I must admit that when I wrote yesterday’s post, I did not expect it to be that high.  I still stand by the general principle – when demand-led items improve, use them for the debt.  ‘Demand led’ meaning: caused by better than expected economic outcomes – better revenues, better AME caused by lower unemployment etc.

Another way of looking at it might be: do your structural adjustments to the deficit through DEL, and don’t frig around with them according to the cyclical changes in the budget position.  So no using hip operations to adjust macro demand.

But £21bn is an awful lot of money – enough to cut income tax by 4p according to Ed. And not all economic indicators are strong (Money yesterday looked weak to me; so too is bank lending according to David Smith).  IF the feared double-dip arose, and the government had done nothing with its new fiscal room, would it not regret it?  Or would such a ‘failure of discipline’ so early in the recovery cycle annoy the bond markets too much?

This is the sort of decision that makes Chancellor-ships.  Intriguing.

UPDATE: Note that the FT thinks the figure will not be as good as Ed seems to.   For reasons related to Tim’s concerns (see below)


29 thoughts on “What would YOU do with £21bn?

  1. One month’s worth of data is not a lot – there is often mean reversion, i.e. one good month is followed by one bad month as tax receipts are lumpy (perhaps people are being paid bonuses early to escape the 50% band, so that next month’s figures will be very much worse? perhaps it is random volatility?). And even if it is correct, it is a one off, whereas an income tax cut would be (de facto) permanent.

    So the answer is to do nothing in the short run, but politically that is a bad answer.

    1. Although I believe they uprated January’s figures as well – so they have huge headroom in March now. http://www.statistics.gov.uk/pdfdir/psf0310.pdf

      Obviously caution has much to recommend it. I would also be interested to know what the figures say about the underlying strength of the economy – do they reflect matters being better than expected? Or just higher nominal growth?

  2. A spare Trident system just in case? £500 of government bonds for every household? Or you could entirely remove council tax for about a year – that would be popular and presumably highly stimulative.

    On the other hand I suspect what will happen is a bit of spending in key areas, a few lower taxes, and otherwise deficit reduction. Which is probably more sensible.

    1. Or how about (wrongfooting the LibDems) a surprise stealing of clothes on the tax threshold idea?

      I must admit, it has been so long since the HMT had more than expected the year before, that this must be an unfamiliar position. Worth remembering that we are still borrowing a huge amount though ….

  3. is this sort of thing deliberate? I mean, would they have over estimated borrowing requirements in order to give themselves some good news now?

    1. Interesting idea – perhaps this being one year where such an overestimation could really matter.

      Did you read the FT analysis on the REPO 105 stuff at Lehmans? mentions similar shenanigans everywhere.

      I ought to have pointed out that the IFS had already estimated that borrowing would be #10bn lighter, so it has been coming.

  4. Virtually all mainstream economists -and that includes you – mischaracterise sovereign credit ie credit/money issued by a Treasury or Central Bank.

    Whether this takes the form of notes and coin (which as recently as 1960 still represented >30% of the money supply) or QE, this is a credit instrument, not debt. ie there is no obligation to repay on a specific date. That being so, it makes sense to consider it as what it actually is – a form of Sovereign Equity akin to a redeemable share.

    Strangely enough, and as I blogged on Labour List, the FT leader was suggesting only this Monday that instruments of Sovereign Equity might be a good idea.

    If you take this National Equity approach for Sovereign Credit, then it completely changes the calculus of the deficit, and moreover, does so in a way that allows us to look at national investment in a more realistic way in accounting terms.

    Underlying this is the point being made by Tomasson and Bezemer What is the Source of Profit and Interest? A classical condundrum reconsidered, and which I have been saying for years, that the credit =money which is tied up in productive assets through the legal claims of equity and secured debt is completely distinct both in its basis, and its economic effect, from the credit needed for the circulation of goods and services and the creation of productive assets.

    The former, being based upon location/land and property claims over other productive assets material and immaterial does not, and cannot, circulate. It is only the relatively small amount of credit based on goods and services and (particularly Labour) which actually DOES circulate. You can throw out the usual equations.

    In other words, the assumption conventionally used – which is that only Labour can be ‘productive’ – is completely ideological bollocks which is used because it justifies limiting taxation to income earned by Labour, and removing it from unearned rentier from privileged property rights over productive assets like Location/land and knowledge (IP) and so on.

  5. The requirement is to change expectations and that requires a political campaign.

    At present businesses and citizens ‘are certain’ that interest rates will rise in the near future and that demand will weaken.

    They are being told this by virtually every media outlet, by their politicians, by their advisers, by their customers, by their friends and neighbours.

    As the Bank reports, “The major UK lenders reported that demand for credit remained subdued.” The weaknesses in net lending to business, mortgages and consumer credit provide the evidence for those negative expectations.

    Our fears are our chains.

    We need some new certainties, some very different expectations – that interest rates will remain low and that there will be a period of inflation.

    More specifically a certainty that the rates and very large fees (disguised rates) presently faced by firms and individuals will fall and remain at that low level.

    And a commitment to increase in the money supply accompanied by an explanation that this will produce a period during which a prices will not fall and demand will grow.

    Bag the £21 billion, but change the balance of the remaining PSBR funding to increase the money supply. Tell everyone what is being dome and why. Tell everyone that interest rates will be low for the foreseeable future. Use the nationalised banks to lead the way on lower high street rates and to bring down fees.

    1. Bill

      You have a very similar view to ‘monetary optimists’ like Scott Sumner, who believe that monetary solutions alone can return growth. My biggest dowbt is whether any amount of monetary simulus can work in the presence of massive balance-sheet issues. Have you read R Koo, ‘The Holy Grail of Macroeconomics?’


      1. Quite right.

        The problem is not the absence of credit but the absence of the creditworthy.

        This in turn is due to the fact that compounding debt and private property (particularly in land) has done what it has always done for thousands of years and unsustainably concentrated wealth so that 90% of people are in debt to the other 10%, who also own most of the unencumbered wealth/equity.

        Historically this was dealt with by Jubilee, or more recently by War or Depression.

        I see a Debt/ Equity swap as the modern day equivalent of a Jubilee, and moreover, I think that the dis-intermediating effect of the Internet is taking us down that road through what I call Peer to Peer Finance towards new forms of equity using unconventional, and interactive, legal frameworks.

      2. I still don’t understand why you don’t advocate further (proper) fiscal stimulus, like pretty much every other OECD country (particularly given the skepticism, which I share, you have in this comment about monetary policy alone doing enough).

        Yes the deficit is humongous. But if private saving is humongous, then that would require radical fiscal policy. I don’t see how monetary policy alone when growth is at zero point something, is going to be enough to avoid a lost decade. And I don’t see how going along with even the cuts Labour or Vince are proposing will stop the deficit growing.


      3. Alex

        I have considerable sympathy with that view, and also recognise that I myself am being a bit inconsistent in not advocating it. I think in March 09 it would have definitely been the right thing to do, but people were spooked not least by Mervyn going against it. I would actually favour them sinking some of the £20bn or whatever in some sort of schemes that helped boost investment – not in supporting those services that need to be cut medium term – and I would not regard this as debt-worsening, as such ventures can always be sold later. But a quick design of such things is very difficult. the best I could manage in my paper was more (fiscally risky) lending to the private sector.

        you have a good point

      4. But a quick design of such things is very difficult.

        Conventionally, maybe, but it’s child’s play to set up a partnership framework – or a network of regional/municipal partnerships – along the lines of the five municipal LLPs used by Glasgow.

        The crucial difference with Glasgow’s conventionally financed LLPs would be that the government would invest its £20bn (suitably managed by a managing partner also on a revenue share) as a ‘Capital Partner’ and would share in the GROSS revenues – if there are any. The Hilton group achieved almost exactly this gross revenue-sharing arrangement a few years ago in a >£1bn property refurbishment/operation deal involving 10 UK hotels.

        The Income/Royalty Trusts used by almost the entire Canadian capital market (and in Australia before that) for investment in GROSS revenues of listed companies took a very similar approach, but using trust wrappers, but these Trusts have now been throttled by the Canadian tax-man.

        You could have such Capital Partnerships up and running in a matter of months (if not weeks) because it requires no changes of law. Oh, and by the way, it’s genuinely Islamically sound, and not just the modern day purchasing of indulgences which goes on now.

        It’s not debt; government spending; or conventional equity either, but a new synthesis. Once assets have been funded and developed using the structure, any future revenues may then be ‘unitised’ and sold to long term investors.

        It’s not Rocket Science

      5. You’re right about the timing, that it is hard to roll these things out quickly. And I can’t think of anything better to do with the money than what you’ve just put forward. However, I would say that it’s important not to get too caught up in the timing issue, as if the reason for looking for more stimulus is that it’s hard to see where growth is going to be coming from in 2 years time, then timing is less of an issue. But if you think that it won’t be long before the private sector has rebuilt its balance sheets, then timing will obviously be more of an issue.

        One thing I just remembered, was something I’d heard a little while ago, but I’m not sure who said it. It may have been Adam Posen, but I did google, and found him making the same point I was looking for (although this exact quote may not be where I read it):

        if you do not fix the banking system by the time your
        stimulus runs out, then private demand will not pick up when the stimulus runs out. That’s what
        we saw in Japan in 1997, and that is what we saw in Japan in 1999-2000. So we have a clock
        ticking here in the UK as in the US and the Euro Area.


        But that looks an interesting read anyway.

        You can read his book on Japan here:


        (free to download chapters).

        Though, I haven’t had more than a skim of it myself so far.

      6. I used a lot of Posen – his speeches to be more precise – in the credit piece. Damned glad he’s on the MPC – and should definitely get his book to add to the Pile of Hundreds

  6. Cut corporation tax by 11 billion for 2 years with a promise that if receipts go up (ie the laffer curve works) rates will be permanently reduced. That would cut CT to 20p or less – not quite Irlenad’s 12.5% but getting there.

    Or put it into a Space X-prize Foundation.

    Or redundancy payments for a million government regulators (this would be easily most cost effective but won’t be done)

  7. If this is a result of a better-than-expected economy, i.e., a cyclical boon, then it must be crackers to use it cut taxes, which are structural.

    On a related point, can you explain why the ONS’ figures for the PSBR and the DMO’s net issuance data are so far out from each other? I can understand a bit of variance, but the DMO has issued (net) £195bn of debt this year, and the ONS is saying HMG only needed £134bn. Does that mean that there is a spare £60bn cash sitting around in a Treasury account (or three) doing nothing except paying out interest?

  8. That question is too interesting to ignore. I would hazard a guess that this is to do with financial market operations. If the govt buys Banking paper in some form, that is not spending – despite the way it is portrayed – but still requires the issuance of debt.

    So in Oct 08, the govt would have had to issue a lot of gilts – for which the market was clamouring – and in return get loads of banking equity. It would not have turned up in the Budget, but in the gross gilt numbers.

    So it is not just paying out interest … I think – though it depends on what it bought whether it is paying its (low) interest bill.

    Any other views?

    PS I agree about corp tax. We need to distinguish the cyclical from structural. When even Reform think corp taxes are ok, I don’t worry about them.

    1. My figures are for YTD 09/10. It may not be Oct ’08, but I guess it could be similar stuff happening since April? Cash injections into banks. Makes sense: it sounds like the right order of magnitude. (So basically, the government used its own credit rating to buy bank shares on a margin which was extended to it by stable banks. Ow…)

      So that just leaves me wondering what the difference is, in Treasury accounting terms, between obtaining a stake in a bank and building a school or a hospital. Temporary ownership versus (ideologically-driven) permanent ownership?

  9. The problem IS structural.

    We are not in recession because we are at the low point in a business cycle (borrowing 12.5% of GNP must put us at the high point), we are in recession (& China, India & most of the world aren’t) because we have made Britain’s economy structurally uncompetitive. All the faffing about with money supply in the world won’t change that.

    1. How can you think it is not cyclical when biz investment is down 20+% in a year? How is that consistent with being at trend? THe government’s deficit is not the way to tell. You should at least throw in the savings of the private sector too

      1. Business investment reducing as a share of GNP is a long established trend. Incidentally bringing in a lack of money available for investment as a reason for keeping up the tax which most discourages investment is somewhat paradoxical.

        If business is increasingly coming to believe that investing here is not a good idea (sometimes as with the closure of Teeside Steel partly with government giving them large amounts of money to move the industry to India) how is that not evidence that we have a structural problem – to wit that government is making industry here uncompetitive?

  10. Posted by Philip Walker on March 19, 2010 at 12:18 pm

    ‘ If this is a result of a better-than-expected economy, i.e., a cyclical boon, then it must be crackers to use it cut taxes, which are structural.

    On a related point, can you explain why the ONS’ figures for the PSBR and the DMO’s net issuance data are so far out from each other? I can understand a bit of variance, but the DMO has issued (net) £195bn of debt this year, and the ONS is saying HMG only needed £134bn. Does that mean that there is a spare £60bn cash sitting around in a Treasury account (or three) doing nothing except paying out interest? ‘

    The difference will be redemptions of maturing debt. As the principal of the maturing debt is repaid the DMO will issue new gilts because the government have a deficit. Because yields are currently low the new debt will have a lower coupon than the maturing debt so the interest cost to the Treasury is lower from the newly issued debt. For example, Germany’s fiscal deficit is much lower than ours. Despite having a lower deficit they still had to issue around 400 billion euros of bunds this year. Their debt has a lower maturity than the UK so they would be rolling over maturing bunds by issuing new ones. If the UK government wanted to save money they should buy up all the existing gilts on the secondary market and issue new gilts with a lower coupon. The commercial banks are doing something similar by buying back their own bonds at depressed prices and booking the balance sheet gain as a profit.

    1. Richard: no, it’s specifically not maturing debt. Two reasons. One: we don’t have £60bn-worth of debt maturing anytime. We’ve got £55bn to roll over sometime in the next few years and that’s about the tops. Two: the net issuance figures take redemptions into account.

  11. @ Posted by Philip Walker

    There are actually # 143 billion redemptions of maturing gilts over the next 4 years. The highest yearly total being # 49 billion 2011/12.

    The public sector borrowing requirement (PSBR) is effectively the deficit and it is this that is lower than forecast. Gilt issuance is central government net cash requirement (CGNCR). Underfunding from the previous year because the Treasury forecasts were wrong are carried forward. Moreover, financing for the purchase of RBS B shares and 9.5 billion to Northern Rock in January are considered temporary so they appear in ( CGNCR) but not in ( PSBR). Treasury bill issuance as collateral for the Bank of England Asset Purchase Facility (APF) appear in (CGNCR) but not in (PSBR). The Debt management Office also issue Treasury bills for their own cash management and as a pool of collateral to be lent to the BoE for the discount window facility. Higher than forecast inflows to national savings would also widen the gap between (PSBR) and issuance.

    1. Sorry, I wasn’t clear. I did mean the highest roll-over (to my memory: obviously I’d got the figures slightly off) was £55bn in a single year, coming sometime in the next few years.

      Thanks for the alphabet soup. 😉 I think I follow you.

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