What is this deficit we hear about continuously? Why are we driving the weakest people in our society to suicide in order to reduce this deficit? When was the last time someone explained to you exactly what this word and the number it represents means? When did your MP tell you why we’re going to kill the vulnerable just to make the number smaller?
Essentially what all the plonkers on TV and in your newspaper are talking about is the gap between what’s coming into the government in taxes and receipts versus what’s being spent. Now considering that the government can simply create money out of thin air and distribute it via the banks it does seem rather bizarre that anyone gives a flier about deficit, but anyway let’s play along. If we agree there are only two variables:
- Money coming in
- Money going out
And the difference is either the deficit or surplus, then it means there has been more money going out than going in. If you think of your own household it effectively means you’ve run up debt. To pay back your debt you can either spend less or earn more. For the government it means they can either spend less or get more tax. Spending less means cutting back on things like health, education, welfare, maintenance, infrastructure, weapons, quangos, etc. Getting more tax means increasing income tax, VAT, company tax or closing down tax avoidance loopholes.
Austerity allows richer people to maintain their lifestyle at the expense of the poor in the face of an unsustainable trade deficit.
Naturally given that wealthy people mostly call the shots they are not keen on higher income tax, company tax or closing loopholes. Surprisingly they are not all that keen on spending less either on things like giant infrastructure projects such as high speed railways, management consultants, tax breaks, private prisons, private hospitals, nuclear power and weapons – these right-wing Neoliberals are more socialist than Karl Marx when it comes to these kind of uses of tax. No, better cut back on the stuff poor people need.
But this still does not answer why we should care about a number. One reason is that letting the deficit get out of hand can lead to runaway inflation. That is true if money is misappropriated and poorly used. But a more important reason is that European and world level banks tell us we need to target a certain value. And if we do not? Well then our credit rating will drop. So? Well then we need to pay more for borrowing. Pay who? Actually this is where we come to the crux. In the end the only deficit of any importance is the balance of trade. That is the difference between what you import and export. If you import more than export you’re going to need to borrow “international” money if you want to keep buying German machinery and gadgets from China. International money is essentially what your currency is worth compared to other currencies and is therefore a kind of barometer for comparing economies and their outlooks.
Why does the domestic deficit not matter when looked at independently of balance of trade? It’s rather simple and my recent article on the DIY Austerity Experiment reveals all. Basically I show that the amount of work you undertake in your own household (=country) is limited only by the efforts expended by the family members (=citizens). As soon as you need something substantial that you can’t make yourself (=computer) from a neighbour or local shop (=foreign country) then you better have something of similar value you can exchange it for (=balance of trade).
In a nutshell:
- UK imports more than it exports. Blame Thatcher, unions, class system, UK doesn’t like making things.
- Germany and China want paid (how unreasonable!).
- UK needs to borrow to pay this.
- The interest rate is set according to numbers such as the deficit.
- Increasing tax might make rich people cry and threaten to move somewhere else so instead we cut spending (on things that don’t upset rich people).
- Deficit looks good so interest rate stays low.
- Keep buying more on loan from abroad as UK’s manufacturing and exports sink further due to cuts in spending.
- Rinse and repeat until society breaks down completely.
- Civil or international war resets system.