Myth: The national economy can be run like a household


From ‘Austerity Illusions Debt Delusions‘ from the Centre For Labour Studies.

Reality: The Coalition has repeatedly used the metaphor of sticking to a ‘household budget’ to justify drastic cuts. But this is not only a misleading comparison, it is also dangerous. Government finances are not at all like household finances, but even at this level their analogy doesn’t work because borrowing for investment is a normal and sensible thing to do at the family level. For example buying a house to invest in the future of your growing family, investing in repairing your car to make sure you can still get to your job, which pays your income and enables you to pay off your borrowing.

What seems appropriate at the personal domestic level is quite wrong at national level. Take the ‘maxed-out credit card’ – while family borrowing is very important as shown above, we all like to live within our means. But if we all cut our personal debt at once, the economy would go into catastrophic depression. This is because what you or I spend, keeps others in work, and what they earn and spend keeps more people in work. If we all cut spending at once, economic disaster arrives like a flash.

Falling real wages amounts to cutting wages. If everyone has lower wages, they have less money in their pockets to spend. When less people spend, the economy shrinks. This applies to savings too. If we all save at once, there is no consumption and no
spending to stimulate investment so the economy goes into a downward spiral.

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