Philip Hammond is in a bind as he prepares for the autumn budget. On the one hand, with Theresa May reeling from ministerial resignations and facing rebellion from the right of her party over Brexit, the chancellor is under pressure from his own MPs to ginger the budget horse. On the other hand he is being stalked by John McDonnell’s popular (and sensible) policies. And the only defence Hammond can mount is the increasingly threadbare invocation of the “fiscal rules”, of keeping the deficit low and maintaining “credibility”.

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Economically, the chancellor would be extremely ill-advised to stick with his austerity strategy, but politically he may have no choice. Whatever he wants to do, he’s constrained by George Osborne’s decisions from 2010.

Hammond’s only salvation, and therefore our problem, lies in the fact that, while austerity may be discredited, its intellectual foundations are one of those “clear, simple and wrong” ideas that survive not because they are correct but because they make for a good gotcha question. Whenever a new spending proposal is floated, someone will reliably pop up to say: “But how will you pay for it? What about debt?”

No matter what country you’re in, the national debt is probably the biggest thing that everyone talks about and nobody understands. Stephanie Kelton, a former chief economist on the US Senate budget committee, recalls asking senators: “If you could eliminate the national debt overnight by magic would you do it?” Universally, they would answer: “Yes, of course.”

“Now,” she would say, “suppose you could eliminate all the US Treasury securities from existence. Would you do that?” She recalls this would often result in more hedging and nuanced response as the senators mulled over the implications of such a move. “But,” she would point out, “you just answered that question. You said you wanted to get rid of the debt. The treasuries are the debt.” You’d think US senators, those who make the actual decisions, would know this.

Government securities – “treasuries” or “T-bills” in the US, “gilts” in the UK – are used by anyone who needs a safe place to invest their savings. Around 25% of the UK public debt is, in fact, held by the Bank of England, which means the government technically owes it to itself and pays interest to itself, an accounting move that obviously nets out to zero.

We’re hamstrung by the language we use when we talk about this. “Debt” and “deficit” are negative-sounding words. “Balance” sounds good, “surplus” sounds even better. But every deficit on one balance sheet has a surplus somewhere else. If the government is in surplus then it is taxing more money than it spends. This means, clearly and by definition, that the private sector – you and I – pays more in taxes than it gets back in spending.

When Bill Clinton famously balanced the US budget in the 1990s, the knock-on effects were disastrous. Since safe government bonds were in short supply under Clinton, people looking for investments were drawn to dubious financial products, which marketed themselves as being virtually risk-free – but which we now know were anything but. It is not an exaggeration to say that the global financial crisis had its roots in the much lauded “great moderation” of Clinton’s budget surpluses.

You will often hear it said that governments only have “someone else’s money”, but this is wrong in several key ways. Governments neither “have” nor “don’t have” money, the same as the referee of a football match doesn’t have a stock of goals he dips into when one of the teams scores. When we go to work we say we “make money”, but if we did it would be called counterfeiting, and we’d be arrested. In reality we produce goods and services that we trade for money.

Facebook Twitter Pinterest ‘When Bill Clinton famously balanced the US budget in the 1990s, the knock-on effects were disastrous.’ Photograph: J Scott Applewhite/AP

The stock of actual money in the economy is managed by the government, either by creating it directly by deficit spending, or controlling how much banks create as loans. Too much money results in inflation, but too little money results in goods being left on the shelves or workers left unemployed, and this is the position we’ve been in while the Tories have been too obsessed with debt to pay attention to the real economy.

As the economist Abba Lerner put it all the way back in 1955, “government fiscal policy [should] be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound”. So numbers like 3% deficit and 2% deficit don’t mean anything by themselves. We must ask: “How does the government’s fiscal position relate to its capacity to implement its goals?” A government deficit is only too high or too low in relation to the impact on the economy, and sticking to an arbitrary benchmark is like insisting you should constantly drive your car in second gear regardless of the road conditions.

Of course, the size of the deficit isn’t the only story; the government can still make bad spending decisions. Even the meagre deficit we’ve been running since the crash could have been better spent. The labour market has been paradoxically slack. Unemployment has fallen, but these aggregate figures have masked real structural deficiencies with chronic underemployment. This has meant there’s no incentive for wage growth or productivity-boosting investment, and the deficit has been wasted on boosting asset prices for the already wealthy rather than taking some of the pressure off the rest of us.

Jeremy Corbyn told the CBI earlier this month: “Britain needs a pay rise.” The only way we can get one is if the government puts some meaningful and sustained investment into the economy. Unfortunately, since we still seem unlikely to stop being obsessively wrong about government debt, it’s unlikely the chancellor will deliver.

• Phil McDuff is a freelance journalist who writes on economics and social policy