Matthew Lynn’s recent article (“The UK is heading for a full-blown financial crash, and nothing can stop it now”) paints a dramatic picture of fiscal doom, arguing that rising government borrowing figures signal an inevitable economic collapse. While the borrowing numbers themselves are significant, the conclusion that they spell imminent disaster fundamentally misunderstands how government finance works in a country like the UK, which issues its own floating-rate currency. Lynn’s analysis, focused solely on the government’s deficit, misses the other side of the equation: the non-government sector’s surplus.

The Accounting Identity: Deficits Equal Surpluses

At the heart of the misunderstanding is a failure to grasp a basic national accounting identity: the government’s deficit (spending more than it taxes) is, pound-for-pound, equal to the combined surplus of the non-government sector (households, businesses, and the foreign sector).

Think of it this way: when the government spends pounds into the economy (e.g., on public sector wages, infrastructure, benefits), it credits bank accounts in the private sector. When it taxes, it debits those accounts. If the government spends more than it taxes (runs a deficit), it has credited more pounds to the non-government sector than it debited. This net injection of pounds is the non-government sector’s financial surplus – their net savings in pounds sterling.

Therefore, the £151.9 billion the government borrowed over the last year isn’t just disappearing into a void; it represents £151.9 billion that the non-government sector (UK households, UK firms, and overseas entities combined) chose to save in the form of sterling financial assets (like government bonds or bank deposits) rather than spend. Saving requires borrowing somewhere else in the system.

Reframing The Arguments

Seen through this lens, Lynn’s points look very different:

  1. “Horrific” Borrowing Figures: Instead of inherently bad, these figures indicate a significant desire or need within the non-government sector to net-save pounds. The government’s deficit is accommodating this desire. The critical question isn’t “Why is the government borrowing so much?” but “Why does the non-government sector want to save so much?” Possible answers include economic uncertainty, deleveraging after past borrowing, or foreign desire to hold sterling assets.
  2. Causes of Borrowing (Spending/Revenue): Lynn points to public sector pay rises and departmental spending driving up the deficit. Yes, this increases government spending. But this spending becomes income for the non-government sector. If that income isn’t entirely spent (i.e., some is saved), the government deficit simply reflects that saving gap. Similarly, disappointing tax revenues (corporation tax, VAT) reflect lower economic activity and spending by the non-government sector. This lower activity increases the private sector’s net saving (or reduces its dissaving). It thus necessitates a larger government deficit to maintain overall demand.
  3. “Lost Control”: Has the Chancellor “lost control”? Or is the government responding, perhaps passively, to the macroeconomic reality that the non-government sector is demanding a large surplus? Attempting to drastically cut the deficit against this desire for saving (through immediate, harsh austerity) wouldn’t magically balance the books; it would likely shrink the economy, reduce tax revenues further, and potentially worsen the deficit-to-GDP ratio while causing significant hardship.
  4. Impending “Crash”: The idea of a “crash” based on borrowing levels misunderstands sovereign currency issuance. Unlike a household or a country using a foreign currency (like a Eurozone member), the UK government cannot involuntarily run out of the pounds it creates. It faces no solvency risk in its own currency. The real constraints are inflation (if spending outstrips the economy’s productive capacity) and the availability of real resources (labour, materials, energy), not the nominal borrowing figure itself. Lynn’s prediction conflates the government’s finances with those of a household budget.

Focusing on the Real Issues

This doesn’t mean government deficits are irrelevant. How the money is spent matters (is it productive investment or inefficient spending?), and excessive deficits relative to the economy’s capacity can cause inflation. The composition of spending and taxation and their impact on distribution and economic potential are crucial debates.

However, portraying high borrowing figures in themselves as proof of an impending “crash” is misleading and ignores fundamental macroeconomic relationships. The government’s deficit is the mirror image of the non-government’s savings. Before panicking about the former, we need to understand the latter. Matthew Lynn’s analysis fails to do this, leading to a conclusion rooted more in rhetoric than sound economic reasoning. The focus should be on managing the real economy – inflation, employment, productive capacity – not chasing arbitrary deficit targets based on a flawed understanding of national accounts.

Chat about this and any other MMT topics on Discord with the growing New Wayland community . New members can click this invite link which will add the server to your Discord account