An excellent article from the Guardian highlighting the issue we have discussed on this blog. Politicians on the right love to scare us. George Osborne, in his Mansion House speech cited "fears" over government solvency and sovereign debt crises. David Cameron has declared the fiscal deficit a "threat" to "our whole way of life," and "a clear and present danger to the British economy". This is nonsense.
The threat we face is ideologically driven cuts that risk causing a double-dip recession. http://www.guardian.co.uk/commentisfree/2010/jun/17/fiscal-deficit-threat
The fiscal deficit seems scary because it is debt. Cameron argues that within five years the national debt will rise to "some £22,000 for every man, woman and child in the country". This may be true, but what he doesn't tell us is that it is money the government owes to us - not money that we owe to anyone else. That's right: 80% of our government debt is owed to the British people.
What is called "national debt" is our own savings, looked at from the other side of the balance sheet. Given that most of us do not knowingly buy government debt, how do our savings end up as the fiscal deficit? We put our savings in banks and pensions funds. But they are just intermediaries: they invest our savings by buying bonds and other securities that pay interest. Some of these bonds will be from private sector companies that want to borrow for investment.
But when private companies do not want to invest as much as we, the people, want to save in a given year, then the only alternative is to invest the money in government bonds, i.e. public debt. The fiscal deficit is just the lending that we make to the government. The fiscal deficit is so high because we are demanding more bonds - that is, we want to save more - than the private sector is willing to invest.
Cameron's claim that "for every single pound you pay in tax, 10p would be spent on interest" is frankly dishonest: 8p of the 10p is cashback for us! If we, as a democracy, decide that we are not spending enough on schools and hospitals, we can simply have the government tax the equivalent of that interest back again.
This reveals the underlying reason why politicians on the right really want to reduce the deficit: expenditure cuts today imply tax cuts and smaller government in the long run. And once we see that the fiscal deficit is our saving with the government, it becomes obvious that Cameron and Osborne's claim that the deficit has us "living beyond our means" is nonsense.
Any politician who cares more about public services than tax cuts should be relaxed about a few years of fiscal deficits.
