John Mason MSP Doesn’t Know His Debt From His Deficit

6yo-deficitJohn Mason MSP is a former accountant who is the Deputy Convener of the Scottish Parliament’s Finance Committee.

Last month he was the focus of a lengthy conversation on twitter after stating that the “UK deficit (is) £1.5 trillion”.

For those of you with time to squander the entire twitter exchange can be found here: https://twitter.com/JohnMasonMSP/status/703699151461203968

When it was pointed out that the annual deficit is actually around £80 billion and that he was confusing this with the national debt (which is around £1.5 trillion) Mr Mason came back with the question: “How is national debt different from national deficit?”

Several people attempted to enlighten him (including the 6 year old son of one of the participants) but Mr Mason was unmoved.

By his logic the national debt is the sum of accumulated deficits, therefore “Deficits equal debt. So no difference in practical terms.”

Let’s deal with this first before we go on the more serious implications of a Deputy Convener of the Finance Committee of the Scottish Parliament not knowing his debt from his deficit.

If deficits equal debt then  every new deficit must be a permanent addition to the pile of debt. By this definition of deficit the value of the national debt can never decrease, it can only stay the same (no additional deficits) or increase (by the value of future deficits).

The corollary of this is that surpluses equal reserves, which is equally ridiculous.

Of course what Mr Mason really means is that the value of the national debt at any moment in time is the net value of all preceding deficits and surpluses that the government has chosen to fund by borrowing.

This may seem like a pedantic point to make but it brings into the argument the notions of cashflow and choice which are at the heart of the government’s role in the economy.

(Note: the preceding three paragraphs have been edited in response to Simon’s comment below which made me realise that my previous attempt at framing this argument was inadequate and ambiguous. Thanks to Simon for pointing out the flaw.)

It’s disturbing that a former accountant can be so sloppy about such things but Mr Mason’s lack of precision in defining deficits and debt is less worrying than his apparent ignorance of the effects of government borrowing on the economy of the nation.

He says: “My argument is that there is little practical difference between deficit and debt. Both are undesirable.”

and: “Surely the obvious solution to both is to run a surplus?”

This is classic “handbag” economics, which pretends that the government is mother, the custodian of the household purse who can only spend what she earns and not a penny more or the bailiffs will be at the door and we’ll all be ruined.

Margaret Thatcher was a great proponent of handbag economics, and George Osborne is following dutifully in her footsteps. Maggie was far too sharp to believe that there was a single shred of truth in the handbag analogy (I’m not so sure about George) but she recognised its value as a weapon in the crusade to shrink the size of government. “We have to live within our means, children, and that’s all there is to it.”

But the government is not an individual household struggling against the weather-gods of the economy. The government, along with the banks who control the money supply and the capitalists who control the means of production, is one of the gods. The government has a significant degree of control of the economy’s climate. Deficits and debt are tools that governments use to prevent economic droughts and storms.

What is a deficit? It’s a decision by the government to take money that’s lying idle in the bank accounts of corporations and wealthy individuals and cycle it through the economy as government spending. What other choices does government have? How else can we provide this degree of liquidity to the economy? What are the alternatives to government borrowing?

The government could increase taxes, but a lot of the money that’s gathered as taxes is already being used in the economy, which means that tax-and-spend isn’t generally as effective as borrow-and-spend when it comes to increasing the flow of money through the system.

And that’s about it, really. Borrow-and-spend or tax-and-spend are the only effective options that government has that are politically acceptable. The idea that adjusting central bank interest rates can get money moving through the economy has long been exposed as a fantasy, as is the neocon favourite of cutting taxes and waiting for the “trickle down effect” to kick in. Even the IMF has now admitted that trickle down is a myth. A recent unconventional alternative, quantitative easing (converting government debt into cash for rich people to play with on the stock market) is harder to sell politically and has had very little positive effect on the real economy.

So a deficit, Mr Mason, in our current financial/fiscal system, is an essential mechanism for making sure that our economy has enough money flowing through it to keep your voters happy.

And the debt? Well, as some of the tweeters pointed out, that’s what will pay for your pension when the voters wise up and realise that you’re not really smart enough to represent their interests in parliament.

If we reduce the national debt, or eliminate it as Mr Mason, George Osborne, and other economic illiterates would like to see happen, with what do we replace it? Where are the private sector investment vehicles that have an equivalent bullet-proof, copper-bottomed rating as UK sovereign government debt?

Readers of this blog and my book will know that I am no fan of our current financial and fiscal systems but until we replace them with something better we must accept that government deficits and debt are essential to the health of or economy.

It is depressing that a member of our Scottish Parliament with a seat on the Finance Committee hasn’t the wit to understand this. I fear that the road to reform will be a slow and hard one.

2 thoughts on “John Mason MSP Doesn’t Know His Debt From His Deficit

  1. Malc

    I only got a few lines down before you started talking tosh so didn’t read all the way.

    Deficit in country terms is exactly the same as P & L in company terms and debt is the same as accumulated losses (or shareholders funds). Accumulated losses are the sum of all the P&Ls – it has always been thus.

    P&L is not the same as cashflow – so in your example with a deficit of a billion in the first six months and a surplus of a billion in the second, the net deficit (or surplus) for the year is zero which is the same as the increase in national debt.

    Sorry but you have this one wrong, and the national debt is basically the sum of all the deficits, less all the surpluses (rare), assuming of course that we started at a zero position.

    Suggest you pen a suitable correction!

    Cheers

    S

    • Simon,

      I thought I had made that bit of my argument very clear but your response to it has made me realise my error. What seemed lucid to me at the time of writing is unforgivably ambiguous.

      I have removed the offending section from the article and replaced it with something that is hopefully easier to grasp.

      Thanks for the help.

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