Chart of the week: Austerity’s repercussions reach our pockets
Household saving has fallen
Government austerity has altered household saving: as the government has saved more (borrowed less) households have saved less (borrowed more). A government in control of its own currency is in a much better position to run a deficit than households, and government borrowing can be used more productively. Households borrow to consume, not to invest. That said, a government like the UK doesn’t actually need to borrow. It can fund spending by creating its own money. Although we don’t tend to think of it in this way, this is what governments actually do — they don’t sit around waiting for a loan to clear. The government’s ability to finance itself is ultimately constrained only by inflation. If inflation expectations remain low, a government with its own currency can run deficits ad infinitum. Just look at Japan. Read more about how governments balance their budgets in ‘Budget Bias’, an article in our latest Investment Insights.