LONDON (Labour Buzz) - Today sees Rishi Sunak launch possibly one of the most important budgets in living memory. This will shape how the UK recovers from the pandemic and may impact our future for the next decade. Battle lines are already being drawn. From the government, opposition and media we can expect to hear phrases such as ‘belt tightening’, ‘levelling up’, ‘sound financial management’, ‘tough choices’, ‘black holes’ and ‘national credit card’.
The problem is: none of them seem to understand how the government’s finances actually work. This lack of understanding means that one way or another, they’ll be taking us back to the program of austerity that was so damaging during the last crisis.
It needn’t be that way.
National finances are often likened to a household. If you borrow money you have to pay it back. And if you borrow too much you’ll be in trouble. “We cannot ignore the unprecedented borrowing,” Sunak said earlier in the morning. The amount borrowed, he said during his speech was comparable with that during the two world wars.
That’s a ridiculous comparison for a number of reasons. First, we don’t own our own currency. Governments do, which means they can, in times of crisis, simply create new money. Second, unlike governments, most of us don’t have the ability to lend to ourselves. Governments do. Once we understand that, the spectre of a high debt to GDP ratio shouldn’t be so horrifying.
Fear of debt
That fear has held a strong grip on our national psyche whenever since 2008 when economists trembled about the prospect of a 90% debt to GDP ratio. Those fears proved to be unfounded, but debt hawks have instead set another equally arbitrary level of 100% of GDP.
This is the level at which they believe the UK risks being overwhelmed by interest payments. Most projections currently expect our national debt to reach as high as 150% in the current direction.
Sunak’s budget will still obsess about stabilising the national debt at 100% of GDP and fixing a £43bn hole in public finances.
According to details which were released earlier, that money will come from a freeze in the income tax thresholds which the government hopes will net an extra £6bn in the year 2024, a cut in overseas aid of £4bn and a phased-in rise in corporation tax netting which, as reported in the Sunday Times, will fetch £22bn.
Unfortunately, that leaves us about £20bn short in a best-case scenario and that’s not taking into account the fact that tax revenues are falling. The balance will have to be raised by more tax increases and austerity.
This will almost certainly result in substantial tax rises for most of us through VAT and Council Tax. This is the government’s favourite form of tax rises as it takes the burden from the wealthy and onto ordinary people without getting the blame.
As Boris Johnson showed last week at PMQs you can force local authorities to raise council tax through spending cuts, and still blame others when they do.
However, taken in context with the past and even other countries high debt shouldn’t be the bogeyman the press makes it out to be. Compared to the national debt of more than 200% after the Second World War, current debt levels seem almost paltry.
Most of that debt was incurred through the building of the nation-state and the creation of the NHS. The government at the time knew that investing in the future was more important than obsessing about short term debt. What followed was the fastest and most sustained period of economic growth and prosperity the world has ever seen. Living standards improved to levels unimaginable before the war. Mobility improved and each generation enjoyed better prospects than the one which went before.
That only changed with the arrival of Thatcher and a new, more regressive, consensus. The result has been a reversal of half a century’s progress. Today poverty has become the norm. Two-thirds of households worry about making ends meet. Child poverty is rising with a third of children are now classed as being in poverty. Child mortality is rising, something which would have once been unthinkable in a developed country.
This is the deadly impact of the government’s response to the 2008 crisis. It’s a response based on a misunderstanding of the economy and arbitrary targets for national debt based designed to justify the very austerity which is pushing more people into poverty.
However, debt needn’t be a worry. Economists are increasingly beginning to say the UK’s high debt levels should not be a cause for concern. The US is about to blast through the 100% figure. It spent $3trillion under Trump fighting the pandemic and plans to spend. Trillions more. Equalled out it equates to similar spending levels proposed by Labour’s 2019 manifesto.
Debt only becomes a problem if there is a fear of default. Interest rates for government gilts are near historic lows which means investors still see buying government debt as one of the safest forms of investment. It doesn’t tarry with the image of a government that is about to run out of money.
Any government which owns its own currency can also simply create more. The Bank of England does this by extending the government’s overdraft, something it says it is willing to do. The government only needs to pay this back when it wants.
Much of this clashes with our regular idea of how economics work, because we’re still thinking in terms of household financing, where the only option to make ends meet, is to increase income or reduce costs. We’ve been taught to fear the prospect of creating money.
In reality, the government and banks create money all the time. Since the 2008 economic crisis, central banks have been regularly using quantitative easing to fuel growth. Banks create money every time they issue a loan.
If you borrow £10,000 that’s not coming out of their reserves. They simply add it to their liabilities and assets before adding a few noughts onto the end of your bank account.
Money is not an entirely finite resource. It is, as it says on your banknotes, a ‘promise’ to pay. The system only breaks down when people lose faith in the government’s promise. There is no reason any of this should happen in the short term.
However, as Positive Money showed, most MPs don’t understand these facts. Instead, politicians on the right obsess about arbitrary debt levels. In the past, it was 65%, 75% or 90%. Today it’s 100% according to the Institute of Fiscal Studies. Tomorrow it will be higher. Bit by bit we are discovering that we can live with debt.
Sunak’s budget will be hopelessly inadequate for the tasks facing it. The £20bn pledged for offshore wind is nothing compared to the £88bn proposed by Labour in their 2019 manifesto. It’s nothing compared to what was proposed by Labour or what is being done elsewhere.
It means more of the same. This means people bearing the brunt of tax rises through council tax hikes. It means more austerity, more cuts and, inevitably, more poverty and more deaths. If the government broke free from its obsession with debt it could craft an entirely different future for the country.
In 1945 Atlee offered a glimpse at how it can be done. In 2021 Rishi Sunak shows how it shouldn’t.
(Written by Tom Cropper, edited by Klaudia Fior)