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.