The Deficit Myth

Every deficit is good for someone, and climate change needs it

When you dig a hole, the dirt has to go somewhere. It piles up somewhere else.

It’s exactly the same same thing with the government deficit. If there’s a £22 billion deficit on the government ledger, then there is a £22 billion surplus on the non-government ledger.

Old monetary policy was tied to gold reserves

Common questions the media put to politicians are: “How are you going to fund that? Where will you find the money to do this?”

This sentiment has a ‘gold standard’ aura about it. As if we really have to go out and find gold in order to be able to pay for education or healthcare or infrastructure, or deal with climate change.

But we don’t have to find gold. We’re not bound by a gold standard or any other. The monetary system that we have today is a fiat currency, which is the Dollar, Pound, Euro, Yenn, or whatever, are currencies with a flexible exchange rate.

The government does not have to pledge to convert the currency into something. We have a degree of freedom available to us (as demonstrated by how we got through the Covid pandemic), and we’re not really taking full advantage of the policy options on offer.

The only thing to watch out for is inflation. Effectively we can’t run out of money, but we can run out of things to buy. And that’s a real constraint.

Inflation means what you get less for your £1000 this year than you did last year

Every deficit is good for someone. We’ve been taught and trained that the word ‘deficit’ is a negative thing. How many pounds the government puts into our hands each year, versus how many pounds they removed from our hands each year (mostly through taxation). This feels negative.

However, if someone were to tell you that the government is putting more pounds into society’s hands than it is taking away, would you have a negative reaction to that, or would you look at it and say “oh they’re making a contribution to the rest of the economy”?

If they add more than they subtract, what they’re really doing is generating a surplus.

This idea shifts the entire debate away from worrying about things like running out of money and bankrupting the country. It gets us focused on the our capacity to build infrastructure, deliver healthcare services, and combat climate change.

So the government deficit is equally a surplus when viewed from a different perspective. It’s our surplus.

I hate the word ‘faucet’

The real conversation is “who is the deficit serving?” Liz Truss tried to give a huge windfall to people who are already doing very well (tax cuts for the rich).

Running a deficit because we’ve borrowed to invest in our national health service would be more ethically sound. Something which makes us all healthier and happier people.

We should want the kind of deficits that deliver outcomes that lift people up. That produce better health outcomes, tackle climate, give us better and more affordable education. Economic deficits that deal with the actual deficits in our society — infrastructure, education, healthcare, the climate crisis.

The thing you have to watch out for when you’re pushing hundreds of billions into ethical pursuits is managing inflationary pressures along the way. Hence governments being so terrified of inflation in recent years, and quite rightly so.

What happened to Liz Truss has become a huge barrier in the thinking of the current government. That somehow if they try to take independent action, they’re going to experience a similar kind of backlash from financial markets.

Not the brightest

The markets’ reaction to these policies was, “they are likely to push up inflation, the Bank of England is going to respond to an increase in inflation by raising interest rates, and based on this we think we should try to move out of the pound.”

And then you have problems with pension funds. The Bank of England rescued that situation, but what the markets were saying is “this is probably gonna be inflationary.”

The real economy is what matters. If we can achieve the outcomes - whether it’s investments in health or education or climate, and you can keep inflation low while doing those things - it doesn’t matter what number pops out of the budget box.

Overcome the markets’ reaction, and we could be winning as a society.