Some people are a lot better off right now

Published: Thu, 07/16/20

I dare say that reports from the Office for Budget Responsibility aren’t the first thing you reach for over your morning coffee (unlike me) but the Office for Budget Responsibility has just published its analysis of the coronavirus (to date) and it makes for very interesting reading.

That is because the government has injected considerable amounts of cash into the economy as we all know. The money in question is technically a liability on the Bank of England's balance sheet, like all bank deposits are in many bank's accounts, but that’s not the point of interest, which is that the government's injection of cash into the economy has massively increased the current savings ratio. The forecast is that it will stay significantly higher than in the recent past. They are forecasting that people are not going to be in a rush to spend after this crisis.

But what this means is this when it comes to the sectoral balances, which work on the straightforward logic that in sterling the books of account must balance. And there are just the four sectors shown which cover all economic activity:

The telling lines are the blue (government) and maroon (household sectors). What the government is borrowing is the sum that households will be saving. So, where did the money that the household sector is now saving come from?

And the answer is, of course, from the money injected into the economy by the government in the first place. Where else could it have come from in the middle of a crisis?

So what is actually happening is that the government cash injections are creating private savings. When the government injects money into the economy private wealth increases. The reality is that as this chart shows many people will have a great deal more savings as a result. While in society at large inequality grows.

Noel Guilford