The UK's misguided obsession with GDP is driving us all into debt

When banks offer loans, money is created as an IOU, something many MPs aren’t aware of. As a result the UK economy is based on ever growing levels of debt

Fran Boait
Sunday 21 January 2018 12:57
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GDP measures the total economic output, or in other words, the value of all of the goods and services being produced in an economy
GDP measures the total economic output, or in other words, the value of all of the goods and services being produced in an economy

Back in November the big story arising from the Chancellor’s Budget wasn’t any of the gimmicks and giveaways designed to grab positive headlines, but something seemingly more mundane – the Office for Budget Responsibility (OBR) downgrading its growth forecast.

This shouldn’t be a surprise. Governments are obsessively judged by analysts and commentators on one figure, whether it’s going up or down, and by how much: gross domestic product, or GDP.

GDP measures the total economic output, or in other words, the value of all of the goods and services being produced in an economy. While the prospect of infinite growth in the amount of things we consume might sound like a good thing, it would destroy the planet on which we depend.

This isn’t a new argument, for years economists have been arguing that we cannot infinitely grow our economies without exploiting natural resources beyond the brink of no return.

Budget 2017: 'Britain is the world’s sixth largest economy'

So how did we develop this planet-threatening growth obsession, and how do we move beyond it?

GDP growth only seemed to become a concern in the second half of the 20th century, when policymakers adopted it as a means of measuring living standards. Since then governments have used a kind of circular reasoning, where increasing growth itself is seen as a means of maintaining living standards, reducing poverty and improving government finances. Growth is also seen as a way of avoiding difficult questions such as “why is there such vast amounts of inequality?”

These drivers of growth tend to be the result of out-of-date and incomplete understandings of the economy which have seeped into every level of political and economic debate. But there is also another, often overlooked, source of growth-dependency – high levels of private and public debt. A key driver of which is the existence of a money and banking system which, in its current form, works to burden society with an endless supply of debt. While some debt is useful, too much can cripple an economy and lay foundations for a crash.

Over 97 per cent of money in the UK exists as bank deposits. Though most MPs aren’t aware of this, banks create new money when they make loans, and through this process, money is created as an IOU, or debt. As a result the UK economy is one which is based on ever-growing levels of debt. Not only do such high levels of private debt pose serious financial stability risks, but they also fuel the Government’s single track focus on pursuing growth.

Policymakers see increasing income as the easiest way to pay off debts. And the best way to do so is by increasing your productive output – working harder and longer to produce more of the goods and services which GDP measures.

Despite the fact that productivity is faltering and underemployment is the new normal, it is this idea along with the fears of mounting debt levels that locks in GDP growth as the overriding objective of economic policy. To our peril, governments’ preoccupation with growth leads to other important concerns, such as environmental and socioeconomic impacts, being put on the backburner.

It is clear that issues such as climate change and inequality are increasingly becoming too urgent to ignore. These challenges require a bold rethinking of society’s priorities. A good place to start is the dysfunctional money and banking system underpinning it.

This means a discussion of how we create money, and whether it should be created privately as debt, in a way which demands unsustainable growth. There are alternatives, which could allow us to create money sustainably, in a way which works for people.

One option would be to utilise Sovereign Money Creation, or “QE for People”. This would involve the Bank of England creating money through a similar way to conventional quantitative easing, though this money would then be injected into the economy through Government spending on green infrastructure, or even a citizens dividend to pay down private sector debt.

But there is also scope to go further and transition to a fully-fledged Sovereign Money System. This would essentially mean stripping private banks of the power to create money as debt. Positive Money estimates that such policies would allow an additional £50bn per year for 20 years of government sector spending, allowing us to pay for the things society needs with no additional private sector debt.

In shrinking levels of debt across the economy, these policies would free governments from the race for endless economic growth. Instead of sleepwalking into a debt-fuelled dystopia, it is not too late to switch to a money and banking system which paves the way for a more sustainable future.

Fran Boait is executive director of Positive Money and co-author of the report ‘Escaping Growth Dependency: Why reforming money will reduce the need to pursue economic growth at any cost to the environment. You can find her on Twitter @franboait

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