Government Spending Comes First in a Sovereign Currency System

Published by Anonymous (not verified) on Mon, 01/06/2020 - 12:08am in



Modern Monetary Theory (MMT) makes clear that the spending of a currency-issuing government necessarily precedes tax payments and bond sales to non-government. This has important implications. It means that a currency-issuing government does not – and cannot – require revenue prior to spending. It means that it is government spending that makes possible the payment of taxes and non-government purchase of bonds, not the other way round. And it means that when a government requires itself to match deficits with bond sales to non-government, it does so voluntarily, and on terms that are entirely at its discretion. In short, the constraints on a currency-issuing government are not financial in nature. The constraints on the spending of a currency-issuing government are properly understood in terms of real resources and the capacity of the economy to meet demand for higher output at stable prices. A currency-issuing government always has the capacity to purchase whatever is for sale in the currency of issue (which, of course, is not the same thing as saying that government should always do this). Yet, the manner in which fiscal and monetary operations are usually conducted can create an appearance that things are somehow otherwise. So, why is it that government spending necessarily comes first? In view of its implications, this is an important matter to grasp.

It helps to begin with what MMT depicts as the ‘general’ case and then proceed to complications that arise in particular or ‘special’ cases. To be clear, whatever case is considered, it is always higher levels of government that authorize government spending and taxing measures. For example, in the US, spending measures are authorized by Congress and the President. Once the spending measures have been passed into law, it becomes the legal obligation of the government’s designated agent (or agents) to ensure that the measures are carried out. Higher levels of government may impose constraints on the way lower levels of government (including the government’s designated agents) conduct their operations. For our purposes, the most relevant lower levels of government are the fiscal authority (the “Treasury”) and the monetary authority (the “central bank”).

The general case can be regarded as a situation in which higher levels of government refrain from imposing technically unnecessary constraints on the way in which fiscal policy is conducted. Particular cases are then distinguished by the set of operational constraints that higher levels of government choose to impose on the Treasury and central bank beyond those that are technically necessary for the authorized spending actually to occur. When it comes to fiscal policy, three technically unnecessary operational constraints have often applied in practice:

A. The central bank is not allowed to incur an overdraft. Typically, the central bank must maintain a net financial balance of zero at all times.

B. The Treasury is not allowed to incur an overdraft. This means, in practice, that the Treasury must match fiscal deficits with bond issues.

C. The Treasury is forbidden from selling bonds directly to the central bank. The Treasury must instead offer bonds to the private sector.

In many countries, all these constraints have often been in force at the same time. In what follows, four cases are distinguished: the general case and three special cases. The general case involves no technically unnecessary operational constraints. The first special case applies A alone. The second special case applies both A and B. The third special case applies all of A, B and C.

As we will see, no matter what the institutional detail – whether the system is characterized by the general or a particular case – it always remains true that the spending of a currency-issuing government precedes tax payments and bond sales to non-government. This is not a matter of choice but of logical and technical necessity. The challenge is to understand why.

The general case

The general case is the simplest to describe. Once higher levels of government have authorized spending measures, the Treasury instructs the central bank to mark up the reserve accounts of banks at which spending recipients have accounts, and the bank accounts of spending recipients are marked up by the same amounts.

The newly created reserves are a form of ‘government money’ (currency being the other form). In adding new reserves, government spending creates government money.

The newly created reserves are a liability of government (specifically, the central bank) and an asset of non-government (specifically, the banks). The newly created bank deposits are a liability of one segment of non-government (the banks) and an asset of another segment of non-government (the spending recipients). Net financial assets – non-government financial assets minus non-government financial liabilities – rise by the amount of the government spending.

In aggregate, net financial assets are the sum of reserves, currency on issue and outstanding government bonds (though bonds are not needed in the general case). All other financial assets held by non-government have offsetting liabilities within the non-government sector, and so net to zero for non-government as a whole. In contrast, the extra reserves created by government spending add to the net financial assets held by non-government, because the corresponding liability is held in the government sector (reserves are a liability of the central bank).

In marking up reserve accounts as directed by the Treasury, the central bank creates the reserves ex nihilo (“out of nothing”). There is nothing unusual about this. All financial liabilities are – and can only be – created ex nihilo by their issuers. Banks create deposits ex nihilo when they lend. Individuals create liabilities ex nihilo when they issue personal IOUs. Ex nihilo is the only way a financial liability can ever be issued.

As just described, the central bank creates a form of government money simply by marking up reserve accounts. Government money is a liability of government to non-government, just as bank deposits (bank money) are a liability of banks to deposit holders, and just as a personal IOU is a liability of its issuer to the holder of the IOU. Like any issuer of an IOU, the government is obliged (i.e. liable) to accept back its IOUs as payment to it. The currency-issuing government commits to accepting its own IOUs back again in payment of taxes, fees, fines and other charges it has imposed.

Since taxes only settle in government money, government money must be created before taxes can be paid. Government spending creates the money that is required for tax settlement.

Payments to government reverse the effects of government spending. Whereas government spending creates government money, tax payments destroy it. For example, a taxpayer with an account at a bank can instruct the bank to mark down the account. The bank, in turn, will instruct the central bank to mark down a reserve account. Reserves are eliminated from the system as the ultimate result of taxation. Or if the taxpayer has an account at a building society, the taxpayer will instruct the building society to mark down the account, the building society will instruct the bank at which it holds an account to mark down an account, and the bank will instruct the central bank to mark down a reserve account. Again, reserves are eliminated from the system. In rare instances, a taxpayer might pay with currency rather than going through the banking system. But, in all cases, the tax payment will ultimately result in a deletion of government money from the economy (either reserves or currency).

Whenever the government spends more into the economy than it taxes out of the economy, the government’s net financial liabilities rise and the net financial assets of non-government rise by the same amount. This is always true, irrespective of the operational methods adopted by the Treasury and central bank. The only difference, under an alternative institutional arrangement, will be in how the net financial assets (government liabilities) are composed. In the general case, it is the central bank’s net financial liabilities that are affected. This is clear because, in issuing reserves, the central bank incurs a new liability without acquiring a new asset or eliminating an existing liability. In contrast, the Treasury’s financial balance, if it makes sense to speak of the Treasury’s financial balance in the general case, is unaffected. The Treasury, in the general case, is not directly engaging in financial operations. It simply directs the central bank to carry out the various spending measures that have been authorized by higher levels of government.

Needless to say, the central bank’s net financial balance holds no implications for its financial capacity to carry out the instructions delivered to it by the Treasury. Since reserves are created ex nihilo, the financial capacity of the central bank to issue new liabilities is unaffected by the extent to which it has issued such liabilities in the past.

What matters in terms of the economics – and what will continue to matter, no matter what set of operational constraints are entertained – are the substantive effects of the government’s policy measures. Relevant economic issues include the impact of government policy on the total level of spending, considered in relation to the supply capacity of the economy to meet demand at stable prices, along with the distributional and compositional impacts of policy. In contrast, the financial capacity of a currency-issuing government, being unlimited, is never a valid consideration.

Special case 1 – central bank prohibited from incurring an overdraft

For whatever reason, higher levels of government might require the central bank to maintain a zero net financial balance at all times. Under this operational constraint, it is no longer permissible for the central bank to alter the level of reserves in the system without at the same time engaging in offsetting operations to neutralize the net effect on its balance sheet. An offsetting operation might be for the central bank to require an asset in exchange for newly issued reserves so that its liabilities and assets change by the same amount. Or, alternatively, an offsetting operation might entail the central bank reducing one of its other liabilities, to negate the impact on its net financial position of the new reserve issue.

One way to handle the situation is to define into existence a liability of the central bank to some other part of government. That way, whenever the central bank issues reserves without requiring something from non-government in return (as occurs when the government spends), it can offset the effect on its own balance sheet by reducing its liability to this other part of government.

The establishment of a ‘Treasury account’ fulfills this purpose. The Treasury account, as the name suggests, serves as the Treasury’s account at the central bank. The balance on the Treasury account is a liability of the central bank and an asset of the Treasury. The central bank is now liable to the Treasury to the extent that there is a balance on the Treasury account. Of course, for government as a whole, the Treasury account is both an asset and a liability, and so sums to zero. It is simply an internal government accounting arrangement that has no effect on non-government. It is a way of recording – and keeping track of – government spending and taxing activities. But for the central bank specifically, the Treasury account is a liability. So, when the central bank issues new reserves as part of the government’s spending operations (which, viewed in isolation, adds to the central bank’s liabilities), the central bank can now offset the effect on its net financial position by marking down the Treasury account (which, viewed in isolation, reduces the central bank’s liabilities).

The introduction of the Treasury account does nothing to alter the economic effects of government spending. The economic effects, as always, will be in the government spending itself, including impacts on demand – both direct and indirect – and the utilization of real resources.

The introduction of the Treasury account also does nothing to alter the financial effects of government spending so far as non-government is concerned. As always, government spending will add net financial assets. Or, to say the same thing in a different way, the net financial liabilities of government will increase by the amount of the spending. All that changes is the entity within government that bears the change in net financial position. In the general case, it is the central bank’s net position that changes: reserves are issued without any operation to offset the net impact on the central bank’s balance sheet. In special case 1, it is the Treasury’s net position that changes: the reserve issue is offset, on the central bank’s balance sheet, by a debiting of the Treasury account.

The balance on the Treasury account is a wash for government as a whole, and equally irrelevant to non-government. The account’s existence, however, does enable the central bank and Treasury to carry out the spending measures passed into law by higher levels of government without violating the constraint (of special case 1) that forbids the central bank from incurring an overdraft. In effect, the Treasury incurs overdrafts when necessary so that the central bank need not do so.

Under the constraints of special case 1, government spending is accompanied by two basic steps. First, the Treasury instructs the central bank to mark down the Treasury account by the amount of the authorized spending and to mark up the reserve accounts of the banks at which spending recipients have accounts. Second, the central bank duly marks up reserve accounts, as it has been instructed to do, and directs the banks to credit the accounts of spending recipients.

Tax payments, as always, simply undo the effects of government spending. In special case 1, when reserves are deleted in final settlement of taxes, the central bank marks up the Treasury account. The central bank’s overall position is unaffected (reserve accounts are marked down and the Treasury account is marked up). The Treasury has a higher balance in its account at the central bank.

The higher balance on the Treasury account is of no consequence to non-government. The Treasury account is a liability of the central bank, not a liability of non-government. What is of consequence to non-government is the reduction in net financial assets that results from taxation. The reduction in net financial assets is reflected at the aggregate level in the depletion of reserves held within the banking system.

The fact that the balance on the Treasury account is not a liability of government, but merely a liability of one arm of government to another, is significant. It means that the balance on the Treasury account is not government money. Money is always a liability of its issuer. This is as true of bank money (bank deposits) and personal IOUs as it is of government money. Since the Treasury account is not a liability of government, but merely an intragovernmental accounting arrangement that nets to zero within the government sector, the balance in the Treasury account cannot be government money. Since only government money can extinguish tax obligations, it is government money (in practice, reserves) that must be spent into existence when the government spends. Otherwise, the financial obligations imposed by government could never be met. For this reason, the balance recorded on the Treasury account is not what the government spends when it spends. A currency-issuing government spends in its own money, which it creates ex nihilo every time it spends, through the marking up of reserve accounts.

Whereas the balance on the Treasury account nets to zero for the government sector as a whole – and so cannot possibly constitute government money – the same is not true of reserves. Reserves are a liability of government to non-government. This is clear because the accounting offset for reserves is in the non-government sector. Reserves, unlike the balance on the Treasury account, are a liability of government and an asset of non-government. For the very reason that reserves are a liability of government, they can serve as a form of government money.

The point is this. The spending of a currency-issuing government necessarily entails the creation of government money. If this were not the case, non-government’s financial obligations to government – which only settle in government money – could never be extinguished. Even government lending is insufficient for the purpose, because a loan from government to non-government to enable a tax to be paid would simply replace a tax liability with a loan liability. The liability created by the imposition of the tax cannot be eradicated until government actually spends its money into existence. And when it spends, a currency-issuing government cannot spend out of a pre-existing fund of government money. No such pre-existing fund exists. Just as it is logically impossible for the balance on the Treasury account to serve as government money, it is likewise impossible for any other intragovernmental accounting arrangement to serve as government money. The money that is needed to extinguish the financial obligations imposed by a currency-issuing government can only come from government spending.

Therefore, whether the government spends by marking up reserve accounts and directing banks appropriately (general case) or spends by marking up reserve accounts, marking down the Treasury account and directing banks appropriately (special case 1), the substance of government spending and any economic impacts are the same.

Special case 2 – Treasury must match government deficits with bond sales

When government spends more than it taxes on a more or less ongoing basis – which will occur if, as is typical of most nations, non-government opts to spend less than its income – the government’s net financial liabilities will rise over time in lockstep with the rise in net financial assets accumulated by non-government. This is simply a matter of accounting. The situation creates no financial difficulty for a currency-issuing government, since such a government is the source of the currency in which non-government is accumulating financial assets. But, as has been observed, the composition of government liabilities will differ, depending on the operational approach the Treasury and central bank are permitted to adopt. In the general case, ongoing government deficits translate into central bank overdrafts. The central bank operates, in these circumstances, with a negative net financial position. In special case 1, higher levels of government deem it inappropriate for the central bank to incur an overdraft. The way around this, under the constraints of special case 1, is for the negative net financial position to be shifted to the Treasury. In special case 1, ongoing government deficits entail the Treasury operating with a negative balance on the Treasury account. Now, in special case 2, higher levels of government – for whatever reason – decide to forbid overdrafts on the Treasury account as well.

This additional restriction on fiscal operations means that the Treasury and central bank must arrive at some other way of ensuring – as is their legal obligation – that the spending measures authorized by higher levels of government are in fact carried out. What is needed, to get around the imposed operational constraints, is some mechanism for enabling the government to spend in excess of taxes – if and when this is the decision made at higher levels of government – without either the central bank or Treasury incurring an overdraft.

A solution is to introduce another accounting construct, the ‘government bond’. Under special case 2, the Treasury, to avoid recording a negative balance on the Treasury account, can ‘borrow’ from the central bank by issuing bonds which will serve as an asset of the central bank and liability of the Treasury. Whenever the Treasury and central bank are required by law to spend in excess of the balance currently showing on the Treasury account, the Treasury will sell bonds to the central bank. In exchange, the central bank will pay for the bonds by marking up the Treasury account. Any interest that the Treasury might commit to paying on the bond will be returned to the Treasury, since the central bank is required by law to return its profits back to the Treasury.

The arrangement, of course, nets to zero for government as a whole. The central bank has a new asset (the bonds) that is exactly offset by the change in its liabilities (the additional balance on the Treasury account). The Treasury, by issuing a new liability (the bonds), has an offsetting asset (a higher balance on the Treasury account). In this way, both the Treasury and central bank comply with the operational constraints of special case 2. The central bank is able to maintain a zero net financial balance. The Treasury is able to avoid a negative balance on its account at the central bank.

Government spending, under the operational constraints of special case 2, is accompanied by three steps whenever the amount of spending exceeds the balance on the Treasury account. First, the Treasury sells new bonds to the central bank, the central bank paying for the bonds by marking up the Treasury account. Second, the Treasury instructs the central bank to mark down the Treasury account and mark up the reserve accounts of the banks at which spending recipients have accounts. Third, the central bank instructs the banks to credit the bank accounts of spending recipients.

In the general case, neither the Treasury account nor bonds are required. In special case 1, the Treasury account is required, but not bonds. In special case 2, operations involving both the Treasury account and bonds are required in the event that the government authorizes spending in excess of the balance on the Treasury account.

Needless to say, the changes mean nothing from the perspective of non-government. As always, the government spending adds net financial assets and results in new bank deposits for spending recipients. As in the general case and special case 1, the extra net financial assets register at the aggregate level as extra reserves, while the actual direct beneficiaries are the spending recipients. The banks’ additional assets (the reserves) are offset by additional bank liabilities (the deposits).

Special case 3 – Treasury not permitted to sell bonds to the central bank

In special case 3, higher levels of government forbid the Treasury from selling government bonds directly to the central bank. Three operational constraints are now in place: the central bank cannot incur an overdraft; the Treasury must maintain a nonnegative balance on the Treasury account; and the Treasury must offer its new bond issues to non-government rather than selling the bonds directly to the central bank.

Under this set of constraints, if the Treasury is legally obligated to spend more than the balance on its account at the central bank, it must sell bonds to non-government. Typically, this is done through an auction in which bidders offering to accept the lowest yields are allocated the bonds. Mostly, the bidding is done by officially designated primary dealers.

A question that arises is whether the constraints of special case 3 mean that bonds now precede government spending? Despite surface appearances, the answer is no. Consider the regime of special case 3 at its inception. The first Treasury auction – like all Treasury auctions – can only settle in reserves. The reserves needed for settlement of the first Treasury auction can only exist because of past government spending. Consider, also, the situation once some time has elapsed, such that the new regime is up and running and non-government has acquired bonds issued at various Treasury auctions. At this point, the central bank may decide to utilize bonds in its conduct of monetary policy, using open market operations to control the short-term interest rate. Whenever settlement of a Treasury auction threatens to dislodge the short-term interest rate from target, the central bank will need to advance reserves to non-government before the Treasury auction can proceed. In advancing reserves, the central bank will require already existing government bonds as collateral (as part of a repurchase agreement). But, of course, the government bonds that are required as collateral only exist because of past deficit spending. Thus, while superficially it may appear – under an interest-setting monetary policy regime – that it is actually government lending rather than government spending that comes first, this impression is misleading. The liquidity management operations of the central bank are predicated on a prior existence of government bonds, and these bonds only exist because in the past the government has spent reserves into existence that could then be used to settle the bond purchases.

Another question to consider is whether the operational constraints of special case 3 undermine the Treasury and central bank’s control over the terms on which government spending occurs? The answer here is also no. In relation to the Treasury auction, broadly speaking there are two possible scenarios. If it is clear that non-government is prepared to purchase bonds on terms consistent with the government’s policy objectives, the outcome of the Treasury auction will obviously be satisfactory to government. If, on the contrary, the cutoff bid is likely to exceed the rate of interest that government is prepared to pay, the central bank will simply purchase – or commit to purchasing – bonds in secondary markets. By doing so, the central bank exerts upward pressure on bond prices (and so downward pressure on bond yields). Bond dealers know that by purchasing bonds at the auction on somewhat more favorable terms than the central bank is offering in secondary markets, there is an opportunity to sell the bonds to the central bank for a capital gain. (Whether bond dealers should be presented with such gifts is a valid concern, but irrelevant to the point at hand, which is that the Treasury and central bank do not lose control of the terms on which bonds are issued. The gift to bond dealers is a manifestation of the decision by higher levels of government to impose the operational constraints of special case 3.)

Put simply, the central bank always has the capacity to dictate the terms on which government bonds are issued. For instance, if the government’s desired rate of interest on government bonds is 0.25 percent, the central bank can set the rate of interest on reserves to a level lower than this (e.g. zero percent) and, by committing to buy bonds in the secondary market at a certain price, signal to participants in the auction that any bonds acquired at the auction on slightly more favorable terms can subsequently be sold to the central bank for a capital gain. If government so determines, the Treasury auction will succeed, no problem, even when the bonds offer negative interest. In that event, the central bank would set a negative interest rate on reserves (e.g. -1 percent). This would motivate a ready market for newly issued government bonds that offered better than the negative interest rate applying to reserves. This would essentially entail a tax on reserves (and bonds if the bond yields were also forced negative). Purchasing bonds at a negative rate (e.g. -0.5 percent) would be a way to avoid the still more negative interest charge on reserves. Even if banks attempted to purchase currency from the central bank to avoid interest charges on reserves (assuming the charges exceeded the storage costs of holding currency), the central bank could impose comparable charges on the supply of currency.

So, under the operational constraints of special case 3, the Treasury and central bank ensure that any deficit spending authorized by higher levels of government can be carried out by including an additional couple of steps in their operations. Whereas, in special case 2, the central bank purchases bonds directly from Treasury, now the central bank acquires bonds, if and when necessary, indirectly via secondary markets. When government authorizes spending in excess of the balance on the Treasury account, the Treasury auctions off bonds to non-government. Meanwhile, the central bank exerts whatever pressure on the auction’s outcome it deems necessary through secondary market operations. As the issuer of reserves, the central bank has an unlimited capacity to buy up previously issued bonds.

The aggregate impact of government spending is the same in special case 3 as in all other cases: there is an increase in net financial assets and a corresponding increase in the government’s net financial liabilities. There is a change, though, in the composition of net financial assets (and the government’s net financial liabilities). Rather than the extra net financial assets being held as reserves, they are switched for bonds.

The economic effects of government net spending remain the same under the constraints of special case 3 if it is assumed that the interest rate applying to bonds is equivalent to the interest rate that would apply to reserves under the other cases. In particular, the various operational regimes are equivalent in terms of inflation risk. Purchasing a bond in no way prevents spending. Any bondholder wishing to spend need only sell the bond to someone else or use the bond as high-quality collateral to obtain a bank loan. In any event, the decision to save (which is simply the decision not to spend) is prior to the decision over how to allocate savings. If there were no bond issue, the would-be bond purchaser, in all likelihood, would simply look for a different saving vehicle. Nor does simply leaving reserves in the system – as in the general case and special cases 1 and 2 – in any way encourage spending. So long as reserves exist, they never leave the banking system. Reserves are used for transactions between banks and for transactions between banks and the central bank. Reserves are never – and can never be – lent out to the non-bank public. (Strictly speaking, if the interest rate applying to bonds in special case 3 happened to be more attractive than the rate applying to reserves in the other cases, then the practice of matching fiscal deficits with bond sales would, if anything, be more expansionary than other practices, not less, as frequently supposed, because of the possibility that more consumption will be induced out of the interest income accruing to bondholders.)


Four cases have been considered. In the general case, higher levels of government do not impose any technically unnecessary constraints on Treasury and central bank operations. In the remaining special cases, various technically unnecessary constraints are imposed. These turn out to be much ado about nothing, merely altering the workaround that the Treasury and central bank must adopt to carry out the spending and taxing measures authorized by higher levels of government.

To recap:

In the general case, the Treasury and central bank are unencumbered by technically unnecessary constraints. The spending authorized by higher levels of government is conducted simply by marking up reserve accounts and bank accounts. The effect is to add net financial assets, in the form of reserves. The extra net financial assets are a liability of government which in the general case is borne by the central bank.

In special case 1, the central bank is prohibited from incurring an overdraft. To get around this, a Treasury account is defined into existence as an asset of the Treasury and liability of the central bank. When spending occurs, the central bank marks up reserve accounts as always but also marks down the Treasury account to neutralize the impacts on its own balance sheet. The impact on net financial assets is the same as in the general case. All that changes is the composition of government liabilities. The net financial position of the Treasury, rather than the central bank, is now affected.

In special case 2, the Treasury is prohibited from incurring a negative balance on its account at the central bank. To get around this, the Treasury sells bonds to the central bank whenever government spending exceeds the existing balance on the Treasury account. The central bank pays for the bonds by crediting the Treasury account. As in special case 1, the Treasury rather than the central bank carries a negative net financial position, but now the Treasury’s liabilities are in the form of bonds rather than a negative account at the central bank.

In special case 3, the Treasury is forbidden from selling bonds directly to the central bank. The workaround, in this case, is for the central bank to acquire bonds indirectly through secondary market operations.

No matter how higher levels of government circumscribe the operations of the Treasury and central bank, it always remains true that the spending of a currency-issuing government precedes both tax payments and bond sales to non-government. Since taxes and non-government bond purchases only settle in government money, government money must be created before non-government can pay taxes or acquire government bonds. This is true even when the Treasury is required to sell bonds to non-government. The reserves needed for settlement of Treasury auctions, and any bonds required by the central bank as collateral when advancing reserves to non-government to ensure smooth functioning of the monetary system throughout the auction process, only exist because of past net spending by the currency-issuing government.


Microfoundations — neither law nor true

Published by Anonymous (not verified) on Sun, 31/05/2020 - 5:45pm in



Simon Wren-Lewis is one of many mainstream economists that staunchly defends the idea that having microfoundations for macroeconomics moves macroeconomics forward. A couple of years ago he wrote this: I think the two most important microfoundation led innovations in macro have been intertemporal consumption and rational expectations …  [T]he adoption of rational expectations was not […]

Mythbuster : The government has to balance its budget

Published by Anonymous (not verified) on Sun, 31/05/2020 - 4:33pm in




The government has to balance its budget.


Reply 1

A government has to deliver full employment at a living wage in a sustainable economy where all other essential services are also provided. If balancing the books means you give up one or more of those, which would it be, and why?

Reply 2

Running a deficit is about saying a government is building a better tomorrow. A deficit is a vote of confidence by the government in its vision of a better future for a country.

Reply 3

A government without a deficit is a government that’s run out of ideas. Get rid of it.

Reply 4

If you want the government to invest without borrowing, how are you going to do that? And why?

Reply 5

A government doesn’t have to run a deficit to invest in our future, but no one’s found a better way to do it.

Reply 6

Sure we can balance the government’s books. People can also be unemployed, starve, go without education and perish as a result of climate choice. Tell me which one you want.

Reply 7

Running a deficit is the surest way known to humankind to deliver full employment. If you want unemployment, please tell me why?

The explanation

The government has only got four economic tasks.

It has to make sure anyone who wants a job can have one.

It has to make sure they can live on the wage that they earn, and help if they cannot.

It has to make sure that the jobs people people have don’t harm our long term survival.

It has to make sure it can deliver all the support that’s required to deliver these objectives, from education and healthcare, to security, justice and defence, onwards.

And that’s it. There’s nothing that says it has to balance its books when achieving those goals.

Anyone who says otherwise has to explain which of these objectives they’ll give up to balance the books.

And they’ll have to explain why they want to do that.

And why that’s a good thing to do.

Because there is no virtue in the government balancing its books. There are three reasons for that.

First, a balanced budget is only the right sized budget if it delivers on the four economic tasks that the government has. If it does not it’s the wrong budget, even if it is balanced.

Second, government spending is the only real and sustainable way that we have to inject new money into the economy. And if there isn’t full employment; or if people can’t afford to live on their wages; and if we need to invest to go green; or if we need to supply other essential services; then in each of those cases, spending more, meaning that the government runs what’s called a budget deficit, means that the government has created the new money that’s needed that to deliver on its goals. Choosing a balanced budget as an alternative to delivering on its promises would suggest we’d got a pretty poor government in that case.

And third, balancing the books is all about now. It’s a technical exercise in book-keeping that’s about making sure everything is neat and tidy at this moment and hang the consequences for tomorrow. But tomorrow matters. And investing in the future is what we need to do. And all that running a government deficit means is that there is investment taking place to create value for today, tomorrow and time to come. A government that will invest has to borrow. If you want a government that has a vision, a plan, and a hope for better things for everyone you want to know it’s willing to put money behind it. Running a deficit is about saying a government is building a better tomorrow. Isn’t that what we want?


Published by Anonymous (not verified) on Sun, 31/05/2020 - 3:28am in




Bristol’s Elected Mayor Supports Schools That Refuse to Open

Published by Anonymous (not verified) on Sun, 31/05/2020 - 2:31am in

Boris Johnson is desperate to get the children back to school as quickly as possible if he can, and has decided that schools will reopen next week for children of specific ages. Parents and teachers are naturally worried about this, especially as the public schools won’t reopen until September. It seems to be once again one law for the plebs and another for the entitled rich. And once again, Boris is utterly complacent about the health and welfare of ordinary people in his desire to get the economy moving once again. So long as the elite don’t get it, he’s not worried.

Mike has published a series of pieces about this, including the very strict regulations governing the movement of young children when they return to the classroom. Mike has commented that this seems less like schooling and more like a prison. The Tories have tried to justify this by pointing to Denmark, which has already allowed its children to return to school. This is not the first time the Tories have embarked on a disastrous policy and tried to justify it as just following the Danes. And that makes me wonder what else they aren’t telling us about our friends across the North Sea. Way back in the 1990s the Tories laid off a vast number of civil servants. This, they declared, would cut bureaucracy and reinvigorate the economy. The Danes had done it, and so boosted theirs. But they didn’t follow the Danish policy absolutely. It had worked in Denmark, I was told by a Danish friend, because their government had given its departing state bureaucrats very handsome final payments of about £40,000 or more, and encouraged them to set up their own businesses. The Tories didn’t do any of this. They just laid people off. This also had a knock on effect on the economy. I’ve heard that for every civil service job, there’s 1 1/2 jobs supported by it in the wider economy, as those employed by the state purchase goods and services. Which meant that when our civil servants were kicked out, they took an awful lot of other people in private industry with them. Now that the Tories are telling us that the Danes are sending their children back to school, I do wonder what it is that the Danes are doing right, which our benighted government isn’t and won’t tell us about.

Mike has also put up a piece on his blog examining the question of parental responsibility if a child contracts the Coronavirus or the Kawasaki disease from school. It seems very clear – in British law parents are held accountable if they send their child to a hazardous environment and as a result they become ill or injured. This is regardless whether they have been urged or told to do so by the government. Parents therefore have a very strong case for refusing to allow their children to go to school if they are afraid for their safety.

Civil disobedience: would parents be irresponsible to send their children back to school now?

These concerns are also shared by Bristol’s elected mayor, Marvin Rees, and his cabinent. Like many Bristolians I received an email last Wednesday from Rees discussing what he and his team were doing about the coronavirus. Rees particularly mentioned schools and stated that he supported those schools that would remain closed. Rees said

Our city’s teachers and school staff have been working even harder than ever to keep schools open for children who are vulnerable and whose parents are key workers. Rather than accepting the 1 June date from the Government, Councillor Anna Keen, a local schoolteacher and our cabinet member for education, and our education team have met regularly with head teachers. The government made the schools opening a binary debate by not discussing their announcement with unions but I am afraid this has been consistent with their continuing failure to engage with cities on decisions, throughout the crisis. 

We have also met with school leaders representing teaching and children across Bristol throughout the pandemic, listening carefully to their views and concerns. It was very clear that they did not want a blanket approach across Bristol – and the teaching unions in Bristol support this too.

Like other councils, our position is clear:  schools should stay closed until they can begin to reopen safely. We are 100% backing teachers to work with parents and communities to make decisions on how their schools return, as Anna’s blog set out on Wednesday.

We also backed the unions’ calls for scientific advice on child transmission to be published. From the start of last week, all parents and carers have begun receiving a letter from the council, via schools, to remind them that they do not have to send their children in and that they should not expect their school to open on a particular date, in a particular way.

The Tories and their pet press and media have done their best to portray those teachers and unions objecting to schools reopening as selfish and unconcerned with the welfare of their pupils. This is the opposite of the truth. I realise that there are bad, sometimes terribly bad teachers, but most teachers are very concerned about the performance and wellbeing of their charges. But the Tories have always hated teachers and demonised them as part of their campaign to break the unions, privatise education and indoctrinate them with approved Tory values. This latest attack on teachers worried for the health of their students is just more of this same rubbish.

I’m not a great fan of Rees. He’s made some decisions for Bristol that have been very foolish, and has alienated many people in south Bristol with his refusal to accept residents’ plans for housing development in Hengrove Park in favour of his own scheme, which was rejected by the regulator. But this time Rees is right.

He and Bristol’s school heads and teacher are worried about schoolchildren’s health and protection against the Coronavirus. Boris isn’t, and shouldn’t be believed whatever comes out of his mouth.

The likelihood that the UK’s unemployment rate will exceed 30% is very high 

Published by Anonymous (not verified) on Sat, 30/05/2020 - 10:53pm in



The Institute for Government has published this chart of unemployment statistics for five countries this morning:

Note that the UK is lowest on the chart.

But that's only because around 25% of the UK's employees and self-employed people are on job protection schemes right now.

No one knows precisely how many jobs will be lost as a result of coronavirus in the UK: the proverbial has yet to hit the fan due to furlough. But Rishi Sunak is prematurely pulling the rug from under that scheme now. The truly torrid nature of our real likely unemployment rate is going to be revealed over the next few months and there is no reason to think we're not on a par with Ireland. The likelihood that our unemployment rate will exceed 30% is very high.

We need four things:

A government committed to full employment, come what may;

A government committed to the environment, come what may;

A government committed to a sustainable economy, come what may;

A government that truly appreciates that in a crisis like this wealth really is created by the state.

I am not convinced we have a  government that understands any of those issues. If it had ti would be talking about a Green New Deal now.

I am terrified that we are easing lockdown from coronavirus too early.

But I am as worried that what follows may well be worse.

And it need not be. All the funding to address these issues is available. But the government is not willing to address them.

If now isn’t the time for a Green New deal, why not?

Published by Anonymous (not verified) on Sat, 30/05/2020 - 10:12pm in



Larry Elliott wrote a piece on the Green New Deal in the Guardian on Thursday, when I missed it, so I will make up for that by posting it now. I seem to recall a conversation with him along the lines of this piece, not that long ago. We are co-authors of the Green New Deal. As he said:

Timing matters. Early 2020 saw an economic collapse the likes of which have not been seen in living memory. Growth has collapsed, unemployment has soared, poverty has increased.

Yet in different circumstances the past few months would have been dominated by calls for countries to do more to cut carbon emissions. As 2019 drew to an end, everybody from the managing director of the International Monetary Fund to the governor of the Bank of England was warning of the threat of global heating.

A year of floods, hurricanes and bush fires had made a strong case for action to make economies more sustainable. What was lacking was a profound shock that would make change possible. Now we’ve had one.

Precisely so. And as he out it:

Governments are creating, borrowing and spending money like never before in peacetime, in an attempt to mitigate the impact of the Covid-19 pandemic. They have the opportunity to reshape their economies in a way that would be consistent with preventing catastrophic increases in global temperatures.

But as he notes:

The world has been here before, though, and there is no guarantee that an opportunity proffered will be an opportunity taken. One was certainly missed at the back end of the 2000s, when the banks nearly went bust. Supporters of a Green New Deal (of whom I was one) said governments should avert the possibility of a second Great Depression by investing in decarbonisation of their economies and programmes that would put people back to work by making their homes energy-efficient.

But the world flunked it then :

There was only a brief flirtation with the idea of a Green New Deal, and the attraction of a return to business as usual proved more powerful. A 1% fall in emissions in 2009 was followed by a near 6% rise in 2010 as conventional stimulus packages kicked in. The banks were bailed out; governments took fright at the size of budget deficits and imposed austerity; nothing really changed.

Surely this time it has to be different?

Things look a bit different this time. The UK economy shrank by as much in March – when there was barely more than a week of lockdown – as it did in the whole of the 2008-9 recession. April’s number will be a lot worse, and recovery is going to be slow, even assuming there is no second wave of infections.

And the case for spending has been made:

What’s more, it has been a case of money is no object. The UK is on course to borrow £300bn this year at dirt cheap interest rates. The Bank of England is creating money through its quantitative easing programme. The argument that a Green New Deal is unaffordable is still knocking around, but is much less powerful than it was a decade ago. Ministers can decide whether they want to do more than respond to the immediate crisis and they certainly have the power to shape the recovery by making demands of the companies they are supporting, if they choose to use it.

But that’s not what they’re doing:

Governments make all the right noises about sustainability, yet many of them have used the crisis as an excuse for relaxing or suspending environmental regulations in order to stimulate activity of any sort.

As Larry notes, some in the market do appreciate that now is a time for change, but he adds:

But only up to a point. For some, lockdown has provided a glimpse of what a sustainable economy might look like. For others – those who face losing their jobs in carbon-intensive sectors – that sort of future doesn’t look so attractive.

He suspects that the opposition is more common than I would wish to think:

Politics reflects this tension. If parties of the left sometimes seem less enthusiastic about a GND than they might be, it is because a lot of the people who vote for them like the idea of cheap flights and rely on their old banger to pay visits to their mum. No question, any transition to a greener, more sustainable economy will have to overcome not just active opposition but passive resistance from those who would like life to return to its pre-Covid-19 crisis state.

But there is a solution:

One solution might be to trial in one of the UK’s big cities – Manchester or Glasgow, say – to see whether a GND creates jobs, cuts emissions and generates a new wave of profitable environmental innovation. Opponents of change don’t need to do anything; they simply need to wait for inertia to kick in. Those who want a different sort of economy need to start somewhere. And they should start with a simple question: if not now, when?


Rishi Sunak is not an economic miracle worker: he’s just a standard ideologue

Published by Anonymous (not verified) on Sat, 30/05/2020 - 10:03pm in



I posted this in Twitter last night having noticed praise being posted for Rishi Sunak. That praise contrasted his performance in this crisis to that of all his colleagues:

I believe Sunak is at least as much a disaster as his colleagues. Let’s ignore the obvious fact that he’s stood by Cummings. And that he’s defended schools reopening when it seems very likely that this will push the reinfection rate above 1, and so start exponential spread of the virus again.

Instead, let’s just note that he’s arguing that businesses can reopen when the risk of that also contributing to an exponential increase in the spread of the virus is very high.

And let’s also note that he’s announced that without telling many businesses when, or even if, they can reopen that they must now bear around 40% of the cost of their furloughed staff, when NIC and pension payments are taken into account, when as yet they have literally no means to do so. As a result he is guaranteeing that millions of people will now be made unemployed. In the process he is undermining the benefits from the entire furlough programme to date, which was meant to ensure staff would still be available when businesses did return to work.

Then let’s note why he’s done this. It’s because he’s worried about the cost to the Treasury.

And then let’s note what that cost is.

He thinks it will be a record so-called government deficit, of round £300bn.

But then note that of this sum £200bn has already been covered by quantitative easing: that is, the Bank of England injecting new money in to the economy to buy back the debt that the government has issued and so cancel it.

The suggestion that the Bank of England will keep doing quantitative easing is very strong: the Monetary Policy Committee’s members have given the strongest possible hints that this will happen.

In that case the nearest round number approximation to the cost of the supposed government deficit that this spending will create is zero.



Not a penny.

And the nearest, similar, round number approximation to the increase in the supposed government deficit that this spending will create is also zero.



Not a penny more.

That is because government borrowing that is subject to quantitative easing is cancelled. The debt in the form of government bonds, issued by the Treasury, is repurchased by the Bank of England. It does so using money it creates for the purpose.

That money that is used is not what is called (incorrectly) ‘taxpayer money’.

It’s money that the Bank of England creates for this purpose by lending it to a subsidiary that it has specially created  called Bank of England Asset Purchase Facility Fund Limited.

That subsidiary does, as all borrowers do to their bank, promise to repay the debt. And as a result the Bank of England credited its account with the funds to buy the government’s debt. And the Bank of England then has an asset in the form of the promise to pay that underpins the loan account.

But, all these transactions are actually in the government’s own books. So in practice they all net out to zero over all. But the money has been created to pay for the government’s spending, nonetheless.

In which case the reason for panicking over the cost of furlough is not real: there is no real increase in the deficit.

But there is going to be a massive increase in unemployment.

And all of that is because the government refuses to state its real borrowing figures net of QE.

And that’s all because they pretend that the debt subject to QE will sold back into markets one day, which would literally not now be possible: there’s just too much of it.

But because Sunak still wants to play this banker’s game - that the government is in debt and in hock to the markets when it’s not - millions of people will suffer.

That’s not competence. That is gross indifference to real people’s plight in pursuit of mistaken ideology. And that’s most certainly not a sign of economic competence.

Britain Boos Boris

Published by Anonymous (not verified) on Sat, 30/05/2020 - 6:49pm in

Last Thursday may well have been the last time Britain ‘claps for carers’. The woman who started it all, I believe, now wants it to end because she feels it’s been politicised. In her view, it’s no longer about applauding and showing appreciation for the tireless heroes of the NHS and care workers seeking to combat this terrible disease.

I can see her point. From the moment it started I wondered if it was also going to be a way Boris and his gang of murderers could bask in their reflected glory. Was it going to be a way Boris could subliminally manipulate the nation’s mood, so that as they clapped for the NHS, they were also clapping him and the measures his government put in place – grudgingly and belatedly? But still, our NHS and care workers deserved it, especially as so many have died, partly due to the government massively fumbling the supplies of PPE. It’s also been a good way to raise morale and bring people together by getting them out of their homes and onto the streets in collective act of celebration. All while maintaining a safe distance, of course.

But now a new collective ritual may be ready to take over from it. A ritual that has absolutely no government sponsorship and definitely does not reflect positively on Johnson and his pack. Last Tuesday, Brits across the country took part in the national ‘Boo for Boris’. Mike posted several of the videos of people booing our incompetent, malign and murderous prime minister across the country, from Canton in Cardiff to Saltaire. One woman even dressed in ancient Celtic costume as ‘Boodica’, to shout her defiance just as the ancient queen of the Iceni stuck it to the Romans. There’s a parallel with modern history there, as well. Boadicea’s rebellion was partly sparked off not just by Roman brutality against her, her sisters and her people, but from economic recession caused by rich Romans like Seneca withdrawing their money from Roman Britain. This is what happens when the rich don’t spread it around and the economy contracts: people get into their spiked chariots and start mowing down the government.

I didn’t take part because, like Mike, I was too shy. But Mike’s article and the piccies he posted of it can be found at:

Britain boos Boris! And about time too…

Sargon of Gasbag, the man who broke UKIP, posted a video denouncing the whole affair. He seemed to think it was like the three-minute hate in Orwell’s 1984, in which the whole nation screamed its hatred of the totalitarian regime’s archetypal state enemy. Like so many of his libertarian fulminations, it’s absolutely wrong. The three-minute hate in 1984 is the total opposite. It’s a consciously staged even by the regime to direct popular hatred away from itself. As such, it’s far more like the regular denunciations we had over the past four years of Jeremy Corbyn as a Communist, Trotskyite, Russian or Czech spy and anti-Semite from the Tory establishment and a complicit, mendacious press. The ‘Boo for Boris’ campaign, on the other hand, was an act of popular discontent and resistance against a government that insists on a stifling control of the media. If there is a a film parallel, it’s probably with broadcast news when people follow the lead of the angry and confused news anchorman by shouting out of their windows that they’re ‘mad as hell’. Though I hope it doesn’t end badly, as it did in that movie.

But as Boris continues to make himself massively unpopular through his support of the unrepentant Cummings, our clown prime minister may well have to suffer more boos to come.

Mythbuster: We can’t afford the interest on the national debt

Published by Anonymous (not verified) on Sat, 30/05/2020 - 4:43pm in




We can’t afford the interest on all the money the government it is borrowing. We'll never afford anything else if we borrow at this rate.

The replies

Reply 1

We can afford the interest on the national debt. The nominal interest rate is falling. The real, inflation adjusted, interest rate is close to zero. And as a proportion of our national income the cost has also been falling. It's simply not true that we can't afford the interest paid on the national debt.

Reply 2

Remember that about one-third of the national debt is now owned by the government, and it doesn’t pay interest on that because that would mean that the government would be paying itself. Of course we can afford the national debt when there’s no cost to a lot of it.

Reply 3

New government borrowing has been at negative rates of interest in recent weeks. That means people are paying the government to hold their money now. We can Most definitely afford that.

Reply 4

You do know that this money does not disappear into a black pit, don't you? Most of it is paid to people in the UK, supporting savers and pensioners in this country. Do you have a  problem with that?

The explanation

Interest paid on the UK national debt has, of course, varied over time. That reflects changing levels of debt and varying interest rates.

Since the 2008 global financial crisis one of the quite remarkable features of the economy of the UK, and of that of many other countries around the world, has been both the decline in interest rates (which is part of a very long-term trend) and the ability of government to now control those interest rates through both short term and long term monetary measures available to it, including quantitative easing. The result is that the average interest rate paid on UK national debt has been falling steadily.

So too has the cost of the interest on that debt ben falling as a part of GDP and of total government spending. Just 4p in every pound the government now spends goes on interest payments. And two-thirds of that goes to people in the UK.

In that case the idea that interest payments on the national debt will be a massive burden makes no sense at all.

Nor will it prevent us affording any other programmes that the government thinks it appropriate to pursue.

The UK national debt is wholly affordable, and given that much of the increase due to the coronavirus crisis will, in any event, be covered by quantitative easing on which no interest is paid, it is entirely affordable.

The data

The annual cost of interest to the UK government from 1974 (when the available time series from the Office for Budget Responsibility begins) to 2020 was as follows. The data is shown at original cost, as a percentage of total government spending for the year, as a percentage of GDP and of the outstanding national debt, with supporting data also being shown:

As is apparent, the cost of interest on the national debt rose over the period did increase:

However, as a proportion of GDP it fell:

And as a proportion of total government spending it also fell:

And that is, perhaps, unsurprising as the implicit interest rate paid on the outstanding debt also fell, quite considerably, over this period:

Most people do not now recall the enormous interest rates of the Thatcher years, and immediately thereafter. The rate paid on the national debt is now a nominal 2% on average, and the trend is still downwards.

Expressed as a cost per person in the UK, and in constant 2020 prices the trend is as follows:

The cost of debt peaked during the Thatcher and Major years and again, briefly in the years after the crisis of 2008, but is now falling steadily. And it has to be recalled that about two-thirds of the interest paid goes to UK savers. It is not, then, lost to the UK economy.

The cost of the interest on the national debt is, then,  no impediment to the government spending now.

Previous Mythbusters on this theme:

Mythbuster: We have to repay the national debt