Simon Wren-Lewis, over at Mainly Macro, has written a scathing critique of politicians like Keir Starmer and Rachel Reeves, who are copying the Tories by saying there is no “magic money tree” and that the government has “maxed-out the national credit cards”.

For clarity: there is a magic money tree. It’s called the Bank of England.

And it is impossible to max-out the national credit cards with the amount of debt the UK currently has.

Professor Wren-Lewis explains:

Keir Starmer, in commenting on the recent Budget, said “Britain in recession, the national credit card maxed out, and despite the measures today, the highest tax burden for 70 years”. The analogy of maxing out the nation’s credit card has been repeated by other Shadow ministers. Rachel Reeves, Shadow Chancellor, has joined many Conservative ministers in saying there is no ‘magic money tree’.

Anyone who knows any macroeconomics understands that these analogies are false. The nation does not have a credit card with an externally imposed credit limit that it can ‘max out’, and the UK government does have a magic money tree because it can create money.

Imagine, for example, if we forced politicians to be more precise. Rather than claiming that the government had ‘run out of money’ and ‘maxed out its credit card’, they would instead have to say that the government had almost hit their self-imposed borrowing limits.

Rather than saying you couldn’t promise to spend this or reduce that tax because there is no magic money tree, politicians instead would need to say that the government could create more money or borrow more, but that would add to aggregate demand which would risk higher inflation and so force the Bank of England to raise interest rates.

Why do politicians say there is no money tree at their disposal? Because they don’t like telling the truth, which is that they don’t want to break their fiscal rule, or they don’t want the additional spending or tax cut adding to aggregate demand and leading the central bank to raise interest rates. That is a trade-off where many voters might take a different view, so it is much easier for them to say there is no money. It is a way of disguising a political choice, and not being honest about these choices.

So ‘there is no magic money tree’ is normally said by Chancellors or Prime Ministers who want an easy excuse for not spending money or cutting taxes. It is a straightforward deception to give politicians an easier life, and therefore it is difficult to defend its use.

The phrase ‘maxing out the nation’s credit card’ is more often used by politicians attacking the borrowing record of others. Yet it too suggests politicians have less choice than they actually have. In this case it perpetuates the idea that governments can only borrow so much, and that they are currently hitting that limit.

This is nonsense. There is a limit to how much UK governments can borrow, but it is way above levels of debt ever historically recorded. (Debt was 2.7 times GDP after WWII.) [1] But it sounds more dramatic to say a government has maxed out its credit card than to say it is leaving insufficient headroom to meet its own fiscal rules.

The use of these false analogies probably wouldn’t matter too much if we had an informed and informing media that was quick to correct these attempts to mislead. Unfortunately the complete opposite is the case. Because much of the media views macroeconomics as too complex and boring for its viewers, it laps up these incorrect attempts to relate fiscal policy to household budgets.

Sometimes this media environment gives politicians little choice but to follow. But that is not the case with phrases like ‘no magic money tree’ and ‘maxing out the nation’s credit card’. No one is forcing politicians to use these phrases. Instead it is their own choice to do so. If they know they are false analogies that just mislead the public they shouldn’t use them. If they don’t know that they are false, I’m afraid that is even worse.

So, when Keir Starmer said those words in response to Jeremy Hunt’s Budget, somebody in BBC/ITV/Sky News or the newspapers should have immediately called them out as lies.

But they didn’t.

This means the media are misinforming the electorate. This in turn means that most of the voting population, at the next general election, will be basing their decision on false information.

That is inexcusable. There should probably be a law against it. But there isn’t, because the law-makers benefit from the falsehoods.

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