'FUNNY MONEY'
Macro-Economists
and politicians deal in ‘funny money’. ‘Flint
faced, turbo-charged accountants’ deal in real money. ‘Funny money’ infests fiscal understanding and
obscures what is really involved in the struggle to control public spending.
Expenditure is sometimes spoken of by economists as being in ‘nominal’ terms, that is what normal people call real money. Economists are fond of adjusting this expenditure by deflating it by (well, take your choice of the GDP deflator, CPI, RPI or RPI-X indices) to so-called ‘real’ terms. It should be noted that, in discussing future projected expenditure, this deflation is by a deflator which is itself a projected figure for some years hence.
The second way in which ‘funny money’ enters the politicians/macro-economist world is when expenditure is referred to as a percentage of GDP. Economists project future spending as a percentage of the projected GDP in a sequence of future years, deflated by the projected GDP deflator for those years.
Quite often, politicians and government economists combine the two sorts of ‘funny money’ and actually refer to future ‘real’ expenditure as a percentage of future ‘real’ GDP – all of these figures being projected ones. The only reality is the actual pound coins being dished out by the government.
When GDP does not grow as projected by the economists and assumed by the politicians, government expenditure runs wildly out-of-control in what they call ‘nominal’ but normal people call real money.
In many ways, the situation is similar to that faced by the incoming Tory government in 1979.
One of the earlier achievements of the Thatcher government was Geoffrey Howe’s termination in 1981 of calculating government spending in ‘funny money’, a system which had gone rampant during the Labour years in the 1960’s and 1970’s.
Then, ‘funny money’ had the slightly different meaning that expenditure was planned in volume terms and much spending was indexed, so that rising prices meant rising spending.
Much of this thinking in volume terms and indexing has crept back again into public finance. For example, it has been assumed that welfare and state pensions, public sector pensions and public sector pay will not decrease even if there is, as now, wage deflation in the private sector, a fall in GDP or a fall in government revenue and a massive pile up in debt apart from public sector pay, the position remains the same after the June budget.
This is a recipe for massive deficits. The truth is that in these conditions there must be a major fall in government spending and, therefore, in the incomes of the beneficiaries in cash or ‘nominal’ terms.
Of course, outside government, nobody would ever reference their future expenditure by setting an annually rising amount and deflating it by the projected GDP deflator or other index or alternatively by referencing it to a putative and as yet unearned increase in GDP deflated by a projected GDP deflator.
The private sector earns its income in ‘nominal’ terms and, therefore, plans its expenditure in ‘nominal’ terms to make ‘nominal’ profits – otherwise it would go out of business. As ‘nominal’ income falls, ‘nominal’ expenditure is cut back.
Of course, sensible financial directors keep an eye on inflation and macro-economic changes, but rarely is private sector investment referenced to inflation or putative GDP growth and just carried on with regardless.
It should be clear, therefore, that, as yet, there are no planned overall cuts in government expenditure following the budget. There is simply a slower rate of increase.
Public expenditure will rise but not rise as much as it would have done if it had risen in line with anticipated inflation (choose your index) or as it would have done if it had risen in line with the anticipated rise in GDP. These are not cuts in what normal people call real money, they are ‘funny money’ cuts.
Creditors do not like being paid back in ‘funny money’ and will try to protect themselves by charging higher interest.
In fact, in the ‘funny money’ world, the only fiscal total that is always expressed in ‘nominal’ terms and is never adjusted by projected inflation to ‘real’ terms (although it is sometimes expressed as a percentage of projected GDP, as deflated by the projected GDP deflator) is the nominal total of debt. That is ‘funny’ but also ominous.
As Sir John Hoskyns, who was working closely with Lady Thatcher and Sir Geoffrey Howe, observed about the 1980/1 crisis in public spending:
“I had also learnt in business that overkill is less dangerous than underkill in such situations but the former would take political courage. Reasonableness and moderation are hopeless in a financial crisis.”
FUTURUS/26 November 2011
Expenditure is sometimes spoken of by economists as being in ‘nominal’ terms, that is what normal people call real money. Economists are fond of adjusting this expenditure by deflating it by (well, take your choice of the GDP deflator, CPI, RPI or RPI-X indices) to so-called ‘real’ terms. It should be noted that, in discussing future projected expenditure, this deflation is by a deflator which is itself a projected figure for some years hence.
The second way in which ‘funny money’ enters the politicians/macro-economist world is when expenditure is referred to as a percentage of GDP. Economists project future spending as a percentage of the projected GDP in a sequence of future years, deflated by the projected GDP deflator for those years.
Quite often, politicians and government economists combine the two sorts of ‘funny money’ and actually refer to future ‘real’ expenditure as a percentage of future ‘real’ GDP – all of these figures being projected ones. The only reality is the actual pound coins being dished out by the government.
When GDP does not grow as projected by the economists and assumed by the politicians, government expenditure runs wildly out-of-control in what they call ‘nominal’ but normal people call real money.
In many ways, the situation is similar to that faced by the incoming Tory government in 1979.
One of the earlier achievements of the Thatcher government was Geoffrey Howe’s termination in 1981 of calculating government spending in ‘funny money’, a system which had gone rampant during the Labour years in the 1960’s and 1970’s.
Then, ‘funny money’ had the slightly different meaning that expenditure was planned in volume terms and much spending was indexed, so that rising prices meant rising spending.
Much of this thinking in volume terms and indexing has crept back again into public finance. For example, it has been assumed that welfare and state pensions, public sector pensions and public sector pay will not decrease even if there is, as now, wage deflation in the private sector, a fall in GDP or a fall in government revenue and a massive pile up in debt apart from public sector pay, the position remains the same after the June budget.
This is a recipe for massive deficits. The truth is that in these conditions there must be a major fall in government spending and, therefore, in the incomes of the beneficiaries in cash or ‘nominal’ terms.
Of course, outside government, nobody would ever reference their future expenditure by setting an annually rising amount and deflating it by the projected GDP deflator or other index or alternatively by referencing it to a putative and as yet unearned increase in GDP deflated by a projected GDP deflator.
The private sector earns its income in ‘nominal’ terms and, therefore, plans its expenditure in ‘nominal’ terms to make ‘nominal’ profits – otherwise it would go out of business. As ‘nominal’ income falls, ‘nominal’ expenditure is cut back.
Of course, sensible financial directors keep an eye on inflation and macro-economic changes, but rarely is private sector investment referenced to inflation or putative GDP growth and just carried on with regardless.
It should be clear, therefore, that, as yet, there are no planned overall cuts in government expenditure following the budget. There is simply a slower rate of increase.
Public expenditure will rise but not rise as much as it would have done if it had risen in line with anticipated inflation (choose your index) or as it would have done if it had risen in line with the anticipated rise in GDP. These are not cuts in what normal people call real money, they are ‘funny money’ cuts.
Creditors do not like being paid back in ‘funny money’ and will try to protect themselves by charging higher interest.
In fact, in the ‘funny money’ world, the only fiscal total that is always expressed in ‘nominal’ terms and is never adjusted by projected inflation to ‘real’ terms (although it is sometimes expressed as a percentage of projected GDP, as deflated by the projected GDP deflator) is the nominal total of debt. That is ‘funny’ but also ominous.
As Sir John Hoskyns, who was working closely with Lady Thatcher and Sir Geoffrey Howe, observed about the 1980/1 crisis in public spending:
“I had also learnt in business that overkill is less dangerous than underkill in such situations but the former would take political courage. Reasonableness and moderation are hopeless in a financial crisis.”
FUTURUS/26 November 2011