That Treaty deficit – Maastricht and austerity

This week I have written a bit about the severe austerity policies followed in parts of the Eurozone, and pointed out the impact these have had directly and indirectly on UK policy. The results were obviously at their most damaging when we were in the Exchange Rate Mechanism and had to hike interest rates at a time when the economy clearly needed lower rates. Again the Euro crisis added to the dangers of the banking crash in 2008-11.In recent years there has been no comparable EU control mechanism directly acting, but the shadow of Masstricht hangs long and steady over the UK government’s fiscal stance. My critics pretend it is otherwise and say I should not associate the EU with austerity policies.

I would ask them to look in each Red Book the government produces. This document has to be sent to the EU to comply with the requirement as the UK is part of the EU economic semester, and has to file its fiscal plans with the Commission. They in turn analyse and comment on them, recommending remedial action where necessary. We are meant to be bound by their two clear controls. They want us to limit state debt to 60% of GDP, and to keep the budget deficit below 3%.The last 3 governments have been breaking these rules, but have clearly wanted to be able to say to Brussels that we are trying to get the deficits down and in due course the debts. Labour set out a course to bring the deficit down, then the Coalition and the pre Brexit Conservative government made complying with the Maastricht deficit rules and starting to get the debt down as central to its aims.

Each Red book has a table which shows where we are under the Stability and Growth Pact. They have to show the progress or lack of it being made in bringing down state debt to 60% of GDP. They have to show the “Treaty deficit”, the budget deficit under EU definitions. They have to show the cyclically adjusted Treaty deficit, as countries are allowed some leeway in a downturn.

The Treasury do not put these numbers in for show, and do have to report and defend them to Brussels. There can be no doubt that cutting the budget deficit and in due course cutting debt is an EU requirement which successive UK governments have taken seriously. Some clearly want to do this for domestic reasons as well, but it is simply wrong to deny the requirements and pressures that stem from the common EU policy. There is abundant evidence that in the Euro area where the pressures to conform are greater, the austerity policies have done damage to employment and output. I have every reason to associate austerity policies with the EU, as their scheme builds them in to all the deficit countries.


  1. LordBlagger
    December 4, 2016

    They want us to limit state debt to 60% of GDP


    In summary, the estimates in the new supplementary table indicate a total Government pension obligation, at the end of December 2010, of £5.01 trillion, or 342 per cent of GDP


    Corresponding figures for the time Conservatives have been in power, no where to be seen.

    1. Denis Cooper
      December 4, 2016

      The 60% limit is laid down in Protocol (No 12) on the excessive deficit procedure attached to the EU treaties:

      and the same Protocol says what is meant by “government debt”; I’m sure that if the EU Commission reckoned that under the rules being used future state pensions should be included in the state debt then they would have said so long ago.

      From the Abstract at your link:

      “These pension obligations estimates are published today in a separate ONS article. This article summarises the new pension obligations estimates and discusses their implications for assessing the broader ‘public sector debt’. It clarifies that, while such new estimates provide very useful extra information for
      assessing the state of the UK economy, they do not add to public sector debt in either the general or accounting sense.”

  2. LordBlagger
    December 4, 2016

    trying to get the deficits down and in due course the debts.


    Levy (2012) explains that the last official figure for the state pension schemes’ obligations was produced by the Government Actuary’s Department (GAD), as at 31 March 2005, at £1.347 trillion,

    In summary, the estimates in the new supplementary table indicate a total Government pension obligation, at the end of December 2010, of £5.01 trillion, or 342 per cent of GDP


    636 bn a year on the debts, for 5 years on the Trot. Even with Osbourne’s cuts of 2 trillion (the loss to the public), the current figure is 10 trillion.

    1. acorn
      December 4, 2016

      The figure of £5.01 trillion only exists in the UK “National Accounts”, which is what the ONS reports on. In the UK “Financial Accounts”, that value does not exist. The government does not have to capitalise its debts like a private pension fund. The latter acquire huge fund deficits when interest rates (discount rates) drop, ask BHS.

      The National Accounts treat the government’s fiscal activity as if it is a “currency USER”, just like a Household; it pretends that the government has to borrow (Gilts) and tax, to fund its operations, which it does not. The government is the currency ISSUER, it does not have to save or borrow its own currency, it has a bottomless pit full of the stuff. Its only worry is spending it faster than the private sector capacity can deliver goods and services, thus causing inflation.

      1. LordBlagger
        December 4, 2016


        The debt is real unless you clearly tell people you aren’t going to pay them. That involves changing the law.

        Now the 5 trillion is now 10 trillion. The last ONS number was 6 years ago.

        The bottomless pit argument doesn’t work. The reason is that printing to pay works for fixed rate debt. But you can’t extrapolate from that to say that it works for inflation linked debt. It doesn’t.

        Take Zimbabwe. How would inflation linked pensions work in Zimbabwe with a print to pay?

        You can print notes, you can’t print tins of beans or any other items in the inflation basket.

        Pensioners can’t eat zeros in an ‘user account’, they need those tins of beans.

        The reason the debt matters is that the debt payments are a percentage of the debt. When the present value of the debt grows faster than GDP, it’s going to end in default.

        1. acorn
          December 5, 2016

          So when do you expect Japan to default? Its debt to gdp is currently 230%. It still runs a 6% budget deficit and a 3% BoP surplus.

          Personally, I can’t remember a year in the last twenty, when some mainstream economist did not predict Japan would default within months.

          1. LordBlagger
            December 7, 2016

            When do you expect the UK to default?

            Oh, yes, it already has. The Tories have defaulted on 2,000 bn pounds of pensions.

            CPI instead of RPI takes 15% off the pensions.

            Each year the retirement age takes 5% of pensions.

            Now they are planning more.

            Socialist pension ponzis for you

    2. SM
      December 4, 2016

      Some of us have been saying for years that the State Pension set-up is an unsustainable Ponzi scheme, these figures demonstrate it.

      Oh well, if Corbyn and his coterie win the next election they will no doubt unveil their Magic Money Mine, and all will be well……

    3. Anonymous
      December 4, 2016

      My recently retired police officer friend has a pension which suggests a pot in excess of £1m. (A mere PC)

      £130k lump sum and £18k pa.

      1. stred
        December 6, 2016

        My professor friend has a lump sum of £70k and a pension of £22k after 30 years at the same university, with London salary weighting but having to wait 20 years to be proffed.( A mere professor)

  3. Lifelogic
    December 4, 2016

    What is surely very clear is that a government that goes ahead with HS2. Hinkley, wage controls. workers on company boards, endless other red tape and intervention before breakfast, lunch and dinner is not really trying to reduce the deficit at all.

  4. Jerry
    December 4, 2016

    So what are you trying to say Mr Redwood, are you are admitting that the Thatcher government, of which you were either an advisor to or a part of, were wrong in signing the SEA and (negotiating much of) the Maastricht treaties. Nothing you claim the EU has caused would have been possible had neither of those treaties ever existed. You do protest your innocence to much, you are as much the cause of our problems as anyone else who was in and around government at the time, I might not like Zac Goldsmith policy position but I respect him for doing the decent, honourable, thing when he disagreed about Heathrow…

    Reply I advised Mrs Thatcher not to give any veto away in the SEA and disagreed with Maastricht from within government.

    1. Jerry
      December 4, 2016

      @JR reply; I guess will have to wait and see if you do ever choose to fully explain your actions with regards SEA, until you do you’ll continue to appear to protest far to much about a period many believe you were just as much responsible for as those you now blame. You obviously did not feel strongly enough to resign, that is clear.

      Reply The SEA was passed before I was an MP!

      1. Jerry
        December 5, 2016

        @JR reply; At the time, before you were an MP, you were an advisor to Mrs Thatcher, you could have resigned from that position.

        Reply I had left her before the SEA was put through!

        1. Jerry
          December 5, 2016

          @JR reply; “I had left her before the SEA was put through!”

          To (prepare to) become an MP in Mrs Thatchers government, apparently on a manifesto policy (in relation to the EEC/EU) that you now say you fundamentally disagreed with!

          Reply Keep changing your ground as I explain more of the facts! I always made clear my stance on the EU to my electors.

    2. Edward2
      December 5, 2016

      If every MP who lost an argument in Cabinet or just on the back benches resigned there would be few MPS left.
      And no one left to continue that argument forward.

  5. Brexit
    December 4, 2016

    Mr Redwood, coincidentally we published a piece this morning which backs up your article yesterday about ‘experts’ getting it wrong, and which also reinforces your piece today about the EU’s impact on austerity.

    It shows what has happened to Italy’s economy – rather topical given that Italians are going to the polls today. Your readers can see our piece here:

    Best wishes, the pro-Brexit Facts4EU.Org Team

  6. Antisthenes
    December 4, 2016

    A state that is a too generous welfare state is an unstable state made so by not correlating welfare with wealth in a sustainable way. It is not correlated sustainably because welfare becomes a means for political groups in society to gain power. Welfare is used as a bribe for votes. The problem is further aggravated by state interference in the wealth creation process not often beneficial. The result is high levels of debt which have to be addressed usually with austerity measures, inflation and sometimes with default. It also attracts abuse and engenders a culture of entitlement and dependency on the state which creates continuous dissatisfaction because welfare can never be sustained at a level that will satisfy an ever increasing demand.

    1. LordBlagger
      December 4, 2016

      Welfare is a cause of wealth inequality.

  7. Mark B
    December 4, 2016

    Good morning.

    Is it only me but, I find it ironic that on one hand the EU Commission demands that the UK reduces its budget deficit and, on the other they increase not only their own expenditure but, demand that the UK and a few others pay more !

    Clearly these people are not what I would call; “Self-aware.” Or, on the same planet as the rest of us.

  8. acorn
    December 4, 2016

    The EU adopted neo-liberalism (NL), just like the UK. Maastricht debt and deficit is the EU version of NL, Osborne was the UK version. the whole western world is neo-liberal. Which is why we are where we are today. All thanks to supranational organisations like the IMF; World Bank; OECD etc; which all need shutting down.

    Brexit will get rid of the Stability and Growth Pact (SGP). The latter does exactly the opposite of what it says on the tin. The numbers 3% for deficit and 60% for debt have no basis in macroeconomics whatsoever. You can make the SGP even more lethal by combining it with a common currency. Which is exactly what the EU did. They couldn’t have got it more wrong if they tried!

    Instead of the Maastricht Treaty, the nineteen members of the Eurosystem, should rename it the Masochists Treaty.

    Anyway, you can see the data at

    Sheet M1 is the summary. If you still doubt Treasury unlimited ability to use its bottomless pit of Pounds Sterling, have a look at Sheet M9. “Liquidity schemes included here are those where the government securities used are not recorded as government debt. By convention, they are recorded in part 2 as “contingent liabilities outside the general government”

    And you never felt a thing 😉

    1. LordBlagger
      December 7, 2016

      So have you found the figure for the pension liabilities?

      Nope, good luck hunting to find them.

      It’s a ‘contingent liability’.

      Hmmm contingent on what? The ONS won’t say. Reminds me to refer them to the ICO for not answering.

      I’ll tell you what its contingent on.

      It’s contingent on the size of the liabilities they are keeping secret.

      1. acorn
        December 8, 2016

        Public Sector Employees Pension liability £1,493 billion (2014/15).

        State Pension Liability £0 . This is a “pay as you go” system, cost £88 billion a year and is paid from the Social Security Fund. The government could repeal the Social Security Contributions and Benefits Act 1992 and stop paying State Pensions altogether – theoretically.

  9. fedupsoutherner
    December 4, 2016

    It seems ever more likely that we are going to get a soft Brexit rather than what we voted for which was all out. Can you tell us John, what benefits will there be for the UK if we enter into a Norwegian style deal? When I voted out I did so because I wanted control over immigration and I wanted us to be able to trade with the rest of the world therefore enhancing our economy. What benefits will we be left with if we don’t actually leave? Half Brexit is not Brexit at all. We are still in.

  10. Del
    December 4, 2016

    And here lies the problem.

    When you talk about the EU and the UK deficits and debts you might as well compare apples with oranges. The currencies are black and white, we are a free floating currency and they are in a fixed exchange rate mechanism.

    When you talk about any country that uses the Euro the comparison to make when talking about deficits and debt is Scotland with the BOE and Italy with the ECB.

    The UK does the tax collection across the UK. Scotland is nothing more than a glorified county council. If you did the accounts for North Yorks County Council you would find it too has a ‘deficit’ that is filled by the block grant and whatever ‘borrowing’ HM Treasury permits.

    Here’s the gory details:

    So the leakage out of the arbitrary line of the Scottish border within the Sterling currency zone is to anywhere else in the world (including the rest of the UK) – and the rest of the UK saves a lot of Sterling. That leakage, plus any net savings within Scotland, is what causes the Scottish government sector deficit.

    Ultimately in the same way that Italy needs to tax German savers, Scotland needs to tax UK savers. To have the power to do that you need UK savers saving in Scotland’s currency which the Scottish government can control and if need be tax. Otherwise Scotland will run out of money as it all drains to the rest of the UK.

    Foreigners save your currency if they want to sell you more things than they want to buy from you. The floating rate would make sure that export+foreign savings = imports in terms of the Scottish currency.

    You can tax it because it is the Scottish currency, and therefore to transfer it to anywhere where it is anything other than inert it would have to go through banks that are licensed by the Scottish authorities to deal in that currency. They will do as they are told if they want to retain their licence.

    Oil is a hug red herring. An enormous canard. It becomes important because although all the dealings are essentially in US dollars and most of the balance sheet is in US dollars, when it is reported in the national accounts it is declared in the reporting currency – which is the Scottish currency. So it’s an accounting trick mostly to make the figures look ‘good’ superficially. The actual Scottish effect is just the fraction of the oil income that has to be physically exchanged for the Scottish currency – to pay staff, suppliers and of course the licence fee and other taxation for the resource.

    Spending only comes back if you have your own currency. If you use somebody else’s then it leaks into a different banking system. Italy’s spending ends up under the control of the Bundesbank. Similarly Scottish spending ends up under the control of the Bank of England, which is owned and directed by the UK government. As long as that arrangement stays in place, Scotland is owned and directed by the UK government – like any other county council.

    That is the key issue with fixed exchange rates. You end up with control of the money under some other entity which you have to follow the directions of.

    If Scotland became independent then what happens depends upon whether it floats its own currency or not. That is the only way to ensure that Scottish money doesn’t leak anywhere. What the size of the government deficit is will still depend upon how many people want to net save in that currency.

  11. Denis Cooper
    December 4, 2016

    There are, of course, different degrees of “austerity”. For simplicity let’s follow the current media pattern and refer to “Soft Austerity” and “Hard Austerity”.

    The UK variety, which involves total public spending in fact continuing to rise in real terms year after year, despite contrary perceptions, but maybe going down in per capita terms as the population expands, mainly through that large scale immigration which we are told is so economically beneficial, and certainly not rising quite fast enough to keep up with overall need, could be described as “Soft Austerity”.

    While the Greek variety, with drastic cuts in public spending, and the government failing to make all due payments in full and on time, including salaries and pensions and the invoices from pharmaceutical companies so that hospitals run out of essential drugs, and bills for fuel oil so that electricity production has to shut down, is “Hard Austerity”.

    And tomorrow there will be another crucial meeting in Athens, with Schaeuble saying that he intends to continue with his hard line:

    “Greece needs reforms, not debt relief – Germany’s Schaeuble”

    The difference being that the UK still has its own currency and so the UK government can arrange for the UK central bank to create more UK money which it can indirectly borrow to pay its bills; while Greece no longer has its own currency, it has adopted the euro, and so the Greek central bank is unable to oblige the Greek government in the same way.

    And of course many of those are now arguing for a “Soft Brexit” previously argued that we should join the euro, which could well have led us into the “Hard Austerity” experienced by the Greeks rather than the mild “Soft Austerity” we are having.

    Incidentally there is an interesting retrospective here:

    “From ‘No Bailout’ to the European Stability Mechanism”

    “This article traces the history of the fiscal stability features of the Eurozone, following the European Union’s movement from a firm ‘no bailout’ policy, through the eventual financial rescue of several troubled Eurozone member states during the Euro crisis, and then on to the 2012 establishment of the European Stability Mechanism. It also describes the parallel history of the European Union’s Stability and Growth Pact, from its origins in the convergence criteria stipulated by the Maastricht Treaty in the run-up to the launch of the Euro, to the first generation of the Stability and Growth Pact and its breakdown and subsequent 2005 reforms, and onto the post-crisis Treaty on Stability, Coordination, and Governance (“Fiscal Compact”) … “

  12. Bert Young
    December 4, 2016

    Reports to the EU are an insult to our own intelligence and national integrity . If we are considered a bad risk , loans , bonds and other direct and indirect international disciplines will reflect it . The defunct EU bureaucracy has nothing of real base to offer us . All it wants is for us to lay bare our GDP so it can rely on the contributions we make . The EU should invoke disciplines of its own and tell us why its accounts have not been signed off for years .

  13. fedupsoutherner
    December 4, 2016

    Talking of all things fiscal John this is an utter disgrace. This is another reason I choose to be a UKIP member. They speak common sense when it comes to energy policy.

  14. turboterrier
    December 4, 2016

    Severe Austerity Policies has been your theme for the week.

    Unless somebody wakes up very damn quick regarding the real state of energy policies that are going to impact on everybody in the UK in the foreseeable future, then this country will be heading for a head on train smash with all the resultant casualties across the whole divide.

    I quote from the Booker article in today’s Telegraph;

    “We are sleep-walking towards what threatens to be the greatest self-inflicted disaster this country has ever faced. And the astonishing thing is that the last people to be aware of what is going on are those politicians who have brought this about. Their brains are so addled by groupthink about climate change that, even when the lights do go out, they will still have no idea that it was entirely their own blind stupidity, which made such a catastrophe inevitable”.

    Rather apt I think.

  15. E.S Tablishment
    December 4, 2016

    I’m still trying to find EU nation state contributions of the Brexit “debate”. Well I’ve found general online websites on the EU but not specific equivalents to JR’s blog written say by a Polish or Italian politician. I suppose they exist. I shall continue looking for them . One gets the distinct impression, however, the Europeans as a whole do not dissect political thought and engage in intrusive analytical investigative surgery as we do. Well. I guess that is understandable, we are British after all, and have the good sense to leave a monotone EU

  16. Ian Wragg
    December 4, 2016

    So now we have it.
    Brexit means continuing payments of tribute to Brussels as indicated by Davies and confirmed by Boris.
    Continued free movement of unskilled workers and continuing paying overseas aid through the EU.
    No doubt we will learn that we will continue with EU environmental and energy programmes.
    So Brexit really means the status quo.
    Better get your cv’s ready for after the election.

  17. hefner
    December 4, 2016

    Ouch! JR nowhere to be found within the 100 most important people for Brexit.

    And according to the recent IPSOS MORI 2016 Veracity Index, politicians are in the lowest category (15%), journalists (24%), estate agents (30%), bankers (37%) when people are asked whether they generally trust them to tell the truth. Top of the pile are nurses (93%), teachers (88%), scientists (80%), police (71%).

    Tough tough tough.

    1. Hope
      December 5, 2016

      Very good and accurate in my view. Today we learn that Whitehall grants of £7 billion given to friends comanies etc. there is no shame or standards at Westminster. The overseas aid £14 billion gravy train in a similar discredited situation. Consultants £2 billion, EU £2 billion- in addition to EU contributions, these are our taxes being p…Ed down the down the drain or into political friends pockets!

  18. The Great Unsaid
    December 4, 2016

    What the Remainers, sunk in a bucket of obviousness, fail to sense are the decades of dark economic and political clouds over the EU. Did they ever give recognition even as a by the way to the economies of Greece, Italy, Spain and Portugal? The depopulation of Latvia, Estonia and Lithuania was ignored. Isn’t it odd that they wished membership of the EU but failed to give examples of “prosperity” or social cohesion in ANY EU-nation state including remarkably: Germany?

    Chris Bryant MP Ex-Shadow Leader of the House of Commons did make one comment of an EU-country but as far as I am aware his view was never taken up by his peers. He said that Spain was “deliberately training far more doctors than it required” in answer that our NHS was bleeding some nations white of their medical and care staff and it would not continue.

    1. Hope
      December 5, 2016

      Good blog. 41000 NI numbers to Spainish nationals last year indicate Spain has a unemployment problem that has become a U.K. problem for our young to compete against! This is never talked about. Spain youth unemployment is simply unacceptable. The notion that these poor performing Euro countries can simply find work elsewhere in Europe, which in the elite view helps create integration to become a supranational state, does not matter. Well it does.

  19. John
    December 4, 2016

    I’m perhaps seeing why we wouldn’t be offered the same as Canada and why we may want to choose to pay for some single market access.

    Say we strike tariff free trade with world car manufacturers outside the EU. Canada, may have that but they would need to transport their cars across the Atlantic! With free trade with the UK and tariff free access to EU markets they can transport parts here tariff free, the cars get assembled here and then put on a train transporter through the tunnel to France.

    The potential is so huge for us that perhaps paying for some tariff free access (not membership) is well worth it when you look at the clear advantage that we would have.

    1. LordBlagger
      December 7, 2016

      Pay to access the market.

      How much do you think we should charge the EU?

  20. margaret
    December 4, 2016

    Are we sure that The Brexit leaks were actually leaks and not from articles written prior to the covert plans by another,?

  21. Lindsay McDougall
    December 4, 2016

    The important deficit of the EU is its democratic deficit.

    When a European constitution was rejected by the electorates of France and the Netherlands, the order of the clauses was changed and it was labelled the Lisbon Treaty. A treaty does not require the same degree of consent as a constitution. Angela Merkel publicly boasted about this. So now you all know the basis for bossy boots Merkel saying what the immigration quotas of other Member States must be.

    In 1990, Nicholas Ridley opined that the European Union was a German racket. He meant a power racket, not a money racket, and got he sacked for his pains. Those who get sacked are not necessarily wrong.

    The villian of the piece was John Major. Had he vetoed the Maastricht Treaty, which he was entitled to do, we would have become detached from this federal nonsense 25 years ago.

    If the EC, Germany, France etc want a European Federal State they must do it the democratic way. Referendums are required in every EuroZone Member State and every Member State that is legally committed to joining the EuroZone. The question would be: “Do you want to join a European Federal State based on the Euro, the 5 Presidents’ Report and the military co-operation authorised by the Lisbon Treaty?”

Comments are closed.