Readers Question: Hi and thanks for your article “UK Budget Deficit”. I am ‘new’ to economics, but trying to do my bit to get to understand it all. From your article I followed links and found the ”Pocket DataBank” published by the treasury. Being a bit retentive about things, I tend to learn by adding things up, and if I my total matches published totals, then I know I’ve understood things correctly.I got confused on tables 11A & 11b

On 11a, I found:
“FINANCIAL YEAR PUBLIC SECTOR BORROWING FIGURES (£ billion) >> Net Borrowing (ANNX) 2011/12″ = -123.8bn

But on 11b, it says
“PUBLIC SECTOR NET BORROWING (J5II) 2011/12″ = 124.7

And then your article quotes £119.3 billion

Would you be able to help me understand the differences?

I spend a lot of time researching data on government borrowing. It is definitely complicated by the fact that there are many different variations – different data series – of essentially the same thing. I once spent a long time researching debt statistics and came up with this post. Understanding debt statistics – but even that does not include every variation of the many different series and data tables. It does frustrate myself too.

I don’t want to further confuse you, but if you look at ONS site (the main place I go for statistics, you will see public sector net borrowing).

In 2011/12 public sector net borrowing was £121.6 billion; this is £4.4 billion lower than the Office for Budget Responsibility (OBR) forecasted net borrowing for 2011/12 of £126.0 billion

so that’s a 4th version to throw into the mix.

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The government have repeatedly pointed to their ‘achievement’ of cutting the budget deficit by 25% in the past two years. But, how has this been achieved? and has it actually helped the UK economy?

UK Net Borrowing

This shows a 25% fall in annual borrowing between 2009-10 and 2011-12.

(Net borrowing – is the annual amount the government have to borrow. The amount spending exceeds tax revenue.)

Public Sector Net investment – HM Treasury psf

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Readers Question: Why is it, that some countries e.g USA, UK, Japan etc can electronically create money whereas India, Germany, Euro etc have to work, trade and manufacture exports and growth to keep pace with the above mentioned ?

Any country could electronically create money if they wanted to. To summarise, the only good time to create money is when the economy is in a liquidity trap – a deep recession where even low interest rates fail to close the output gap.

The US, UK and Japan have pursued quantitative easing because the recession of 2008-12 was very deep and conventional monetary policy seemed ineffective in ending the recession.

Arguably, Quantitative easing would have been more successful in UK and US if it had been combined with expansionary fiscal policy or giving to consumers directly. But, the hope was creating money electronically (quantitative easing) would lower long term interest rates, increase bank lending and promote economic recovery.

It is important to bear in mind, creating money doesn’t create any actual output. It’s purpose is to increase demand and help unemployed resources to become better utilized.

Why doesn’t the Eurozone create money electronically?

The ECB is much more reluctant to create money. In the past, they have argued that constitutionally they cannot (though this has become somewhat more blurred recently) . The big fear that Europe (and Germany especially) have is that creating money will cause inflation. Therefore, the ECB have been reluctant to pursue quantitative easing to help the economic malaise.

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A look at the changing profile of energy production in the UK.

In the early 1960s, coal provided 81% of UK energy needs By 2010, this had fallen to 30%. At peak times in cold winters, coal use can increase to 40% of the UK’s electricity production. Despite a revival in coal production in the last year. A third of our current coal power stations are expected to close by 2016 so that they meet EU air quality legislation.

The % of electricity from coal has continued to fall. (The big drop in 1984 was the coal miners strike.)

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A helicopter money drop is a form of monetary policy in which a Central Bank prints money and distributes it directly to households/consumers. The aim of helicopter money is to boost nominal GDP, overcome deflation and help reduce unemployment. In normal circumstances, printing money will be inflationary. Economists usually suggest helicopter money in a liquidity trap and period of deflation.

The idea of a ‘helicopter money has been referred to by Milton Friedman and picked up by the Chairman of the Federal Reserve, Ben Bernanke. One image of ‘helicopter money is a  helicopter dropping cash from the sky, which presumably would be picked up and spent pretty quick. On a more practical vein, it could involve the Central Bank sending a cheque in the post to people across the country.

In a period of severe deflation, the cash sent could even have an expiry date. Meaning you have to spend it in 6 months or lose it. This expiry date will prevent people just saving it.

Purpose of Helicopter Money Drop

• Increase the money supply
• Target higher inflation
• Increase aggregate demand in the economy when conventional monetary policy has failed. (e.g. in a liquidity trap with zero nominal interest rates)

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