Jeremy Corbyn and the Truth about Deficits

corboJeremy Corbyn is in big trouble if he doesn’t start telling the truth about deficits. Other politicians can build card-houses out of the pack of lies that has been handed around since the 1970s. Corbyn’s position can only rest comfortably on a foundation of fact. Sometimes honesty really is the best policy.

Andy Burnham made a bit of trouble for Corbyn in the recent LBC debate. It was a small taste of what could easily kill Corbyn as Labour leader. Burnham asked Corbyn whether he wanted to eliminate the deficit. Corbyn replied that he did, eventually, but added that the best way to do so is to invest in the economy and foster growth. Burnham replied that the economy is already on a steady growth path, yet tax revenues don’t come near to covering expenditure. So, he implied, you need to either raise taxes (unpopular) or cut spending (anathema to Corbyn).

You can quibble over the details and cite models supporting or opposing Burnham’s claim. But why accept the premise of the question? The burden of proof should be on those who think that the government needs to act to eliminate the deficit at all. People think this because they’ve been told to think it. They believe it because they don’t know what a deficit is. Why not tell them? I’m convinced that this is easier than many think. You could do it like this (if you don’t like my explanation you can try Neil Wilson’s):

Think what happens when the UK government spends one pound. Somebody gets that pound. There are three things she can do with it:

  1. Spend it
  2. Use it to pay tax
  3. Save it.

If she spends it, somebody else gets it and then has the same three choices. If that person spends it, somebody else gets it and then has the same three choices. It’s like one of those flow charts where one option keeps looping you back to the question until you choose something else. Ultimately there are only two places the pound can go: back to the government as a tax payment, or into savings in some form or other, in the UK or overseas. If it gets paid as tax, it ‘balances the budget’. If it goes into savings, it is part of the government’s deficit.

That’s all the deficit is: the total added to the pounds that the government has spent that people still have. The Whole of Government Accounts call it ‘Liabilities to be Funded from Future Revenues’ (p.54), which is a nice derangement of epitaphs. ‘Future’ revenues is a misnomer for potential revenues: these pounds could be being paid in taxes to the government, but they aren’t, because people are holding them rather than spending them.

This way of looking at things has been associated with what people call ‘Modern Monetary Theory’. But this part isn’t a theory at all. It’s just a statement of a plain, simple fact – one of those facts that’s so obvious that it hides in plain sight.

Once you acknowledge that simple fact, you can ask: why are deficits so bad? Why is it so terrible for the government to allow people to hang onto some of their pounds? Why not let the deficit grow and shrink naturally, as people decide whether to hold onto their pounds or pass them on until they find their way back to the government?

I can’t imagine Andy Burnham or anybody else coming up with a halfway convincing answer to those questions. But they aren’t asked, because people don’t know the truth about deficits.

Jeremy Corbyn should tell the truth. He should throw the burden of proof onto the people who talk a good game about deficits but neglect to mention – and perhaps don’t know – what they actually are. No need for this (from Corbyn’s economic policy document):

Screen Shot 2015-07-23 at 16.59.54


18 thoughts on “Jeremy Corbyn and the Truth about Deficits

  1. Al Cider

    The deficit – You are saying it is “where” the money is (private or public), is that right? Tom Clarke sums it up as “the rate of debt reduction” here.
    Is only one of you two accurate?
    Have you both given different but accurate definitions?
    Are you both correct but your explanations clash?
    Is it somewhere between the two analogies but needs more work to make comprehension easier?
    I do “sort of” understand what the deficit is but struggle to explain it over the dinner table. Myself and many others need to be explaining this (over dinner tables) to expose the needlessness of austerity. Most of the media won’t do it.

    1. axdouglas Post author

      Thanks for your comment.

      The blog you link discusses the difference between the debt and the deficit, which isn’t a main topic of my post.

      When I said that the deficit is ‘the total added to the pounds that the government has spent that people still have’, I could have put it this way: the totality of pounds that the government has spent that people still have is the National Debt; the amount added to that totality within a specified period (usually a year) is the deficit.

      But this is a small matter of terminology. It’s embarrassing that some MPs don’t understand it, but it’s not the big misunderstanding I was trying to point out.

      The big misunderstanding, which drives the austerity ideology, is that if the government runs a deficit (adds to the debt) it is ‘spending beyond its means’. It isn’t. A good way to think about this is in terms of the government’s ‘super platinum credit card’, as Neil Wilson explains it.

      That’s what I want Jeremy Corbyn to start saying. He’s right to oppose austerity, but he hasn’t yet told us why he’s right. This is why.

  2. larry

    When it is said that taxes won’t cover expenditure, that will be both true and irrelevant. Taxation has no substantive economic relationship to government expenditure. It performs other functions. This is what Corbyn could and should have said in reply to Burnham. It seems he didn’t. Which leads me to believe that he doesn’t clearly understand how the real economic system actually works, especially the monetary system. He has some cognitive work to do.

  3. jake

    The criticism of deficit spending ,isn’t just that it is” bad”.but that it is matched by “expensive” borrowing which incur tax obligations on future generations and ourselves in the future.

  4. kropotkin2000

    The narrative may seem easy to counter, but only if the listener is rational and open-minded.

    There are a lot of obtuse people out there, and they really think they have a good hold on how government finance and macroeconomics work. Suddenly telling them that the deficit is a necessary and even good thing may as well be telling that night is day and black is white.

    Corbyn himself isn’t an economist. I believe he’s an intelligent and astute fellow, and he probably has a decent idea of the issues involved from listening to his own economic adviser, but being a layman may not give him the confidence to boldly take on the false narrative in public.

    I think strategically, and for the short-term at least, he’s doing the right thing by reframing the “deficit debate” and arguing that growth rather than austerity is a more viable “solution”. And even this much is often getting him lumped as a “deficit denier”. It’s a tough crowd out there.

    1. Stephen Ferguson

      Pushing for ” growth rather than austerity ” never worked, and never will, for the fatal reason it ultimately validates the ‘household’ budget framing. Why? Because that is the very pretext on which neoliberalism is founded.

      Corbyn could gift his political enemies an easy way to destroy his entire platform by using THEIR ‘household budget’ framing, or he could wake up and listen to this alternative…

      PS Is about Aussie budget, but equally applies to UK

      1. Mark Kinnear

        austerity only works when the economy is pumping too much and things need to be tightened …. other than that see how greece is going with austerity … even Australia’s liberal govt is trying to reign in the deficit = GDP growth 0.2%

        ps great video, Steve is a character.

  5. jamesmarnold

    Hi Alex,

    Firstly, congrats on your book on debt. Will certainly try to get hold of a copy when it is out.

    Secondly, I have a question, which I’m sure you have an answer to, so this is more for my own benefit to see how to respond. My worry is that maintaining a deficit will increase the debt of the country, and that if the deficit is not eventually reduced, the increase in debt will be used against the UK. I know that historically we and other countries have had much higher levels of debt, but my worry is more that, given global economic system we have, the UK will be attacked by e.g. the credit agencies, international financial institutions, and other economic powers. The symbolism of, for instance, the UK losing its triple-A credit rating, would be a blow to any government. As would companies engaging in even moderate capital flight. It could be argued those are empty threats, but isn’t there a real risk there?

    I’m sure I’m just missing something, but would be obliged to have it pointed out to me in clear terms. Thanks,


    1. axdouglas Post author

      Hi James – thanks for the congratulations, and thanks for your question.

      The worst-case scenario would be if nobody wanted to buy UK Treasury bonds (say the ratings agencies have everybody spooked). In that case, here is what would happen with deficit spending, so far as I understand. First, HM Treasury would spend, crediting bank accounts and leading the Bank of England to credit the reserve accounts for the banks. Then HM Treasury would hand over to the Debt Management Office, to ‘fund’ the spending (i.e. close the Treasury’s overdraft with the BoE) by selling bonds. Ex hypothesi, the DMO would be unable to do this – we’re imagining that nobody wants the bonds. So the effect of deficit spending would be to leave excess reserves in the banking system. Increasing reserves would bid down the bank rate, but the BoE could maintain its target by paying the target rate as interest on reserves.

      And so we end up with something pretty much operationally identical to what we have: the government can run whatever size deficit it likes, and the BoE can control the rate. The upshot is that the government of a nation with its own central bank doesn’t *need* the bond market in order to deficit spend. Government bonds are largely redundant; they’re a handy but not necessary tool for adjusting the interest rate, and they’re a device for allowing the government to directly fund pension funds, etc. They’re not a funding mechanism for the government; the government has its own central bank and needs no funding mechanism.

    2. Stephen Ferguson

      There is no need to worry. An entity which is the monopoly issuer of an abstraction of its own making e.g. £ sterling (for the UK government) or football points (for the FA) cannot run out of it – ever. For the £, there are constraints, but these are physical, not numerical and certainly not the opinion of credit-rating agencies.

      Now imagine the howls of laughter if Standard & Poors decided to de-rate the FA because they issued ‘too many’ football points.

    1. axdouglas Post author

      I’ll do a more detailed reply soon. But here are three points:

      1) The author makes a mistake I’ve tried to fight against in my book. He views bond-issuance by the Treasury as ‘borrowing’, when in fact, on a fiat currency, it’s much more like issuing currency. When the Treasury deficit spends, it effectively issues bonds and pays with those. In fact it issues excess reserves then drains the excess reserves off by selling new bonds, but it’s operationally the same. The bonds are pretty much as liquid as cash; the main difference is that they pay interest, which makes them effectively cash with a non-zero own rate. On the gold standard, there was a big difference: cash could be redeemed for gold whereas bonds could not. But with a fiat currency this is no difference.

      2) The author, like almost everyone, misunderstands the nature of inflation on a fiat currency system. With a fiat currency, the price-level is just a function of what prices the government pays when it spends (and what collateral values it demands when it lends). The economy as a whole has to take the prices the government offers, since it needs the government’s currency to pay its taxes (and to supply any net savings desires). So currency-issuance by the government only creates inflation if the government uses its new money to pay higher and higher prices. If it doesn’t – if it pays more but demands proportionately more stuff in exchange, for instance – then the price-level doesn’t change. There is a real constraint, of course. If the government issues and spends twice as much this year as it did last year, and the economy is only capable of producing 1.5 times as much stuff as last year, then the government will be paying higher prices and generating inflation. But anywhere short of that constraint, the government can just choose the price-level it wants.

      3) The author depends too much on a very simplified presentation that Mosler wrote for a public readership not trained in economics. He is not criticising in good faith until he engages with more sophisticated presentations such as these:

      I also agree with many of the criticisms made by Peter Martin, Auburn Parks, Andy, and others in the comments.

  6. Pingback: Post-Brexit: Britainia Handia eta alderdi laborista | Heterodoxia, diru teoria modernoa eta finantza ingeniaritza

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s