Reading update

Published by Anonymous (not verified) on Fri, 22/02/2019 - 3:43am in


Debt, reading

Although Reading has still not provided details of the £120million its owes to the National Institute for Research in Dairying Trust, for which it acts as sole trustee, a couple of letters and a blog post have provided a bit more insight.

Reading’s UCU branch has published a letter from the acting vice-chancellor, Robert van der Noort, which argues that the £120m is not a debt.  I was told by Reading press office that the money owed to the trust is a loan and that interest is payable.  (As an aside, I first contacted Reading in mid-January and spoke to them at length over a week before publication, when I gave them a list of questions. These were reiterated in the email to which the letter refers. They have still not answered these.)

Following a staff vote of no confidence, van de Noort published an Open Letter on Reading’s website. It contained the following paragraph:

Undoubtedly, some past activities and investments, such as our Malaysia campus, have not performed as well as we would have liked. Others have given a positive financial return for the institution, which we have reinvested in necessary improvements to our campus environment, teaching and research infrastructure and student experience – including the redevelopment of a modern library. Despite views to the contrary, the NIRD land sale is one of these and all considerable net proceeds of the sale will over time be reinvested in research in food and agriculture at the University. (my emphasis)

The future of the loss-making Malaysia campus is now under review. More pertinent to our concerns, Reading management here appears to admit that money coming from the trust should have been spent on research relevant to the trust’s objects.

The key point is that Reading does not have that money currently to hand and “over time” funds will have to come from elsewhere to match the £120m. That has financial implications for university, despite what has been said so far and irrespective of arguments over what exactly constitutes a “debt”.

In a blog originally intended for wonkhe but appearing today at Times Higher Education, van der Noort expends a lot of words saying not very much but does confirm the outlines of what we reported:

The article in The Guardian highlighted an issue that we have already dealt with, relating to the sale of land belonging to a charity for which the university was both trustee and beneficiary. Acting on the best advice available, we took steps last year to resolve this, and there are no wider implications for the university group’s finances. This concerned a historical issue of governance that needed to be put right.

Reading have as yet not explained how the matter has been resolved (if it has – we have yet to hear from Office for Students) and, again, the article makes no mention of the loan.



Americans Are Drowning in Debt

Published by Anonymous (not verified) on Mon, 18/02/2019 - 7:00pm in



We live with it. We die with it. And we’re told it’s our fault.

“What You Need To Know About The $22 Trillion National Debt”: The Alternative SHORT Interview

Published by Anonymous (not verified) on Mon, 18/02/2019 - 12:53am in

Steven Rattner’s opinion piece in the New York Times and Furman’s interview on National Public Radio are perfect examples of the ideas that MMT want to debunk. Deficits are not normal; deficits crowd out private investment; the public debt is … Continue reading →

The post “What You Need To Know About The $22 Trillion National Debt”: The Alternative SHORT Interview appeared first on New Economic Perspectives.

“What You Need To Know About The $22 Trillion National Debt”: The Alternative Interview

Published by Anonymous (not verified) on Sun, 17/02/2019 - 10:05am in

Steven Rattner’s opinion piece in the New York Times and Furman’s interview on National Public Radio are perfect examples of the ideas that MMT want to debunk. Deficits are not normal; deficits crowd out private investment; the public debt is … Continue reading →

The post “What You Need To Know About The $22 Trillion National Debt”: The Alternative Interview appeared first on New Economic Perspectives.

Call for abstracts – Critical Macro-Finance Workshop

Published by Anonymous (not verified) on Fri, 15/02/2019 - 9:33pm in


event, Debt

Critical Macro-Finance Workshop

Warwick Critical Finance Group & Political Economy Research Centre at Goldsmiths

9-10 September 2019 at Goldsmiths, University of London


A decade after the 2008 financial crisis, new political economic imaginaries have emerged to make sense of our financialised world. As the work of scholars such as Adam Tooze and Daniela Gabor has shown, critical macro-finance is one of the most important of these trends. It has shed light on the infrastructure of contemporary global finance, the links between shadow banking, money markets and monetary policy, and the evolving governance architecture established in the wreckage of the crash. This work can seem obtuse and technical at first and in the domain of (heterodox) economics rather than broader political economy traditions. Yet it has important implications for how we understand the categories of ‘state’, ‘market’, ‘governance’ and ‘power’ in the contemporary world.

Following the open and collaborative spirit established at our previous two workshops, the Warwick Critical Finance Group (WCF) and Political Economy Research Centre (PERC) at Goldsmiths are collaborating to explore these implications and move the conversation into new directions. We want to discuss the basic methods of critical macro-finance analysis and debate its uses and misuses for understanding the political economy of global finance. And we seek to break fresh ground for a conversation between critical macro-finance and existing debates and approaches in political economy research. The workshop will take place 9-10 September 2019 at Goldsmiths in London.

Papers and Participants

Instead of the standard panel and paper presentation format, we invite academics who work broadly within the field of critical macro-finance to submit papers that can be used as a basis for discussion of one or more of the following themes:

• How can we politicise critical macro-finance?
• How can we historicise critical macro-finance?
• How does critical macro-finance relate to and inform geopolitics/IPE?
• How does critical macro-finance relate to and inform discussions on the Global South?
• How does critical macro-finance relate to the literature on financialisation?

Accepted papers will be divided into these themes and authors will be asked to give a brief presentation of their papers. However, the main focus of the event is placed on informed debates on the questions posed above between the authors as well as other participants.

Paper proposals should be submitted to in form of an extended abstract (400-500 words) detailing which of the above research theme(s) the paper is suited for by 30 April 2019.

We also have a number of places available for non-presenting participants who are interested in joining the debate.

Registration Fee

The registration fee is £25 for the full two days.


Limited funding is available to support travel expenses for a number of unfunded participants. If you would like to apply for financial assistance, please include a short case for support (max. 200 words) when submitting your abstract.


• Application deadline: 30 April 2019
• Notification of acceptance: 15 May 2019
• Registration deadline: 30 June 2019
• Workshop: 9-10 September 2019

You can find the Call for Papers here, more information to follow soon!

The post Call for abstracts – Critical Macro-Finance Workshop appeared first on Political Economy Research Centre.

Has Reading milked its dairy trust?

Published by Anonymous (not verified) on Tue, 12/02/2019 - 3:04am in

Back in December, I made an offer via Twitter to look over the accounts of any universities where academics and/or students had any concerns about what was happening.

A member of staff at Reading approached me. A quick look at the latest financial statement (for 2017/18) flagged up a few issues. The main one was contained in Note 19 “Creditors: Amounts falling due within one year”.

reading amounts

It looked as if the University was committed to paying £120m to the trusts for which it acts as sole trustee.

That seemed unlikely. It was not as if the University was in a position to produce such sums and anyway the figure included for 2017 indicated that a slightly smaller sum had been in the same category in the previous financial year.

The accounts offered no explanation. I would have expected to see something either in this Note or in that devoted to “Related Party Transactions”. This prompted me to look back through Reading’s previous financial statements.  I had to go all the way back to 2014/15 to see the first clue:

“Included in other creditors is an amount of £40.9m owing to the University’s endowment trusts (2014: £13.2m). This total increased significantly in the year due to land disposals by the trusts.”

In subsequent years, the amount owed to the trusts increased rapidly, climbing to £87m and then the £107m of the 2016/17 accounts. What I now know is that this reflects the manner in which the proceeds arrived from the sale of land at Shinfield belonging to the National Institute for Dairying Research Trust: £20m in 2014, £50m in 2015 and a further £50m in instalments over the next 3 years.

The University spent these sums and noted that it owed NIRDT the £120m. In a statement issued on Saturday in response to our Guardian story the University argues that the sales were fully documented in its accounts.

“The University is confident that it has responded appropriately to the issues relating to the sale of land that formed part of the assets of the National Institute for Research in Dairying trust. The details have already been set out in the University’s published financial statements.” (9 February 2018)

I don’t disagree. But what is missing from all recent financial statements is any account of the loans, which the University says were made to itself by the Trust. The University has nowhere disclosed the terms of the loan and, although it told me interest was payable, it was not able to say what interest was due and indeed whether any had been paid.  The terms of the loans should have been published in the accounts and declared in the notes devoted to “related party transactions”.

There are prima facie conflicts of interest when a trustee is also the beneficiary of a trust. In this case, Reading appears to have accepted that it should have acted differently …

“The appropriate governance arrangements are now in place relating to the university’s management of the trust …” (my emphasis)

but is still being less than clear regarding how the matter is going to be resolved. I was told that two independent panels with legal representation have been convened: one to represent the interests of the trust, the other, the university. And that the university has also informed the regulators of what Office for Students called “a reportable event”. OfS said it had received this notification “recently”, but would not give any more specific timeframe.

There is obviously a broader question about what this means for the university’s finances and whether such a loan should be thought of as a “real debt”. I take that to be part of what needs to be resolved. Since the trust is designed to fund research at Reading, it is never going to be in trust’s interests to precipitate a brutal reckoning, but it seems clear that the loan is on generous terms (rolled over and increased each year) and isn’t being used solely for agricultural research. This indicates two sets of questions: was the conflict of interest properly managed? should the loan have been approved and extended annually?

Setting those questions aside, and returning to the finances: it is clear that the university has used proceeds from the sales to cover over problems in the last few years (deficits from ordinary activities of c. £20m in each of the last accounting periods).* It is not all clear what additional pressure may be put on the university’s position when the matter is fully resolved. (If anyone knows more about trust law and potential precedents, feel free to comment below).

More broadly, there is a question regarding how appropriate it is to “consolidate” the accounts of related trusts into university statements. NIRDT accounts do not appear to be published. Since it is a trust connected to an “exempt charity” , its accounts do not appear on the Charity Commission website; since it is not a company, there is nothing at Companies House. Reading does produce an annual statement regarding the investments held by another of its trusts, the Research Endowment Trust, but does nothing similar for NIRDT. Does anything prevent OfS from requiring universities to also publish the accounts of such trusts? (Again, if anyone with more knowledge in this area wants to comment, please do so below).

Judging from my inbox, this story has wider pertinence. My offer is still there. Please email if you want me to have a look at something.

*update: while over £110m was spent on acquiring fixed assets.

Social Media Generated Nonsense – Again!

Published by Anonymous (not verified) on Wed, 06/02/2019 - 10:23am in

As I’ve said numerous times over the past couple of years to those who’ve been recently exposed to MMT and who worry that we’ve a long way to go, you’ve come very late to the game. You need not worry. We are nearly finished here. We’ve arrived at the end of the beginning. Game, set and match is rapidly approaching.

The post Social Media Generated Nonsense – Again! appeared first on Ellis Winningham.

The Myths and Legends of Hypothecated National Insurance

Published by Anonymous (not verified) on Mon, 28/01/2019 - 4:00am in

Over the last few days there has been a story whizzing around social media that our National Insurance contributions are being used to pay off the national debt. The Fund, as revealed by John Prescott in 2015, supposedly contained £30billion of spare money which at the time it was said could be used to save the NHS. Now it is being claimed, falsely, that the surplus fund is being used to pay down the national debt.

There is a fundamental public misunderstanding about how governments spend, the role of taxation (and after all National Insurance is just another tax) and even what the national debt is. The myth about government needing to tax or borrow in order to spend persists in the public mind. However, a government which issues its own currency, neither needs to tax nor to borrow in order to spend and shock, horror that big bad national debt burden is nothing but our savings and no threat at all for today or future generations.

In this excellent blog, originally published here, Public Matters tells the real story about NI from its history to the present day. With a better understanding of how National Insurance works, the questions about how public programmes will be paid for can move from it being dependent on prevailing financial conditions to a question of political choices and ideology.



Wordcloud on the subject of tax and the economyThere are pressing reasons for understanding a bit about how our tax system works and very specifically what National Insurance is. NI is used as successive governments’ tax increase of choice because of a widespread and mistaken belief that it is a direct payment to the NHS. The Liberal Democrats had it in their 2017 manifesto, Gordon Brown put 1p on NI to ‘pay for’ the NHS, Frank Field (Labour) gave evidence on NI to the Lords Committee on the long-term sustainability of the NHS and his website says he is working on this issue with Oliver Letwin (Conservative) and he wants to restore a ‘something for something’ society.

Frank Field’s website says:  ‘Polling last year found that while 42 per cent of the public would support an increase in tax to pay for a larger National Health Service budget, this figure climbs 11 points, to 53 per cent, once the public are asked about an increase in NI contributions.’

One of the most recent additions to this proposition was in an ‘exclusive’ from the Daily Telegraph (18 March 2018 paywalled):  “It is understood there is now broad agreement within the Cabinet that extra money must be provided for the health service. Some ministers have privately suggested an across-the-board rise in National Insurance to provide new ring-fenced funding for the NHS. However, The Telegraph understands that officials are drawing up plans for a more targeted tax rise on older workers as part of a new 10-year funding plan for the NHS championed by Jeremy Hunt, the Health Secretary. One idea under discussion is to make the 1.2 million pensioners who keep working past 65 to pay NI contributions. The move would raise £2 billion per year which could be spent on the health service. Scrapping universal free prescriptions for the over-60s is also under discussion.”

The Telegraph article incorporates many of the issues frequently raised when talking about how to pay for the NHS. These arguments have muddied the waters about how public funding is allocated giving rise to political decisions being made on the spurious grounds of ‘affordability’, ‘sustainability’ and ‘no money’. And it has led to campaigns and petitions calling for 1p in the £ tax or the hypothecation of NI to ‘pay for the NHS’.

Here we make the argument that this is not only misleading but it will undermine rather than support the NHS.

A political consensus – can we afford the NHS if the public won’t pay more?

Earlier this year, thousands of NHS campaigners marched and rallied across the country in protest at the de-funding, cuts and privatisation of the NHS. Anyone who isn’t an NHS campaigner could have been forgiven for missing it, it was given so little press attention.

In contrast, two days later the BBC gave headline space on its flagship news programme, Radio 4’s Today, and on BBC One’s Breakfast, to the Liberal Democrats’ perennial call for NI to be increased for the NHS. They are also calling for NI to be converted into National Health and Social Care Insurance – which they refer to as a hypothecated tax.

Simon Stevens has argued for different funding sources too:

“Would intergenerational fairness support a further increase in the share of public spending on retirees, at the expense of children and working-age people? Should it be easier for families to flexibly fund social care by drawing down resources tied up in housing, pension pots and other benefits?”

A little bit of history (but not too much)

Funding was a key issue in all the prototype versions of the health service that finally became the NHS. The debate about how to pay for the NHS was based around three elements, all of which are reflected to greater or lesser degrees in other healthcare systems around the world today.
These were (and are):

1. The Exchequer should pay a proportion via government run national insurance.
2. Local authorities should pay a proportion from the rates (council tax).
3. People should make a contribution from their own pockets -usually as some form of insurance.

Combinations of these are used across the world in a system known as the Bismarck Model.

NI already existed for working people in the UK before the creation of the Welfare State. It gave an entitlement to unemployment benefit, seeing a doctor and some pension benefits. But Prime Minister Clement Attlee supported Aneurin Bevan’s desire to break the connection with insurance to bring in something quite different for the NHS – and unique in a Western democracy. The NHS was to be paid for in full by the Exchequer. It has caused complaint and consternation ever since about its affordability – ‘growing and ageing populations’ have always been seen as a threat to its survival. Yet it has been consistently one of the lowest cost universal healthcare systems in existence. And that has been largely as a result of this direct funding method.

In 1952 Bevan wrote ‘In Place of Fear’ a remarkably modern set of essays showing that the questions about funding, who gets access, what should be provided are perennial and instantly recognisable across the years. He writes one of the best explanations of why NI was not chosen as the method of payment:

“When I was engaged in formulating the main principles of the British Health Service, I had to give careful study to various proposals for financing it (…) what was to be its financial relationship with national insurance; should the health service be on an insurance basis? I decided against this. It had always seemed to me that a personal contributory basis was peculiarly inappropriate to a national health service. There is, for example, the question of the qualifying period. That is to say, so many contributions for this benefit, and so many more for additional benefits, until enough contributions are eventually paid to qualify the contributor for the full range of benefits.”

So, to answer Bevan’s question, what is the NHS’ “financial relationship with National Insurance” in 2018?

Given the number of people who respond on social media to questions about funding the NHS by saying, ‘I pay for it already with my National Insurance’ – it looks as though the question is answered in popular consciousness, if not in reality.

It might surprise people to learn that the National Insurance Fund (NIF) today is used to calculate employment related and pension benefits, as it did before 1948. It doesn’t include paying to see a doctor! This Fund supposedly contains £30 billion of spare money. You may have seen the petition to parliament asking for the release of the money to save the NHS. John Prescott, former Deputy Prime Minister, was the person who discovered this ‘secret’ in 2015. But, like many things which have an eternal life on social media, it isn’t quite true.

Bevan talks about ‘the qualifying period’ for NI. NI still has qualifying periods for the various benefits it covers.

According to the government website the list below is what NI is for. Each of the benefits listed have different numbers of contribution years needed to be able to claim them. For example, it takes a minimum of 10 years contributions to earn entitlement to any state pension at all and 35 years to earn full entitlement. State pensions aren’t like private pensions. There is no personal money pot built up. Instead your contribution to society through your earnings is a social contract. There is an expectation that, having contributed through your working life, the government of the day will honour the contract when you retire.

Class 1: employees 
Class 2: self-employed 
Class 3: voluntary contributions 

Basic State Pension 

Additional State Pension 

New State Pension 

Contribution-based Jobseeker’s Allowance 

Contribution-based Employment and Support Allowance 

Maternity Allowance 

Bereavement Payment 

Bereavement Allowance 

Widowed Parent’s Allowance 

Bereavement Support Payment 

The NHS is conspicuous by its absence from the list above.

In the late 1970s over 65% of all unemployment benefits were based on contributions from previous employment with 35% being means tested. Today it’s almost the mirror image and contributory benefits are now just over 42% of the total.

Why do people say that National Insurance pays for the NHS?

Most people will remember Gordon Brown, when he was Chancellor of the Exchequer, saying he would put 1p on NI to ‘pay for the NHS’. There is that claim from John Prescott that he had ‘found’ £30bn in the NIF ‘for the NHS’. And the Liberal Democrats – along with Labour’s MP Frank Field – insist that NI should be changed to fund the NHS and Social Care as a hypothecated tax.

Is it any wonder that people believe that’s how the NHS is paid for, with so many politicians saying it is, or should be?

There is, in fact, a difference between the NIF and the National Insurance Contributions (NICs) collected. And the difference illustrates the confusion that exists about the tax system. At this point it is worth pointing out that, despite any statements to the contrary, NI is just a tax.

The Government Actuary’s Department has estimated that NICs will raise just over £125 billion in 2017/18, of which £101.8 billion will go into the NIF and £23.7 billion will go to the NHS.

What is accounted for in the NIF, as explained above, is the estimated amount of contributions needed to pay for the contributory benefits including pensions. Any excess over that amount is supposed to ‘go’ to the NHS, but it isn’t equivalent to the amount of funding the NHS needs. It is simply accounted for in the Consolidated Fund at the Bank of England which is a record of all the Government’s spending and receipts.

This brings us to the central issue of why politicians insist on making the link between the NIF and the NHS. At its most basic it is because politicians believe that if the public think that the tax is being spent directly on something they want and have a direct interest in (working benefits, pensions, health) they are less likely to complain when that particular tax is increased. And why do they believe it? Because countless polls tell them so. They also like going to the polls saying that they will not increase income tax – that’s a huge vote loser. But a manifesto commitment on ‘income tax’ can be neatly circumvented by increasing the other income tax – NI.

Is National Insurance a hypothecated tax?

A true hypothecated tax is one in which the tax is ring-fenced for a named service and pays for all that service. This system effectively enforces a spending cap on the service being paid for as it limits spending to an equivalent of the tax levied. That’s very difficult to do when necessary spending is required before the taxes are received. It’s also difficult to define the ‘whole’ of a service.

The NIF appears to be hypothecated. Its rules say that the Fund must always contain enough contributions to meet all its obligations as listed above. To this end it must have a reserve in hand (John Prescott’s £30bn ‘secret’). But the Treasury also makes grants available to the NIF to make sure it keeps to its rules when it doesn’t have enough contributions coming in. A further adjustment is made between the balances in the England & Wales account and the Northern Ireland account to make sure they both represent the right amounts for their relative constituencies. Yet more adjustments are made because the Department of Work and Pensions and the Department of Business, Skills & Innovation both make payments out of their own budgets for the benefits accounted for under the NI scheme so transfers are made between them to equalise the accounts.

There is also an excess of receipts required to fulfil the contributory principle over the course of the accounting year and that doesn’t go into the Fund at all. It is not a genuine hypothecated tax. It is a bookkeeping exercise.

If NI is just a tax and it isn’t hypothecated, what’s the point of it?

Historically people had a direct link between their NI contributions and the benefits that accrued to them as a result. Pensions retain that historic link, with a defined minimum and maximum number of ‘contribution years’ required. In and out of work benefits for those covered by the NI scheme also have minimum contribution periods. It is the contributory principle that makes NI difficult to abolish. Income tax is simply recorded as an annual amount, no matter what the source of the earned or unearned income. NI, on the other hand, is recorded as the number of consecutive weekly contributions. It is the appropriate number of full years in a given period that defines eligibility for the benefits.

People who take breaks from paid employment for any reason and therefore have a break in their contributions may receive a letter asking if they wish to make a voluntary payment to cover the missing contribution period. That couldn’t happen with income tax. Getting rid of NI therefore leaves a problem of how to calculate eligibility for contributions-based benefits.

NI hides the true levels of income tax

The headline rates for income tax are currently set at 20%, 40% and 45%. This looks as if we have a very fair system where the lowest earners only pay half what higher earners pay. However, if NI is added to income tax the picture looks very different.
NI (tax!) starts below the personal allowance level.

Income bracket 
Income tax rate  
NI rate 
Total tax 

£8164 – £11,500 



£150,000 + 

People often call NI a regressive tax because it doesn’t increase with higher earnings but what is far worse is that it masks the real differentials between the rates of taxation. The lowest rate is quoted at 20% and the higher rate at 40% which leads people to reasonably believe that lower earners are not carrying the burden of tax but as the real figures are 32% and 42% respectively then it is a far less fair system.

So, when campaign groups call for a penny on income tax to fund the NHS or that there should be further increases in NI they may not be aware of how serious the impact is on lower paid workers.  In 2016-17 a fraction over 31p in every £ of tax collected was income tax. NI accounted for just under 22p. The rest is accounted for by other taxes.

Inter-generational Fairness – a concept designed to persuade people that you don’t get what you don’t pay for

Over recent years there has been a change in the general understanding of what the economy actually means. Politicians talk as if the economy consists of the private sector and its wealth creation with government wholly dependent on the taxes raised from that wealth creation. Government expenditure is framed as money lost or wasted or a drain on the economy. The tax ceiling is used as a whip to limit government who must be vigilant against overspending or allowing ‘debt’ to get out of hand. It also tends to focus on income tax and NI to the exclusion of other taxes.

This is the narrative that explains why services need to be reduced or more paid for them by the public. It creates an obligation on those who cost most to be asked to contribute more for the sake of ‘fairness’ and ‘not burdening the state’. It makes means testing into a harsh system of proving you really need state help before you can get it. It reflects Frank Field’s ‘something for something’ idea that you don’t get what you don’t pay for. It is the political and moral opposite of the NHS.

Far from ensuring intergenerational fairness, this system forces the burden of payment for the NHS on to people in paid employment who are paying NI as this tax is not paid on unearned income nor by various other income groups.

The idea of expanding NI to retirees and of extending its range, making it more progressive, also ignores the contributory element. The regressive nature of NI is directly attributable to its contributory nature. Once you have paid ‘enough’ to meet the contributions threshold there is no justification for levying any more, as there is no more additional benefit to be ‘earned’.

This is the landscape that gives rise to the NHS Five Year Forward View with its voucher scheme for maternity and personal budgets for disability and now for the Liberal Democrats arguing for a National Health and Social Care Insurance for older people. Asking pensioners to pay NI when they already made their contributions to earn the status of pensioners is clearly nonsense and anything but fair, but you can change that argument if you change the purpose of the tax.

An insurance-based health and social care system

The Liberal Democrats report says:

“we .. believe that an NHS funded by national taxation continues to be the best option for delivering our healthcare system, and so we decided early in our discussions that we would not explore options for an insurance-based health system as a means of raising additional revenue.
…. thanks to great strides made in tackling pensioner poverty, after housing costs pensioner households are far less likely to be in poverty than households of working age, particularly those with children.
For this reason, we suggest policy makers consider ending the exemption from paying NICs for people who continue working past the state pension age. NICs could either be equalised with the rates paid by the rest of the workforce, or introduced at a lower rate.
(…) this is the age group who are the biggest users of health and care services and, as described in the section on income tax above, on many measures this group of workers are proportionately better off than younger generations.”

Like many of the issues we have examined in this blog these statements appear to superficially make sense regardless of whether or not you agree with them. But health and social care now form part of a single government department and the NHS and local authorities are being brought together within integrated systems with combined budgets.

Despite saying they would not explore options for an insurance-based health system, the Liberal Democrats’ focus on paying some form of insurance for health and social care actually means converting NI to a state insurance scheme. They are calling for Theresa May to back their scheme. This would transform our Bevanite state-funded NHS into a Bismarckian system. Currently healthcare is free at the point of need and social care is means-tested, which brings an element of uncertainty to what exactly is to be covered by this insurance.

If this were simply an argument about tax there are, of course, many other forms of tax. It takes experts to calculate the changes in government receipts and the effect on households when tax thresholds are raised or lowered. That is what would be being considered if this was about changing our tax structures or raising taxes in general.

But this is not an argument about tax. This is an argument over the role of the government.

While it may appeal to many to call for increased taxes to ‘fund’ the NHS what we really need is to understand how public funding works. The root of the problem does not lie in our tax system. It lies in public policy decisions.

If you are asked to sign a petition or support calls for a hypothecated NHS & Social Care NI or for 1p in the £: just say ‘no’.

For further reading:
Post crash economics and ‘Professor’ George Osborne
Jeremy Hunt calls for increase in tax to pay for Trident






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The post The Myths and Legends of Hypothecated National Insurance appeared first on The Gower Initiative for Modern Money Studies.

Lovers of exemption from tax

Published by Anonymous (not verified) on Mon, 21/01/2019 - 4:00am in

Welcome to Alan Hutchison, our MMT Long Read author for this week. Alan begins his blog post with a riddle, and as he notes most people will answer without hesitation. But there is another option which meets all the criteria. Read on to find out what in this creative and entertaining introduction to Modern Monetary Theory.

Originially posted on Alan’s blog, Matches in the Dark here

British stamps from 1937 and 1952

‘Tax Payers’, GB 1937, 1952

Notwithstanding their fundamental simplicity, it is sometimes a little difficult getting across the basic concepts embodied in Modern Monetary Theory. That it is occasionally a bit tricky indicates how misconceptions about the monetary system are deeply ingrained in the public consciousness.

Examining the ideas in an unusual context can help and that’s what I am going to try here.

It starts with a little riddle:

I am made of paper and have interesting designs printed on my surface. I am usually associated with a nation and if that nation is a monarchy it is commonplace for me to have a representation of the monarch included in my design.

I am created and issued on demand by the state (although the state may contract my creation to the private sector). It is illegal to create counterfeits of me.

I have monetary value and I am denominated in varying amounts of the national unit of account. In comparison to my denominated value, it costs the state virtually nothing to create me.

I can be used to pay for goods and services supplied by the private sector or by the state.

I can also be used to pay taxes to the state. When I am used to pay tax, or to pay for services from the state, I am cancelled.

Until I am cancelled I represent debt owed by the state.

Quite a few people desire to hoard large quantities of me and forego using me for payment. In certain circumstances the state will pay interest to the people who have collected me.

Some foreign entities like to hoard me and are happy to accept me in return for real resources.

The fact that some people like to hoard me means that the state issues more of me than gets cancelled.

Finally, my greatest fear is hyperinflation.

What am I?

Most people will answer without hesitation. Surely the answer to the puzzle is ‘currency in the form cash’, isn’t it? That is certainly a valid answer, but there is another option which meets all the criteria: postage stamps.

Eh? Can you pay for goods and services with stamps? Can you really fulfil your tax obligation with little sticky labels? Does the government pay interest on stamp collections? Do people gleefully swap real resources for tiny bits of paper which the state created at virtually no cost?

The answer to all these questions is ‘Yes’ and that’s because stamps are a form of currency.1 Let’s look at the description in detail to see why.

I am made of paper, issued by the state and cost virtually nothing to create

Kenya 5c stamps with Thompson's Gazelle motif from 1966

Printing money, Kenya 1966

Clearly, stamps fit the physical description, being made of paper and bearing printed designs which frequently feature a ruling monarch. At one time they were issued exclusively by the state (no longer so in the UK now that Royal Mail is a private company) and there are custodial sentences available for anyone making illicit copies of them. Stamps are generally denominated in the local currency — ranging in the UK from a few pence to a few pounds — and the cost to the state to print them is negligible.

The same applies to cash issued by the state and the bit about costing nothing to create is at the core of MMT. The no-cost concept applies to all new money created by the state, most of which can be brought into existence with nothing more onerous than typing a few numbers at a keyboard. And all state spending is new money, just like all stamps issued by the state are new stamps.

I have monetary value

One Arna stamp from India, 1883 and one pence stamp from New Zealand, 1941

Officials, India 1883, New Zealand 1941

Unused stamps have worth and can always be exchanged for cash at or close to their face value. Just like cash, precautions must be taken when unused stamps exist in large quantities and to prevent theft they need to be kept in a secure place and be subject to regular auditing. The problem of theft is particularly troublesome in countries with large bureaucracies and extreme income inequality — countries of the British Empire, for example.

In India under colonial rule, a lowly railway clerk may have been tempted to pocket a few postage stamps which had been issued for government use and sell them on in the private sector. To get around the problem the colonial administration issued special ‘Officials’,  stamps overprinted with ‘On Her Majesty’s Service’ or something similar. They were supplied exclusively to civil service departments and would have no value in the private sector. Officials were issued by administrations across the Empire and Dominions.

Looked at from an MMT perspective, the processes which follow on from the issue of Official stamps are interesting. The stamps cost almost nothing to produce and could, in theory, be issued in any quantity desired by a particular civil service department. When the stamps are used on letters and parcels they cause work to be done in another part of government — the postal service. Officials effect a transfer of resources from one government department to another.

In the same way, when the government spends money (which costs nothing to create) it causes resources to be transferred from the private sector into the public sector. Provided we have elected a suitably enlightened government, those resources will be used to further the public purpose.

I can be used to pay for goods and services

Postal Order, Ireland, 1922

Postal Order, Ireland 19222

That stamps are used to pay for a service is not contentious. It’s something you do every time you put a stamp on a letter and drop it into a post box. If the state owns the postal service then you are paying the state for the service; if the postal service is in private hands then you are paying the private sector.

There used to be a very easy mechanism for paying for both goods and services using stamps: postal orders. These were pre-printed in a narrow range of fixed values and stamps were used to make a postal order up to an intermediate value.3

Stamps are not legal tender in the UK and you cannot demand that someone accepts them as such. However, there is nothing to prevent anyone accepting them as payment for goods. In fact, this was common practice in the past when small items sold by mail order could often be paid for in stamps. ‘Send 1/- in stamps for bumper collection of jokes’ is typical of the sort of small advertisements found in 1960s children’s comics.

I can be used to pay taxes

Penny Lilac used to pay Stamp Duty, 1902

Penny Lilac used to pay Stamp Duty, 19024

The use of small paper labels to indicate that tax has been paid pre-dates the introduction of postage stamps. The labels were used to show that document tax had been paid and were known as ‘revenue stamps’. Document tax was a small, fixed levy on certain types of documents, particularly those used for record purposes, including receipts, cheques, licences and wills. The tax was considered a payment to the government for its part in ensuring — through the courts and by force, if necessary — that the agreements recorded in the documents were upheld. The tax became known as ‘stamp duty’.

Most people in the UK associate stamp duty with the tax payable when property is bought and sold. This is actually a tax on the transfer of title and is proportional to the purchase price. It is not a document tax and I doubt very much that it can be paid in stamps.

A document tax can have unintended consequences. The Stamp Act of 1765 introduced to the British colonies in America a tax on printed documents. It wasn’t very popular, gave birth to the slogan ‘no taxation without representation’, started a revolution and, ultimately, led to a chap called Trump taking up residence in the White House.5

When Roland Hill launched the world’s first postage stamp in 1840 — the Penny Black — it was really just an extension of the document tax. The stamp showed that a tax had been pre-paid to the state for delivery of a paper document. Prior to Hill’s introduction of the Universal Penny Post, postage fees were paid by the recipient and could be very high, being based on distance and the number sheets of paper. Receiving a single sheet could cost a shilling or more — a day’s wages for the working poor. Under Hill’s system, sending several sheets in an envelope was pre-paid by a tax on the sender of one penny, no matter how far the destination.

This explains the word ‘philately’, which is derived from the Greek philéō meaning ‘I love’ and atéleia meaning ‘exemption from tax’ — referring to the fact that the recipient of a letter doesn’t have to pay anything.6 So, technically, we can call anyone who avoids or evades tax a ‘philatelist’, a lover of exemption from tax. Perhaps the Left should use this in their campaign to get the rich to ‘pay’ for government spending:

Down with the philatelists! Stop them stashing our money in tax havens!

Postage stamps were issued alongside revenue stamps until the Customs and Inland Revenue Act of 1881 when the two types were combined and a new stamp was issued — the Penny Lilac — bearing the words ‘Postage and Inland Revenue’. From that point forward you could indeed pay tax with postage stamps.

The words ‘postage’ and ‘revenue’ were included on all British definitive stamps, like the two at the top of this article, right up until 1967 when both words were dropped. By the way, you may need to adjust your initial interpretation of the ‘Tax Payers’ caption I added to those two stamps.

I am cancelled when I am used to pay tax or for state services

Cancelled half-penny stamp on a postcard United Kingdom, 1903

Cancelled half-penny stamp, Lancaster 1903

When a stamp goes through the postal system or is used for revenue purposes it has to be cancelled to prevent it from being reused. In the case of postal use it is partially obliterated with a postmark and for revenue use it is often done with pen and ink — a signature, for example.

It’s the same with government spending. Quite a few critics of MMT misunderstand the theory and think that it advocates abolishing taxes. If there were no tax then, just like uncancelled stamps, money issued into the economy by the state would be available for infinite reuse. Inflation would soon result if the state continued to spend. Tax ‘cancels’ the money issued by state. Tax prevents inflation.

The only difference between taxation and cancelling a stamp with a postmark is that the latter only allows for single use, whereas the former allows multiple uses, albeit with reduced purchasing power after each use. Tax only cancels a portion of the money spent in a taxable transaction, but over time and after multiple transactions the money is completely destroyed.

Tax destroys money which was previously created out of nothing by the state. The state doesn’t need the tax money in order to continue spending. Tax money is not re-spent. Anyone who thinks that it is should ask themselves why the government is not obliged to soak stamps off envelopes in order to keep the postal service running.

I am debt owed by the state

Bank of England one hundred pound note, 1938

State debt, GB 19387

An unused postage stamp clearly represents a liability of the stamp-issuing state because it is obliged to swap the stamp for postal services. Every liability must be matched by a corresponding asset and this is no less true for stamps. From the holder’s perspective a stamp is an asset, it is a ‘postal credit’.

It’s much the same with money. Money represents a liability of the currency-issuing state because the state is obliged to accept its own money in payment for taxes. In the same way that a stamp is postal credit, money is simply a tax credit.

The state should only ever accept its own money in payment for tax because this is what gives value to today’s apparently worthless ‘paper money’ (money not backed by gold). We are willing to accept ‘paper money’ in payment for goods and services because we will need it to pay tax.

State issued currency — state debt — can exist in multiple forms. For example:

  • paper cash as shown here;
  • entries in a computer system owned by the Bank of England;
  • entries in a computer system owned by the Treasury; or
  • entries in a computer system owned by National Savings and Investments (NS&I).

All four of them are a ‘bond’, a form of debt, issued by the state. The only real difference between them is their lifespan, how much interest they pay and the form of that interest.

State debt in the form of cash is effectively a zero-interest, perpetual bearer bond. It’s a bond which pays no interest, which never expires and which belongs to the ‘bearer’ — whoever is currently holding it in their wallet.

Currency registered on the Bank of England system is perpetual and pays a small bit of interest. It is usually registered there by a commercial bank on behalf of its customers (individuals cannot have accounts at the Bank of England). This means that a positive balance on your bank account isn’t really ‘money’ in the sense of it being state debt. It is a debt owed to you by your bank which is matched by an equal debt owed to your bank by the Bank of England. By the way, if anyone starts talking about the Bank of England being ‘independent’ you should stop listening to them. The Bank of England is a wholly owned subsidiary of the Treasury.

Currency registered on the Treasury system is slightly different. These are Treasury bonds or ‘gilts’. They pay a bit more interest and expire after a period ranging from a few months to a few decades. When a Treasury bond expires it is converted into an equivalent amount of debt held at the Bank of England or is simply rolled over into another Treasury bond. The process of ‘repaying the debt’ represented by Treasury bonds requires nothing more than swapping a few entries between computer systems — tax money is not required and it is never a ‘burden’ on future generations.

An example of currency registered on the NS&I system are Premium Bonds. These are perpetual, registered directly in an individual’s name and pay a strange form of interest called ‘winnings’.

All modern money is, and can only ever be, debt. Anyone who campaigns for ‘debt-free’ money really doesn’t know what they are talking about and needs to have a chat with an accountant about how double-entry bookkeeping works.

The state will pay interest to the people who have collected me

Post Office Savings bank card, GB circa 1925

Post Office Savings, GB circa 19258

To the best of my knowledge, the state has never made periodic payments to anyone as a reward for the contents of their stamp albums. But the state did once reward a different form of stamp collecting: deposits in Post Office Savings Banks. As you can see here, this was a particularly good method of encouraging children to save. Get them saving when they are young and with any luck the habit will stick.

Unfortunately, the concept of saving causes no end of confusion. It’s clearly seen as a good thing for the individual, but as Keynes pointed out in 1931, it’s not necessarily good for society:

Whenever you save five shillings, you put a man out of work for a day.9

If savings lead to unemployment, why does the state allow us to put our money into savings? Remember, ultimately, all saving is with the state, whether it’s cash in your wallet or the Treasury bonds which pension companies are obliged by regulation to buy. Surely the state should stop people from saving, shouldn’t it?

Well, the MMT view is that the state probably shouldn’t pay interest on savings, whether it’s Bank of England reserves or Treasury bonds. After all, it is really just welfare for the rich — because it is they who are most able to save — and it would be better for their money to be used productively.

However, there is one reason why the state might want us to save and that’s because savings are really a form of taxation. I know that sounds crazy, but bear with me; it does make sense.

When people think of tax they usually think of it in terms of coercion. Tax is something the government forces us to pay and prison awaits those that don’t pay. Tax certainly is coercive, but it is a necessary mechanism for removing money from the system so that the government can continue spending without causing inflation. Savings have exactly the same effect, but without the coercion. Savings also remove money from the system and allow the government to continue spending without causing inflation.

The only difference between tax and savings is that tax is compulsory and permanent (no choice, you never get the money back), whereas savings are discretionary and temporary (your choice, you always get the money back).

So, there will be occasions when the state encourages us to save because it increases the amount it can spend into the economy without risking inflation and without having to raise tax rates. The more the state can spend, the more it can direct the use of real resources. The more it can move real resources around, the more it can further the public purpose. And in doing so, the state can always employ the ‘man’ that you put out of work.

There is one a good example of the state actively encouraging savings as a form of taxation: War Bonds. During the world wars the state needed to withdraw money from the economy because it was spending on a massive scale, directing all the country’s resources for a single purpose. It could have done it by increasing taxes, but that would have meant taking money away and we are psychologically indisposed to that. It would have engendered feelings of defeat. Instead, the state played on feelings of patriotism and encouraged people to help with the war effort by ‘lending’ to the state. As compensation for voluntarily and temporarily removing money from the system the state paid a little bit of interest.

And guess what? In both world wars the UK government issued special War Bonds stamps for people to save.10

Foreigners accept me in return for real resources

USSR stamps, 1966

Unprinting money, Russia 1966

Many governments have taken advantage of the popularity of philately as a hobby and have issued new stamp designs solely for the purpose of sale to collectors. This is particularly true for countries that have a desire (and indeed a need) to acquire foreign currencies and was very much the case for the countries of eastern Europe prior to the ‘collapse of communism’ and before we all abandoned the gold standard.

In the 1960s, for example, large quantities of stamps were printed for export to dealers based in those countries which had ‘hard’ currencies. The stamps were heavily discounted below their face value (remember: stamps cost virtually nothing to create) and this provided the dealers with an opportunity for large profits. The collectors were duped into thinking that the high face values meant that they were getting a bargain.11

There was one little problem: stamps are currency. The stamp issuing countries were printing money and selling it abroad at a discount. On the face of it, that wasn’t a problem because the stamps couldn’t be ‘spent’ abroad. However, if those stamps made their way back into the issuing country they could be spent and had the potential to lower the perceived value of officially issued stamps. Why buy stamps from the post office when you can get them at half price on the grey market?12 The purchasing power of the domestic currency (in the form of stamps) would be diminished. In other words, there would be inflation.

The solution was to cancel the stamps before they were exported. Whole sheets would be hand postmarked in a process known as Cancelled to Order (CTO). In most cases the CTO postmarks would be positioned on each stamp in a manner most pleasing to collectors — a quadrant across a corner is best. You can usually tell a CTO stamp by its improbably perfect postmark. That and the fact that the gum is still on the back because it has never been through the postal system.

In summary, people in one country were depriving themselves of real resources (because they had less money to spend) in return for worthless bits of paper. People in the other country were swapping bits of worthless paper for real resources (which they could buy from other countries with the ‘hard’ currency they were earning).

Which is not unlike how international trade has worked ever since we came off the gold standard. The UK is a net importer from China and the Chinese are happy to collect our currency (which costs us nothing to create) in return for the real resources they send by the ship load. However, there is one major difference when compared to CTO stamps: we don’t cancel the currency before giving it to the Chinese. This means the Chinese can spend the money here at some point in the future and critics of MMT identify this as a big problem. It isn’t. As long as the UK has the ability to impose capital controls then we can always ensure that the money is spent in a way that is advantageous to both the UK and China.

The state issues more of me than gets cancelled

Postage stamp album, circa 1890

‘The Deficit and The Debt’, circa 189013

There would be a shortage of stamps if, in any given period, the state only issued as many stamps as had been cancelled by being passed through the postal system. That’s because some unused stamps end up in stamp albums and never get cancelled.

Let’s look at what would happen if the state stuck to some bonkers rule which said that it must only issue as many stamps as it cancels.

Suppose the philatelists want to collect uncancelled stamps amounting to 5% of the stamps issued in any given period. Then in the next period the state is only able to issue 95% of the stamps required to keep the system going. And in the next period the artificial limit is reduced by another 5% and so on. People soon find that they are unable to send letters because the state is not allowed to print enough stamps. Even although the state has the capacity, it is prevented from providing essential services because of a silly rule.

People end up queuing for miles outside post offices, hoping to get their hands on a few precious stamps. State employed postal workers are laid off. Mail order companies go bust. The country goes into recession as the effects of the redundancies ripple through the economy. There are stamp riots.

The private sector, sensing an opportunity to make a quick quid, steps in to provide a bastardised version of the postal service. Some of the former postal workers are taken on by the new providers as ‘self-employed’ contractors — but at considerably lower wages. The public are offered a confusing array of packages, plans and deals — up to 40 letters, 2 small parcels and 1 recorded delivery for only £75 per month on a 36-month contract. The government believes it is powerless to do anything about the crisis and merely urges people to switch providers. Competition between the new companies drives up prices.

The right-wing press are relentless in their support for the new model. The liberal press eventually falls into line too. Over time, the public forgets what it was like when the state provided essential services or, more accurately, when the state was allowed to issue as many stamps as were needed. There is a paradigm shift and the public begin to see the mess as the natural order of things.

The public’s acquiescence is partly down to a new focus on the individual. When the time is right, the big postal corporations use this individualism to blast away the bedrock which has supported postal services for 180 years — they abandon the idea of the Universal Post. Not only are postage rates now calculated by distance, but also by remoteness. Heaven help those who live in Cornwall or Caithness.

Eventually, the idea of pre-paying for delivery with a stamp is abandoned too and we go back to recipients having to pay to get their letters. The public now believes that it is only common sense for someone who ‘chooses’ to live at Dunnet Head to pay dearly to have their mail delivered. Solidarity finally departs these isles.

You probably see where this is going, so I’ll stop there.

Matching stamp issue to stamp cancellations is madness and nobody could possibly support the idea. But then many people can’t see that this is exactly how they want the country to be run. These are the people who invent a scary name for the difference between the amount of money the state issues in a year and the amount that is cancelled by tax: they call it ‘the deficit’. And they claim it has to be eliminated at all costs. Even the Labour Party is committed to getting rid of ‘the deficit’ within five years of taking office.14

These people are unable to grasp that ‘the deficit’ is no more scary than adding a few more stamps to our stamp albums each year. And the thing they call ‘the debt’ is just the sum total of all the stamps in all our stamp albums. It’s just our savings and it’s nothing to worry about.

My greatest fear is hyperinflation

Stamps from Germany 1923, Hungary 1946

Hyperinflation, Germany 1923, Hungary 1946

Stamps don’t cope at all well with hyperinflation. They either have to suffer being overprinted or have a very short lifespan. The examples here show what happened in Weimar Germany in 1923 (overprinted due to 1,000,000% inflation) and in Hungary in 1946 (issued 15 July, withdrawn 31 July).

The Hungarian stamp has a face value of 40,000 adópengő. The adópengő was introduced at the beginning of 1946 purely as an accounting unit and was used alongside the pengő, which was the real currency. Adó in Hungarian means ‘tax’, so the adópengő was ‘tax money’. It was introduced so that the government didn’t have to bother with an excessive amount of zeroes in its accounting procedures, particularly in relation to tax. They set the amount of tax due in terms of the adópengő and you paid in pengős at whatever the going rate was that day.

Eventually it all became too cumbersome and the adópengő was adopted as the currency. This must be the only time that the true nature of money — that it is a tax credit — has been reflected in the currency’s name.


Well, that was a bit weird. Five thousand words explaining the descriptive components of Modern Monetary Theory through the medium of postage stamps. And I haven’t even begun to talk about the prescriptive elements (although I did make one oblique reference to the Job Guarantee).

It’s difficult writing something which covers so much because there’s a limit to how much text people are willing to read and I had to choose what to include and what to omit. Making those choices means that I am never going to please everyone.

For example, in the section on savings I had to choose one topic for discussion. I went with the ‘savings are voluntary taxation’ angle. Some proponents of MMT will say that I should have gone for the ‘bonds maintain interest rates’ line of reasoning. Some will say that I should have explained how the current arrangements mean that a fair chunk of our savings end up being used by pensions fund managers to buy their yachts. Instead I opted for a simple example — one that most people will understand, one that will sow a seed.

If nothing else, this piece demonstrates how MMT leads us to examine apparently unrelated bits of the world in ways previously unthought. As Scott Ferguson says:

After Modern Monetary Theory, nothing looks the same: not political economy; not everyday caretaking; not paintings, pop songs, or porn sites.15

Hopefully, the opposite is true — that by analysing the seemingly unconnected we will lead more people to an understanding of the theory.

It should also help with the problem of framing. When we talk about the theory in context we just end up reinforcing existing frames — internalised concepts, ideas and beliefs. Mention ‘tax’ and pre-existing neural pathways fire up in the listener’s brain, pathways that lead to a stored frame that says ‘tax pays for spending’. The frame is there because people have heard the assertion over and over their whole lives. And once that frame has been brought to the fore it is very difficult for the listener to consider an alternative.

Hence stamps. Create a parallel frame using a different terminology and there is a greater chance of disrupting the stored frame.

So, next time you are faced with someone who doesn’t understand deficits ask them to explain why the state prints more stamps than it cancels.


Some proponents of MMT will be bristling at the suggestion that postage stamps are currency. If you are one of them, I urge you to read on before passing judgement.


Image source: Postal Order Provisional Govt Ireland overprint 1922 [Public Domain], Wikimedia Commons


Postal orders still exist, but are now produced on demand in any value requested. They no longer need stamps to top them up.


Image source: Carnegie receipt from Wolverhampton Council [Public Domain], Wikimedia Commons


No, I am not saying that the American colonies should have stayed under British rule.


See ‘philately‘, Wiktionary,philately‘, Oxford English Dictionaries and, weirdly, Cumberland Times/News, 12 June 1987.


Image source: 100 Pound White Note 1938 Peppiatt obverse [Public Domain], Wikimedia Commons


Image source: George V Post Office Savings Bank deposit slip [Public Domain], Wikimedia Commons


John Maynard Keynes, Essays in Persuasion, [1931] 1963, Norton & Co, p152


The imagery used on war savings stamps issued in the UK has very different connotations today. In the First World War it was a swastika; in the Second World War it was a burning cross.


What’s worse was that many of the collectors, the end consumers, were children and were targeted through advertisements in children’s comics. The issuing countries colluded in this exploitation by churning out brightly coloured designs based around themes which appealed to children — butterflies, space travel, horses, cars, cats, scouts, locomotives and so on. Relevance to the issuing country was unimportant.


See Grey market, Wikipedia


Image source: Another old album [CC BY-NC-SA 2.0], Flickr.


’Our manifesto is fully costed, with all current spending paid for out of taxation or redirected revenue streams. Our public services must rest on the foundation of sound finances. Labour will, therefore, set the target of eliminating the government’s deficit on day-to-day spending within five years.’ Balancing the Books, Labour Party Manifesto, 2017, The Labour Party.


See The Unheard-of Center: Critique after Modern Monetary Theory, Scott Ferguson, Arcade, Stanford University.





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A question of interest: Is UK household debt unsustainable?

Published by Anonymous (not verified) on Thu, 17/01/2019 - 8:00pm in

Lewis Kirkham and Stephen Burgess.

UK household debt is high relative to income. But is it “unsustainable”? Some commentators say “it is”; others say “there is no reason to worry”. To investigate, we build a simple model of the economic relationships between household debt, house prices and real interest rates which we believe must hold in the long run. In our model there is no single threshold beyond which debt suddenly becomes unsustainable, but we argue that household debt should be broadly sustainable under any rise in real interest rates of up to about 2 percentage points (pp) from current levels. We also show that falling real interest rates may have contributed around 20-25pp to the rise in the household debt-to-GDP ratio since the 1980s.

What constrains
households’ debt levels?

Household debt has more than doubled as a share of GDP over the past 40 years (Chart 1). Elevated household debt has been identified as a key risk by the IMF and ESRB, and evidence shows that high debt levels can force prolonged downturns in spending. But there may be perfectly good reasons why households have chosen to take on more debt. So how do we know when household debt has become “too high”?

One way to judge this is to look at individual borrowers and to see how likely they are to get into difficulty as their debt levels increase. Other authors have suggested fitting trends through aggregate data. Our own approach is grounded in macro time series analysis and exploits fundamental economic relationships between the three series in Chart 1. (Throughout the blog we use data to the end of 2017).

Chart 1: Household debt and housing wealth relative
to GDP, and real policy rates

Sources: ONS, Bank of England, Nationwide and Halifax.
We define the real policy rate to be Bank Rate minus the five-year moving average of the GDP deflator.

Chart 2: Household leverage and debt service ratios

Sources: ONS, Bank of England, Nationwide and Halifax.

As any prospective home-owner knows, there are usually two
constraints affecting what (s)he might be allowed to borrow. The first is the
size of the loan relative to the value of the property. The second is the
extent to which debt service payments are a burden on household incomes. We can
extend this idea to the UK as a whole and calculate two useful summary
measures: households’ “leverage” – their debt relative to total housing wealth;
and their debt service ratio (Chart 2).

We suspect that, when one of these two quantities is rising
sharply, that may indicate the economy is on an unsustainable path. For
example, in the late 1980s and mid-2000s, increases in the debt service burden
were followed by large falls in household spending. But although household debt
has been rising for most of the past 40 years, these two measures have moved
within a relatively narrow range since the 1980s, and recently have been

We capture the relationships in Chart 2 more formally in a model known as a cointegrated VAR, which we explain in more detail in a technical annex. Our model draws heavily on a previous paper for the US by Juselius and Drehmann and a second paper they co-authored with Borio and Disyatat.  Figure 1 provides a stylised illustration of the long-run relationships. Reading from the left, the first two arrows capture the leverage and debt service constraints. The third relationship, labelled “spread”, captures the way in which movements in Bank Rate pass through to the effective loan rates facing households, and hence their debt service costs.

Figure 1: Stylised illustration of the long run
relationships in our model

We estimate our model back to 1975. In the earlier part of
our sample, households’ leverage and debt service burdens were increasing. We
suspect that growing financial liberalisation over that period allowed
households to take on more debt at given levels of house prices and interest
rates. We model this explicitly in our long-run equations.

In the rest of our blog we show two applications of this
simple model. First, we calculate a “benchmark” level of household debt for the
UK, and find that debt today is below that benchmark. Second, we try to account
for why household debt increased in the past.

How does UK household
debt today compare with our benchmark?

We estimate a simple “benchmark” level for household debt to judge whether or not current levels are sustainable. This will depend on the level of the real interest rate, which we define to be Bank Rate less the five-year moving average of the GDP deflator. For a given real interest rate, the three relationships in Figure 1 (shown by the blue arrows) imply a unique benchmark level for household debt in the long run.

Chart 3 shows how that benchmark measure would have evolved over time as interest rates have changed (blue line). The orange line shows the actual data for the ratio of household debt to GDP, and the red line a measure of the gap between them. The gap would have been elevated going into the 1990-2 and 2008-9 recessions, because of elevated debt service burdens, and the model would have forecast an adjustment in the economy in order to unwind the imbalance. But today, the level of household debt is well below our benchmark, suggesting that debt is not at an unsustainable level.

Chart 3: Actual household debt and our benchmark level based on contemporaneous real interest rates

Sources: ONS, Bank of England and Bank calculations.

Chart 4: Sensitivity of our view on debt and house price sustainability to the level of real interest rates

Source: Bank calculations.

Now this partly reflects low real interest rates, which may not last for ever. Evidence suggests that “equilibrium” real rates have fallen over the past 30 years, with a number of possible causes. Here we define the equilibrium real rate to be the (unobserved) value to which the real policy rate will eventually converge. So real policy rates could rise towards that equilibrium over time, or the equilibrium itself could rise. If interest rates were to rise, the blue line in Chart 3 would fall towards the orange line and the red line would pick up.

Chart 4 shows what our model indicates about current levels of UK household debt and house prices as real interest rates vary. We do not presume to know a precise value of the equilibrium rate, but this chart illustrates why it is important. At a current real interest rate of less than -1% (blue dashed line), debt is below its benchmark level. If you thought that real rates would eventually settle at a long-run equilibrium of close to 1%, then current debt levels look broadly sustainable (orange dashed line), though house prices would then be higher than our benchmark. By way of comparison, in the late 1980s and mid-2000s, both household debt and house prices would have been well into the “red zone” at the real interest rates prevailing at the time. When debt is in the red zone it does not necessarily imply that a large adjustment will happen soon, but it does indicate an above-average level of vulnerability.

How can we account
for rises in household debt over the past?

These calculations can tell us a lot, even though they just use the long-run reduced form relationships in our model. We can do much more if we estimate a full dynamic model, and introduce structural shocks. As we show in the technical annex, our VAR has several nice features, though the fit of the model is less good in the early part of the sample where the data are most volatile. We therefore focus more on the broad conclusions, which we feel are robust, rather than the precise numerical results.

By “identifying” the VAR under certain assumptions, we can decompose the factors which may have driven up household debt over the past 40 years. We explain the details in our technical annex. We note that our identification scheme is theoretically contentious in some respects, so what follows is more speculative than the rest of our blog.

Chart 5 shows how
our identified VAR explains the rise in household debt over the past 40 years.
We find that most of the rise in household debt in the 1980s was due to
financial liberalisation (dark blue bars), which allowed households to take on
more debt for given interest rates and house prices.

But since 1990, the biggest contribution has come from shocks to “equilibrium real interest rates” (in the red bars). We find that a shock which ultimately lowers real policy rates by 1pp eventually raises the ratio of household debt to GDP by about 8pp. This could mean that falling interest rates since the 1980s have pushed up household debt by about 20-25pp relative to GDP.

Chart 5: Factors driving the rise in household debt relative to GDP

Sources: ONS, Bank of England, Nationwide, Halifax, IMF and Bank calculations.


We have shown in this post that a full analysis of debt sustainability needs to go beyond just headline debt numbers: it’s also important to think about the economic forces which constrain debt accumulation. Over the past 30 years, falling real interest rates have allowed UK households to take on more debt, and that larger stock of debt looks as though it should be sustainable, provided real rates do not rise by too much.

But since interest rates are unlikely to remain as low as they are now indefinitely, we can only assess debt sustainability properly by making a judgement about their future path, which is challenging. Plenty of researchers are now studying the causes of low real interest rates, and whether they might persist for a long time. We think our analysis reinforces why this is such an important question, and we hope it inspires future work.

Lewis Kirkham works in the Bank’s Monetary Projections and Outlook Division and Stephen Burgess works in the Bank’s Macrofinanical Risks Division.

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Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.