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Why austerity can’t eliminate the deficit

osborne-the-grim-reaper-e1322746795195As Osborne has yet again pronounced, the Tory mantra repeated like a broken record is that spending cuts will continue throughout the next Parliament until the structural budget deficit is eliminated by 2019. Labour, to its shame, follows exactly the same line. Yet the ONS Quarterly National Accounts published by the government demonstrate that this objective is fantasy and on current policies will never happen. The reason for this is that the government deficit is only one component of the borrowing and lending by the 4 major sectors which takes place every year in the economy.

The other 3 are all the businesses operating in the UK, all the households or consumers, and the UK’s trade transactions with foreigners. All the borrowing and lending done by all these 4 sectors has to sum to zero, because all borrowing has to be matched in accounting terms by exactly equivalent lending. The ONS National Accounts figures show all too clearly the key problems in cutting the deficit and why on current policies they’re insuperable.

To finance the balance of payments deficit has to obtain finance from the rest of the world either by borrowing or by selling assets. This figure, which appears in the ONS table as lending to the UK, has been steadily rising from £11bn in 2008 to £67bn last year, and could well hit £80bn this year. Households which were big borrowers in 2008 then responded to the financial crash by deleveraging (paying off their debts) so that they too, like the foreigners, were sucking demand out of the economy on a large scale until last year they became modest borrowers again.

The corporate sector has accumulated enormous cash balances over the last few years – between £88bn and £110bn each year after the crash (from 2008-2011) – which then had to be lent to the rest of the economy and thus also reduced the level of aggregate demand. All of this leaves government borrowing as essentially the residual amount necessary to prevent the economy spiralling downwards as a result of the lack of demand.

The inevitable result is that the government deficit – the balancing item – stays as high as it was before and will almost certainly get higher. Thus it was £98bn in 2012, £96bn in 2013, and will probably reach nearly £105bn this year. Cutting government net expenditure will therefore not reduce the deficit. On the contrary, what will happen is that the borrowing and lending totals will still sum to zero, but at a lower level of GDP than before as the reductions in demand from government cuts in expenditure force the economy downwards.


  1. Bernie Evans says:

    Totally agree. Wrote this letter to Guardian about tax:
    Your editorial rightly states, “something like 90% of the current retrenchment is being effected by expenditure cuts”, and the “consequences of this imbalance” are now being felt more severely than ever, especially as real wages are declining, food banks increasing and voters` antipathy growing. (Straight-talking Ukip can duck inconvenient truths. Others don`t have the same luxury.13/10/14) Why then, do you assume that when the “imbalance” is corrected by the next government, there will be “rage…directed at whichever party is controlling the Treasury”? Is anyone not in the top few percent happy to see inequality spiralling out of control?
    The majority of voters would welcome a progressive income tax system which was actually aimed at making the well-off pay more, which increased taxes for those earning over £75K, and didn`t stop at 50% for the extremely wealthy. Another mistake made by this Tory-dominated coalition with its “low wage economy” nonsense is that with so many workers either on very low wages or resorting to self-employment, government tax receipts will inevitably fall; unless real efforts are made both to collect the hundreds of billions avoided and evaded every year, and to make the financial sector pay its fair share with a transaction tax, governments will continue to fail to balance the books, and provide the services expected in a modern, civilised society. Taxing the rich will not cause “the ire to carry Ukip to still giddier heights”, but it could well save Labour from electoral embarrassment!

  2. David Ellis says:

    You are absolutely right Michael austerity not only cannot eliminate the deficit it is making everything worse. If the problem is growth i.e. capitalsm is suffering from systemic over production then austerity can only make that condition worse. The capitalists are unable to sell even less of their overproduced tat to an increasingly impoverished consumer base making the problem of overproduction even worse feeding stagnation and economic collapse. But of course Keynesian stimulation cannot be a solution either because stimulating further production means simply producing more of what is already over produced resulting in the same effect as austerity. It seems that capitalism is snookered. We need neither Plan Austerity nor Plan Borrowing but Plan Consolidation. Plan A is a kind of consolidation: a bourgeois consolidation as they liquidate all assets to bail themselves out. We are living through the greatest redistribution of wealth from poor to rich since the beginning of capitalism with the enclosure of the commons and the Highland Clearances. The opposite is needed: a workers consolidation that results in a massive redistribution of wealth in the other direction. We need full-employment with each on a living wage, a People’s Bank with a monopoly of credit, workers democracy to replace the fat cats, socialisation of the means of production and distribution and a renegotiated socialist EU with full employment and a living wage in every member state.


    The way to mend this situation I think, would be to listen to Martin Wolf, Lord Adair Turner, and Positive money. They all now advocate Positive debt free money, helicopter money, Overt Monetary finance as they call it. Martin Wolf has recently given a lecture on this, here.

    This money could be used to create jobs, and repatriate industries now taken over by sweatshops in China and India. Many of these jobs could be created in the North, where empty houses lay unused.

    The exports created could help to lessen the trade deficit and balance of payments. In difficult times, why not just write off the government deficit?

    According to Michael Hudson and Steve Keen, the created money should also be used to help people clear private debt – give them sovereign money grants to pay off student loans and inflated mortgages. This would zero off debt as money is destroy when loans are paid. The banks would lose interest, but as they use tax havens, this could be a subtle way of collecting unpaid tax! Helping landlords as well with debt could enable government to introduce a rent cap.

    People would then have money to spend on domestic goods, and taxes would clear the government deficit.

  4. William Jones says:

    If I was say an entrepreneurial Middle Class Capitalist I would be one of the worst critics of Austerity that we’ve seen since 2010.

    All we have seen since then is that those in the lower income groups have borne the brunt of the policy whilst those in the top income groups have not only not seen any of the pain,they have seen their share of the cake massively increase.

    Of course this should indeed spell out a warning to the Capitalists.For it is those in the lower income groups that spend their money on goods and services.They must have a death wish!

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