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September 29, 2009



Surely if the private sector is starting to borrow again that improves the case for cuts in discretionary spending now, if you think the structural public sector deficit is too large and needs to be reduced at some point. If the time to cut public spending isn't when private spending is picking up, when is it?

The Tories were knuckle-headed to be calling for immediate cuts when private sector demand was low. But don't these data strengthen their position now?


Chris, as his is nearly an identity does it 'tell' us that an increase in private sector lending has compelled the government to borrow more - or might there be a possibility (not large in this instance because of what else we know) that an increase in government borrowing has compelled the private sector to lend more.

Also, theoretically couldn't a large increase in private sector lending have led to a large outflow of capital abroad? Would this have happened if the government had cut spending and raises taxes - I'm not why. In that scenario I'd have though a decline in GDP bringing private saving and government deficits back into line would be more likely.


@ Chrisg - I forgot to distinguish between two different arguments for cutting public spending. The argument we hear is that cuts are necessary to reduce the big deficit. This is silly, at least whilst gilt yields are low.
There is, though, another argument - that as the economy recovers and private sector borrowing resumes, fiscal policy should be tightened counter-cyclically. I've no problem with this - except that we are a few years away from such a stage.
@ Matthew - Yes, increased government borrowing can cause higher private saving. This is what happens under an orthodox Keynesian expansion; a portion of the higher incomes are saved. But as you say, this is not the main story now.
And yes, private lending can lead to capital outflows. This has happened in the last 12 months, because the same credit crunch that caused higher private lending also caused a collapse in cross-border banking activity which hit the UK hard, though not as hard as Iceland!
However, these outflows have abated recently. And it's not at all obvious that tighter fiscal policy would have made a difference; overseas banks withdrew money from UK banks because they needed the cash themselves, not because they were worried by UK government borrowing.

Grumpy Optimist

What is happening to the overseas deficit? I don't have the figures but I guess that it is not increasing as the counter party to the public deficit as happened in the 1970s. This again is an argument for avoiding drastic deficit reduction now.

What is the breakdown between personal and corporate net lending? Again my guess is that it is the corporate sector that is the big generator of the increase in the surplus
The risk is surely though that government is now just too big and that the private sector will not choose to spend more unless it is incentivised to do so. Or is this too ideological.

Chris Neufeld

How this ultimately turns out is going to be quite interesting.

Sarah Danes

nice post...
i really like this...



remortgage repayments

Whenever you consider any lending, particularly the substantial amounts required for a mortgage secured against your home, you should make sure you check thoroughly what the payments will be like before committing to anything.

Shyloh J

Maybe if we raised the pay wages and lowered the cost of living a little bit we could minimize private lending, and personal, business and over all debt. If we made enough that we didn't need the loans to get by then the problem could be solved.

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