What they did not tell us – austerity pushes households into the red

To understand what is going on you have to look at data. I like sectoral balance data because it shows us how money is flowing around in the economy. I have talked about this before (here and here) but will try and keep it simpler this time. Both David Graeber and  Richard Murphy have also recently discussed worrying signs in the sector balances. As David Graeber says it is easiest to understand the principle of balance by considering just two sectors, say public (government) and private (which includes households companies and other institutions, both home and overseas). If government spends £10 billion more in one quarter than it collects in tax then it has a deficit of -£10 billion and the private sector gets an injection of +£10 billion. Next we divide these amounts by GDP. If GDP is £500 billion per quarter, then government has a deficit of -2% of GDP and the private sector has a surplus of +2% of GDP. We do this for each quarter and see what happens over time.

It follows that if we plot the quarterly public (surplus/deficit) and the private sector (surplus/deficit) they will be mirror images of one another. The actual quarterly data for the UK going back to 1987 is shown below* – perfect mirror symmetry (until the last few quarters where the data is not yet final).

Now we break up the private sector up into components. There is a component corresponding to households, one for companies (split between financial and non-financial), and a component that goes to overseas savers. Below the main plot, I just show the household sector (in red) – that’s us!

You can see that mostly households are in surplus. We are savers. But there are times when we go into deficit, 1989 (followed by a recession in 1990), 2003-08 (followed by a recession in 2009) and in 2016- followed by? The worry at the moment is that the household deficit is growing so fast. In fact it is larger now than in any quarter before the global financial crisis.

If you go back to the upper plot you can see that the government is actually doing what it said it would and reduce the deficit. But what they did not tell us was that this means that the debt ends up on us. Households do not have very broad shoulders – their income stream does not last forever and can be volatile. We cannot sustain this for long. Sooner or later something has to give.

  • You get get the data directly from the ONS or use Neil Wilson‘s useful spreadsheet.


  1. Taffer -

    You should probably mention that balance of payments is crucial – if we are capital importers than one side of the fiscal balance has to make up the deficit as money flows out of the country and in via debt financing/ investment. If we are capital exporters, then we are running a trade surplus and thus both sides of the fiscal balance can be in surplus (in theory).

    1. Charles Adams -

      Yes, in principle the exchange rate should balance trade but imbalances persist for longer than we might expect. Investing more in R and D would help. We are at 1.7% of GDP whereas strong exporters like S. Korea are at 4.1%.

  2. KeithP -

    If the government spends £160 billion in one quarter and receives tax and other income of £150 billion the government account (cashbook) is credited with £160 billion and debited with £150 billion. £160 billion is debited to the various private / commercial entity cashbooks, whilst £150 billion is credited. £10 billion of “cash” is injected into the economy to be spent or saved.

    Theory is that the government then issues gilts to the value of £10 billion in order to rebalance its account thus creating another income stream – interest on the gilts – for the private sector but taking £10billion in cash (liquidity) out of the economy. Not however affecting the P & L accounts /GDP (apart from the interest on the gilts).

    As we have seen the balancing exercise has been shown to be a notional one since the BoE QE cashbook reverses the effect of the gilts issues. It woul appear that in the domestic economy the government need not borrow, it could simply maintain a balancing account with the BoE.

    It seems self evident that both the quantum of the government spend and the size of deficit/surplus impact upon economic activity. This was clear in 2010, I wrote to my MP at the time pointing out that the austerity risk was huge; response was that Nick Clegg had had discussions with the Treasury and that the reduction of the deficit via reductions in government spending was supported by all parties.

    We were not told by anyone that GDP growth would be funded by a dramatic increase in household borrowing.

  3. David Malpas -

    Is there also a large demographic component to the issue? The lower chart manifests some cyclical effects from expansions (surplus) and recessions (deficits) but it seems the trend might be lower. In Japan, the financial crisis around 1990 was temporally coincident with the rollover in the dependency ratio (number of workers per dependent) and lower savings rates. The financial crisis period of 2008-12 showed a similar pattern for the US and European countries. The Fed modelled the impact of demographics on the US economy ( https://www.federalreserve.gov/econresdata/feds/2016/files/2016080pap.pdf). This model generated a household savings rate that peaked in the 1980s/90s and then fell, falling most rapidly during 2010/30 (page 44) as the baby-boomer generation retires in larger numbers and switched increasingly rapidly from saving to consumption.

    I’m not implying that austerity isn’t causing household savings rates to fall (and debt to rise). If you run a large and persistent current account deficit (thus a capital account surplus) then at least one of the categories on the domestic side has to run a major deficit. It’s just that fiscal expansion may well have been necessary just to help offset the impact of demographic challenges. An ideologically driven policy of fiscal austerity surely just exacerabates the problem further.

    1. Charles Adams -

      Good point but our demographic effect is less severe than in Japan (Japan is now at 250% public debt and doing quite well). I think the UK problem started when companies went into surplus. Companies are supposed to borrow to invest and they are not doing that – government should have focused on creating demand rather than giving companies tax breaks – demand comes from households! As both you and KeithP say, if overseas are in surplus, companies are in surplus and government wants to be in surplus, then growth is only possible if households go into debt – history suggests that does not work.

  4. Peter May -

    Steve Keen always says it’s not the (so called) deficit that is important it is the balance of payments. And of course with the government not investing aka austerity the country is at an immediate disadvantage in trying to improve that. Cue lots of inflow of foreign money into property rental portfolios, buying up UK airports, railcos and companies in general. That is rent extraction from the UK by the rest of the world. We should be at least trying to sell them guilts where the interest/rent is lower and the influence less.
    Basically austerity means that there is a double whammy – for individual prosperity and for the country’s.
    The Tories say they are economically competent. In fact they’re criminally irresponsible with our economic prosperity.

  5. Tony_B -

    Conservatives claimed Labour’s debt caused the Great Recession.

    If you look at sectoral balance (debt side) data (Graeber or Murphy links above) e.g. between 2004 and 2009 Govt debt (yellow) is many times household debt (blue). Do they have a strong political point? What is the counter argument, that high aggregate private debt (many owners in distress) is unsustainable but Govt debt (one owner managing [1]) is OK?

    You have to say the Conservatives’s simple message succeeded, delivered by the MSM and accomplices.

    [1] http://pwlb.gov.uk/docs/publications/investorsguides/mb230611.pdf

    1. Charles Adams -

      1. The 2008 Global Financial Crisis was global. First bank to get into trouble BNP Paribas was based in France! It would be odd and probably impossible for UK politics (fiscal policy) to cause a global financial crisis.
      2. Government debt is sustainable. The government can run a deficit = growth + inflation forever without the ratio of debt to gdp increasing. If growth and inflation are both 2% that is a deficit of 4%! Private debt (especially for individuals) is not sustainable because we cannot roll our debt over indefinitely because our earning potential has a finite and relatively short duration (a few decades only).
      3. What really went wrong in 2007 was the culmination of neoliberal policy where a larger share of profit goes to the owners of capital rather than the workers/consumers. This is why households drifted into the red in 2003 and are doing so again now.
      4. The Conservative message worked because too few people understand even basic economics which is bad.

      1. Tony_B -

        @Charles – thanks for a structured, numerate response and taking time. That’s clarified it for me, I’ve increased my sparse knowledge of economics. Graeber’s Newstatesman article was less clear and, of course, his was a political statement. You’ve explained how to factor in the magnitudes of these sectoral balances, that puzzled me earlier to assess.

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