The British Office of National Statistics released the latest – Public Finance, October 2015 – last week (November 20, 2015), which showed that the British fiscal deficit has grown by around 16 per cent in the past 12 months and is around £2.2 billion higher than was forecast by those who care to forecast such things. The hysterical press reaction was quite amazing. For example, the so-called progressive UK Guardian described the results as “shock UK deficit figures” and said that the recorded deficit was the “worst … for six years”, despite the fact that any informed dialogue about fiscal balances would eschew the use of terms ‘worst’ or ‘better’ to describe such outcomes. Meanwhile, the US press went haywire with claims of a scandal of what effectively amounts to the government hiding revenue from itself. Quite amazing.
ONS reported that:
1. The deficit “increased by £1.1 billion to £8.2 billion in October 2015 compared with October 2014”.
2. Net public debt “at the end of October 2015 was £1,526.8 billion, equivalent to 80.5% of Gross Domestic Product; an increase of £70.4 billion compared with October 2014”.
The UK Guardian commentator Phillip Inman wrote in his article (November 20, 2015) – UK deficit figures: expect a new George Osborne conjuring trick – that:
On the surface, the figures are bad.
He didn’t actually say why they were bad other than they were higher than expected.
Deficit outcomes are neither good nor bad in themselves. For a currency issuing government, like the British government, these qualitative terms make a no sense.
A fiscal outcome, whether it be a deficit or surplus, should never be the objective of policy. Rather, that outcome provides a signal to government of the state of the real economy (output, employment, inflation, overall well-being), which is the appropriate target for policy interventions and policy adjustments.
So whether a deficit is rising or falling is not the point. The point is to understand, firstly, whether the flow of net government spending (the deficit) is appropriate relative to the spending and saving behaviour of the non-government sector; and, secondly, to understand why the fiscal balance is changing from year to year.
When I say that a particular deficit or a change in the deficit is neither good nor bad per se I am referring to the fact that we can only make sense of the outcome with reference to the real economy.
However, I also use the term ‘good’ and ‘bad’ deficits, which might be misleading without further clarification. For example, a deficit might move over the course of 12 months from 3 per cent of GDP to 6 per cent of GDP. How would we go about interpreting that shift?
The sort of knee-jerk journalism that the UK Guardian displayed last week would use terms like ‘shock’, ‘bad’, ‘deterioration’ and the like because all they would be focusing on was the doubling of the deficit to GDP ratio.
However, under some circumstances the 6 per cent of GDP deficit might be a ‘good’ deficit, whereas under different circumstances, the same deficit outcome could be described as a ‘bad’ deficit.
In the former case, if the government had have responded to declining non-government spending and implemented a discretionary increase in its net spending, which had stimulated economic activity that would otherwise have been in decline, and as a result employment was higher and unemployment lower, then the resulting deficit of 6 per cent of GDP deficit would be reasonably considered a ‘good’ deficit.
Alternatively, if the government failed to respond to declining non-government spending and allowed economic activity to decline, and as a result tax revenue fell, then the resulting deficit of 6 per cent of GDP deficit would be reasonably considered a ‘bad’ deficit.
Context is everything!
Another UK Guardian article (November 20, 2015) – Shock UK deficit figures dent George Osborne’s economic plan – quoted some private sector economist is saying:
October’s poor borrowing numbers extinguish any lingering hope that the chancellor will be able to soften his austerity plans materially in next week’s autumn statement.
The journalist failed to scrutinise that comment and therefore left it as and authoritative statement without context.
The context that is relevant is that the latest national accounts data released by the British Office of National Statistics in October showed that the British economy was slowing substantially (the latest quarterly growth was a miserable 0.5 per cent) with key sectors like construction in decline and industry more broadly in decline.
Please read my blog – British government analysis shows fiscal stimulus effective in supporting growth – for more discussion on this point.
Phillip Inman’s article notes a little further on, after he has told us how shocking and bad the figures are. that the “business environment has worsened”.
Now that is the ‘bad’ outcome because it means that the already low-quality employment environment will deteriorate further, notwithstanding the claims that employment growth is strong (note I emphasise quality).
Inman writes that this “means 2014 was a high-water mark for economic growth and a slip backwards this year to a gentle expansion output is the new normal”.
Which really tells you what’s going on.
The decline in government receipts in October 2015 relative to the 12 months previous were driven by declining “corporation tax” which fell by 1.1 per cent (or £7.2 billion).
Government spending was also up by 3.3 per cent (or £1.9 billion).
The data also shows that not only did the government will fail to meet this year’s fiscal targets at the revisions for 2014-15 showed that government borrowing was higher than previously thought.
As I wrote in this blog – British government analysis shows fiscal stimulus effective in supporting growth – the increasing deficit has been a positive influence for total expenditure and without it the British growth rate would be falling back towards zero if not into negative numbers by now.
While the Conservatives like to make out that they’re pursuing a hard-nosed austerity program, the fact remains that up until now, the fiscal stands has been supporting growth. That’s not to say that the cuts that have been made in spending programs (you might call these a sort of micro austerity) have not been extremely damaging to those in the breach.
The other theme that came out last week, which was reflected in the quote above about the upcoming Autumn statement, was that the rising net spending will necessitate even harsher austerity plans being implemented then were previously announced.
The UK Telegraph article (November 20, 2015) – Autumn Statement 2015: George Osborne dealt a blow by ‘terrible’ borrowing figures – was similarly hysterical, which is no surprise given the ownership of the newspaper.
This article quoted the same private sector economist that the Guardian had quoted but this time use the words “terrible” to emphasise the message.
The British Chancellor should take the combination of moderating growth rate, the government’s contribution to supporting that growth rate, and the declining company tax revenue as a warning that any attempt to cut the discretionary component of the deficit will in all likelihood push the British economy back towards recession.
With the goods-producing sector in decline, any austerity-type attacks on households, particularly those low-income families with high propensities to consume, will impact heavily on the services sector, which is currently driving the (moderate) growth.
There is actually in need in Britain at present for an increase in discretionary net public spending to ensure that growth continues and non-government sector confidence doesn’t collapse again as it did in 2010-11.
Meanwhile across the Atlantic …
Moving across the Atlantic, the Magazine Politico carried the story last week (November 20, 2015) – Fed pushes back as Congress eyes its billions – which makes you wonder whether editorial functions exist anymore.
The gist of the article was that US Congress members were “plotting to use the central bank as a government piggy bank” while at the same time accusing the US Federal Reserve Bank “for being too political with its monetary policy”.
Please read my blogs – The consolidated government – treasury and central bank and The sham of central bank independence – to learn about why the notion of an independent central bank is nonsensical in a modern monetary system.
Governments create a complex accounting web to hide the intrinsic characteristics that define their currency-issuing status. These voluntary creations have little economic purpose but do serve to engage politicians in the games they play about debt ceilings, ‘disastrous’ deficits, and all the rest of the lunacy that ignorance breeds.
These labyrinthic accounting trails are quite often time-consuming to work out but they all have the same intent – they make it look as though the central bank is in some way divorced from the treasury functions, that tax revenue ‘funds’ government spending and that funds raised from debt-issuance funds government spending beyond the tax revenue.
All this is convenient for those who wish to maintain the myth that taxpayers fund government spending and are therefore being robbed when the government spends its money.
In Australia, for example the Reserve Bank of Australia:
… provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government’s daily cash position. These banking arrangements include the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility.
On July 1, 1999, the Australian government made the pretense of opening up its banking services to commercial private banks. The decision meant that “all Australian Government departments and agencies have been responsible for their own individual banking arrangements. Under devolved banking arrangements, agencies are required to test the services previously provided by the Reserve Bank of Australia (RBA) against what is available from other financial institutions” (Source).
However, the RBA “sweeps balances of Australian government departments and agencies from their transactional banker to the Official Public account at the RBA” on a nightly basis.
Furthermore, the so-called “strictly limited overdraft facility” can be changed by the government under the legislative umbrella that determines RBA functions anytime it chooses.
The Politico article quotes a US Federal Reserve spokesperson (presumably) as indicating the bank is horrified at the thought of the government “using the resources of the Federal reserve to finance fiscal spending”.
Who would have thought! The government being upset and using its currency issuing capacities for its own spending.
Meanwhile, the doleful congress members are apparently scheming to get their hands on the government’s own money, because they claim it is the “only politically feasible way to fund the long-term transportation bill” because the deficit is so large and they think the public will not realise what is going on.
The account at the central banking question is the so-called Capital Surplus Account, which is used by the bank to “absorb weekly losses” (and gains) that the Federal Reserve’s operations might generate.
Of course, given that the Federal Reserve can create US dollars ‘out of thin air’, these accounts are just veils for obfuscating the intrinsic nature of a currency-issuing government. From a different perspective, they may be seen as pigeon holes for arranging and describing the different activities the central bank engages in.
But as an expression of any intrinsic financial constraint on either arm of government – Central bank or Treasury – the accounting structures have no meaning.
The article quoted the Federal Reserve Vice Chairman as claiming that such a move constituted “quasi-fiscal policy, with manifold implications for central bank independence as well as for the quality of fiscal policy decisions” but chose not to elaborate on why this would compromise fiscal policy decision-making.
This is just a rehearsal of the old taboo relating to what we now call Overt Mon`etary Financing. The implication is that without the political constraint of having to issue public debt to match deficit spending governments would go crazy as they raided their own bank.
And, indeed they might! But the consequences would reveal themselves very quickly and guarantee a short political tenure for that particular government.
And the economic incompetence so demonstrated would rival the irresponsible behaviour we now call pro-cyclical austerity, although the consequences of the latter are significantly more damaging than about of inflation brought about by a government pushing nominal spending growth ahead of the capacity of the economy to respond by producing real goods and services.
Whether the transportation bill being proposed is a sensible policy intervention is another matter. I have nothing to say about that in this blog. The point is more general and relates to the myths that are used to constrain government from using its currency-issuing capacity to advance well-being for all.
The Washington Post article on the same topic (November 7, 2015) – Republicans raid the Federal Reserve – articulated the nonsense in more detail.
It claimed that the central bank’s Capital Surplus Account was necessary because it “increases public confidence in its ability to weather a crisis, albeit marginally”. Note the “albeit marginally” qualification.
In fact, I doubt the public even know about the existence of that account and its purpose. The public are by now aware that in terms of ‘weathering’ a shortfall of capital, the US Federal Reserve has unlimited capacity.
After all, they saw billions created out of ‘thin air’ by Ben Bernanke in 2008 and 2009 which was handed over to the banksters. No-one questioned the central banks capacity to weather a crisis then.
Amazingly, the Washington Post writes:
Note that the maneuver does not generate new financial resources, as taxes or offsetting spending would have done. Rather, it takes money out of one government pocket — the Fed — and puts it into another — the highway program. This is an offset only in the artificial world of budget “scoring.”
Which is about as confused as a journalist can become on these matters. It certainly “takes money out of one government pocket … and puts it into another”.
But note, the money then goes in to “the highway program”, which means that it is left the government sector and entered the non-government sector to provide productive public infrastructure (in this instance).
So it does generate new net financial resources in the non-government sector whereas if the government spending had been matched by an offsetting tax drain, the net financial resources of the non-government sector would be unchanged. I need to qualify that last statement because the government spending even if matched, initially, by tax revenue, would have multiplying affects in the non-government sector that would leaves that sector wealthier.
I also note the Washington Post writer acknowledges that all this accounting is really an artificial scoreboard and, like scoreboards around the world in sporting venues, it is nonsensical to say they can run out of points to post during a particular game.
The Washington Post leaves its readers with the typical Weimar scare mongering. It says:
Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves. We’re not saying that the highway bill creates a precise analogy between the United States and those sorry examples — or even a close one. We just wish we could say that there’s no analogy whatsoever.
There is no analogy. The highway bill expands the supply side of the economy, whereas the hyperinflation in Germany in the 1920s was largely caused by a dramatic reduction in the supply capacity of the economy to meet the growing nominal spending.
I would also like a list of so-called ‘banana republics’ that have come to grief through governments using their Fiat currency capacities to expand productive infrastructure. I think the list would be relatively short if not non-existent.
Building highways and maintaining transport infrastructure is quite a different thing then building statues of political leaders who wish to perpetuate a cult of personality!
The British fiscal figures tell me that the discretionary deficit is too small relative to the spending and saving plans and actions of the non-government sector.
It is quite obvious that George Osborne’s hope that Britain would return to prosperity through the ‘March of the Makers’ (that is, though an export-led growth boom) will not come to fruition. It was one of those Conservative dreams or cover-ups to justify hacking into domestic demand when they resumed office in 2010. The dream hasn’t reflected reality since then.
With household debt still extremely high and the resulting balance sheets of the debt holders in a precarious state, and with industrial production and construction activity in the doldrums, the correct thing for George Osborne to announce in his Autumn statement would be and expansion of discretionary deficit spending.
He won’t and the British economy will reap the rather nasty harvest.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.