Tag Archives: living beyond means

Want to reduce your deficit, Mr Osborne? Stop your boys burning those £50 notes* !

* Or at least ask them to tell you about it!

The Oxford University based Bullingdon club has attracted controversy of late, in large part  due to certain unsavoury practices  indulged in by its young, privileged, elitist but poorly behaved members. Their current initiation ceremony is reported to include the burning of a  £50 note in front of a beggar or homeless person.

.B

Former members of the club are now a well ensconced part of the UK political establishment. These include the current Prime Minister Mr David Cameron (In photo, second from the left standing) , the Chancellor of the Exchequer Mr George Osborne, and the Mayor of London Mr Boris Johnson (far right sitting)

A key source of worry for our worthy politicians is the UK’s government budget deficit which now runs at approximately 4% of GDP. This is the gap between what the government spends into the economy and what it receives back in taxation.  The budget deficit is often referenced in support of their argument that we are all “living beyond our means”,  that our “credit card is maxed out”, and that cutbacks in spending  and increases in taxes are unfortunately necessary to “cut our coat according to our cloth” etc etc.

So in this context, we might ask just what macroeconomic impact the burning of our currency might have? It is course illegal to deface or destroy currency. Why should that be?

It does have an effect. If these wealthy young men had chosen to give £50 to a homeless person that money would no doubt have been quickly spent. It would have been a stimulus to the economy.  The destruction of £50 has the opposite effect. It is exactly the same as if we had handed that £50 note over to the government in taxation, where the government routinely puts old notes through the shredder.  If Mr Osborne knows of specific instances where currency has been deliberately destroyed he is quite entitled to count that as voluntary taxation. His deficit would be reduced commensurately.

As he can’t know just what happens to our currency he has to assume it still exists and that it is just being saved somewhere. The net effect is still the same. To keep the economy functioning,  at full capacity,  any money which has been taken out of circulation either by its destruction or because it is being stored in a safe or bank account has to be respent back into the economy by government on our behalf. It’s neither here nor there  whether the budget is in deficit or in surplus.

We don’t need to know how much is being burnt and how much is just being stored. If any government overdoes the spending, relative to the levels of taxation, we’ll have too much inflation, but if it underdoes it , like now, we’ll have deflation and high levels of unemployment and underemployment.

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The Government isn’t living beyond its means!

All Governments which, together with their supposedly, but aren’t, independent central banks  issue their own currency have to do just that. ie issue currency. Currency consists of the IOUs of the government, and without which modern society could not function. Governments have to issue more than they receive back in taxes. It is a logical, or arithmetical, impossibility for them to do otherwise.

It can be argued that taxes are too high, or inflation is too high, or the resources of society should not be ‘wasted’ on the poor and unemployed but that is not the same as government, or society, living beyond its means. It is a readily observable fact that society, in most western countries, is living at less than its means. Industry is working at well below full capacity and many workers are kept in a state of enforced idleness who could, otherwise, be adding to the general means.