This matters for the public finances for a simple reason - across the whole economy (which includes foreigners), net borrowing must equal net lending by definition. So if firms and households borrow more, government will borrow less.
My chart, taken from table I of today’s GDP data, shows this. It shows that there is an almost perfect negative correlation (minus 0.93, R-squared = 86.2%) between private sector net borrowing and government net borrowing*; these numbers refer to Q2, so take no account of today‘s data.
This tells us that government borrowing is largely a result of the credit crunch. In forcing the private sector to become a big net lender, this has compelled government to borrow a lot.
This means that if the private sector starts borrowing again - as today‘s figures suggest they are - government borrowing will fall almost one-for-one. If so, the public finances might improve quicker than expected in which case the need for spending cuts will be less.
You might object that this is too optimistic. The cliché “you can’t read too much into one month’s figures” is a cliché precisely because it’s true. We are a long way from the normal level of private borrowing required to get government borrowing down to its usual levels. And in fact today’s numbers show that financial companies are repaying debt.
These objections are valid. But they hardly produce an urgent case for cutting government spending. Doing this at a time when the private sector is unable or unwilling to borrow and spend is a recipe for depressing demand.
The message is simple. Looking at government borrowing properly - that is, as the counterpart of private lending - suggests either that spending cuts might be unnecessary, or that they could be downright damaging.
This isn’t to say that spending cuts will be unnecessary in all circumstances. We might need them to pacify the bond market. But because gilt yields are so low now - even in the face of the worst news about public borrowing - this is only a plan B.
* The correlation is not minus one because I’ve ignored foreigners’ net lending. But the fact that the correlation is so strong shows that this omission makes little difference to my story.