Fiscal Charter Debate

Here is George Osborne accusing Labour of wanting to ‘borrow forever’.

The funny thing about this turn of phrase, which is meant to make us gasp in horror, is that it actually shows why the government, in principle, never needs to run a surplus. That’s exactly the point: it can borrow forever. (Of course, I don’t think it’s really borrowing, but I’m happy to play along with the conceit for the sake of argument.)

If I borrow, I need to run a surplus at some point to pay back my debt. I can try to keep borrowing to repay my debt, but at some point nobody will be likely to extend me a new loan to refinance my existing loans. Why? Because at some point I’ll die, and the last person holding my debt will get nothing but my feeble assets. Death is the ultimate default.

But the State doesn’t die. It doesn’t even retire. So it can borrow forever. Think about how simple this actually is. You, the immortal State, borrow from person 1 now. Then you pay back person 1 by borrowing from person 2. Next, you pay back person 2 by borrowing from person 3. How easy is this? Hilbert’s Hotel is a great place in which to do your fiscal operations.

If the series came to an end, there would be somebody at the end who lent the government money and didn’t get paid back. But the nice thing about borrowing forever is that there need be no such person. Everybody is paid back from a loan issued by the next person in the chain. And there’s always a next person. Or if there isn’t then public debt is the least of our worries.

Sensible economists recognise this, which is why they focus on the sustainability of public debt. Of course the government can roll over its debt forever. But it needs real income from which to service the debt – to pay the interest. There’s a whole separate conversation to be had about that. For now just note that all economists recognise that there’s nothing unsustainable about the government borrowing forever as such. Sustainability only becomes a concern if the interest rate on the debt comes to exceed the rate of growth in income available for the government to tax.

Of course there could be situations in which the government should run a surplus. If spending is too high, in general, for the productive capacity of the economy, then the government might need to run a surplus, if that is the best way to suppress spending and prevent inflation. But there’s absolutely no reason why the government shouldn’t be in an average net borrowing position over the long run, as in fact it is. The long run is really very long.

So what is Osborne’s problem? We mortals have to worry about debt because we can’t borrow forever. But if you can borrow forever, why on earth wouldn’t you? If the interest payments are sustainable, who exactly is losing out? The infinity-plus-one-th person? It’s the best deal in the world, and its win-win. Actually it’s win-win-win-… etc. ad infinitum. You’d have to be a fool not to take that deal. You’d have to be a fool even to abstain on the decision. What a waste of sovereign immortality. Lord what fools these mortals be.


16 thoughts on “Fiscal Charter Debate

  1. NeilW

    “Of course the government should run surpluses in certain situations. If spending is too high, in general, for the productive capacity of the economy, then the government might need to run a surplus in order to suppress spending and prevent inflation. ”

    But only if, in the current configuration, the central bank is unable to suppress private borrowing sufficiently *or refuses to do so*.

  2. John Callanan (@JohnjoCallanan)

    Great post Alex. But of course ‘Osborne’s problem’ is not one of economic analysis, but of the perceived political advantage of instituting the relentless ‘ we must live within our means’ narrative (surely to be heard constantly for the next 5 years) into legislation. The disanalogy between individual v state, or household vs state, is exactly what must be ignored if the rhetoric is to get traction with the public. Not a reason not to keep blogging about it of course….

    1. axdouglas Post author

      Thanks, John. You’re right. But whatever ‘Osborne’s problem’ is, *our* problem – that is, the problem for us ordinary voters – is a failure of economic analysis. It’s our failure to think it through that allows Osborne to keep using this trick of logic. We let the government tell us that it, too, has to live within its means, and we forget to ask what exactly its means are. We forget to ask, as Neil puts it, what it has in its wallet:

      1. John Callanan (@JohnjoCallanan)

        yes, definitely. Didn’t mean to recommend that you blog about it wearing any specific political hat either, just in case you thought so. I’m interested in thinking about the general, poltically-relevant question you are interested in, of how concepts like ‘infinite debt’ (or indeed, ‘debt’) might be able to presented to non-philosophers and non-economists as having a non-negative connotation. Really enjoy the posts for this reason.

  3. Tom Hickey

    “the State doesn’t die. It doesn’t even retire. So it can borrow forever”

    Same with corporations, although they can go bankrupt whereas a currency cannot be forced into involuntary bankruptcy. Who is concerned with significant debt of large corporations? And odds are, it is mostly conservatives that own the major share of those firms.

  4. grkstav

    And the interest fiat, not-mandatorily-convertible-into-anything-other-than-itself, floating Fx, currency issuing governments pay out to service their ‘debt’ (denominated in the same currency) comes from the same inexhaustible source as all their other expenditures.

  5. Simon

    So what is Osbourne’s problem? ‘Osbourne’ , of course, is a metonym for a specific power structure with vested interests operating at a subliminal level. ‘Osbourne’ himself (he has a self of sorts!) will then be the glove puppet of this background ‘package.’ perhaps we need to ditch metonymy to aid fuller discussion? Would increase veriage of course!

  6. Schofield

    The key to the success of Neoliberal framing is that they anthropomorphise government. Government is made out to be led by a “spendthrift” prime-minister or president!” In reality government is simply an institution or mechanism where money is concerned. It’s there to firstly ensure a sufficient quantity of money is in active circulation, equitably distributed and at optimum velocity coupled with satisfying any desired level of savings that doesn’t undermine the first objective.

  7. Simon

    Alex-have you come across the work of David Bohm (the late physicist)? he talks about how language (subject/object/intransative expressions) don’t adequately reflect ‘what’s going on’ (perhaps Wittgenstein would say; ‘we can’t see what is in front of us’?) and he experimented (in a sort of unsuccessful way) with what he called the ‘rheomode’ by modifying English to change the relational aspects. His essay ‘Problem and paradox’ is also interesting where he explores our attempts to solve what we call ‘problems’ which are essentially paradoxes.

    See chapter on ‘Rheomode’ in:

    1. axdouglas Post author

      When I was at Birkbeck, I got access to David Bohm’s archives, and looked through them a bit. He’s a fascinating thinker. I didn’t know much philosophy of language then, so I’m glad you’ve reminded me to revisit his stuff.


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