Jack Mosse unpicks the flawed understanding of national debt that has pervaded the Conservative leadership contest and Tory economic policy for a number of years

To fund her tax and spend plans, Liz Truss has promised that she will extend the period over which we would need to pay back our COVID-19 debt – to which Rishi Sunak has responded that there is no such thing as ‘COVID’ debt. This exchange between two seasoned politicians – one of whom will be our next prime minister – provides a terrifying glimpse into the shaky foundations of what passes for economic knowledge in 21st Century Britain.

If Truss and Sunak can’t even agree on the fundamentals of the economic world we live in, what hope do the rest of us have?

When it comes to the economy, we are strangers living in a strange land. The dominant narrative for the past decade or so has been austerity. ‘We spent too much in the 1990s and 2000s and now we’ve got to tighten our belts; the government simply can’t afford to support those on disability benefits, the NHS, local councils, or those struggling to get by in a low wage economy’ so the narrative goes. We were ‘all in this together’, the infamous Conservative slogan maintained. And we all needed to suffer until the government’s accounts were back in the black.

Then came the pandemic, during which the Government printed vast sums of money in to pay people who weren’t able to work, while also funding a mammoth response to a 100-year healthcare storm. So, where did that money come from – and was it there all along?

This seems to be the fundamental question facing our policy-makers at present. But the dearth in economic knowledge I discovered in the five years I spent researching how we, as a society, understand our economy offers very little reassurance for those hoping for a swift and successful end to our current economic woes.

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While conducting research for my book, I spoke to hundreds of people, many of whom were involved in policy-making, and read up around contemporary economic understanding in the UK. One figure from a poll conducted by the group Positive Money stood out: it claimed (based on a sample size of 50)that 85% of MPs don’t know where money comes from.

I initially found this figure hard to believe, but the more people I spoke to about the economy, the more believable it became.

There simply isn’t any public discourse or information that would inform people about this fundamental aspect of how our economy works. Discussions around public debt, government spending, banking reform and how to deal with inflation – the discussions that currently dominate politics – have very little grounding in reality.

When it comes to COVID debt, between April 2020 and July 2021 (the furlough period), the Bank of England, a government-owned body, bought 99.5% of total new debt issued by the Government to pay for COVID support schemes. That money is now effectively, as Jacob Rees-Mogg put it “owed to government by the government”.

Yet this crucial fact is ignored in mainstream economic discourse.

Truss has claimed that the UK can borrow long-term to service its COVID debts and Sunak has said there is no such thing as ‘COVID’ debt – debt is debt and must be serviced. In fact, the debt-owed to the Bank of England is nothing more than digital numbers that one branch of government has said it will transfer to another branch of government, at some point in the future.

The idea that the nation’s economy is akin to a household budget – with a finite pot of money – is a myth I ran up against time and time again in my research.

This is the notion – alluded to by both Conservative leadership contenders – that the state can only spend what it borrows or collects through tax. That, like a household, it has to balance the books.

But is that true of a household with a money printing machine in the basement? No. And it’s not true of state spending either. We can and do create vast amounts of money to deal with crises – money that we don’t need to pay back if we don’t want to.

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What does recognising this mean?

The first thing to note is that it does not mean we can just print money to solve our economic issues, especially not now, with inflation running into the double digits. But it does mean that there is far more policy space for state spending at times of crisis.

We are entering into a time of crisis. Inflation brought on by the rise in global fuel costs will be ruinous to millions of households and businesses if the Government does not act to protect them. And acting means spending money; money which, unfortunately, Truss and Sunak claim we don’t have.

Instead, their approach is to act as if their hands are tied, as if they have no option but to crash the economy, creating destitution and unemployment in order to get inflation under control.

This will work – in bringing inflation down – but vast amounts of people will suffer and it will put the UK on shaky ground when the inflationary spike has passed.

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Instead, a recognition that the factors driving inflation (dramatic rises in global fuel and gas price) are temporary, and that there is money to spend to protect the economy and invest, allows for a far more positive vision.

Indeed, data from the World Bank shows that most commodity and energy prices fell in July, including crude oil by 10%. This will take time to filter through to the high street, especially in Europe and the UK, on account of dependency on gas imports. But, in time, new supply lines will be established, and prices will return to normal.

When this happens (the Bank of England thinks it will be next summer), we want to be in a position to grow, to make major green investments and to bring our education, healthcare and overall standard of living back up to, and even above, the level attained in other comparable developed nations.  

Yet, there’s little chance of this happening, if we find ourselves standing in ruins of an economy destroyed by policies designed to bring inflation down by crushing business and household spending power – and, crucially, if the household budget myth is not dispelled.

Jack Mosse is the author of ‘The Pound and the Fury: Why Anger and Confusion Reign in an Economy Paralysed by Myth

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