Filling (or digging?) a ‘black hole’

With the economy slipping into recession, (by all accounts maybe the longest ever), you’d think it would be generally accepted that at the very least, as even right-wing Tory Ian Duncan-Smith acknowledged on TV at the weekend, a bit of ‘Keynesian’ public spending is necessary, if only to stop things getting significantly worse.

But paving the way for Austerity Mark 2, Sunak and Hunt are desperate to persuade us that the ‘black hole’ in the nation’s finances needs filling. This is a political choice not an economic necessity. ‘Adventurist’ Trussonomics was originally blamed for everything, but she’s been and gone and her policies were quickly reversed. Now the more mainstream defenders of neo-liberal economics are setting out their stall. 

Disregarding everything Keynes ever said and likening the economy to a ‘household’, where budgets have to be balanced and government debt reduced; cuts have to be made and taxes increased.  Hunt and Sunak point to ‘external’ and ‘international’ pressures, the cost of financing the pandemic, yet ignore the economic consequences of Brexit.

Most of all (unlike Truss!) they ignore how the economy has flatlined for the last 10 years. A situation made significantly worse by Austerity Mark I (implemented by Cameron and Osborne) but also the consequence of having one of the lowest rates of investment in Western Europe. Meanwhile the Bank of England raises interest rates in response to an inflation that has very little to do with anything happening in the domestic economy.

There’s also another twist. It’s true that billions were spent on the Covid support measures, particularly the ‘furlough’, but in a departure from conventional Keynesianism which relied on borrowing from commercial markets, almost all of this debt was bought by the Bank of England.  If this is separated from commercial debt in accounting terms like it used to be – and as the chart below from Progressive Economy Forum makes clear, ‘reversing a decision to exclude the Bank of England’s debt from the government’s own debt figure, made in January 2022, completely wipes out the projected “fiscal hole”’

But the main point is the Bank and the Treasury are both parts of the state and the Bank has the power to continue to create any money that the Treasury needs, why should the public be expected to pay for it.  Indeed, why should anybody want to pay interest to borrow back money from somebody they’ve given it to in the first place?  This ridiculous argument was used by Osborne during Austerity 1 when UK state debt was likened to that of Greece (which doesn’t have its own currency).

The ‘Quantative Easing’ that was used by the ‘independent’ Bank of England to finance Covid should ( supplemented by the odd wealth tax or two!) continue to be used to subsidise energy bills, better still, to stop the NHS and public services falling apart.  Not to mention the Green New Deal.

But rather than doing this and rather than writing off the Covid debt, the Governor of the Bank of England is effectively ‘privatising the debt’ selling it back to the commercial markets, so that Hunt and Sunak can pay it off.

Rather than filling a black hole, Hunt and Sunak are digging a new one. Economics of the mad house!