THE BLOG
09/03/2015 08:30 GMT | Updated 07/05/2015 06:59 BST

The Funding Illusion

Suppose a country is importing more than it exports, and suppose that its citizens want to net save. In this case, if the population wants to maintain the same standard of living it is used to, then the government must run a deficit. This follows from the National Income Identity.

The UK, in 2014, ran a trade deficit of £34.8bn. It also seems reasonable to assume that people would like to net save and maintain the same standard of living, if not improve it. Then, it follows that the UK government must run a budget deficit. This is because net saving and importing "leaks" money from the economy, and in order to maintain living standards there must be some equivalent "injection" of currency from somewhere. The only remaining place for such an injection (if not the foreign or private sectors) is the government.

Though this is a very simple truth, it appears that very few people in the media or political profession appear able to grasp it. To take some examples, consider the Green Party Conference. On the Green's promise to give free social care to over 65 year olds, the Guardian committed that they "did not explain how this would be funded." The Telegraph, with almost identical words, said of plans for free childcare that they have "not said how it will be funded." Or consider the Eurozone's response to Greece. "Tell me," as the ECB council member, Luc Coene, asked, "where the money should come if the Greeks do not want reform?"

These examples demonstrate the lack of honesty or complete stupidity that pervades the media and political class: the government must finance or fund its spending somehow. But the truth is that, in its current state, the UK economy -- and all economies across Europe -- actually requires government deficit spending, and quite a lot of it too. Furthermore, this bias completely misrepresents what money actually is. It is not some limited finite resource we must dig up from the ground or harvest from trees, and then distribute to the government and private sector. Rather, to quote the economist Alfred Mitchell-Innes, money "is credit and nothing but credit" -- and credit is potentially infinite. Therefore, there are no funding issues concerning the credit issuer: they just issue more credit.

By insisting that the state does face financial restrictions, the media is complicit in the propogation of further austerity -- essentially, misleading the public. This is because this is the assumption that austerity-proponents rely upon: that a nation can run out of money, therefore to avoid that it should not run deficits.

However, once we come to terms with what is truly going on, there is no reason not to endorse the more "radical" proposals that require spending. If, as a society, we decide that we should provide free childcare, renationalisation, net import goods and net save, then we should and can. If Greece decides -- as it did -- to end austerity and solve its humanitarian crisis, then there is no reason the Greek government cannot issue credit to this end. But there is absolutely no basis for anyone to retort, "how can it be funded?"