently) being so ‘economical’ with their facts if it is so easy to find proof to the contrary?

          6. Edward2
            August 22, 2015

            But I am asking you Jerry.
            We are talling about average public sector pay and pensions and conditions compared to the private sector.
            And it is you that is in denial.

            Figures show the public sector to be much better.
            But within an average you will be able to show singular examples where pay in the public sector is poor just as you could show singular examples of high private sector pay.
            But the average figures, which can be checked on line across many research papers published are all showing the public sector pay pensions and conditions is much better.

        2. libertarian
          August 25, 2015


          Oh sorry another link to facts that you don’t accept as it doesn’t agree with your opinions. Tell you what why not find me a link that proves your assertion.

          You don’t seem to know Jerry that public sector pay and renumeration are fixed in publicly available bands, so a career website that lied as you imply would look pretty silly.

    3. Hefner
      August 20, 2015

      Lifelogic, You should read JR’s contribution: it is much more sophisticated than your “Private good-Public bad” view.
      I would very much like to know what your perfect country would look like, who would be in charge of transport, health, education, defence, border control, environmental protection, …

      1. Edward2
        August 20, 2015

        No one is saying no state hefner, just less waste.
        Our state is spending about £100 billion more than it gets in tax adding to a long term debt of £1.5 trillion.
        State spending in 2000 was £340 billion now it £740 billion and it is still rising each year.
        This is not sustainable.
        HS2, Trident, rapidly rising EU fees, failed defence and IT projects, bosses in the public sector on six figure salaries retiring at 50 then being rehired as consultants, overseas aid, green subsidies, money being fed into thousands of quangos and charities, pointless overseas wars etc.
        Not a penny can be saved.
        Yeah right.

        1. Jerry
          August 20, 2015

          @Edward2; “No one is saying no state hefner, just less waste.”

          Trouble is that far to many people like you and think that anything you do not need is waste.

          “Our state is spending about £100 billion more than it gets in tax adding to a long term debt of £1.5 trillion.”

          But is that because of waste or because taxes are to low?! The answer will depend on ones politics of course, ones wealth, ones health needs etc.

          “This is not sustainable.”

          That is something just about everyone can agree on, it’s the detail that needs debating!

          “[long list of what Edward2 obviously thinks of as state waste]”

          Your rational has looped back to the beginning, what you personally think of as ‘waste’…

          Reply Tax as a percent of GDP is at the high end of the UK post war range. There is considerable waste an inefficiency – e.g. Network Rail is 25% less efficient than comparable EU railways

          1. Edward2
            August 20, 2015

            I’ve given some specific examples of what might be called Government wasteful spending Jerry.

            I have many more, but would you agree with any of them?

          2. Colin
            August 20, 2015

            “Trouble is that far to many people like you and think that anything you do not need is waste.”

            Yes. Spending money you haven’t got on things you don’t need is indeed waste.

          3. Jerry
            August 20, 2015

            @Edward2; @Colin; As I said, the debate and rants regarding “government waste” is nothing but pure personal ideology, one persons waste is another’s necessity, I have no doubt that even a room full of devout UKIP supporters could argue until the cows come home about what is and is not government waste but fail to come to any agreement…

          4. libertarian
            August 20, 2015


            In ONE year alone government departments WASTED £100 million of tax payers money on failed IT systems.

            The failed and scrapped NHS IT system wasted £10 BILLION of the taxpayers hard earned money

            At the other end of the scale why is government offering £3000 broadband vouchers to SME’s?


            The state should provide Foreign, Defence, Law and order, health, education, roads and welfare . Thats it. The VAST amount of money collected in taxes is more than enough to drastically improve service delivery in those fields.

            The annual budget for the Department of Business Innovation & Skills is wait for it £16 BILLION . For the love of all things holy think about what that amount of money could be usefully spent doing.

            The department of Culture Media and Sport £1.5 billion

            This is insanity its over government and a complete total and utter waste of tax payers money.

            You two as Labour party supporters need to understand you’ve been rumbled by the voters. We know that the AVERAGE earner in the UK is handing over 60% of their earnings in taxes, duties and government licences. The average voter also sees the vast amount of central, regional and local government waste.

            We do not have austerity we have profligacy on a grand scale

            We struggle to get people to take up the available jobs because more people recognise that once the governments taken their slice they are working 5 months a year for nothing.

          5. petermartin2001
            August 20, 2015

            Of course we should try to do everything as efficiently as possible. We shouldn’t just make up jobs or have more people doing those jobs than is necessary.

            That’s because there are only so many people available to work in the factories, the hospitals, the schools, on our transport system etc. There’s a limit to what we can import from overseas.

            Ultimately we need to organise our affairs so that we don’t have wastage. That should include having people hanging around unemployed doing nothing, or underemployed and not working productively.

          6. Jerry
            August 21, 2015

            libertarian; “In ONE year alone government departments WASTED £100 million of tax payers money on failed IT systems. “

            No, their suppliers wasted £100 million of tax payers money on failed IT systems!

            “The failed and scrapped NHS IT system wasted £10 BILLION of the taxpayers hard earned money”

            Yes because the private sector messed up in the systems specifications, it would be obvious to a 10 year old that such systems need to grow, or unknown-unknowns become known and thus need to be patched etc. The system should have been specified and built with that mind, not as is so usual in public-private contracts, built for as much profit as possible whilst costing as little at source, whilst being as difficult as possible to upgrade without a major rework of the hardware, software or both, that then triggers penalty clauses in the contractors favour.

            “The state should provide Foreign, Defence, Law and order, health, education, roads and welfare . Thats it.”

            That is your ultra-capitalist opinion, others (the vast majority, looking at the popular vote) think otherwise.

            “We do not have austerity we have profligacy on a grand scale”

            Indeed and I suspect that even Mr Corbyn agrees, the only point of debate will be on what the money is being spent!..

          7. Edward2
            August 21, 2015

            Dodging any proper reply as usual Jerry.
            Yes there are arguments as to what govt waste is.
            This is because so much is not essential and so much could be saved and then put to better use.
            My list was just a few items which could save many billions.
            Again I ask, are any ones you would agree with?

          8. Gary
            August 21, 2015

            “The state should provide Foreign, Defence, Law and order, health, education, roads and welfare . Thats it.”

            Apart from welfare, I agree entirely. That is definitely Liberatarian

            I believe that people are inherently good and compassionate and will provide welfare out of their own pockets. Socialism has a deep mistrust of people and holds that only the govt is benevolent and knows best.


            Despite our previous differences, it appears that we are actually almost on the same page. Well said.

          9. libertarian
            August 25, 2015


            If your ridiculous argument was true, its even worse as as the public sector management that specified, ordered and paid for these projects clearly aren’t fit for purpose.

            Jerry lesson number 44 in I know nothing about business

            “Yes because the private sector messed up in the systems specifications”

            Dear god man even a 7 year old knows that the CUSTOMER specifies and manages what they want NOT the supplier.

            Which public sector employees awarded the contracts on the basis you claim Jerry and what do you think of them. What do you think of the £250,000 per annum NHS IT manager in charge of the project?

            Grow up

      2. Lifelogic
        August 20, 2015

        I do not say private good public bad and did read JR’s contribution. Clearly some things are best done by the state sector – defence, law and order, control of borders etc. Health and Education are probably best done privately in general. Perhaps with some minor interventions/vouchers by the state sector when needed.

        I merely make the point that the state sector spends nearly half of the countries wealth and delivers very little of value for that level of expenditure. Much of the state sector just inconveniences, taxes, mugs and over regulates the private sector and does much positive harm.

        Look at the high priced energy/government green crap exaggeration religion or the absurdly complex tax system for a good examples.

        1. Lifelogic
          August 20, 2015

          Furthermore the “free” or subsidised health care, schools & university systems, social housing etc. often kill (or at least freeze out) alternative (often far more efficient) competitors.

          Much of the state sector is just a poorly run, monopoly business on the make while delivering the minimum it can get away with.

          This while even controlling or influencing the legal frameworks they operate under.

        2. turbo terrier
          August 20, 2015

          Life Logic.

          Look at the high priced energy/government green crap exaggeration religion

          That is exactly what it has become, a religion.
          CMD had the golden opportunity to put in someone like our host, David Davies, Owen Patterson or David Davis in charge of the DECC. In industry I found it always worked out well to put in a total non believer into a department to shake things up and get people to start thinking outside the box.

          The first thing that CMD should have realised is that the DECC
          is too big with too wider a remit. Have a CC department if you must to keep the greens on side but have a smaller Alternative Energy department to break the hold on the RE religous disciples. It is not about saving the world. It is about keeping the lights and engines of industry on. With a £1.5 trillion national debt we do not have a lot of choice

      3. Bob
        August 20, 2015


        “who would be in charge of transport, health, education, defence, border control, environmental protection”

        A smaller more efficient public sector, with fewer pen pushing time servers.

        1. turbo terrier
          August 20, 2015

          You forgot to add faceless and nameless to boot.

          With all these cock ups who will become responsible and accountable?

          Wasn’t me boss seems to spring to mind!!!!

          Only obeying orders. Shades of 1945?

      4. Bob
        August 20, 2015


        “As Jon Snow put it on Channel 4 News: “When it comes to military procurement, Israel spends £9 billion a year and administers its purchases with 400 people. Britain spends £10 billion annually on procurement and has a staff of 23,700 to do it.””

        Telegraph 23/10/10 Dan Hannan

        1. Jerry
          August 20, 2015

          @Bob; His (Mr Hannan) and thus your point being what, exactly, considering that Israel is a much smaller country even if it is in a constant state of readiness, nor does it have any commitments to NATO etc.

          1. Edward2
            August 20, 2015

            Jerry it must be plain to most people that this simple comparison shows that the UK defence ministry could easily reduce its office based jobs and still run a decent army navy air force for much less money.
            Even allowing for Israel’s smaller size and our NATO and UN status the difference in numbers is large.
            Too many in the HQ not enough on the shop floor.

          2. Colin
            August 20, 2015

            I thought the point was pretty clear: Israel spends a similar amount to the UK on defence procurement, yet manages to administer that operation with less than 2% of the staff. If they can manage that, why can’t we?

          3. Jerry
            August 20, 2015

            @Edward2; You seem to be comparing apples and pears again whilst believing you are counting eggs… 🙁

          4. Edward2
            August 21, 2015

            What on earh are you talking about Jerry?

            If you cannot begin to understand the point being made by the comparison of staff needed in two nation’s defence ministries then I am amazed.
            Israel and the UK are not perfectly similar but the difference in staff numbers is so huge it is shocking.

          5. Jerry
            August 21, 2015

            Edward2; “If you cannot begin to understand the point being made by the comparison of staff needed in two nation’s defence ministries then I am amazed.”

            You are the one who fails to understand, even if your assumption about country size is ignored, which it can’t, as there are cost implications on all sorts of logistic levels, just the fuel bill for diesel will be vastly different for example.

            How can anyone make a direct comparison between a country with many diverse worldwide military obligations with that of a country that has all but a single obligation, defence of their homeland – if all the MOD needed to do was keep their Generals hunkered down in a bunker and their squadies in their home barracks (or as home defence civilians reservists in their own homes/workplaces) for much of the time then yes costs could be cut but that is not were the UK can be unless we wish to withdraw from undertakings we have agreed to since 1945.

          6. APL
            August 22, 2015

            Edward2; “If you cannot begin to understand the point being made by the comparison of staff needed ”

            Jerry: ” just the fuel bill for diesel will be vastly different for example.”

            Illustrating nicely, why it is an utterly pointless exercise attempting to hold a discussion with Jerry.

          7. Edward2
            August 22, 2015

            Struggling there Jerry
            Keep digging…

        2. turbo terrier
          August 20, 2015

          Got it in one Bob. Spot on.

        3. Lifelogic
          August 20, 2015

          Indeed and still they order aircraft carriers without any aircraft.

          1. Bob
            August 21, 2015


            “they order aircraft carriers without any aircraft”

            Reminds me of the adage that begins “too many cooks…”

            Reply I am assured they have ordered the planes as well.

      5. Denis Cooper
        August 20, 2015

        Well, one could easily get the impression that nobody is really in charge of border control at the moment …

      6. Lifelogic
        August 20, 2015

        I do not aspire to sophistication just truth. Health, education and transport would be far better if government had very little to do with them. I agree that some is needed very occasionally. Perhaps just giving vouchers to those who really cannot pay themselves for education and health.

      7. Peter Stroud
        August 20, 2015

        I agree with you, Hefner. Lifelogic’s view of the public sector is incredibly simplistic, and bears no likeness to the London Underground. I worked as a scientist in both the public and private sectors. I saw the transition from public to private ownership of one of HM’s defence establishment. Frankly, the amount of unnecessary bureaucracy was more after privatisation than when the establishment was publicly owned. Business administration tasks seem to increase with greater than a linear relationship with the size of the business, regardless of the sector that ‘owns’ it.

        1. Richard1
          August 20, 2015

          Clearly there can be uselessness and inefficiency in the private sector. this is particularly the case when public sector monopolies are privatised as private sector near-monopolies. The key difference though is in the private sector there is a market pricing mechanism for capital – private firms can make mistakes, but sooner or later – unless they really are protected monopolies – they will pay the price in cost of capital, access to capital, competitiveness and ultimately survival. The NHS shows how difficult it is to introduce supposedly market-driven management practices without actually having a competitive market.

        2. Frank salmon
          August 20, 2015

          Typical. Go to network rail and assess how much ‘cheaper’ it is to operate now that it has been taken back in to public ownership…..

    4. Jerry
      August 20, 2015

      @LL; “[the public sector has] better working conditions, more sick days, earlier retirement and more sociable hours”

      Care to provide some real world examples?…

      “Look for example at the huge pay levels for tube drivers. A job that clearly should be mechanised anyway.”

      There speaks someone without a first clue as to the modern day reason why tube trains still carry a driver, perhaps you will feel different the first time your tube train grinds to a halt in all but total blackness, will you know what to do, how to or when to, without the guidance the driver will give [1] – but what if there has been a collision and the driver is incapacitated you say, well thanks for demonstrating why guards should still be on trains to!

      [1] and much the same applies to above surface trains to, even ones that never travel at night, never travel through tunnels

      1. Edward2
        August 20, 2015

        Why is a tube train driver paid more than HGV lorry drivers or overground train drivers or Thames ferry captains or London bus drivers Jerry?
        If a tube train grinds to a halt with or without a driver you are stuck just the same.
        There are dozens of unmanned train systems around the world working very well.
        As usual your world view is still back in the 1970s

        1. Jerry
          August 20, 2015

          Edward2; “Why is a tube train driver paid more than HGV lorry drivers or overground train drivers or Thames ferry captains or London bus drivers Jerry?”

          Irrelevant, they are all very different jobs with different skills etc.

          “If a tube train grinds to a halt with or without a driver you are stuck just the same.”

          Yes, but with one the passengers have a fully trained point of contact on the train, with the other they have nothing but a telecoms link (assuming it still works) with a remote control room whose operatives might well not understand what the problem is or the full extent – read the evidence given to the London 7/7 hearings… Then you assume that the person who makes contact with ‘control’ can a/. give a suitable and actuate description of the fault/event, b/. understand what they are being told to do and not do by ‘control’, then c/. convey those instructions to their fellow passengers with significant authority.

          “There are dozens of unmanned train systems around the world working very well.”

          Then you will have no problem in citing such underground systems, nor the details of their safety systems and the cost of those systems, and how those systems were installed -new build, total rebuild, or piecemeal whilst the system remained fully functional, for example. I’m not suggesting that you are wrong, as I’m fully aware that there are such systems, just that I suspect you are comparing apples and pears for the majority of TfL underground lines.

          As usual your world view is still back in the 1970s”

          Whilst you seem to wish a return to the safety attitudes of the 1800s, non at all in other words. So what if Mr or Mrs Pleb makes contact with a 700v DC live rail, or de-trains in to the path of a still running train on another track.

          1. Edward2
            August 21, 2015

            1 Why irrelevant?
            Why is the tube driver paid most?
            2 The train is still atuck driver or no driver, the systems on driverless trains can be interegated remotely, who says the driver can guess the fault accurately?
            3 A poor argument Jerry. There are many countries operating driverless trains all working well without ihcident or strikes disrupting the customers
            4 Who wants to return to any previous age of technology or safety levels?
            Health and Safety is crucial in any transport system and if you have any knowledge of poor or dangerous practices on driverless train systems then please let us know.
            Otherwise keep your childish slurs to your self.

          2. Jerry
            August 21, 2015

            @Edward2; “Health and Safety is crucial in any transport system and if you have any knowledge of poor or dangerous practices on driverless train systems then please let us know.”

            I have, you just don’t want to accept them, once again choosing to show up your utter lack of any real knowledge or understanding.

            “Otherwise keep your childish slurs to your self.”

            Who is slurring anyone [1], I merely stated why driverless underground trains have many and varied safety issues. It will also be noted that you again failed to actually name any such driverless underground train systems. As for being “childish”, stop putting your own dirty pots and pans on display so often Edward…

            [1] unless of course Edward if you wish to declare a professional or investment in such a technology sector

            Oh and driverless trains will not stop disruption from strikes, it will just mean who the critical staff are, even driverless trains still need some staff, without who the system will either not work or will be deemed by regulators to be unsafe and thus can not be operated. The only solution to such a conundrum will be to radically reduce the safely standards that have existed and been constantly improved upon since the mid 1800s – good luck on selling that to the public…

          3. Edward2
            August 23, 2015

            I await your examples of dangerous practices or breaches of health and safety laws Jerry
            Im assuming you will be informing any appropriate authorities as is your duty.
            Bluster without any facts from you as usual.

          4. Edward2
            August 23, 2015

            If I had any connection to or any commercial interest whatsoever in anything debated on this site I would declare an interest.

            Please stop impuning my honesty Jerry.

      2. libertarian
        August 20, 2015


        More nonsense, you’ve never heard of the Dockland Light Railway and its driverless trains then?

        Jerry there speaks someone claiming to be an engineer who’s doesn’t know that a modern day centrally controlled communication system is perfectly capable of informing passengers on a stuck train what to do. In an age about to launch driverless cars, with advanced communications and computer technology Jerry wants a bloke with a red flag and a whistle. You really are stuck in the past aren’t you.

        You are laughable

        I gave you a link further up this thread with the evidence that NHS nurses whilst paid roughly the same salary as nurses in the private sector get more by way of pension payments, holiday entitlements , paid overtime etc etc

        1. Jerry
          August 21, 2015

          @libertarian; “More nonsense, you’ve never heard of the Dockland Light Railway and its driverless trains then?”

          Yes, indeed, more than you obliviously considering we are talking about UNDERGROUND trains, and thus the safety issues involved.

          1. Ted Monbiot
            August 21, 2015

            Not all the London tube is underground Jerry nor is all the worlds numerous driverless train systems all overground either.

          2. libertarian
            August 25, 2015


            Here you go son , a list of more than 70 underground train systems with driverless trains


            Welcome to the 21st century

    5. margaret
      August 20, 2015

      Pensions are lucky if you can get them in the public sector . What they tell you and the reality is different. I have worked in the NHS for over 40 years and my pension is extremely small a lot smaller than state pension, due to being subcontracted, working for NHS patients and monies being diverted.
      The latest example of this for the last 25 years , is that I continue to work for the NHS , but the GP who is supposedly paid very high amounts has to pay for the staff. The NHS will not pay for me treating nothing but NHS patients. Therefore there is no pension .
      As my ward was sold off in 1995 I mentioned this to the manager in Manchester , she said well I put my money into a private pension . It ‘s all messaged and lies.
      The office staff are superannuated , but not the nurses.

      1. margaret
        August 20, 2015

        sp ‘massaged’ Sorry done in a 10 min break .Despite some people thinking that we all have time to write a referenced piece , re read and correct before we comment I still don’t like’ faux pas’ in spelling.

      2. alan jutson
        August 21, 2015


        I am confused a little about your Post.

        You say you work for the NHS, but that your pension is/will be poor.

        It is widely accepted by most people that the NHS pension provides excellent benefits especially when compared to any self funded Personal Private scheme.

        We have a family member who has also worked for the NHS, although for nowhere near as long as you suggest you have yourself.

        The 25% tax free lump sum they got on retirement was very nearly the equivalent of their entire pension contributions made into the fund themselves.

        In addition they also get a good pension return on what was left in the pot (certainly better than any private scheme), which is subject to annual increases in line with inflation/cost of living, and a 50% spouses benefit to continue after their death (if the spouse survives)

        The new HNS revised Pension I agree is not as good as the old one, but the old benefits of the old system still apply are guaranteed and are locked in should you have been a member of that scheme, up to the date of the recent changes, when the new benefits would start to accrue, on top of the old.

        In the old system the NHS as the employer (the taxpayer in effect) made a 14% contribution of your salary amount into the scheme, to which you added your own contributions.

        Thus I do not understand your point about poor returns, unless it is that you are privately employed by an organisation which works for the NHS, but is not run under the NHS scheme.

      3. libertarian
        August 28, 2015


        Your post is confusing.

        IF you work and have done continuously for 40 years for the NHS then you have a large pension.

        IF you work for a GP surgery then you don’t actually work for the NHS and you therefore might have any kind of pension from none at all to quite good.

        If your pension is contracted out then you most definitely do not work for the NHS.

    6. Ralph Musgrave
      August 20, 2015


      You are simply expressing your personal political views: not of much relevance to JR’s article.

  2. Ian wragg
    August 20, 2015

    Of course it makes sense to reduce the deficit and ultimately the national debt. As interest rates rise the cost of servicing it will bankrupt us. A good deal of the interest is paid to overseas investors thus removing it from our economy.
    It is a disgrace that Gideon has reduced the amount we reduce the deficit once again as we all knew he would. When the next recession comes we will be totally unprepared.

  3. Gary
    August 20, 2015

    you’re running up against the nightmare that every social planner in history encounters. You cannot successfully plan an economy, eventually you get the tiger by the tail.

    The problem starts with the funny money that must be conjured out of thin air to buy govt debt and then multiplied into the private economy as loans. Right there you have created a tangled knot of dependencies and these mutually dependent sectors. The dependencies are created from using the incorrect premise that funny money is a given.

    If you replaced the funny money with sound money ,that is not a debt to anyone and its value moved in lockstep with the growth of the economy(not the other way round) , then the free market, ie the billions of people taking decisions every day to allocate their scarce savings for commodities, the economy would run itself.

    But no. Govt has to stick its oar in, out of arrogance or seeking graft , and it says it knows best. Well it doesn’t, it can’t, but until this is realised we sail along with this ship of fools.

    1. Iain Gill
      August 20, 2015

      yes government manipulation of markets is the problem not the solution. housing is an obvious area where Osborne seems to think even more manipulation is the answer to problems he has caused by manipulating too much.

    2. Denis Cooper
      August 20, 2015

      Talking about “funny money” and for general interest, recently when browsing I came across a reference to this Currency and Bank Notes Act 1914, which inter alia authorised the Treasury to start issuing its own paper currency as legal tender, the so-called “Bradbury pounds”:

      That Act is no longer on the statute book, having been repealed in 1928:

      Those were the days when Parliament apparently took an active interest in such matters and passed Acts about them, rather than just leaving it to the government to do as it may see fit.

      For example, on the strength of a statutory instrument quietly rushed through in February 2009 by the negative resolution procedure – that is, without any votes unless sufficient objections are raised – and without the normal period of 21 days for objections, to exempt the market-rigging “money-go-round” of quantitative easing from any regulatory scrutiny:

      “It was not possible in the case of this Order to comply with the 21-day rule
      according to which relevant instruments are laid before Parliament for at least 21 days prior to coming into force. The Order was made on 29th January 2009 and will come into force on 2nd February 2009.”

      Reply If the Opposition had opposed then it would have been debated and voted.

      1. Denis Cooper
        August 21, 2015

        Well, of course the Shadow Chancellor had expressed reservations, if not outright opposition, just a few weeks before on January 8th 2009:

        “”The very fact that the Treasury is speculating about printing money shows that Gordon Brown has led Britain to the brink of bankruptcy,” the shadow chancellor said.

        “Printing money is the last resort of desperate governments when all other policies have failed.

        “It can’t be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation and all the economic problems that high inflation brings.””

        And again on January 19th in the Commons:

        “Finally, will the Chancellor be straight with people about the announcement today of an asset purchase facility? He mentioned it in his statement, but he did not spell out that it could have implications for the whole country for years to come. That asset purchase facility gives the Bank of England the power to use asset purchases for monetary policy purposes. That amounts to a programme of “quantitative easing”—the modern equivalent of printing money. While no one rules it out, it is the last resort for Governments who have run out of other options. Two weeks ago the Chancellor said in Liverpool that it was “an entirely hypothetical debate”; that was the phrase that he used. Two weeks later, it has become a real option for which the Government are clearly preparing. What has changed in the space of a fortnight?”

        But of course even if Osborne had wished to raise objections to the Order to permit the Treasury and the Bank of England to rig the gilts market on a massive scale without falling foul of the FSA there was very little time to do that, with the Order being put in a bundle of papers laid on the table on the Thursday and coming into force before MPs reconvened on the Monday.

        I also find that this was only possible because this was not the first Order under the relevant Section of the 2000 Act, which had been strangely worded so that the first Order needed the affirmative procedure while subsequent Orders could be passed by the negative procedure, and that the period laid down by the Statutory Instruments Act 1946 was forty days, so presumably the “21 day rule” means days when Parliament is sitting.

        JR, we often criticise the EU for breaking its own rules, but this seems to be just as bad. Of course it is also irrelevant, insofar as it would not be possible to ask the now defunct FSA to examine the £375 billion of QE operations and declare that they constituted illegal rather than legal rigging of the gilts market, even if a court did find that the Order was invalid on the grounds of the procedural irregularities.

        Reply The Opposition could have opposed and forced a vote but chose not to.

    3. Denis Cooper
      August 20, 2015

      Further to this comment, I would have thought that if the economic circumstances were sufficiently extreme on Thursday January 29th 2009 that the government wanted an Order to come into effect on the following Monday, ignoring the 21 day rule and with Parliament not sitting on the intervening days, not on the Friday nor at the weekend, then instead it could have laid an Order to activate the Treasury’s reserve powers under Section 19 of the Bank of England Act 1998:

      suspending the operational independence of the Bank of England.

      However a Section 19 Order would have to be approved by affirmative resolution, while approval of the exemption Order was only by negative resolution and so with a drastically curtailed period for objections it could much more easily slip through under the radar, both the parliamentary radar and the media radar.

      In fact there is no record of that Order in Hansard for January 29th 2009, the only mention of it in the parliamentary records in at the end of the separate “Votes and Proceedings”:

      along with a clutch of other “Papers presented or laid upon the Table”.

      1. petermartin2001
        August 21, 2015


        I’m sure you’re not doing your health any good by continuing to fret about QE. We need to ask the question if Britain is better or worse because of it rather than to dispute what happened on a strict point of law. Nothings going to be undone anyway.

        You might like to ponder more on the nature of money, why we have it, and why sometimes we need to just create a bit more, out of nowhere, to keep our economy moving. Surely that’s the main thing? We can’t eat the tokens we call money, but we can eat the bread and the cheese which are the products of our real economy.

        1. Denis Cooper
          August 22, 2015

          I think you should be more concerned about the health of our parliamentary democracy, when it seems that the government can simply ignore the longstanding standard procedure as laid down by an Act of Parliament, and rush through an Order to legitimise large scale rigging of the market in government bonds in an attempt to get itself out of a financial predicament which was largely of its own making, without any debate in either of the Houses of Parliament let alone a vote, and while one of those leading the main opposition party had publicly criticised what he believed the government was intending to do and called upon the Chancellor to “be straight with people”, it now seems that he was fully aware of that Order and also of the procedural irregularity, and that he could have demanded an emergency debate and a vote but instead chose to connive with the government in its decision not to “be straight with the people”, most of whom still have no proper understanding more than six years later of what was done in their name, even though it did indeed “have implications for the whole country for years to come” and has now resurfaced with a proposal from one of those who seeks to lead the party which was in government at that time.

          If we are going to judge government actions purely on the basis of their practical benefits or disbenefits and disregard any questions of legality, let alone democratic legitimacy, then we might as well shut down Parliament and stop all the nonsense about elections and just hope that the dictatorship will always be a benign dictatorship.

  4. petermartin2001
    August 20, 2015

    Mr Redwood,

    I don’t have much time so just a very quick comment.

    What you say is true to the extent that there can be 4 sectors if we divide up the domestic sector into household and business. Or there can be only two if you combine the domestic and overseas into the non-government sector. The divisions are quite arbitrary and can be as many or few as anyone cares to make.

    It is also true that ” there is no simple identity between the public deficit and the balance of payments”. But they are related. It is no co-incidence that the exporting countries like Germany, Switzerland, Singapore, and Denmark all are able to run balanced budgets or better (in conventional terms) whereas that’s a big problem for big net importers like the UK and the USA.

    But, its good to see that the question of sectoral balances is being discussed. It’s one of the few areas of economics which is accountancy based and so devoid of all political interference. Whether our views are to the right or the left, the arithmetic is exactly the same. If we study what’s happening in our economy with these in mind, we can have a much better understanding of political possibilities for all.

    Reply Japan has quite often run a big balance of payments surplus and a government deficit, as has China

    1. petermartin2001
      August 20, 2015

      Reply to Reply,

      Yes this is theoretically possible. Germany too has a BOP surplus of around 7% of GDP, whereas its government budget is just about in balance, or maybe just a slight surplus. Some Germans would claim it was still slightly in deficit at the Federal level but I think that’s not including social security contributions which they seem to regard as different to taxation.

      So why is that? What happens to all those euros that enter Germany? The answer is that they end up in German savers’ bank accounts, both at individual and business level, so there is no need to remove them from the economy in taxation to prevent inflation.

      It’s also theoretically possible for it to work the other way around too. ie Germans could desave ie borrow to the same extent to have a balanced budget and also a trade deficit of 7% of GDP.

      I’d question if it would be practically possible, though, except perhaps for a very short period of time.

  5. Edward2
    August 20, 2015

    Its our fault. Us the electorate.
    We generally vote for politicians who promise the most goodies for ourselves.
    They borrow and print funny money to provide these things for us.
    A lesson was learned from the USA presidential elections when Dukakis stood against Bush snr
    Dukakis said the nation needed to cut back state spending and increase taxes to reduced the huge unsustainable state debt.
    Many agreed with him.
    Bush said “read my lips no new taxes”.
    Bush got in.
    The Conservatives have done well to get elected on a sort of “austerity” manifesto when over half electors are net recipients of state handouts.

    1. turbo terrier
      August 20, 2015

      Edward 2

      Could the 4 million that voted for UKIP have lent a helping hand in the final outcome?

  6. David Cockburn
    August 20, 2015

    As you highlight, one of the fundamental problems with our economy is that we have a current account deficit and balance that off by selling our assets and borrowing from abroad. Not a good long term strategy.
    Part of the problem may be that our public sector is not really in the exporting business. When the NHS treats a foreign patient it often doesn’t collect money to pay for that treatment. Further, our borrowing from abroad holds up the value of the pound at levels which make too much exporting industry uncompetitive at current wage rates.
    As we are not as rich as we thought we were, the next decade is going to be tough as we get our economy onto a sustainable footing. The faster we get on with it the better in my view.

  7. Richard1
    August 20, 2015

    Good that you have set it out so clearly. Hopefully this will clarify the issue for those parties who post here on this subject with limited knowledge. An important point you make is the need for productive investment, it is quite possible for investment to be unproductive – to take resources away from where they would be better deployed. I suspect strongly that HS2 falls into this category. Wind farms are another example. Government has to be particularly careful and disciplined when taking other people’s money to ‘invest’ as there is no market pricing mechanism to act as a check, except when a govt spends so much it loses the confidence of markets.

    1. petermartin2001
      August 20, 2015


      We’ve all got limited knowledge. Only a fool would claim to know everything.

      I’d agree we need productive investment. But how do we all, including yourself, decide on what’s “productive”?

      We do that by looking at the finances. We’d want to know that any business we put money into has a good supply of paying customers. And where does the money come from that those paying customers might spend? Yes they can borrow some of it, but Government has its part to play by issuing enough money into the economy to create those paying customers.

      1. Edward2
        August 20, 2015

        Are you talking about management of the supply of money (and credit) into a growing economy here Peter, or are you talking about deficit spending by Government by borrowing?

        1. petermartin2001
          August 20, 2015


          We need to consider where money comes from in the first instance. Until it’s been created by Government/Central Bank there’s none available to be either ‘borrowed’ by Govt or to form the taxation revenue of Government. Once its been created then it is usually, but not always, possible to issue bonds to ‘borrow’ back those unused saved ££ to keep the economy moving.

          The ‘borrowing ‘ process is more one of issuing new IOUs which do pay some interest in exchange for old ones which don’t.

          The idea that Government controls the money supply through the issuing of credit and that there’s some kind of multiplier effect is I believe incorrect.

          I’d cite “Money creation in the modern economy” by McLeay, Radia and Thomas of the BoE to support that claim.

          They say “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits”

          1. Edward2
            August 21, 2015

            Still not differentiating between the Bank of England managing the money supply in the way it has for decades and the state creating money to pay for its excess spending plans.
            This theory of your refuses to see the Bank of England and the State being different and I can see why.
            The last paragraph is plainly wrong
            It is exactly what banks do every day.

  8. Iain Gill
    August 20, 2015

    Given that the average house is going up in value more than the average total earnings of the households living in them then surely we need to restructure our economy. We need to leverage this success story. We should stop manufacturing, services business, farming, music business, and so on and go over to simply what could we call it? er house farming. Lets just move all our productive energy over to house building as its clearly where the demand is. Lets make our living in the world selling houses to international rock stars, drug dealers, dictators, and so on that want to buy more and more houses here. Lets rebalance our economy to just concentrate on houses, that what the figures say. Surely this is common sense.

  9. Bert Young
    August 20, 2015

    Debt is debt and all debt should be paid back . I grew up to believe that you should make your own way in life and not be dependent on others ; if I wanted a particular thing I saved for it until I had enough to buy it ; I have never had a mortgage .

    In the business that I created in 1964 , I always made sure that the cash flow was enough to cover on going expenses ; expansion in this country and in the 10 places abroad were always financed by group cash flow . Banks were always eager to lend and to foster more development but their offers were never taken up . When I became the Non-Exec Chairman of a software group in 1987 , I insisted on adopting this same principle ; the borrowings they had were eliminated and their subsequent cash flow sponsored further development .

    I strongly believe that the Government should adopt the same policy – get rid of debt , maintain a stringent control over expenditure , foster and invest in enterprise and keep a watchful eye on progress . Incentivising and motivating are ingredients that have to go hand in hand with this process and , where stagnation and unnecessary delays are found , get rid of them quick .

    All the companies I advised during the 24 years I was involved , received the same sort of advice and whenever the Chief Exec resisted , I always endeavoured to change him . Looking at our state of affairs today , we are badly in need of discipline and control and we should not shirk getting on with it .

    1. petermartin2001
      August 21, 2015

      I strongly believe that the Government should adopt the same policy – get rid of debt …..

      If we all (or nearly all!) look in our wallets and purses we see government IOUs we call money.

      If government ‘got rid of its debt’ we wouldn’t have any pounds in our wallets. We’d have to switch to a barter economy, or, even worse, use the euro 🙂 !

      The national debts of all the worlds countries total to some $60 trillion. We don’t owe it to Mars. Those debts are our financial assets.

  10. Denis Cooper
    August 20, 2015

    ” There is no simple identity between the public deficit and the balance of payments.”

    Red rag to bull time, I think, JR, but I have a shed to paint and so I may stand stand aside from any protracted debate … I have to say that it before reading comments on this blog it had never occurred to me that if I bought something which was made abroad rather than in this country then that would increase the pressure on the government to over-spend.

    1. petermartin2001
      August 20, 2015

      Maybe not, but John Redwood does understand (I think!) what I’ve been banging on about for the past few months now.

      Look, I may not be agreement with the right-wing desire to have a much smaller government but I do accept that it’s a perfectly legitimate point of view.

      However, you guys aren’t going about it the right way. You’ve confused the size of the deficit with the size of government. By trying to reduce the deficit, with the introduction of austerity economics, you’ve just created the social and economic conditions which has led to the rise of Nationalism in Scotland and Corbynism in England.

      In other words you’ve left many people wanting bigger Govt !

      Reply The Coalition government raised public spending in real terms.

      1. Edward2
        August 20, 2015

        First Peter you argue there is a firm link between the balance of payments deficit and Government deficit spending as a real necessity for economic success, now you say that our Government, by failing to spend as much as our import deficit, has had the effect of helping to elect Jeremy Corbyn and Nicola Sturgeon.
        Suddenly you are beginning to win me over to the benefits of perpetual deficit spending.

        1. petermartin2001
          August 20, 2015

          I would say the Labour Party does need to get back to its roots. But, I’m not happy about Mr Corbyn’s anti-Americanism, and I wouldn’t agree with pulling out of NATO. I certainly don’t like the idea of the break up of the Union. That makes it much easier for the EU to divide and rule.

          So I would like to see all shades of political opinion to get away from the so-called “New Keynesian” thinking that the economy can be solely regulated by the variation of interest rates. Austerity economics isn’t just about Govt spending. The creation of much too high levels of private debt can have that effect too.

          Reply Current economic policy includes interest rate setting by the MPC, bank balance sheet management by the Bank of England, fiscal and supply side policy by the government.

      2. Frank salmon
        August 20, 2015

        Left wingers can’t even do 2 plus 2….

    August 20, 2015

    I would not dream of challenging your interpretation. For me, “If it is just a question of which brings more satisfaction…” ( 3rd paragraph line 10 ) stands out.
    I realize I have probably a majority of one in that I do not believe a house is a store of value unless it has gold bullion within its walls and the government does not know about it.

    Economic explanations and terminology are fun to read. You can get two equally well-educated and accomplished individuals presenting entirely antithetical theses and both appear to make bags of lolly in the financial world. One thinks of Mr Miliband when people scoffed at his assertion that the country was not left in deficit because he spent money on hospitals which he termed “an investment ” and was “not over-spending”. People laughed at his words but they were no less funny than many private corporations who set their investments/borrowing/buying/expansion against tax, do not make a real profit year in year out and yet are regarded as being (good companies ed – named e.g. left out)
    Unfortunately for the Labour Party and yes even the nation, Mr Miliband has left the stage to lesser minds. His education and economics qualifications should humble most of us.
    It is a pity you JR ,who has practical experience in the financial field as well as education and, Mr Miliband, are not the leaders of their Parties.
    Off topic, but was it Mr Cameron’s idea to set up a “Command and Control Centre” in the (words left out ed) shanty town in Calais?

  12. outsider
    August 20, 2015

    Dear Mr Redwood; Thank you for this analysis, which is a useful corrective.

    In a healthy. expanding economy, both the non-market public sector and cross-currency trade should be roughly in balance. The private household sector should have a surplus so as to build up savings and wealth and the business/productive sector should be in deficit to finance higher output and productivity.

    That of course is in the long run. As Lord Keynes taught us, we are always in the short run. So today’s alarmingly different sectoral balances have to be judged in the context of our position in the monetary/business cycle.

    Official economists are gradually coming round to my own view that the UK economy is now roughly on its long-term trend, close to midpoint in the economic cycle, having suffered a one-off permanent output shock post 2008. If that is so, the public sector should very soon, if not already, be in balance.

    Unemployment, however, remains historically high.Young people in general, and young graduates in particular, find it hard to get decent jobs. This suggests that unemployment is now almost entirely structural. Why?
    First of all, there is a mismatch, a fundamental clash between large-scale immigration and the UK welfare system at many levels. Second, there is a mismatch between job vacancies and the reasonable, taught expectations of qualified young people. Third there is a geographical mismatch between people and job opportunities, partly due to lack of labour mobility but more importantly, in my view, due to geographical immobility of capital.

    Unless and until these mismatches are fully dealt with, which is still nowhere near the case, net welfare and welfare -related spending (eg employment subsidies, free prescriptions) will be permanently higher than we are used to throughout the economic cycle, even in boom conditions. So to balance the budget and trade, taxes will need to be even higher.
    The choice is simple, if difficult.

    1. Iain Gill
      August 20, 2015

      workforce mobility is severely constrained by the way social housing works. once you are lucky enough to win the social housing lottery and are allocated a house it becomes impossible to move closer to a changing jobs market. and the state actively keeps large social housing estates going which were originally built to house the workforces of shipyards, mines and steelworks which have gone and not been replaced with anything able to employ the volumes of people on the estates. if the residents had buying power in the relationship with their tenancies they would have moved closer to the evolving jobs market all on their own. its crazy policies like this that create problems like you describe.

    2. petermartin2001
      August 20, 2015

      The alternative is to not balance trade. If Germany, for example wants to supply us with more real things than we supply to them, and buy gilts with their surplus cash why not just let them?

      So what then do we do with the money the Germans give us from the sale of those gilts? Why, deficit spend them back into the economy of course!

      1. outsider
        August 21, 2015

        More realistically Peter, suppose that Germans are intelligent and use their trade surplus pounds money to buy UK assets such as National Power (npower) and Powergen (E.ON), taking their profits back home, while the British Government and taxpayers have to finance the extra 500,000 to 1 million UK unemployed who would be in decent jobs if our worldwide exports of goods and services matched our imports.

        1. petermartin2001
          August 21, 2015

          Wouldn’t these payments show up in the current account figures?

          There’s no particular reason why the level of unemployment in a net importing country should be any higher than a net exporter. Exports are a real net cost. Spending on those exports by overseas buyers creates an inflationary pressure which can only be eased by extra taxation.

          On the other hand, imports are a real net benefit. Those imports create a downwards pressure on local prices which means that Governments have more leeway for discretionary deficit spending to keep their economies buoyant without inflation becoming a problem.

  13. Iain Gill
    August 20, 2015

    So the betting on the result of the next Greek general election…

  14. Ralph Musgrave
    August 20, 2015

    Good to see an MP thinking about sectoral balances. However JR goes a bit off the rails in his 3rd paragraph where he suggests that a smaller public sector deficit could be facilited by the private sector borrowing more.

    When a private sector entity borrows, it borrows from other private sector entities, so that has no effect on how much money crosses sectoral boundaries. Thus a change in private sector borrowing doesn’t have anything to do with it. What WOULD facilitate a lower public sector deficit would be a lower private sector saving: that’s less saving or hoarding of public sector liabilities, i.e. base money or government debt.

    I’ll leave the last word to Keynes who said, “Look after unemployment and the budget will look after itself”. I.e. government should run whatever deficit (or surplus) is needed to keep unemployment as low as is consistent with acceptable inflation. Whether than results in a massive government deficit or massive surplus is immaterial. The latter are just numbers that come out in the wash.

    Reply Less saving or more borrowing are the same thing in terms of economic impact. The net saving figure for the private sector can be altered by people borrowing more or saving more, with the overall figure being the net result of both savers and borrowers. The savings rate falling may be because for example people borrow more to buy homes at the same time as other people save more of their income but not sufficient to offset the extra mortgages.

    1. petermartin2001
      August 21, 2015


      JR is right to equate greater borrowing (or less saving) in the private sector with a smaller public sector deficit. In both the USA and the UK, around the turn of the millenium , there was, due to increase private sector borrowing, even a government surplus!

      Of course, the Clinton government in the USA and the Blair government in the UK were both quick to claim the credit for what they claimed were successful economic policies.

      But, as we now know, a surplus for government must mean a deficit for non-government. But, we really have to ask if these surpluses (or deficits depending on how we look at it) were really such a good thing after all?

      1. Edward2
        August 21, 2015

        “But, as we now know, a surplus for government must mean a deficit for non-government”
        Only according to your favourite economist Peter.
        And those of you who follow this modern day guru.

        Other economists are available.

  15. Lindsay McDougall
    August 21, 2015

    This all very educational but it is the State that is running a significant deficit on its expenditure and it is the State that has built up a total debt of 80% of GDP (90% if you use the Maastricht definition). It is this State debt on which taxpayers pay interest, money flushed straight down the toilet.

    The annual interest on State debt is bigger than the defence budget and roughly equal to the amount that the State spends directly on education and the amount that the State pays to fund Local Authority education. We are not talking peanuts.

    Over this parliament, State debt is projected to fall from 80% to 67% of GDP. With interest rates about to rise, don’t expect a reduction in the annual debt interest any time soon.

    The idea that the State ‘borrows to invest’ is laughable. Firstly, it doesn’t, current expenditure being higher than capex. Secondly, whenever there is a need to cut the fiscal deficit, capex is normally the first to be chopped – notably under the Labour government in 2009/10, when current expenditure wasn’t cut at all.

    1. petermartin2001
      August 21, 2015

      It is this State debt on which taxpayers pay interest, money flushed straight down the toilet.

      I’ve seen quite a few comments on this blog over the last year or so complaining that savers aren’t getting a good deal due to very low interest rates and they do have a point. The cost of supporting the National debt is 3% of GDP compared to a typical 20th century level of 4%. The peak was close to 10% of GDP in 1930.

      No-one gets rich lending to government. Interest rates are nearly always very low and can even be negative when inflation is taken into account. I don’t believe we should begrudge whatever interest payments we do make.

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