The 20^th century American comedian Rodney Dangerfield had a catchphrase: “I don’t get no respect”. The public debt is the Rodney Dangerfield of government finances. It is a long term benefit treated as perennial problem.

When we change our perspective on of the nature, size and ownership of the UK public debt we can see that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. If we treat the national debt as an asset, we can use it as a means to end austerity. 

Give the public debt some respect and end austerity!

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why.

When our government borrows it does so by selling a promise to pay, called a bond. For example, a household buys a £100 bond and our government promises to buy it back at the same amount in ten years with interest (at present 2.5% or £2.50 every year). A pound note also is a promise to pay (look at the small print near the Queen’s picture). A pound note is a bond paying zero interest.

Britain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England. The option to sell to the Bank of England provides a fool-proof mechanism to prevent excessively high bond rates.

Whether the economy is strong or weak, the British government can never default on its debt. The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

This buying and selling of public bonds is not the much-misunderstood Quantitative Easing (QE). QE was a one-way street – our government bought private corporate assets from companies threatened with bankruptcy. In a phrase, QE was “bail-outs” of reckless private sector financial behaviour.

The size of the public debt is not a problem

Figure 1 shows that outstanding public bonds (called “gilts” from the days when the edges of the bond had gold gilt) amounted to £1.9 trillion or 96% of GDP at the end of 2016, which was the UK gross debt.

When we look closer at the national debt, its nature changes. Public sector liquid assets (for example, cash deposits held by the central and local governments and financial assets such as stocks and bonds) reduced this to £1.7 trillion or 86% of GDP. When we subtract the government’s assets from its debt, we have the net debt, the measure of public indebtedness used by the Treasury. The gross/net distinction also applies to households. A household with a £300,000 mortgage and £50,000 in the bank has a net debt of £250,000.

Another 27% of the net debt amount (£466 billion) was held by public sector institutions, the vast majority by the Bank of England. This portion of the national debt is what the public sector owes itself. Subtracting this gives the effective debt, the debt that the UK government owes to others. In 2016, the effective debt was 62% of GDP.

 The public debt is not a burden

Who the government owes is an important factor determining whether the public debt is a burden. In the UK, the public sector itself owns 25% of the £1.9 trillion UK gross public debt (see Figure 2). The government pays the interest on this portion of the debt to itself. Thus, one-quarter of the debt and the interest paid on it are not a burden.

Pension funds hold a large portion of the 75% of gilts not owned by the government. The interest paid on debt held by pension funds is income to retired households. As such, this portion of the national debt is a source of household income, a benefit not a burden to citizens.

Debt held by the government itself and pension funds are long term holdings, rarely bought and sold. They do not represent a speculation danger that might put upward pressure on bond rates. When these are subtracted the remaining “gilts” constitute the market-active public debt, £808 billion, or 45% of GDP.

At the end of 2016, private corporate and foreign gilts holders owned 41% of the UK’s national debt. Only the £524 billion of gilts held by foreign creditors could be considered a “burden” in that the associated interest payments are from UK taxpayers to non-UK creditors. For fiscal year 2015/16 interest payments to foreign creditors were approximately £12 billion, or 0.6% of GDP – quite a small burden.

This analysis of the nature, size and ownership of the UK public debt shows that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. From this come the following policies to end austerity:

1. Sound management of the national debt means more public borrowing for investment and current expenditure, which is justified by the modest size of the effective debt.
2. The minor burden represented by foreign interest payments could be reduced by measures that would limit bond sales to domestic buyers (already applied in several other countries).
3. Implementing a fair and progressive taxation system will ensure interest payments to domestic bond holders don’t have negative redistribution effects.
4. Any speculative pressure on government bond interest rates can be prevented by selling bonds to the Bank of England.

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The lost decade?

A decade on from the Global Financial Crisis (GFC), now is the time for serious reflection on where we are, how we got here and what future lies before us. In the aftermath of the 2008 crisis, finance-driven capitalism appeared to be on a precipice. The collapse of leading global financial institutions in the US and UK led to a free fall in global markets, followed by the European Sovereign Debt crisis. It all seemed to herald the end of unfettered financial expansion. Indeed, many believed 2008 was another 1929 moment – a systemic crisis would bring about a New Deal style recovery and a Bretton Woods agreement for the 21^st century to establish clear parameters for a stable global financial system. A decade later the outcome is far different: finance capitalism has never had it so good.

The initial bailouts, deemed necessary to keep the financial system afloat, were followed by drastic reductions in interest rates that have yet to return to pre-crisis levels. Risk guarantees offered by Central Banks and Treasury Departments across the globe were committed to providing the money (liquidity) necessary to maintain the stability the global financial system. This was followed by asset buy-back schemes and long-term refinance operations which became systematised into successive rounds of Quantitative Easing (QE). Technocratic speak refers to the last decade, euphemistically, as the ‘era of unconventional monetary policy’, or the biggest ever helicopter money drop onto the financial sector in living memory. Those who believed 2008 could have been a reckoning for the failures of finance-driven growth could not be more disappointed. The financial sector is more entrenched than before the crisis, and the political power of finance to control the public policy agenda stronger than ever.

Looking to the future and seeing much of the same

Looking back over the past decade, even achieving an economic ‘recovery’ took longer than the Great Depression. The promises of a rebalancing of growth across Great Britain, well-funded health and education services, and prosperity for 95% that did not benefit from QE, never materialised. The failures of austerity are plain for all to see: the economy is stagnant and most people are worse off now than a decade ago.

Our shared economic future only promises more austerity. Wages and incomes will continue to stagnate. The economy will be still dependent on private debt to fuel asset bubbles and ever more household debt will be needed to sustain meagre economic growth. With the economy in the doldrums and Brexit looming on the horizon, we face entrenched economic malaise or another severe financial crisis. When growth is forecast over the medium term, it is always revised downward. To put it simply, no one is predicting that the UK’s economic future will get any better.

Making another future possible: we need an alternative policy agenda

In the face of peril, we cannot lapse into fatalism. We need to break out of the perpetual loop of anti-austerity, which points to the real failures of the austerity policy agenda without clarity on viable alternatives. The Progressive Economy Forum (PEF) seeks to dispel the myths and lies of austerity economics and replace that pernicious ideology with a progressive macroeconomic vision and narrative that makes another future possible.

The aim is to develop a 21st century Keynesian policy platform, that will end today’s austerity just as Keynes’s ideas in practice helped end the Great Depression and usher in a generation of economic stability and prosperity.  In his pioneering work, The General Theory of Employment Interest and Money (page 383), Keynes famously wrote:

“Practical [people] who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Today, the global economy is gripped by these same “madmen in authority” that bring us austerity. The current “voices in the air” come from economists who are very much alive and whose scribbling continues unabashedly. In response, we must begin mapping out a new direction, to forge a different path that leads to a better future.

100 policies to end austerity: a call for interventions

The goal of PEF is to build a policy platform that will end austerity in a way that embraces the progressive values of equality, dynamism and sustainability. In line with openDemocracy’s New Thinking for the British Economy agenda, our aim is to cultivate a rich garden of new ideas, policies and plans to end austerity by forging a new path. Our bold plan is to curate 100 Policies to End Austerity as a starting point for a better future. We will bring together contributions from economists and policy experts that articulate clear proposals for a progressive, sustainable and equitable British economy for the 21^st century. This is the start of an interactive conversation, not a definitive policy platform, about a vision of a better future.

In practice this means debating the key ideas that inform public policy, like monetary, fiscal and taxation policy needed to end austerity. In addition, it requires addressing the problems created by austerity. For example, creating an investment bank, green jobs, affordable housing, a fully-funded NHS and education system, compassionate care for an ageing population, a secure social security system, better local authority services and regional development. The list of ways to end the harm caused by austerity goes on. The challenge for progressives is to create a policy agenda that can foster a better future for everyone.

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Throughout more than fifty years as professional economist, rare has been the opportunity for me to claim “I was right” – even less “I told you so”. However, the recent meeting in Chequers of Theresa May with her unspeakable cabinet provides me with one of those rare moments.

Despite repeated and almost universal denials of the possibility of a Brexit agreement brokered by the accident prone May, a deal now seems if not imminent then certainly in the offing. And, yes, I predicted it. As much as I might like to attribute my prediction to analytical brilliance, the explanation is mundane: recognising the obvious.

The coming of what May dubbed a “UK-EU free trade area” is what any reasonably open-minded observer would have anticipated. The pieces of the Brexit puzzle have been lying around in full sight, awaiting some momentarily open-eyed person to put them together.

The Brexit jigsaw puzzle

Like jigsaw puzzles, the likely Brexit outcome is more easily assembled when one begins with the corner pieces then works to the centre. First among these is that any Brexit outcome will be determined by the most powerful actors. These are the financial interest of the City of London and German manufacturing capital.

Especially important is German trade in transport equipment with Britain (including cars). German producers have a substantial surplus as a glance at the numbers shows. The Merkel government has sought and will seek a deal acceptable to German manufacturers, as May will with the barons of the City. Both governments are right-wing, whose natural constituency is big business. As with most decisions in Brussels, the other EU governments are likely to yield to German economic interests and seek compensation and reciprocity on other issues (immigration, in EU budget negotiations, etc).

The second corner piece is that few if any Conservative MPs will cast a vote the result of which is to bring the government down and force an early election (that is, before 2022). The Chequers game demonstrated yet again that the enthusiasm of Tory Brexit MPs for “no deal” is more than offset by their loathing for a Labour government, with Tory Remainers in agreement on that point. To put it simply, fear of an end to almost forty years of Tory and Blairite neoliberalism far outweighs fear of leaving the European Union.

The improbability of a second referendum of any type provides the third corner piece. The first obstacle is timing. The average time it takes for parliament to process a bill to law is about 12 months. The Article 50 two year deadline is 29 March 2019. If a referendum were scheduled for the 11^th hour, such as 21 March, referendum legislation would need Royal Assent not later than a month before to allow minimal campaign time. Parliament “rises” for recess on 17 July and does not return until 5 September when party conference season begins, which does not end until the first week of October. That leaves very little time, about 18 calendar weeks for legislation to run its course. The schedule is even tighter because of the five weeks of scheduled recess during October through mid-February.

This leaves a very tight parliamentary schedule to achieve a very contentious goal.  The difficulties are compounded by the likelihood that a May government might not itself introduce a second referendum bill, even were a Tory revolt to be successful. The alternative, a private embers bill, would face well-known and insurmountable obstacles. The likelihood that all the best outcomes occur – a sufficiently large and solid revolt of Tory MPs, a shift by Labour to enthusiastic support, new legislation that gets passed through parliament, and a question that is favourable or neutral to Remain – is very small indeed.

The fourth and final corner piece is that the fear of Brexit economic disaster represents a losing strategy in 2018, just as it was in June 2016. Thanks to fiscal austerity, the British economy has fluctuated between stagnation and sluggish growth for eight years. The most negative calculations of Brexit compare economic growth with and without EU membership. Were the same method used for the impact of austerity, the Brexit estimation would seem trivial. For a decade UK growth performance has been dismal, so how persuasive is the fear that GDP growth might decline from 2% to 1.7%?

After identifying the corner pieces, filling in the puzzle is an easy task. The important players want a deal. Tory parliamentarians are unlikely to bring their government down. The odds are stacked against a second referendum. And the public propaganda strategy for retaining membership was and is ineffective. All of this is obvious, yet even after the Chequers game almost every commentator and some of the public still persist in the “no deal” illusion.

Let reality intrude

As I write, articles are dismissing May’s cabinet agreement as temporary and certain to collapse. Remainer optimism has seized on cabinet resignations as indicating “chaos” in the government, an oft-used word with no clear meaning. The immediate question is not whether the Tory government is chaotic or orderly. Instead the important question is: will May survive? If a revolt removes her, the Chequers deal becomes an irrelevant.

If her removal prompts a new election, the probability of stopping Brexit increases dramatically. A successful leadership challenge requires that a majority of Tory MPs take the gamble of bringing the government down and prompting an election that ushers in a Labour majority, or a Labour coalition government. Every progressive should hope that so-called chaos transforms into successful Tory rebellion, while recognising that its likelihood is not high. The obvious “stop-Brexit” strategy is to eject this government.

Bitter experience and many disappointments have convinced me that, when it comes to politics, one must plan strategy and tactics for the worse outcome. For a realistic Remainer, the worst outcome is the following scenario:

1. May and her allies reach a tentative agreement with their continental counterparts (all right-wing except in Portugal and Spain).
2. The agreement is announced at the Tory party conference at the end of September.
3. Three weeks later at its scheduled meeting, the European Council gives conditional approval to the same or similar agreement.
4. In November the British and European parliaments approve the agreement.
5. Before the end of 2018, Britain is out of the European Union with a new trade agreement in place.

As Will Hutton has written, approval by the European Council is quite likely.  Furthermore, no announcement will be made at the Tory Conference without de facto agreement with Brussels. Members of the European Parliament may grumble, but any agreement approved by the European Council will pass. For the May government, the weakest limit in this scenario is UK parliamentary approval. This is also the only point at which progressives can block the scenario from running its course.

We face the possibility that long before any second referendum could be approved, much less voted on, Brexit will be a “done deal”. The anti-Brexit strategy must therefore take that seriously and plan accordingly. We must pressure Tory Remainers to think, for them, the unthinkable – a rebellion that could bring the government down.

Accepting reality

The refusal to entertain the possibility of a Tory brokered deal may in part result from deep anxieties about the consequences of Brexit, an outcome many view as too disastrous even to contemplate much less plan for. While I share those anxieties, I also realize that what we want to happen, and what will happen, are frequently different.

For many reasons, I want the British government to retain membership of the European Union. Contrary to what I want, the probability is high that Theresa May’s government will end Britain’s membership of the European Union, perhaps before the end of the year.

The time has come for rational Remainers to shift strategy, away from methods of prevention and towards developing a policy agenda to mitigate an undesired outcome.  Managing adversity requires foresight and policies. If by a great stroke of good fortune we remain in the European Union, our Brexit preparations will prove unnecessary, erring on the side of caution. But if Brexit happens, our preparations for it will provide the progressive policy response to mitigate disaster.

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On 16 May Caroline Lucas MP, co-leader of the Green Party, and Anneliese Dodds, Shadow Minister for the Treasury, spoke at the launch of the Progressive Economy Forum (PEF), an organisation initiated by prominent London human rights lawyer Patrick Allen. The following day the PEF Council, which is made up of leading economists, met to initiate its project of transforming the economic narrative in Britain. As part of our commitment to policy making, Peter Dowd, Shadow Financial Secretary in the Treasury, joined us in the afternoon.

The Progressive Economy Forum will launch a new macroeconomic narrative, founded on the progressive values of equality, dynamism and sustainability. To put it succinctly, PEF seeks to dispel the myths and lies of austerity economics and replace that pernicious ideology with a progressive macroeconomic vision and narrative.

What we seek to dispel is nothing less than the ideological justification for the destruction of public services and the associated disintegration of our national sense of community. Conservative governments have implemented this destruction and disintegration through expenditure cuts whose long run purpose is the weakening of the public sector, sometimes encapsulated in the term “neoliberal agenda”.

Austerity: the Tory default Mode

Severe as it has been for the welfare of the British people, the last eight years of austerity under three Conservative governments are only the most recent manifestation of Tory assaults on public services. Since Margaret Thatcher became prime minister almost forty years ago, shrinking the public sector has been the recurrent theme across Tory governments.

Far worse than a drip, drip, drip of water torture cuts, Conservative governments have assaulted the public sector with the siege machines of constrained departmental budgets, privatisation and catastrophic reductions in local government grants. This is the sorry history of Tory governments that PEF, through its educational and outreach activities, seek to expose and discredit.

That sorry story appears in Chart 1, which shows total public spending as share of GDP over four decades (from 1980-2017). I was initially surprised that in the first three years of the Thatcher government the share of public spending in GDP rose. This unexpected rise is the “exception that proves the rule” of Conservative governments, resulting not from expenditure increases, but from austerity-driven contraction of GDP. Then Chancellor Douglas Howe consciously provoked a severe recession with the putative and punitive purpose of reducing inflation. As the economy haltingly recovered, the public sector declined. The share of public spending fell continuously for the rest of the decade, from 42.8% in 1979 in the last year of the Labour government to less than 35% in 1989 (Thatcher’s last full year in power).

By comparison, the years of the Major government were relatively benign for public spending, though it remained continuously below the 38 year average and fell after 1992.  The return of a Labour government briefly coincided with further decline, to 35% in 2000 from 37% when the Major government staggered to its unlamented end in a near electoral wipe-out. The decline at the end of the 1990s represented the reverse causality of the early 1980s. A four year above-average growth rate of 3.5% resulted in GDP expanding faster than public expenditure. During the last of the Blair years, 2000-2007, the public expenditure share in GDP rose almost continuously, to well above the period average.  In 2007 just before the global financial crash public spending relatively to GDP had returned to the four decade average of 39.7%.

In the early 1980s a policy-induced recession pushed up the spending-GDP ratio by driving down GDP. A far more severe and certainly not intended recession arrived in 2008. The collapse in GDP combined with strong countercyclical fiscal policy took public sending to 44% of GDP in 2010.  Following the reactionary tradition of Thatcher, the Cameron-led governments quickly and aggressively reversed that increase. This neo-Thatcherite assault on public spending, faithfully continued by the May government, again brought the spending share below 40%.

Chart 2 shows the clear link between squeezing public expenditure and economic growth. During the Thatcher-Major years, when the public expenditure share fell drastically and remained consistently for long term trend, the 17 year average GDP growth rate was 2.2% and negative in five of those years.

By contrast, during the 10 Blair-Brown years prior to the global crisis the spending ratio rose and GDP growth increased to an average of 3%. The seven full years of Cameron-May brought us back to the Thatcher-Major rates, even lower at 2.0%. Four decades changed neither Tory economic policy nor its outcomes – a contracting public sector and growth rates well below potential.

To quote a famous song by Frank Sinatra, Tory austerity and stagnation “go together like a horse and carriage”, and multiple conservative governments have confirmed “you can’t have one without the other”.

Exposing Austerity

Those of my generation may remember another song, this one of the 1960s and satirical, “Lilly the Pink”. The song celebrates the virtues of a miracle cure for all conceivable bodily ailments, the “medicinal compound”. However, when taken by hopeful sufferers, the consequences are disastrous – e.g. its “cure” for a stammer is to leave a person unable to speak.

It would be difficult to find a better metaphor for the austerity ideology. Thatcher, Osborne and Hammond all promised that it would repair and revive the British economy. As in the song, when urged to “drink-a-drink-a-drink” the austerity compound, the British public finds itself not cured but suffering from a collapsing health service, economic stagnation, local governments in bankruptcy and social services in tatters.

Building on the gathering public recognition that the austerity ideology is no more than snake oil, the Progressive Economy Forum provides focus for a new, positive economic narrative. It is a narrative of hope not despair, identifying the policies that can take Britain from the current austerity-induced malaise to a vibrant society managed for and by the many not the few.

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