A survey found that 85% of politicians
in the U.K. have no idea of where money comes from. Presumably even fewer can
disentangle themselves from the spurious lore that attaches
significance to the "Budget Deficit".
Concerns about the "Budget Deficit" are a
corollary of the myth
that government finances are like a household budget.
the government is the issuer
of money while everyone else is
The government could
commandeer supplies, as it would in wartime, but instead
it imposes taxation to reduce private sector purchasing power and then buys
the goods and services it needs in competition with everyone else.
Unlike a money user
, however, there are no constraints on the government's
The public has produced goods and services that are now owned by the public through
the intermediary of government, and the work done has been paid for as salaries,
interest payments, licensing fees etc., with these moneys being marked up in people's bank
accounts in exactly the same way as if they had done similar work for the private sector.
If the government miscalculates and too much private purchasing power remains, prices will
be pushed up, aka
inflation. Sufficient taxation is required to limit competition
between the public and private domains while both attempt to buy the production of the
country. Limited resources (goods and services) are the real constraint on how much purchasing
power can be accommodated.
Evaluating the Budget Deficit
If all the production (goods and services) of the country during a time period sums to P
(a price, not a quantity), this P provides
the income of all participants in the production process, meaning that the potential purchasing
power in the economy is also P.
Some of this purchasing power will be saved, S, and some will be taken as tax, T.
If the government decides it needs to purchase G,
the actual purchasing power is now
P - S - T + G
the value of what's for sale is P and so, for the market to clear,
P - S - T + G = P
G - T = S
Now G - T is what is termed the "Budget Deficit", and it can be seen to be identically
equal to S, the private sector saving.
If we had the sense to refer to the "Budget Deficit" as "Our Savings", we might be able to
disentangle ourselves from the spurious mythology promoted by the neoliberal agenda that
tries at every turn to rubbish the needs of the public sector.
Government expenditure is not "spending" in any user-centric sense of the word.
The expenditure comes from nowhere (just like rugby points), but if the expenditure
pays my salary as a NHS nurse, say, this money will end up in my account. Similarly, at the
end of a rugby match, points are accrued by the teams, even though these points did
not exist prior to the game.
The National Debt
While the "Budget Deficit" is "Our Savings" over a time period (usually one year), the
"National Debt" is the accumulation of these savings over all time.
Referring to this accumulation as a "debt" is pure mythology.
"Our Savings" is the government expenditure that has not (yet) been taxed
back. The private (ie. non-government) sector has been paid by the state for goods and
services, and has decided to save a portion of this income.
These savings sit inert as numbers in savings accounts at the Bank of England. Such
accounts may be given fancy names like "Treasury bonds", but they are just savings.
They may earn a small interest, but other than that, they are just numbers in a computer.
If the holders of these savings decide to spend them, there could conceivably
be a problem of too much money chasing too few goods - inflation - but there is always
this risk whenever anyone spends money. If there is a problem with inflation, the state needs to
remove purchasing power - through taxation - or it needs to boost production.
Given that saving is a choice
not to spend, it is highly unlikely that bond holders
will suddenly decide to spend their savings in the real economy.
The "National Debt" can always be taxed away, but this would not be very popular. The state
provides a service enabling the private sector to save, and sets a lower bound on interest
rates in the economy by doing so.
To be clear, inflation is the indicator to watch. The size of the "National Debt" is