Very basic politics #3: where has all the money gone?

[This was written in hurry: please forgive any typos or other mistakes; better still, point them out in the comments, and I’ll fix them.]

As noted in part 1, the UK’s annual fiscal deficit (the difference between its income and expenditure) is about £100 billion. The population of the UK is 64 million, so that means that as a nation we are spending £1500 per person more than we’re bringing in. To put it another way, we each need to chip in one and a half thousand pounds a year to balance the books.

That’s why Liam Byrne, the outgoing Treasury chief in 2010, famously left a note saying “I’m afraid there is no money.


This is the note that David Cameron is forever waving around in debates (although I note that he misquotes it as “there is no money left“, which is subtly different. But we’ll let that pass.)

The question of course is why there is no money.

Is it because we’ve spent it all on unemployment benefit for lazy scroungers? We know it’s not that, because the unemployment benefits budget is only £3.8 billion — meaning that even if we cancelled all unemployment benefit, that would only clear one 26th of the deficit.

Did the money go into the bank bailout? No. That was financially catastrophic indeed — the National Audit Office’s figure is £850 billion in 2009 alone, though estimates vary wildly. But the point is that it was a one-off disaster in 2009, and doesn’t directly explain why we are continuing to haemorrhage money.


As best I can make out, the ongoing problem is the old one of the rich getting richer while the poor get poorer. It’s well documented that the wealthiest 1,000 families in Britain, far from bearing their part of the burden of the financial crisis, have more than doubled their wealth since 2009. The Sunday Times “rich list” estimates that their collective wealth has grown by 112% since the banking crisis, so that they now control £547 billion — which is more than the combined total of the poorest 40% of British households. Since the UK has 26,473,000 households, that means that 1000 families own more than ten million do.

If you’re a socialist at heart, you might object on principle to this degree of inequality; but if you’re a capitalist at heart, you might think it’s actually perfectly reasonable that some people will do better than others. Paul Graham, for example, whose insight I respect tremendously, has argued that inequality of wealth is a good sign for a country’s culture and economy. Where’s the problem?

It’s here: if you already have a billion pounds, there is nothing you can usefully do with another billion. When a billionaire doubles his wealth, the extra billion is essentially lost to the economy. Because you simply can’t meaningfully spend more than a certain amount on houses, yachts, islands, what have you. Beyond a certain level of wealth, the limiting factor on your spending is not how much money you have to spend, but how much time you have to enjoy the things you buy.

When someone on, say, £100,000 a year gets a rise of £10,000 and spends it on  new car, that money continues to circulate in the economy, making its way into the hands of the manufacturers, their employees, the people who the employees buy their food from, etc. But that doesn’t happen when the very rich increase their wealth. The money doesn’t work — it just sits in bank accounts, often offshore ones.

That’s why David Cameron can argue, quite rightly, that the GDP has grown under his tenure as prime minister, but regular people are not feeling the effect of this growth. Yes, money is being generated: but it’s a simple observable fact that it’s not reaching the people who need it most. In fact, much of it is simply being moved offshore.

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Why is this important to understand?

Because the facts contradict a lot of the rhetoric that surrounds this election. It’s common to hear politicians say things like “we had to make some tough choices, but we’re all in this together”. We simply are not. The wealthiest are actively benefiting from the financial crisis, and the burden is being borne by the poorest. It really is that simple. Money is being taken out of our economy by the richest, and we’re balancing the books by taking away the public spending that the poorest depend on. (That’s what “austerity” means.)

How bad is it? There is a whole science of metrics that can be used to measure inequality, so answers are not trivial to arrive at. But if you go to the Wikipedia page List of countries by income equality and sort by either of the columns “World Bank Gini” or “CIA Gini”, you will see that UK comes out ahead of essentially every other western democracy apart from the United States. We rank alongside countries like Mali, Tunisia, Jordan and Burkina Faso — much more unequal than the likes of France, Canada, Spain or Sweden. In terms of income distribution, we are basically a third-world country.


What can be done? In principle, the solution is simple and obvious: tax the rich. In practice, people argue that it’s difficult to increase total tax revenue by increasing rates. This claim is at least unintuitive, but I’ve heard in made by people much, much more informed than I am, so I can’t just write it off.

What I do know is that:

  • I can’t want another Conservative-dominated government, given how the present one has presided over the continuing transfer of wealth from the ten million families that most desperately need it to the thousand that least need it.
  • I’m desperately disappointed that the Labour party have completely failed to offer a distinguishable alternative to the Conservative economic policies that have brought us to this point.
  • I can’t quite bring myself to trust the Greens, because of the strange mix of their policies and the oddball ideas thrown in here and there.
  • I couldn’t vote for the SNP or Plaid Cymru if I wanted to, because I am English.
  • UKIP are utterly contemptible.

So it seems that by a process of elimination, I am left inclining towards the Lib Dems as the least worst of an appallingly disappointing, and horribly indistinguishable, bunch. It’s hardly a ringing endorsement, and in fact I am still far from sure who I will actually vote for*, but it’s where I seem to have landed up.

Oh, but I wish we had a choice between Conservative and Labour parties that obviously and clearly stood for different things. I wish the electorate had a practical way to signify whether they prefer present course of making poor people pay for rich people’s mistakes, or whether they’d prefer something different. In the end, the greatest failure of British politics in 2015 may be that we simply don’t have that choice.

[Read on to A final thought on the election]

* In my own constituency, the Forest of Dean, there seems to be some realistic prospect of our UKIP candidate winning the seat from the Conservative incumbent. It would be so humiliating to be part of the most backward and xenophobic constituency in the country that I may in the end be forced to vote for Mark Harper, the Conservative candidate, just to keep UKIP out. This is course is a travesty of what I should be using my vote for, which is why I was so very keen that we should adopt the Alternative Vote system (aka. STV); but of course the great British public rejected that idea.

19 responses to “Very basic politics #3: where has all the money gone?

  1. “It’s here: if you already have a billion pounds, there is nothing you can usefully do with another billion. When a billionaire doubles his wealth, the extra billion is essentially lost to the economy.”

    That’s a bit abstract. Why not add an example? Like this:
    “It’s here: if you already have a billion pounds (like Steve Jobs), there is nothing you can usefully do with another billion. When a billionaire doubles his wealth, the extra billion is essentially lost to the economy (by being wasted on useless stuff like founding NeXT and Pixar).”

    There. Isn’t that much clearer?

  2. You think Steve Jobs was a typical billionaire? You think he was a typical anything?

  3. Hi Mike – I readily confess to not being an expert on high finance – but I don’t think a billionaire’s money does nothing. Even assuming the sort of person who has accumulated billions kept the money in a bank, he’d still be contributing to the bank’s liquidity – it’s capacity to fund loans and invest externally. Realistically however the money would be invested in multiple portfolios, including pension investment schemes, government bonds, funding new companies, purchasing shares in established stock etc. The billionaire will employ somebody to do this on their behalf of course. Some billionaires spend the excess on benevolent causes, recently Gates and Lucas, but for those who don’t give it away the money is still doing something. About the only way wealth can be lost to the economy is if you literally stick it under your mattress or set fire to it.

  4. “Even assuming the sort of person who has accumulated billions kept the money in a bank, he’d still be contributing to the bank’s liquidity – it’s capacity to fund loans and invest externally”

    I guess that would explain how the banks have managed to be so solvent over recent years. (I may well just be being sarcastic now.)

  5. You’re conflating wealth with income. Wealth means “I own an expensive house”. Income means “I can afford an expensive house”. It’s very important to distinguish the two. House price in London are essentially irrelevant if I live and work in Manchester. I’m not somehow worse off.

    You want to look at income inequality metrics, like the Gini coefficient. These show no such effect.

  6. The answer to why there is no money is simple. Its easy for politicians who want to spend money to get elected by people who want to receive benefits, it is hard for politicians who do not want to spend money to get elected by people who want to receive benefits.

    Also, it is hard for politicians who want to raise taxes to get elected.

    Therefore, the easy path, which will always be taken, is that of promise spending increases and not tax increases. Iterate this over a few decades and you are constantly borrowing to cover the spending increases promised in the past.

    Now if you could only match the rate of increase in spending to the rate of economic growth you’d be set. Until one politician campaigns against their rivals to give out _more_ benefits.

    The irony here is that I think this situation is somewhat a cause of the “rich getting richer” problem.

    When the government borrows, it waters down the money supply, making everyone’s dollars (pounds in your case) worth less money. BUT, the stock market is responding to this too. Companies inherent value isn’t necessarily (unless they have large cash reserves) devalued by the inflation, in fact their value is likely increased, hence stocks go up. I contend here that stocks are similar to gold as a hedge against inflation. This large increase in the stock market benefits who? Well it benefits the rich who, as was mentioned above, put their wealth into the market.

    So the borrowing is a partial cause to the market increases that benefit the rich disproportionately.

    In the end I claim that this problem isn’t at all about taxing enough, because in a situation where elections favor those who increase spending, there will never be enough taxes to cover since candidates will always be challenged by those who want to spend more, even after more taxes are acquired.

    The problem is we don’t elect responsible leadership anymore, or at least we are always swayed by those who say they can solve all the problems with more government.

  7. “the wealthiest 1,000 families in Britain…now control £547 billion”

    So for 5 years we could take everything they’ve got and balance the budget. And then what?

    This is the exact same fallacy as blaming the deficit on benefits.

    It’s all the stuff that’s given away to the people in the middle (from 40% up to 90%, say). Politicians are always talking about the “hardworking middle classes” who, unfortunately are the the most important, but also hardest, to raise taxes/cut spending on.

    “…much more unequal than the likes of France, Canada, Spain or Sweden.”
    Because Spain is doing so well… And France isn’t much better off.
    Not saying this metric isn’t relevant, but you can’t prove anything with a comparison like that.

  8. cjp39, I guess you missed the part of the post where I told readers to go and play with the Wikipedia list of countries by inequality and sort by the two different assessments of the GINI. (For the rest of your comment, see my reply below to the other Chris.)

    jwerpy, your narrative that the debt is due to politicians always promising to raise spending and lower tax (and then actually following through on the promise) is a compelling one; but I don’t think the facts really bear it out. We’re not spending greatly more now than a few years ago, and we’re not meaningfully taxing less aside from the (very welcome) raising of the bottom of the tax bracket. In fact we’re taxing less than we were in the year when the top rate went to 50%.

    Also, I’m a bit surprised that you’d say politicians will always campaign on promises of more spending, when in fact both major parties are very explicitly saying they will cut benefits even more than the government just ended. I find it astonishing rhetoric from Labour, but presumably some spin-doctor has told them that it will win votes.

    Your idea that government borrowing causes inequality is particularly frightening, since I maintain that inequality causes a deficit, requiring further borrowing. If we’re both right, then we’re in a negative feedback loop.

    Finally, Chris writes: “So for 5 years we could take everything they’ve got and balance the budget. And then what?”

    I may not have been clear. I don’t believe in taking everything the richest have, but taxing their income fairly. (I’d also favour a wealth tax, but that’s a separate discussion.)

    Let’s talk about their income alone, ignoring wealth for now. Remember, the wealth of those richest people has increased by 112% since 2009, and now stands at £547 billion. So the increase was £547 billion x 112/(100+112) = £289 billion. That accrued over six years (2009-2015), so on average, by £48 billion a year. That is half of the deficit. From just 1000 families. Tax that income effectively at say 66% (closing all the avoidance loopholes) and you’ve cleared a third of the deficit. Or you could use the £32 billion per year to fund the NHS.

    Even if you still think I’m mistaken somewhere here, I’m not sure why you’d say “This is the exact same fallacy as blaming the deficit on benefits.” If it’s a fallacy at all, surely it’s a completely different one from that? What commonality do you perceive?

    As for which countries we are more unequal than: I picked a few at random from much lower down the table. They are very far from the only examples. Like a say, go and play with the table yourself. I think you’ll be surprised.

  9. Ah, I missed the timescale. So you’re assuming that the top-1000’s wealth will continue to accumulate at the same rate indefinitely (unless taxed). If that’s true, that works, and is indeed more or less what you should do. If this is some blip caused by, say, the bizarre way financial markets are working due to QE etc then this only earns you a brief windfall. Are you sure that this isn’t just restoration of value (shares etc) nominally lost in the crash?

    The commonality would be picking on some unpopular group who aren’t that big of a contribution to the problem, instead of looking at much larger factors. The same as complaining about foreign aid, or defense, when the NHS completely dwarfs them.

  10. Chris, no, I’m not sure — and you’re right to make the point that the present grotesque inflation of the wealth of the richest may not be a continuing trend. At least, we can hope not.

    Ah, I see what you mean — that it’s a scapegoating issue. Except in this case, it’s not: the richest could indeed make a massive contribution to the economy. Remember, collecting 66% tax on the income of those 1000 richest people would give us eight times more cash than cancelling all unemployment benefit.

  11. Pingback: A final thought on the election | The Reinvigorated Programmer

  12. As a note: yesterday I was reading a back issue of the LRB and there’s a good article about precisely this question — to what extent does inequality create poverty (and, by extension, strain the government’s finances)? Unfortunately it’s paywalled, but if you have access to the magazine I’d recommend it. It’s directly on topic of this series.

  13. Mike, you’re right, I missed that. But did you look at the historical values for the Gini? They don’t support your narrative. If Britain is unequal, it’s always been that way. Corollary: whoever gets in now won’t change that.

  14. I can only hope you’re right that “whoever gets in” doesn’t change it (i.e. doesn’t make it even worse).

  15. If Britain is unequal, it’s always been that way. Corollary: whoever gets in now won’t change that.

    I don’t know about Britain, but in the US that isn’t true. Over the last five years, or so, there have been an increasing number of people trying to answer the question, “how, exactly do public policies mitigate or exacerbate inequality?” Which isn’t easy to answer because, as you imply, it’s difficult to untangle economic policy from broader economic trends.

    But, it’s pretty clear that they do. See, for example, this striking pair of graphs.

    In theory, it should be possible for incomes to rise for everyone at the same time — for the gains of economic growth to be broadly distributed year after year. But the takeaway from these graphs is that since World War II, that’s never really happened in the U.S.

  16. I’ve found this series useful. Unfortunately the least worse option didn’t do very well this time.

  17. I’m afraid you’re very right, Paul. Thanks for the kind words, nevertheless. At the very least, the process of writing these posts has helped me to get my own thinking straight.

  18. Pingback: A meta-comment on voting in the election | The Reinvigorated Programmer

  19. Pingback: Very basic politics #2: what is government spending for? | The Reinvigorated Programmer

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