Are you concerned about the amount of money the government has borrowed, the so-called National Debt? We are constantly being told that we should be and that therefore the government should try to reduce the figure by cutting its expenditure.
A different question. Have you got any Premium Bonds, or a pension plan, or even a ten pound note in your pocket?
These may seem like two unrelated sets of questions but they are in fact two sides of the same story. One person’s debt has to be balanced by another’s credit. In this case the public sector’s ‘debt’ is balanced by private sector’s savings. And yet it is always the debt/borrowing side of the narrative that we hear. Those of you who read my previous ‘Alternative Narrative’ will have come across my Sankey diagram illustrating the flow of money resulting from government spending. Here it is again.
As the initial government spend flows through the hands of individuals and businesses (blue) it generates economic activity and, as it goes through further stages, more of it gets taxed out of the system (orange). That which doesn’t remains in the hands of those individuals or businesses (purple). It is money waiting to be spent. It could well be in the form of money in your pocket, premium bonds you have bought or savings in a pension scheme. A detailed analysis can be found in Alan Hutchinson’s paper for the Gower Institute.
The implication of this narrative is that, as time goes by, the accumulation of government spending which has not been taxed away and which is called the ‘National Debt’ is actually equal to the amount that the private sector is holding in savings. If you have money in a National Savings account you are holding some of the National Debt. If you have a pension fund and the company handling it uses it to buy government bonds then under the established narrative the government has borrowed that money and it is part of the National Debt.
But the other side of the story is that your pension savings have been converted into the safest form of asset since the government can always pay out maturing bonds given its money creation powers. Pension funds do not want that option to disappear. You would not necessarily wish to cash in your premium bonds but that is what would happen if the National Debt were to disappear because that purple route in the Sankey diagram above would not exist.
So when the government says it can’t afford to spend more on the NHS or schools or social housing because it would add to the National Debt, it is also saying it does not want to create more economic activity and more opportunities for individuals and businesses to save. So instead of asking “Can we afford it if it adds to the National Debt?”, we should be asking “How best can that spending, and the associated use of resources, contribute to improving citizens’ well-being?”.
The fact that the government promotes the narrative that its spending grows the National Debt, rather than that its spending adds to economic activity and grows savings opportunities, suggests it is more interested in allowing the expansion of the private sector’s use of resources to generate profits rather than using those resources for the benefit of its citizens.
