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3 April 2020

We need to dispel once and for all the myth that when a government runs a big fiscal deficit grandchildren pay the bill.

They do pay part of it but the greater part they do not.

There is only so much output in a country in a fiscal year.

When in an emergency, as now, the government borrows a great deal, it arrogates more of that output to itself.

This year that is necessary because the money is being used as life support to the economy. Government finances in future would be much worse if it did not do so.

The government bonds that are issued to obtain the money are willingly bought by our very efficient financial markets.

They have money that they must place on deposit or invest somewhere and to place it anywhere else than with the state exposes then to the risk of loss, default or exchange rate fluctuation.

They know that the real rate of return may be paltry or non-existent and that in the long term this may not be the best investment but they willingly take the risk.

Once purchased most of the risk no longer lies with the government or 'the grandchildren' but with the holders and their successors in title to the bonds - with the markets.

The government stock, War Loan, illustrates the point.

This was issued in wartime so as to take more of total output to direct to the war effort. The corollary was that private comsumption was reduced which was desirable in the circumstances.

The purchasers largely bought it for patriotic reasons not knowing if it would be a good investment. If not necessarily for them, if they sold before the 1960s, but for most of their successors in title it proved not to be.

Decades later governments redeemed it at a fraction of the GDP it had consumed in wartime due to later rampant inflation diminishing the debt's value in real terms.

The reason for purchase is largely irrelevant. Once government had sold it the risk was with the holders. These days it will be with the financial market institutions not small holders.

Today, should the markets not buy our government stock the Bank of England will through quantitative easing. The governments of 2010-2016, partly taking their cue from the preceding government were, in nominal value terms, the largest deficit financers in the history of the British state. QE mopped up much of the stock.

Were the Bank of England not to buy, the real rate of return can be raised. World class financial markets in London will always do business with the government and one day a future government will redeem on terms favourable to 'the grandchildren' and sensible governments will roll over the debt till then.

It is this year's output that is being pre-empted not theirs.


The second myth than needs dispelling is that cleaners paid a higher percentage of their income in tax than hedge fund managers.

Do the sums properly for the time the statement was made and you will find it is fake news.

When Nigel Lawson proposed having capital gains tax rates at the same rates as income tax there was only about a 4% separation between the two so it would have been administratively convenient but it was still a bad idea like shadowing the ERM, another of his ideas.

Now, with Covid-19, you can see why.

If you set up a business there is about a one in six chance that you will still be there in a decade's time. It is like playing Russian roulette with cartridges in five of the six chambers.

If you put up a quarter of million to set up a good restaurant and Covid-19 forces you into bankruptcy the loss is 100% yours. It cannot be offset against anything else. There will not be another restaurant or even employability.

You probably never paid yourself much and your only real hope was to sell it on for double your investment when your dreams of making a name for it were realised.

Subject your gain to the same rates as income tax, if you spin the barrel 'right', and the conclusion is clear: do not go into business.