The National:

THERE are so many big stories relating to impending crises at this moment that it is a little difficult to stand back and look at the bigger picture within the political economy. Sometimes, however, it is important that we do so because that’s the way in which we see what the problems coming our way might be.

One big issue that is looming on all our horizons at present is politicians’ newfound enthusiasm for what are called fiscal rules. Like so much else in economics, the term ‘fiscal rule’ is not what it seems. It’s meant to convey order. What it actually means is that the person promoting the rule intends to balance the Government’s books so that government expenditure is equivalent to it tax income.

This balancing of the books is not necessary. It is a choice. That’s because, as we all now know, there is what politicians like to call a ‘magic money tree’. What this really means is that the Bank of England can actually create money on demand for the Government whenever Parliament or (more realistically, given how little control of anything the Parliament in Westminster now seems to have) the Chancellor of the Exchequer decides that it should.

The process that has been used to do this is commonly called quantitative easing. Both the name and the process used are intended to be baffling, because the Bank of England would prefer it that way. The reality that hides behind the name is that the Bank of a England can create money by doing nothing more than making a few entries in its computer records to record that it has given the Government a bigger overdraft. The result is, however, of enormous significance. That overdraft kept the economy going through Covid. That was a big deal.

What we now know though is that Labour wants to stop this money creation process. As importantly, it even wants to stop running a deficit, except to fund investment. But, because it also says that overall debt, including that used to finance investment, must fall as a percentage of UK national income, the result is that what we will really face is austerity if it has its way.

That’s because to achieve this goal Labour would have to raise more in tax more than it spends on services on a regular basis, which will reduce the actual income each of us has and severely squeeze public services at the same time. That’s what austerity does.

The National: Labour leader Keir Starmer Labour leader Keir Starmer

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Labour are not alone in saying this though. The Tories already have such a rule. They might have abandoned it during Covid, but Rishi Sunak is set to restart using it in his budget to be announced this month. And just in case there is any doubt about it, this is also logic that underpins Andrew Wilson’s Growth Commission Report for the SNP, which is the best indication of that party’s thinking on this issue.

In other words, all major political parties in Scotland are saying the books must be balanced now, with the three-word slogan so beloved of politicians appearing to be unanimously agreed to be ‘austerity, austerity, austerity’.

The big question to ask is why. There is no good answer to that. Our economy is not booming. There are inflationary risks at present, but none of them caused by the new money that quantitative easing created to fund us through Covid. And what we know is that from the NHS, to education to the environment (and much else) there is a list of things for government to do – with people willing to do them – as long as anyone’s arm. So austerity is the last thing that we need.

What is more, people are queuing up to lend money to the Government. When it recently sought to borrow £10 billion, banks, pension funds and other organisations sent in bids for more than £100bn of that new debt – suggesting there is 10 times more demand for debt than the Government is meeting. What is more, the interest rate offered was less than 0.9%, which is less than the current inflation rate, meaning that the Government can afford to borrow these sums with ease.

In that case, why are we going to face fiscal rules, balanced budgets and austerity? It seems that this is just to keep the bankers, to whom the Bank of England think we are in debt, happy. But as I explained last week – we can entirely eliminate bankers from government funding if we wish and so avoid this risk of austerity that will harm us all.

So the real question is, why are our politicians united in working in the interests of bankers and not for all the rest of us in society? I wish I could answer that question, because no reasonable explanation appears to be available.