A household is not like a state

As a society we need to be far more concerned about climate and inequality than money, however as it is almost a year since I last wrote about sectoral balances, there are another 4 quarters of data to look at, and I want to make the point again, money is not a contraint on what as a society we can achieve.  As a reminder, the essential message of sectoral balance data is that the private sector surplus is equal to the public sector deficit. This is a simple accounting identity that has to be true. If the government spends and the private sector spends then everything is paid back in tax and there is no deficit. Only if the private sector chooses to save, does the government (the public sector) experience a deficit. Importantly, the key point that follows from this is that governments are not fiscally contrained, they are only resource constrained, or as Ann Pettifor puts it ‘we can afford what we can do’. Which means if we want to reach carbon neutrality by 2030, we could do it (especially as the UK has some of the best offshore wind resources anywhere on the planet).

Coming back to sectoral balances. As I said, the private sector surplus (savings) is equal to the public sector deficit (the different between government spend and tax receipts). We can see in the data that this is indeed true, as it is has to be. If you look at the upper plot in the figure, you can see that the private sector in black (mostly in surplus, as individuals like to save) is a mirror image of the public sector in grey (mostly in deficit, because the private sector chooses to saving rather than spend).

As the government chose to try and reduce the deficit after 2010, the private sector surplus necessarily declined which reduced growth. Now if the government choses to run a surplus then the private sector has to be in deficit. As the private sector is made up of households and corporations, it follows that as government tries to reduce its deficit it is likely to push either companies or households into the red. Back in 2000, it was companies that went into the red, but now it is households. The household data (the bottom plot in the figure) shows us the household started to spend more than their income in 2017, and have now been in deficit for 10 successive quarters. This is shocking because it has never happened before. In this era of very low interest rates, it may be easier for households to sustain a deficit, but still the situation cannot last. Unlike government, a household cannot roll over its debts forever.

In the middle plot, I have included our balance with the rest of the World (we are in deficit so red, and the rest of the World is in surplus). There are different viewpoints about how important this is. One argument is that it does not really matter whether savers live in the country or not. However, wherever they live, if savers decide to sell pounds in exchange for another currency, then the pound depreciates. If this happens, then the indebted citizens of the UK will no longer to be able to afford those more and more expensive imports and the balance of trade deficit will reduce. Into the mix, we need to add political uncertainly that also impacts on exchange rates.

It seems that at the moment, in both economics and politics we are living through a bizarre hiatus, waiting to see how things might pan out. At some stage, consumers will have to repay their debts. The economy will tank, interest rates cannot go much lower, and fiscal policy will be the only way out. Better get ready by starting the Green New Deal now rather than latter.


  1. john 77 -

    The demographic balance of the UK has changed over the years and there are far more old people. The baby-boomers born between 1946 and 1949 have all (or almost all) retired and are spending the pensions/savings.
    Therefore there is a good reason for the household sector to move into deficit. There is also a bad reason – young women with adequate incomes choosing to spend far more than they earn and falling into debt. Neither of these should be within the control of the government.

      1. Peter May -

        Agreed entirely about austerity. It is self harm on a large scale – or at least harm by a cruel, lying government on its people.

        But the rest of the World has always worried me. When we import sometimes 60%, sometimes 40% (depending on season0 of our food we are dependant to some vital extent on the kindness of strangers. Now one can say Brexiter style that they will always want to supply the UK’s large market and they’ve been doing it for ages. Generally that’s true, but suppose crop failure – that is automatic imported inflation as I mentioned here http://www.progressivepulse.org/economics/13257 – or maybe we’d just prefer to go hungry. We have an economy built on much more uncertainty than should be necessary.
        The economy needs to be as diverse as possible so we can do lots of things ourselves and most of the rest we can do with near neighbours.
        I certainly agree that offshore wind and tidal power looks like salvation for the UK in so many ways. The government should be driving this. They aren’t of course and today we even had a semi national power cut….

      2. Johnson Matthey -

        Define austerity.
        Real government spending per head is more now than it was in 2007. The last 10 years government spend is the highest aggregate spend of any 10 year bloc in UK history.
        By the way a 1 year increase in median age is rather significant – about 2.5%. And you are pointing to a 1% of national income net household deficit and using that to say the government is doing it wrong. Yes, the government is doing things wrong, by infringing our economic and personal liberties and subsidising the rich, but that was not your point which was that government overspending is insufficiently large.

      3. Peter May -

        I’m sure Charles will be replying in due course but 1% net household deficit matters not a lot if you’re borrowing £5k for a car. But matters vitally if you’re £50k in personal debt and struggling to pay rent and feed your children and borrowing so to do. The real problem always is the distribution – the fact that borrowing in order to pay everyday expenses is much more widespread than ever before.

      4. Charles Adams -

        I would define austerity as a reduction of government spend as percentage of GDP.

        Government spending was reduced from 44.9% to 38.5 between 2010 and 2018.


        When government cuts spending it also reduces GDP (unless it can do so while maintaining above average growth rates) so has to cut even more to keep on reducing the percentage. A reduction in government spending as percentage of GDP reduces the money supply in the economy which means the private debt has to increase in order to maintain the level of activity.

  2. Johnson Matthey -

    You’re stating the obvious that a household with a lot of debt relative to their income will struggle. The person in your example needs to seek debt advice, and that could lead to an IVA, forbearance or similar. There is data to show that there are more evictions of bad tenants than say 12 years ago, but far fewer mortgage repossessions. I think I know something that could help here, but it would be a neoliberal solution and would rather upset the CPRE. Do you want to know what it is?
    But you’ve gone rather off point from what Charles is saying, which is that government overspending has been insufficient, resulting in the savings ratio turning negative.

    1. Charles Adams -

      “government overspending has been insufficient” is one of my points, except I would call it government investment rather than overspending.

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