Tis the season?

overseas-aid

You may have seen this graphic, or some similar sentiment, doing the rounds at the moment.

As you may be aware, successive governments have committed to spending 0.7% of GDP on aid to some of the poorest and most needy people around the world. It’s also a tiny amount of money. The plot below makes this clear: it’s a small amount even of the interest the government pays on its national debt, and (not plotted) about a twentieth of what we spend on pensions each year.

Foreign Economic Aid and Interest on National Debt since 1993

So, practically, firstly, stopping this money would make little difference to the government’s overall budget. Bear in mind that the deficit is still much larger than 0.7% of GDP.

Secondly, there are many, many things that the government spends lots of money on that might be better reconsidered if there is a need to cut other things before we spend more money on flood defences (and helping those affected by the floods).

Third, as we’ll learn about this coming term, governments have budget constraints, and if they spend more than they get in tax receipts they run a deficit (as the UK government has done for a long time now), and need to borrow. As such, if something is important (hence has a good rate of return, however measured), and can be financed at a low interest rate (as is the case at the moment), then a better argument is that it should be funded by more borrowing.

Finally:

Borrowing… again

News today is that government borrowing for the month of October was the highest it has been for six years.

Borrowing like this contributes throughout the whole year to the deficit – the gap between government receipts (taxes, mainly) and government spending.

As you’ll be well aware given the recent passing of the Fiscal Charter, the government is set on austerity and on running a budget surplus – by 2019/20. So it’s not too much of a problem with regard the Charter that borrowing is up, but it nonetheless shows the difficulty of getting government spending under control.

Not least, various parts of the NHS are running large deficits, Network Rail projects (in and around Reading) are showing eye-watering overspends, and probably biggest of all, pensions continue to rise at 2.5% even while inflation is at -0.1%. The first two are symptomatic of the difference between fiscal plans, and fiscal outturns – things don’t always happen as expected and can impact government finances as a result.

Today’s Conversation: China and FDI

Image from the Guardian 🙂

Today’s Conversation in Economics is on Chinese infrastructure investment in the UK. Last week the main announcement during an official visit to the UK of Chinese president, Xi Jinping, was a one third stake in the development of a new nuclear plant at Hinkley Point. This follows on from other recent investments, or expressions of interest, in parts of the UK’s rail network (HS2), and other infrastructure projects.

There is so much to discuss about these investments; many question why it is necessary to secure funding from China for large investment projects, particularly as interest rates remain very low (c.f. Corbyn’s People’s QE which attempts by a different (and inflationary) method to do the same thing).

It is clearly a reflection of the emerging economic power of China, which became the world’s largest economy in 2014. In addition, its regular and massive trade surpluses have left it in a position with lots of “cash in the bank”, so to speak.

With regard China’s investments in the UK (we’re 8th on its list of favourite places to invest), another criticism is that it’s nationalisation – just by China, rather than the UK: “The government will indeed put some of our most vital infrastructure under state control – but the states in question will be France and China.” Of course, the reality that China takes a one-third stake in Hinkley Point is ignored. Also ignored are the huge costs and uncertainties involves in investing such an epic amount of money (£24bn!), without knowing what the outcomes will be in however many years it is until the plant is operational.

Hence, an alternative take here is that actually, the UK does well. We get other countries to stump up the finance for a cripplingly expensive infrastructure project. The Chinese see it as beneficial, as must the UK government, else one party of the two negotiating would not agree to it, and the trade would not occur.

“Living within means”

Last night, the Fiscal Charter, blogged about yesterday and the day before, passed in Parliament. Aside from the politics of Labour’s stance on it, the essence of this charter is that governments must run budget surpluses (so tax receipts must be higher than government spending) in the economic “good times” (defined as real GDP growth of less than 1% a year, as measured on a rolling four-quarter basis).

This is far from the first set of fiscal rules devised by a government or governments; Gordon Brown famously had his golden rule of only borrowing to invest over “the cycle” – so balance the current budget (spending on current consumption like on benefits), but allow borrowing for public infrastructure projects, while the eurozone has the Stability and Growth Pact, which limits deficits and debt levels of eurozone members. Brown’s rule was never enshrined in law, of course, but this need not make a particularly large difference since it’s not at all clear how any deviation from the fiscal charter would be punished, should it happen.

However, the main thing I want to write about this morning is a message we often hear, namely that Britain must “live within its means”. It is simply another way of implying that governments have to be like households, but yesterday I talked about why, outside the eurozone and provided a government can borrow in its own currency, that’s not a useful comparison.

One’s own means include its credibility as a debtor; are we expected to repay debts we incur? Because the vast majority of households in the UK take on gigantic mortgages at some point in their lives, many multiples of the size of their income, but do so on the basis that they will be able to pay off that large loan over a long period of time: they are credit-worthy. If a government can print its own money and borrow in that currency, then it is creditworthy – it will be able to pay back, even if the resulting money is worth less due to inflation.

Hence living within one’s means need not mean running a surplus and never borrowing, just as it doesn’t mean that for a household. More next term…