Jack Mosse reverses the flawed understanding of the national debt that has permeated Conservative leadership competition and Tory economic policy for some years
To fund her tax and spending plans, Liz Truss has promised that she will extend the period by which we would have to pay off our COVID-19 debt – to which Rishi Sunak has responded that there is no “COVID” debt. This exchange between two seasoned politicians – one of whom will be our next prime minister – offers a chilling glimpse into the shaky foundations of what passes for economics in the year 21St Century Britain.
If Truss and Sunak can’t even agree on the basics of the economy we live in, what hope do the rest of us have?
When it comes to the economy, we are strangers living in a strange land. The dominant narrative over the past decade has been austerity. “We overspent in the 1990s and 2000s and now we have to tighten our belts; The government simply cannot afford to support those on disability benefits, the NHS, local councils or those struggling in a low-wage economy,” the narrative said. We were “all in it together,” went the Conservatives’ infamous slogan. And we all suffered to get government accounts back in the black.
Then came the pandemic, during which the government printed vast sums of money to pay people who couldn’t work while funding a mammoth response to a 100-year healthcare storm. So where did the money come from – and was it there all along?
This seems to be the fundamental question facing our policy makers at the moment. But the lack of economic literacy I’ve discovered in the five years I’ve spent researching how we as a society understand our economy offers very little assurance for those hoping for a quick and prosperous end to our current economic ones hope problems.
In researching my book, I spoke to hundreds of people, many of whom were involved in policy making, and learned about contemporary economic thinking in the UK. One figure from a poll by group Positive Money stood out: it claimed (based on a sample size of 50) that 85% of MPs don’t know where the money is coming from.
At first I found that number hard to believe, but the more people I spoke to about the economy, the more credible it became.
There is simply no public discourse or information that would educate people about this fundamental aspect of how our economy works. Discussions about government debt, government spending, banking reform and how to deal with inflation – the discussions that currently dominate politics – have very little connection to reality.
As for COVID debt, between April 2020 and July 2021 (holiday season) the Bank of England, a government body, bought 99.5% of the total new debt issued by the government to pay for the COVID support schemes. That money is now effectively, as Jacob Rees-Mogg put it, “owed to the government by the government.”
Yet this crucial fact is ignored in mainstream economic discourse.
Truss has claimed Britain can borrow long-term to service its COVID debt and Sunak has said there is no such thing as “COVID” debt – debt is debt and must be serviced. In fact, the debt to the Bank of England is nothing more than digital numbers that one branch of government will transmit to another branch of government at a later date.
The idea that the nation’s economy is comparable to a household budget — with a finite pot of money — is a myth I keep coming across in my research.
This is the notion – to which both Conservative contenders for the leadership alluded – that government can only spend what it borrows or collects through taxes. That, like a household, it must balance the books.
But does that also apply to a household with a money printing machine in the basement? no And the same does not apply to government spending. We can and do create vast amounts of money to deal with crises – money that we don’t have to pay back if we don’t want to.
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Back to reality
What does it mean to recognize this?
The first thing to note is that this does not mean that we can simply print money to solve our economic problems, especially now that inflation is in the double digits. But it means there is much more policy space for government spending in times of crisis.
We are entering a time of crisis. Inflation caused by rising global fuel costs will bankrupt millions of homes and businesses unless government acts to protect them. And trading means spending money; Money that Truss and Sunak unfortunately claim we don’t have.
Instead, they act as if their hands are tied, as if they have no choice but to crash the economy and create misery and unemployment to get inflation under control.
This will work – by bringing down inflation – but huge numbers of people will suffer and it will leave the UK on shaky ground when the inflationary spurt is over.
Instead, recognizing that the factors driving inflation (dramatic increases in global fuel and gas prices) are temporary and that there is money to be spent protecting the economy and investing allows for a far more positive vision.
In fact, World Bank data shows that most commodity and energy prices fell in July, including crude oil by 10%. Due to the dependence on gas imports, it will take some time for this to penetrate the main markets, especially in Europe and the UK. But over time, new supply lines will be established and prices will return to normal.
When that happens (the Bank of England projects it will happen next summer) we want to be able to thrive, make big green investments and get our education, healthcare and general living standards back on track or even above the level achieved in other comparable developed nations.
However, there is little chance of that happening when we find ourselves in the shambles of an economy devastated by policies designed to lower inflation by crushing the purchasing power of businesses and households – and, crucially, if the myth of the household budget is not dispelled.
Jack Mosse is the author of The Pound and the Fury: Why Anger and Confusion Reign in an Economy Paralyzed by Myth
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