In less than six months since his inauguration as US President, Joe Biden’s administration has staked out a new agenda for US policymaking, breaking with the previous four decades of Republican and Democratic domestic economic policy to focus deliberate government action on job creation, addressing racial equality, environmental goals, and rebuilding American manufacturing industry. A dramatic expansion in trade union rights, pushing back on four decades of draconian restrictions on workplace organising has been pledged, and over $6tr of public spending is lined up, to be funded mainly by taxes on the richest Americans and the biggest corporations.

The UK equivalent for the whole programme (using share of 2020 GDP as the baseline) would be £560bn: £170bn for immediate coronavirus relief; £240bn for investment and business support; £150bn for welfare and education.

Surprising many with the scale and scope of its ambitions, the Biden Administration’s domestic economic programme has raised the bar for progressive governments across the world. This briefing breaks down the emerging details of the programme for a UK audience and lays out the main political conclusions.

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Since January 2021, the Biden administration has spent or committed to spend $1.9 trillion for immediate COVID-19 relief, $2.7 trillion for investment and business support, and $1.8 trillion for welfare and education. This amounts to $6.4 trillion, or nearly 30% of US GDP. The $1.9 trillion already delivered through coronavirus spending will tail off, leaving $4.5 trillion, or about 20% of GDP, to be spent over the next ten years.

The spending will be financed largely by US Federal Reserve bond purchases, with tax hikes coming later. But will it represent the biggest mobilization of US public investment since WWII, or rather an inflationary splurge?

We don’t know yet, because we have no accurate way of measuring the output gap – the difference between actual and potential output, or, roughly, the amount of slack in the economy that can be absorbed before prices start to rise. The International Monetary Fund predicts that the US economy will be growing above potential by the end of this year, and that European economies will be close to their potential. This signals inflation ahead and the need to reverse deficit finance.

Against this static view is the belief – or hope – that government investment programs will increase the US economy’s potential output, and thus enable faster non-inflationary growth. Much of Bidenomics is about improving the workforce’s productivity through education and training. But this is a long-term program. In the short run, so-called supply-side “bottlenecks” could drive inflation. There is thus a palpable danger that an overambitious agenda gives way to abrupt policy reversals, renewed recession, and disillusion.

There is a steadier course available, but the Biden administration has ignored two radical suggestions that might make its life a lot easier. The first is a federal job guarantee. Put simply, the government should guarantee a job to anyone who cannot find work in the private sector, at a fixed hourly rate not lower than the national minimum wage.

Such a scheme has many advantages, but two are key. First, a federal job guarantee would eliminate the need to calculate output gaps, because it would target not future demand for output but present demand for labor. This in turn underwrites an unambiguous definition of full employment: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. On this basis, there is substantial underemployment in the United States today, including among people who have withdrawn from the labor market or are working less than they want.

Second, the job guarantee acts as a labor-market buffer that expands and contracts automatically with the business cycle. The 1978 Humphrey-Hawkins Act in the US – which was never implemented – “authorized” the federal government to create “reservoirs of public employment” to balance fluctuations in private spending.

These reservoirs would automatically deplete and fill up as the private economy waxed and waned, creating a much more powerful automatic stabilizer than unemployment insurance. As Pavlina R. Tcherneva of Bard College says, a job guarantee “continues to stabilize economic growth and prices, using a pool of employed individuals for the purpose rather than a reserve army of the unemployed.” No “management” of the business cycle, with its well-known political risks, is involved.

The second radical idea is the economist Vladimir Masch’s compensated free-trade plan. America has lost millions of manufacturing jobs so far this millennium, largely owing to offshoring of production to cheaper labor markets in Asia. The counterpart of this has been a structural US current-account deficit averaging about 5% of GDP.

One of the Biden administration’s main objectives is to rebuild US manufacturing capacity. While the COVID-19 has fostered a conventional wisdom among all deindustrializing countries that they should reserve “essential” procurement for domestic manufacturers, Biden’s “Made in America” efforts echo former US President Donald Trump’s “America First” approach. But Biden’s plan to rebalance US trade by means of tax subsidies for domestic producers, trade deals, and international agreements, rather than tariffs and insults, is vague and unconvincing.

In a world of second-best options, the Masch plan offers the quickest and most elegant way for Biden to secure the balanced trade that he wants. The basic principle is simple: any government in a position to do so should unilaterally set a ceiling on its overall trade deficit, and cap the value of permitted imports from each trading partner accordingly.

For example, China, which accounts for about $300 billion of the current US trade deficit – half of the total – might be limited to $200 billion worth of annual exports to the US. If China exported more, it could either pay a fine equal to the excess over its quota or face a ban on excess exports.

Compensated free trade, Masch argues, “would stimulate a return to the US of the off-shored enterprises and jobs.” It would also automatically prevent trade wars, because “any attempt by the surplus country to decrease the value of its imports from the US would automatically decrease the value of its allowed export.”

Policymakers seeking to stimulate the economy must pay more attention than past Keynesians did to avoiding inflation and ensuring that job creation at home is not offset by a drain of production capacity abroad. The Biden administration will have no choice but to learn these lessons. If it’s wise, it will shun austerity and unfettered trade in favor of full employment and the manufacturing capacity needed to achieve it.

Robert Skidelsky

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This week’s budget appeared at first to be seismic shift away from conservative economic orthodoxy by the government. Alongside a further major expansion in borrowing to support jobs and incomes over the next six months, the chancellor adopted the previous left-wing Labour party’s policy of a major rise in corporation tax (from 19% to 25% of profits) to close a record peacetime budget deficit.

But as the dust has settled and the numbers interrogated, the budget looks rather less radical.

Firstly, it cannot be described as a rejection of austerity. The budget contained no explicit additional resources beyond the coming financial year for public services to deal with the legacy of the pandemic. Rather, as pointed out by the government’s own spending watchdog, the Office of Budget Responsibility (OBR), it involved an additional £4bn spending cut, alongside £11bn previously announced, beyond next year. For the most vulnerable, the proposed £20 cut in universal credit remains, even if pushed back to September. The freezing of income tax thresholds will also hurt lower paid workers, assuming wages do rise.

Annual revaccinations, ongoing test and trace capacity, a huge NHS catch up program on thousands of missed operations, and rising unemployment bills will all be somehow funded on pre-pandemic spending plans. Meanwhile, NHS workers can look forward to a miserly 1% pay rise in return for their heroic pandemic efforts.

Secondly, the budget was singularly lacking in ambition when it came to the government’s role in creating a sustainable, inclusive and investment-led recovery.

There was no mention of investment in social care, a sector that is badly organised, extremely low paid and clearly vital in improving the resilience of an ageing population and economy to future pandemic-type shocks.

There was no new green stimulus despite the UK facing a £100bn funding gap to reach its net-zero by 2050 target and despite its hosting of the global COP26 climate change summit this November. Neither was there any major program to help young people find work. Both the latter two challenges could have been tackled with green jobs and apprenticeships program focused on renewable energy and environmental conservation.

Meanwhile, the new National Infrastructure Bank will be capitalised with just £12bn (equivalent to just 0.5% of GDP) and again, be heavily reliant on private sector co-investment.

Indeed, it appears the government may have abandoned industrial policy altogether, shutting down the Industrial Strategy Council lead by Andy Haldane and moving industrial policy out of BEIS and in to HMT.

Reverting to economic orthodoxy

Instead, the Treasury is reverting to free-market economic orthodoxy, relying on business and the housing market to do the heavy lifting.

A 130% ‘super deduction’ tax break for capital investment by businesses in machinery and plant was the key pro-growth policy announcement. Whilst it makes sense to reduce tax on productive investment, it is highly questionable whether the majority of British firms believe there is sufficient demand in the economy for major new capital investment outlays. The OBR is predicting not, forecasting a return to anaemic growth of just 1.7% in 2023, following a boom in 2022.

“The Treasury is reverting to free-market economic orthodoxy, relying on business and the housing market to do the heavy lifting.”

The policy may bring forward some existing planned capital spending but is unlikely to create the structural shift in investment the economy needs. The exception may be those firms already doing rather well in pandemic conditions. Amazon, for example, has racked up record profits over the past nine months as physical retail has collapsed and may use the supertax break to wipe out its UK tax bill completely.

The corporate tax profits hike is a sensible policy. However, its timing — not being introduced to 2023 — is suspect and will likely mean it is subject to ferocious counter lobbying if the economy improves. If businesses are to be taxed, a more sensible approach would have been a phased in rise in corporate tax starting immediately, accompanied by a windfall tax on those companies — like Big Tech, Private Equity and the Supermarkets — that have done so well out of the pandemic.

On housing, the budget was an opportunity to push forward a big capital investment in public housing and retrofit of existing stock and rethink the country’s highly regressive property taxation system. Reducing property tax for the poorest would be a fair way of stimulating stagnating demand.

Instead, the government extended the stamp duty tax cut on home purchase into the summer and announced it will guarantee 95% mortgages. These are expensive policies that reveal the Treasury remains fixated on the idea that ever-rising house prices are the best way to stimulate the economy and private sector house building. This debt- and consumption-lead economic growth model is inefficient, leads to greater financial fragility as well as increasing inequality as more people are priced out of the housing market.

Meanwhile, there was no sign of any reform of property taxation, nor even a commitment to raise capital gains and remove exclusions as had been rumoured.

In summary, whilst the extension of government support to the Autumn should be welcomed and will help the country avoid a much more severe recession, this Budget was not the economic reset the country needed. It will do little to stimulate a sustainable recovery and help Britain on to a more progressive economic trajectory. Now was surely the perfect time to shift the focus of taxation on to economic rents and away from labour. Instead, it is a budget that mainly favours the rentier sectors already doing well — Big Tech, banks, developers, homeowners — at the expense of the public sector, lower paid workers and renters.UCL IIPP Blog

This blog first appeared on the blog for the UCL Institute for Innovation and Public Purpose

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Covid-19 is disrupting heavily the global economy. Internationally, it led to massive financial turmoil, a sharp fall of international trade, and a major global recession, possibly even bigger than the Great Depression. It resulted in significant flight of portfolio capital from emerging markets: over $100bn according to the IMF.

In many countries, sovereign debt repayments will be due soon, and it may become impossible, to raise new funds in private markets, for both governments and private companies to roll-over their debts, or even less increase borrowing. Even before the corona pandemic hit the world economy, many developing and emerging economies were already facing severe debt and liquidity problems.

Problems will be compounded by sharp falls in commodity prices -illustrated dramatically by the recent collapse of the price of oil.  The coronavirus crisis can, therefore, trigger large-scale balance of payments crises across the developing world, as well as a sharp fall in output, employment, and increase in poverty. To avoid this, emerging and developing economies, would need $2.5 trillion of funding, as estimated by the IMF and UNCTAD.

A number of key measures need to be taken urgently by the international community to provide key international liquidity and development finance to emerging and developing economies, so they can minimize economic slowdown, and facilitate recovery.

These measures should be seen as important steps towards beginning a major reform of the international financial system. This is particularly important in the case of the global financial safety net, which remains patchy: it lacks coverage and resources to deal with a crisis of the magnitude we are currently facing.

The International Monetary Fund (IMF) should agree a rapid issuance of at least $500bn in international liquidity, in the form of additional Special Drawing Rights (SDRs). This would build on the enlightened decision, taken by the G20, under the leadership of Gordon Brown, at their London meeting in 2009 to issue SDRs equivalent to $250bn. The UK, as well as the G7 and G20 should take leadership on this now as well. 

It is highly disappointing that in the recent spring IMF/World Bank meetings, the issue of SDRs was vetoed by the United States, with the surprising support of India, even though major European countries supported it. It is key that the issue is proposed again, especially as the world economy continues to deteriorate.

The SDRs are international monetary assets issued by the IMF – acting. They are part of the foreign exchange reserves of countries, and they can be sold or used for payments to other central banks. Close to two-fifths of this allocation would enhance the international liquidity in the hands of emerging and developing countries, the main users of SDRs.

Furthermore, this should be the beginning of a deep discussion about the role of SDRs in the international monetary system. They are the only true global money, backed by all IMF members. However, it has remained as one of most underused instruments of international cooperation.

Though international liquidity is crucial, especially for balance-of-payments constrained developing and emerging economies, provision of sufficient long-term development finance, to help them fund investment is equally key, both to help support demand and future growth, as well as facilitate major structural transformation to a fairer societies and low carbon economies.

At the multilateral, regional and bilateral level (as well as the national one), public development banks can offer significant additional funding, especially at times when private capital and banking markets are unwilling or unable to take risks in the face of uncertainty and provide enough finance. It is therefore important to increase rapidly the capital of multilateral banks –the World Bank and the regional development banks like the European Investment Bank and the African Development Bank—, as well as of bilateral development banks –like Dutch FMO or German DEG—, to allow higher lending from them to take place speedily. It is important also that these banks, including especially the World Bank, do not attach structural conditionalities (particularly greater market reforms) to such loans, as the causes of the increased demand and need  for their loans is not determined by economic policies but by the internal and external effects of the COVID pandemic.

By significantly increasing their lending in a counter-cyclical way, these larger multilateral, regional and bilateral development banks can support depressed short-term economic activity and, particularly, job creation, and help build a more equitable and sustainable economic development model.

In the medium-term, a more balanced financial system, both internationally and nationally, with a significantly increased role for development banks can help create a system that far better serves the economy, society and the planet than the current one.

Image credit: flickr/niawag

Stephany Griffith-Jonesis is a Council Member of PEF; she is Emeritus Professorial Fellow at IDS, Sussex University and Financial Markets Director, IPD, Columbia University.

José Antonio Ocampo, a professor at Columbia University, is a former Minister of Finance of Colombia, and former United Nations Under-Secretary-General for Economic and Social Affairs.

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 Symbolic of the failure was that Britain’s 10,000 bank branches were not seen alongside petrol stations, supermarkets and hardware stores as offering a core economic function that needed to be kept fully open during the lockdown, instead of closing or opening part-time. Of course in a way the government was right. Bank branches in Britain have long ceased to be hubs supporting local enterprise: they now largely exist to process the documentation associated with providing mortgages or the odd financial transfer that does not lend itself to automation – hardly needed during lockdown.

  But that is indicative of the problem. The British financial system’s long standing dissociation from the real economy of innovative wealth creation while embracing real estate lending in incredible volumes has widened over the last 30 years. The government may want to use banks as the pipes through which it can channel vital emergency credit to business. But the pipe network barely exists, and even where it does the pipes are shrivelled and silted up.

 British clearing banks know their business customers largely as notations on centralised data bases. It is expensive and time-consuming to organise sophisticated credit scoring of business borrowers, let alone to get to know their business models, their leadership teams, their strategies and sales prospects. Indeed beyond London and the South East there is very little net ending to small and medium sized enterprises ( SMEs) at all. Credit scoring of small and medium sized companies is contracted out to agencies like Experian who have industrialised the process, or for larger companies left to the tender mercies of credit rating agencies. Banks want to conserve their capital and deploy it to maximise their financial returns, and on top regulators insist that the risk weightings associated with much business lending, especially SMEs, are significantly higher than those on real estate lending.

Lending to business is thus risky, low margin and expensive in terms of foregone opportunities to use scarce capital on more profitable lending to property. On top the banks suffer the same disability as the rest of Britain’s quoted companies: they have no anchor “block-holder” shareholders but rather the same shifting, often anonymous, shareholder base of institutional investors who, with honourable exceptions, are disengaged from the companies in which they invest and largely ignore their stewardship obligations. Their interest is in short term share price performance. Where the banks do have large shareholders they are “ activists” insisting that they promote even more short term profitability by even more disengagement from business lending.

 Government schemes to help de-risk business lending – typically various business loan guarantee schemes – are themselves expensive, with the costs displaced onto the business borrower. Small wonder that of the £1.7 trillion of loans on British bank balance sheets in 2019 some £1.45 trillion were represented by mortgages. Lending to small and medium sized business stood at some £160 billion, of which £110 billion was real estate or property related. Manufacturing lending totalled £10 billion. Net new lending to the entire sector stood a miserly £15 billion over all 2019, a fraction of the credit advanced by regionally dispersed German banks – many co-operatively or publicly owned . To explain Britain’s much criticised incapacity, compared with Germany, to manufacture vaccines, ventilators, masks, testing equipment and PPE, you need hardly look beyond these figures.

 The British Business Bank, set up by the Coalition government to plug the gap, is a misnomer in terms: it has been disallowed from doing any significant lending itself after intense lobbying by the banks who complained it might displace the private sector so that its principal job is to broker financial support, in particular government schemes,  to particular borrowers that would otherwise not have known of them  – a job which its some 300 staff in London and Sheffield do effectively. But besides public business and development banks in other countries – Germany, Holland, Sweden, South Korea, Japan – its size and scope is an embarrassment.

 The necessary transformation of the entire system requires action on a number of fronts. In response to the crisis the Treasury has introduced  Covid Business Interruption loans (CBILs) that companies can apply to banks for.  To support CBIL lending the  Bank of England  has  launched  a new Term Funding scheme for Small and Medium Sized Enterprise (TFSME) that banks together with relaxing capital requirements ( and requiring the suspension of dividends), the Bank says could boost lending to £190 billion  to SMEs over the next twelve months – as  it dryly observes, 13 times more than the banks managed themselves over all of 2019. But as banks conserve their capital, they have little appetite to increase their lending 13 times – the scale that is necessary.  In the most recent week banks lent £1.3 billion: weekly lending needs to run at ten times the rate £12-15 billion – as much as banks lend to SMEs in a year –  if by mid-summer there is not to be an avalanche of closures and redundancies.

To dynamise what is happening he Chancellor should chair an emergency task force tasked with driving lending up by the day, to be monitored with the same intensity we monitor Covid testing. The British Business Bank, miniscule compared with industrial development banks in other countries, needs immediately to be given the mandate and capital to increase its own lending ten times – across the country. It must be tasked with getting the money to where it is needed across the country beyond the south-east – with the banks cajoled into becoming active partners.  It will be a transformation of the role of the BBB into a fully fledged development bank in a matter of weeks – but if the army can build Nightingale hospitals at such speed the BBB must rise to the task in its sphere no less quickly. Its lending should not just be about preserving viable businesses: it should be thinking of supporting firms, especially SMEs, in key sectors, especially those identified as priorities by the Industrial Strategy. The MacMillan Committee recognised the problem ninety years ago. It is sad that it has taken a pandemic to trigger the necessary action.

 Secondly bank shareholders need to say more vocally and publicly than they have hitherto that they will support banks as they lend to distressed lenders. It is a public interest function. As fast as possible a new Companies Act should require banks retail and commercial arms, as discharging core economic functions, to incorporate as public benefit companies whose task is first and foremost to transmit money and credit to achieve public interest outcomes. Profit will follow from the delivery of purpose. The Act should also lay a responsibility on shareholders actively to curate and steward the companies in which they invest, ensuring that they deliver on the purpose for which they were incorporated. Britain will thus create a new generation of commercial  banks that serve the economy and society. Many good bankers would welcome the change.

 Thirdly it is no longer exports that requires financial guarantees. The fourth industrial revolution is being driven by scientific advance. Intellectual property rights need to become as good as collateral as property, so that the risk weightings on both are the same. A transparent market needs to be established in intellectual property rights ( as Big Innovation Centre has consistently argued) so that they can be fairly valued, and then crucially insured by government just as it does exports, to create bankable low risk weighted collateral. This insurance function can also be extended to the top slice – say 20 per cent – of other loans to small business, so that insured IP loans, insured  SME loans and eventually British Business Bank TFSME loans can be bundled together and sold as bonds to the UK insurance industry, allowing it to diversify part of its £1.9 trillion holdings of financial assets into bonds that directly create real wealth, with the funds recyclable for a fresh round of financing.  The insurance industry should not be allowed to stand on the sidelines.

Some companies will not want loans, but equity: the venture capital and private equity industries must transmute themselves from their default role as predators and asset sweaters to long term patient investors – working with the newly  created Futures Fund to take generous equity stakes in companies in need.  Supporting intellectual capital rather than seeking property collateral should be new North Star of British finance

 If there is not to be a terrifying slump followed by stagnation, the British financial and ownership system needs a revolution – and to take place in mere  weeks. Good people abound in it, marginalised until now by the predominant culture of wealth extraction. They need to be unleashed. These measures taken together would transform the piping of the British financial system. Instead of being an engine to inflate property prices, it would become an engine to promote innovative enterprise – a crucial component of the economy the UK need to grow not just to avoid deep economic scarring in the months ahead but to support great businesses, jobs and livelihoods in the future. Once we get to the other side, the new systems of engagement and support need to be retained. Good, after all, might come from all of this pain.

Image credit: flickr/Mike Cohen

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Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them. Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in. That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many. It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as small a part in the economy as possible – is also misguided. Far too much capital is being used for short-term, speculative purposes, whilst not enough is finding its way into the development of sustainable businesses that provide long term employment and pay decent wages – not the hand to mouth existence of a zero hours contract. In other words, the economy should work for the many, not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself. This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”. Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy. Rethinking Britain shows how.

Photo credit: Flickr/Christian Reimer.

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In a recent Financial Times article, Chris Giles asserts that the “UK’s low national savings rate raises fear of trouble ahead”. After reminding readers that Adam Smith characterised Britain as a nation of shopkeepers, and highlighted by a mock-up photograph of two upper-middle class women on a shopping spree, Giles tells us:

“Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little. As a nation — which statisticians break down into households, companies and the government — Britain spends far more than it earns. On this measure, the UK borrowed 5 per cent of national income in 2015, according to the OECD, the Paris-based international organisation”.

To some this report may seem quite shocking, suggesting that we are “living beyond our means” as a country. But reporting that the UK borrowed 5% of national income merely states that the country had a deficit on its external current account of 5%. When a country has a current account deficit – a negative balance on trade plus short-term money flows – it automatically borrows and the foreign debt increases.

Knowing this, we can update Mr. Giles’ numbers. Figures from the Office of National Statistics show that the current account balance reached its lowest point in 2016, standing at minus £103 billion (5.2% of GDP) in that year. In 2017 the deficit shrunk to minus £68 billion (3.3% of GDP), before moving to minus £81 billion (3.9%) in 2018. The explanation of the external balance deficit is not found in the behaviour of “shoppers”.

The external balance has shown a deficit every year since 1984, and deteriorated especially quickly in the years following 2011. The magnitude and persistence of the deficit in the years 2013 to 2016 is unprecedented. Those two dates provide a strong clue to the causes: the long-term effects of the policies of the Thatcher government and the short-term impact of fiscal austerity. In the 1980s, the Thatcher government initiated policies that led to the long-term decline of UK manufacturing.

In addition to industry-specific policies, the deregulation and rapid growth of the City resulted in a consistently high exchange rate for decades, as explained in a recent study of the distorting effects of large financial sectors. From over 20% of GDP in the early 1980s, manufacturing value added fell to 15% in 1997 then to 9% in 2008, where it remains. In effect, financial services and short-term financial flows replaced manufacturing in the UK current account.

Mr Giles’ profligate shoppers buy imported consumer goods because the growth of the financial sector undermined UK production. It is not true that “Britain spends far more than it earns”. Correct is the statement, Britain imports far more than it exports, and covers the difference directly or indirectly with earnings from finance. It is certainly true that many if not most British households on balance spend more than their incomes, but not in the aggregate. Since early 2017 the saving rate has been almost 5% of household income, approximately the same that it was in much of the 1960s and briefly in 1999.

As PEF Council Johnna Montgomerie has argued in her book Should we abolish household debts? (Polity), household debt is a problem of income distribution, not the feckless consumption habits of the UK population as a whole. To put it simply, the rich shop till they drop and never worry about their retirement pensions. The middle class struggles to maintain its standard of living in the face of stagnant real income and declining public services. The poor spend more than their incomes to try to survive. Ending austerity will be a step in the right direction to redress these inequalities.

Photo credit: Flickr / Adam

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