And Mr. Skidelsky gets it wrong again

The national debt is deferred taxation: According to this oft-repeated fallacy, governments can raise money by issuing bonds, but, because bonds are loans, they will eventually have to be repaid, which can be done only by raising taxes. And, because taxpayers expect this, they will save now to pay their future tax bills. The more the government borrows to pay for its spending today, the more the public saves to pay future taxes, cancelling out any stimulatory effect of the extra borrowing.


It doesn’t matter whether the government pays off the debt or not. It’s still deferred taxation. Because the government has to pay interest on what it borrows. The net present value of that interest being, of course, exactly equal to the capital value of the bond.

So, whether it pays off the capital of the bond or rolls it over indefinitely (or perpetually) the amount that the taxpayer must pay in interest must, by definition, be equal to the amount that has been borrowed in NPV terms.

It is deferred taxation.

Nice of Skidelsky to define as a fallacy something that is true, isn’t it?

15 comments on “And Mr. Skidelsky gets it wrong again


    On what planet does that happen? Here the marginal propensity to save could be negative, I think.

    Tim adds: He’s trying to talk about Ricardian Equivalence and not explaining it very well.

    It’s the assumption that if people see that their taxes will go up in the future they will start saving for them now. The end result being that deficit financing to provide stimulus doesn’t work. Because the saving will negate the stimulus.

    Keynesians hate Ricardian Equivalence because it means their plans won’t work. In reality, it’s true for most people some of the time, all people occasionally and not for all people all the time.

  2. He’s partly right though, in how taxpayers respond to increased government spending. They don’t save in anticipation of future tax hikes; they go out and spend more themselves.
    At least that’s what happens in Britain. It’s a different story in Japan, where no amount of government spending or 0% interest rates could persuade the population to spend.

  3. Usual leftist duckspeak. It translates to “shut up and spend more taxpayers’ money”.

    Paul Krugman was on the radio a few months ago, fielding softball questions from the BBC. He was asked if his “spend now, worry later” advice was sustainable in the longer term. His response was the first time I’ve ever heard somebody shrug live on radio.

    And to think it’s the bankers who are routinely lambasted for being dangerously insulated from the real-world consequences of their actions.


    Thanks, Tim.

    But is that assumption valid? This is not behaviour I recognise: people tend to buy fags and booze before anticipated increases in duty and 300,000 French nationals around South Ken aren’t there for the love of the circle and district lines.

    I tend to agree with Andrew M at #2, the best way to keep as much money as possible out of the government’s hands is to spend it. As things stand, you have badly mismanaged your affairs if you do not die a pauper.

  5. I don’t think people anticipate future tax rises and compensate by saving, in general. The big error in Skidelsky’s paragraph though is that he refers to this, if it doesn’t happen, being “stimulus”, which of course is a Keynesian chimera that doesn’t áctually exist, because as any fule no, economic growth is not a monetary phenomenon.

    The actual consequence of stimulus spending is to worsen the Gini Index by inflating the money supply differentially (you give more money to people who already have the most, while reducing the value of the monetary unit).

  6. Here’s a paper on Ricardian equivalence

    New Evidence on the Private Saving Offset and Ricardian Equivalence
    The ability of discretionary fiscal policy to affect economic activity following shocks depends on how private agents react. This paper re-investigates the extent of possible offsetting private saving behaviour to fiscal policy changes. The results suggest that the private saving offset is around 40% on average across countries in both the short and the long term, which is somewhat lower than found in prior research. However, the estimates vary considerably across countries. Disaggregate analyses of the budget components shows that changes in current revenues are almost fully offset, whereas offsets to current spending are on average around one third to one half depending on the sample. There is no offset for public investment, making it the most potent policy tool. Saving offsets are stronger the higher the level of government debt consistent with the expectation that snowballing debt may ultimately lead to higher taxation. They are also stronger the better developed financial markets are, pointing to the importance of liquidity constraints for the effectiveness of policy.

  7. No Tim, you’re just wrong. Gov’t borrowing just isn’t deferred taxation; any Argentine will tell you that!

    P.S. I’ve got a wallet full of Zim dollars if anyone is interested.

  8. “they will eventually have to be repaid, which can be done only by raising taxes.”

    Not exactly. Government revenue from taxes does not correlate 1.0 with tax rates. Indeed, the Kennedy, Reagan, and Bush tax cuts INCREASED government revenue.

  9. The interest to which Tim refers is mythical in the sense that the REAL or INFLATION ADJUSTED rate of interest is approximately zero for responsible governments at the moment (e.g. Germany, UK, US, etc). In fact the real rate of interest has been NEGATATIVE for some of those countries at various stages over recent years.

    Tim adds: Sure, you’re right. But Skidelsky is making a claim about all times at any interest rate. Which is simply untrue.

  10. The Meissen Bison wants to know on what planet Ricardian Equivalence occurs. The answer is “Planet Academia”.

    Hundreds of academics at this very moment will be dreaming up all sorts of variations on the basic Ricardian idea, not based on any sort of empirical evidence, and with a view to finding an excuse to erect a “model” as academic economists call them. That in turn enables them to write a paper, which will further their careers.

    Tim adds: No, Ricardian Equivalence is true for most people some of the time, some people near all of the time, no one all of the time and everyone some of the time.

    Like most things in economics in fact. Think through a little experiment. We’ll have a tax cut for one two week pay period and everyone is told that that tax cut will be taken back out of the paycheque for the next two week pay period following, as well as taxes going back to their normal level.

    Then again, we’ll cut taxes now and it will be you or your children in 20 years time who have to pay it back.

    I think we’d all expect to see different behaviour on the spending of those two different tax cuts. Ricardian Equivalence will be true in both cases: but to different levels for different people.

    Just as with, say, income tax changes. We know very well that there will be both income and substitution effects. Either will predominate in one individual’s reaction and the aggregate of those individual reactions will tell us which side of the Laffer Curve peak we are.

    We *know* there are these effects. What we don’t know is how important they are at any given moment or level.

  11. Ian B

    after the recent discussion of comparative advantage, I have started to wonder about whether the “Dutch disease” is actually equivalent in its effects to quantitative easing. In the UK, there is a strange ramping of house prices and stock market indices that seems very similar at first sight…

  12. Tim: Think through a little experiment

    Well the experiment seems a bit academic to me. The good fortnight/bad fortnight thing would seem to test behaviour with predictable cycles of pay.

    Consequently it would require a fair bit of mutton-headedness (or you’re Gordon Brown which amounts to much the same) to spend more after the fat pay slip when you know the thin pay slip is coming next.

    The longer term thing is much hazier, in part because the resolution is far in the future but also because you might have a new dispensation, Deo volente, that believes in smaller government and doesn’t want to chomp through so many tax pounds.

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