Communities may suffer the loss of leisure and cultural facilities, fewer bus services, unkempt parks and green spaces and see fly-tippers go unpunished without government investment in under-pressure council services.
On Friday the cross-party Local Government Association launched its campaign to influence the forthcoming government Spending Review by warning about the growing risk to vital local services if the Government does not take action to secure the financial sustainability of councils.
However, the LGA said that, with the right funding and powers, councils can continue to lead their local areas, improve residents’ lives, reduce demand for public services and save money for the taxpayer.
Between 2010 and 2020, councils will have lost almost 60p out of every £1 the Government had provided for services.
Some councils are being pushed to the brink by this unprecedented loss of funding and an ongoing surge in demand for children’s services, adult social care services and homelessness support. This is on top of having to absorb other cost pressures, such as higher national insurance contributions, the apprenticeship levy and the National Living Wage.
More and more councils are struggling to balance their books, facing overspends and having to make in-year budget cuts.
Councils provide more than 800 services to residents in their local area – some of these are legal duties they have to provide whilst others are optional powers they can use depending on local priorities.
Money is increasingly having to be diverted from these optional services, which help build communities people want to live in, to plug growing funding gaps, while some councils have already been forced to cut their services back to the legal minimum “core offer”.
With councils in England facing an overall funding gap of £8 billion by 2025, local government leaders fear many more will have to take similar action.
That could mean many cherished local – but discretionary – services such as the maintenance of parks, improving food hygiene and safety, certain bus services, cultural activities and council tax support for those in financial difficulty – face being drastically cut back by councils across the country.
To illustrate the point, the LGA has produced a list of seven popular discretionary services that councils might need to consider reducing in order to meet their statutory duties:
- Nearly half of all bus routes in England currently receive partial or complete subsidies from councils. Faced with funding pressures, councils will struggle to maintain current discretionary subsidies for bus routes across the country – such as free peak travel, community transport services and post-16 school transport.
- Councils can apply council tax discounts for people experiencing financial hardship. Council tax support schemes are no longer fully funded by central government with £1.7 billion lost between 2013 and 2020. As a result, more than half a million households no longer receive council tax support as councils are unable to protect discounts.
- Councils recorded 997,553 incidents of illegal fly-tipping last year, an average of more than 2,700 a day. Councils were given the power to issue on-the-spot fines of up to £400 to fly-tippers in 2016.
- Trading Standards budgets and staffing have been cut by around half since 2010. This is already making it extremely difficult for some councils to maintain previous levels of food standards work, given the competing demands of areas such as social care and children’s services.
- Recent analysis by the BBC found the number of school crossing patrollers funded by councils in the UK has fallen by 1,500, almost a quarter, in five years.
- Local authorities have protected spending on statutory services at the expense of discretionary services. In a report on the financial sustainability of local authorities last year, the National Audit Office found that adult and children’s social care services have seen a reduction of 3.3 per cent and an increase of 3.2 per cent in real terms, respectively. In contrast, spending on cultural and related services fell by 34.9 per cent.
- An investigation by the Mail on Sunday recently found that one in three parks no longer has any staff on site, park funding has been reduced by at least £15 million in the past two years, with 95 per cent of councils expecting to make further cuts to parks in the next five years.
Local government leaders are also clear that the scale of the funding gaps and demand facing children’s services, adult social care and homelessness support mean scaling back discretionary services will not be enough to protect the ability of councils to provide dignified care for older and disabled people, protect children, and support those experiencing or facing homelessness.
Cutting these discretionary – often preventative – services is also a false economy as they can help alleviate pressure on statutory services. Other parts of the public sector, such as the NHS, are also then forced to pick up the pieces. For example, parks and leisure facilities can help improve the health and wellbeing of residents.
With sustainable funding, councils can make a difference to people’s lives by building desperately-needed homes, creating jobs and school places, providing dignified care for our elderly and disabled and boosting economic growth.
The money local government has to provide vital services is running out fast and huge uncertainty remains about how councils will pay for services into the next decade and beyond.
If the Government fails to adequately fund local government then it will be our local communities and economies who will suffer the consequences. It will be those who rely on vital adult social care to live independent lives, rural bus routes to get out and about, council tax support to ease financial burdens and those who value clean streets, green spaces and roads fit for the purpose.
The Spending Review will be make or break for vital local services and securing the financial sustainability of councils must be the top priority.
This is the only way to ensure councils can meet their legal duties to provide dignified care for our elderly and disabled, protect children, and prevent and reduce homelessness and protect the wide-range of other valued local services which also make such a positive difference to communities and people’s lives.
* Councillor Howard Sykes MBE is the Liberal Democrat Group Leader at the Local Government Association. The LGA is a politically-led, cross-party organisation that works on behalf of 415 councils to ensure local government has a strong, credible voice with national government.
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203 Comments
Some of us twigged at least five years ago that the Coalition, yes COALITION, Government’s use of Local Government as a kind of human shield against the public would have serious repercussions down the line. There was always an alternative to austerity to solve the serious debt problems we faced in the late noughties, namely something similar to FDR’s ‘New Deal’ in 1930s USA. The former was chosen and Local Government, which successive governments have been emasculating since WW2, became the whipping boy.
The Barnet ‘Graph of Doom’, which reckoned that there would be a £19 billion black hole in LG finances may have been going a bit too far; but, if Mr Sykes is correct, £8 billion by 2025 is not far off Armageddon in terms of local services.
The answer, as I have been saying on LDV for some time (and possibly vying with Mr Bourke’s championing of LVT in repetition) has got to be, at least as far as England is concerned, a root and branch reform of local government structure and finance : Unitary Authorities, no more County and District Councils, more powers to Town and Parish Councils, if they want them, the scrapping of the Council Tax and its replacement with a combination of Land/Property Tax, Local Income Tax or even a Sales Tax. This restructuring could be the start of the move in England towards the creation of English Regional Assemblies on the path towards a Federal (still) United Kingdom.
However, first there is the small matter of Brexit.
The £8 billion in cuts doesn’t even come off the Govt’s deficit. Much of that money would have been spent on salaries and wages. The recipients would have paid income tax and National insurance. So, straightway, the Govt loses that revenue.
The rest would be spent and respent in the economy and would have inevitably have ended up back with the Government in one way or another. Where else can it go?
John is correct including his comments about the need for unitaries (albeit of a manageable size).
I’d add that the Coalition’s use of local government as an arm’s length method of austerity by attacking so many personal services was a cowardly way of doing things and for many people destroyed the Lib Dem claim to be the party of local govrrnnent. As a cabinet member for social care at the time I witnessed those pressures first hand and felt betrayed. There’s no dodging it.
In the spirit of our new red in tooth and claw society, I fear the reply from the government when told people will die will be
“they had better do it, and decrease the surplus population.”—from Charles Dickens’ A Christmas Carol
Clegg throwing his councillors under the bus, always puzzled me. It was almost as if power dazzled him to the people who had a actually built the party to a point he could settle his harris into the back seat of a government jag. I fear that if you have had a gilded life handed to you, you really don’t appreciate other peoples efforts (or worries).
Although I started this off, let’s not reduce this thread to Coalition bashing (I would imagine that the likes of David Evans are already salivating at the idea). Equally, I hope the LD purists don’t simply try to use this crisis – and it REALLY is a crisis every bit as seriously as, dare I say, Brexit – as a way of improving their poll ratings. Restructuring local government in England might well see the demise of councils, like Oadby & Wigston DC near Leicester, for example, which are under LD control. Is that a bridge too far?
It’s a bit like the slavish support for the ‘People’s Vote’, which LDs think will eventually attract Remainers to them. Come on, folks, wake up and smell the coffee! It’s not happening, is it? As someone who is no longer actively involved in party politics I really don’t care which party wins, as long as it’s elected by PR, and as long as we get a system that actually delivers the services and policies that benefit the maximum number of our citizens from the cradle to the grave. So, forget your vested interests, stop using bellicose language when dealing with your ‘opponents’, grasp the nettle and MAKE IT SO!!
John if Brexit goes through we will be poorer, if we are poorer, well someone will have to pay for it. A quick guess on my behalf will be the ones who will pay will be the poor and one way of doing that is reducing services, so yes Brexit counts. I know some Brexiteers will say it doesn’t matter we can print pounds, well yes we can but the value of a pound relies on trust and Brexit drives a coach and horses through that. Brexit will define how much we can afford to allocate to local government going forward, I fear it will be very little and governments approach will be “Just manage”.
An important warning from Howard Sykes. I woud endorse much of John Marrott’s comments a on the need for root and branch reform of local government structure and finance. I think this is urgent and would advocate devolution of tax raising powers to Mayoral authorities from the fiscal year beginning April 2020, by which time approx 2/3rds of councils will receive no central funding and be reliant on sel-funding from business rates and council tax.
The council tax discount issue raised by Howard can effectively be dealt with by a switch to LVT where Landowners, not tenants, pay property taxes. In cases where homeowners currently benefit from council tax discounts the great majority would pay no LVT; and the small number in high value propeties who were assessed could defer payment until the property was sold or bequeathed.
Transport infrastructure and services like bus services enhance property values along the routes as does proximty to schools (with their road crossings), clean streets, parks, roads fit for purpose the provision of adult social services. Al these services contribute to increasing and maintaining land values and consequently are a natural fit with Land Value Capture as a source of funding.
John Marriott,
one thing I must take issue with in your comment is “There was always an alternative to austerity to solve the serious debt problems we faced in the late noughties, namely something similar to FDR’s ‘New Deal’ in 1930s USA.”
Hegel once said “Nothing great in the world was accomplished without passion.” “We learn from history that we do not learn from history.” “To be independent of public opinion is the first formal condition of achieving anything great.”
FDR’s New Deal was an important initiative during the great depression, but it was not designed to solve what you term as ‘the serious debt problem’. It was principally tax-funded infrastructure and work creation programs designed to mitigate the impact of mass unemployment. While softening the impact of the depression in the US, it did not resolve the underlying structural problem. That came via ‘military Keynesianism’ when arms and munitions production was ramped up in WW2.
The UK ‘cheap money’ policy introduced by Neville Chamberlain as Chancellor proved much more successful in the 1930’s boosting economic growth in Britain by an average of 4% from 1933-34. The British mistake was in failing to direct necessary investment to distressed areas of the country that did not see the benefits of the economic expansion brought about by new industries in chemicals and plastics and mass private-sector housebuilding in the Midlands and the south.
Austerity is not the cause of the UK’s economic problems, nor has it inhibited the creation of 3.5 million new jobs since 2010 and the lowest unemployment levels since the 1970s. What it has done is decimated local government financing and welfare support. This is an ideological small state issue, not a macroeconomic problem. We need to raise taxation (local and national) to levels sufficient to maintain vital public services and increase borrowing to invest in infrastructure and social housing.
Peter Martin talks of government spending coming back to the government. It is simply a failure to understand that in an economy near full employment, real resources have to be reallocated from private consumption to the provision of public services. The sooner we all recognize that and quit looking for fantasy economic solutions that do not exist the sooner we will be able to develop real-world solutions to address the pressing issues that Howard Sykes highlights in his article.
@Joseph Bourke
Far be it from me to argue the toss with an expert like yourself. I don’t know whether you have served any length of time as a councillor or have preferred to try your luck at getting into the higher echelons of governance. As someone, who spent a continuous thirty years at all three of the lower echelons at one time or another, I can tell you that for all of that time I have seen how local government, which gave us so many of the institutions, which helped my generation get on in life, has been abused by successive governments.
You mention Neville Chamberlain. I think I am correct when I say that he and his father first cut their teeth in Town Hall politics in Birmingham. Indeed, you could argue that this was where they learned their trade. It’s a pity that so few of our current parliamentarians have had the same experience. If that were the case, perhaps they might just appreciate a little more how, given the tools, local government might still be able to deliver.
I’m not very bothered about what Hegel said; although I suppose he had a point. If you are saying we ought to learn from history I would agree. We never do. All I know is that we were living beyond our means when the banking crisis struck and I believe that the idea of spending oneself out of a recession was something that JM Keynes advocated, and was something that FDR appeared to do. Others argue that what got the world out of what was effectively a slump was the rearmament that took place at the end of the 1930s in the lead up to and subsequently during and after WW2, not that I would want to see that as a driver today.
John Marriott,
I have yet to convince the good folk of Hounslow Borough to elect me either as a councillor or as a member of parliament. My voluntary service has been as a teachers union treasurer, board member with an industrial and provident society, director of a quango and a trade association and a school board governor.
Like you, I have great faith in the capacity of local government to deliver local services if only they were not so shackled by central government control. Joe Chamberlain, as Mayor of Birmingham in the 19th century, demonstrated what could be done. He had to deal with Gladstone who was famously parsimonious when it came to any central government spending.
The point about history is FDR did not spend his way out of recession. His first act on coming to office was to cut the pay of everybody who worked for the government and the armed forces by 15%. Government departmental spending was also cut by 25%. These savings were reinvested in New deal programs. He also ended the prohibition on alcohol. Excise taxes were levied on alcoholic beverages, cigarettes, matches, candy, chewing gum, margarine, fruit juice, soft drinks, cars, tires, telephone calls, movie tickets, playing cards, electricity, radios and other goods considered non-necessities. The big infrastructure projects like the Hoover Dam were financed via a 50 year federal loan to the State of California repaid by residential and industrial users of electricity via their monthly utility bills. FDR left a legacy that showed that the Federal government could intervene to make life a little more tolerable for the great mass of the population. if not able to cure all problems.
PS: If Hegel’s philosophy is not much to your taste, how about his student, Karl Marx, who opined that history repeats itself, “the first as tragedy, then as farce.”
@ JoeB,
“Peter Martin talks of government spending coming back to the government. It is simply a failure to understand that in an economy near full employment, real resources have to be reallocated from private consumption to the provision of public services.”
Your failure is to understand that we are not at full employment. Nowhere near it. You’ll probably be thinking that 4% unemployment is an acceptable figure. At one time you might have been right. However, there have been big changes to the nature of employment in recent years. It is all much less clear cut that it used to be. At one time if a worker was working for 50% of the year they would be regarded as unemployed for 50% of the time.
Now if a worker only has 2 or 3 days work during the week, in the gig economy, when they would like 5, they aren’t counted as unemployed at all.
There have been numerous changes to the counting method over the years. It used to be the case that anyone could register as unemployed if they were looking for a job. Now they are only counted if they are in receipt of benefits. They still might not be counted if they are deemed too sick, too young or too old.
It used to be the function of staff, at what I remember as the DHSS, to help potential workers find jobs. Now the priority seems to bully them to move off the unemployed register wherever possible. You’d have to be pretty desperate to put up with the treatment that was so well documented in Ken Loach’s film “I Daniel Blake” for £75 p.w.
We also have the fact that the American President is reducing taxes for the rich, increasing expenditure and destroying the international trading system. America is increasing its debt. Another economic crisis is coming. The high employment rates in the US – and in the U.K. – will be a thing of the past.
In the meanwhile we are destroying the planet’s ecosystem.
We need to be advocating a green new deal with the aim of halving our consumption and giving humans a chance.
Message to Messrs Bourke and Martin – and to myself, for that matter. It’s time to stop exchanging erudite economic observations and to find a solution before Rome burns down completely. It usually means shuffling money around from wherever it can be found. Put that fiddle away!
@ John Marriott,
I’m an easy going sort of person, but if the ship is heading for the iceberg I tend to get fairly agitated! Not the Brexit iceberg either! I can’t compromise with neoliberals who say things like:
“Austerity is not the cause of the UK’s economic problems”
If there’s anything wrong with this statement it is that it doesn’t go far enough. The slashing of council budgets was done in the name of austerity. To balance the books etc etc. It hasn’t even done that but it has caused a large measure of misery throughout the country. So I would say that:
Austerity is the cause of both the EU’s and UK’s economic problems. Ultimately it is the cause of Brexit.
John Marriot,
we have the answers to the UK’s economic issues – it can be found in Libdem policy as democratically thrashed out in conference.
Peter Martin’s insistence that the European Union is destroying the UK and European economy and 6th form student analysis of the workings of money in the economy, have no place within an economically credible policy offering to a British public perfectly capable of sorting out the political chaff from the wheat.
@Peter Martin
So, what’s your answer to the potential demise of local government then, except possibly to leave the EU?
@ Joseph Bourke “we have the answers to the UK’s economic issues – it can be found in Libdem policy as democratically thrashed out in conference.”
And what sort of a job is the party making of selling these policies – and just how democratic and representative is a body that is self selecting and can afford to take a few days off in a hotel hundreds of miles away from the rest of the UK ? Has anybody done a profile of conference attenders and compared it to the profile of the general population ?
@Peter Martin
My understanding is that the Labour Force Survey is a SURVEY i.e. like an opinion poll – some 58k households chosen randomly are interviewed – that is it is not dependent on the claimant count.
The unemployment rate is low at 4% and the lowest since the early ’70s. Quite a bit of this is “frictional” – most people do not claim unemployment benefit beyond six months – partly because benefits become more difficult to get after that but indicating a large number get another job within six months. There is a debate to be had on “under-employment”. Female participation in the labour market is at a historic high. And youth unemployment as I think you have pointed out is relatively low in this country compared with many. There are clearly those on zero hours contracts etc. And those that could do a job with a higher economic value.
And those working part-time but a large proportion of those for a variety of reasons do not want a full-time job.
So there are aspects where you should add to the headline count and aspects where you should take away from that.
Overall I think it is tough – although difficult to say precisely – to say that there is a particularly big pool of unemployment. And while I favour high levels of Government spending and indeed some Government borrowing – there is a danger of Government activity “crowding out” private sector activity in an economy operating near if not yet at “full employment”.
—
To that end it has to be said that the policies since 2010 including during the coalition after the recession under Labour have “worked” and indeed in general employment reduces poverty and austerity.
—
@John Marriott – actually I find the discussion so long as it is not too repetitive (or too impenetrable) useful for thinking about the issues! To avoid sinking through striking an iceberg one has to design the ship well – and for a democracy that means discussion on how to construct it!
https://webarchive.nationalarchives.gov.uk/20020625191833/http://www.statistics.gov.uk:80/ssd/surveys/labour_force_survey.asp
https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/january2019#unemployment
Michael
The reason youth unemployment is low is because the young are either shunted into the gig economy or are in what amounts to compulsory higher education, which they have to accumulated a huge future debt to pay for.
IMO, austerity is an ideological driven attack on the state by economic liberals who have mostly wanted to shrink it and which has been the orthodoxy since at least the 1970s. A carrot for the boss and a stick the employees with meagre protection to make the legal disenfranchisement of organised labour seem more palatable.
@ Joe Burke,
The EU economy is performing badly. Growth is sluggish. Unemployment is far too high in many regions. So if the EU isn’t to blame who is? Is it just an Act of God that we’re all in a bad shape? The state of the EU and UK economies is caused by people who think like you. If anyone wants more of the same as they’ve had in the last decade they should carry on listening to people like yourself.
If they don’t, I don’t want them to listen to my say -so, particularly, but I would like them to put on their thinking caps and start to think for themselves rather than listening to your supposedly “economically credible policy”! This is just code for more austerity.
@ John Marriott,
The UK did have the good sense to stay out of the euro. We wouldn’t have if the Lib Dems had had their way! So I’m not blaming the EU for everything.
There’s simply no sensible reason why local government should have been defunded to the extent it has. If we could afford to fund local government prior to 2010 then we can afford to fund it now.
Peter Martin has a point. Ten years ago, The Guardian (14 September, 2008) reported : “In an interview, Vince Cable, the Lib Dem treasury spokesman, abandoned the party’s historic commitment to ‘ever closer’ European integration and its decade-long push for rapid British entry into the euro system. Prompting a furious response from the party’s pro-European wing, Cable steered them on to a more Eurosceptic course in the hope of preventing a haemorrhage of votes at the next election to the traditionally anti-Brussels Conservative party.”
“Cable said he also expects a row in Bournemouth over plans to slash public spending by up to £20bn and cut the overall tax burden over an economic cycle. The economic plan – again designed to outflank the Tories – reverses the party’s traditional commitment to higher spending and increases in taxation for the well-off.”
Does this stack up for a party as ‘evidence based policy founded on principles’ ? Looks more like opportunism. If the party is in a hole with most people (91%) not listening, then evidence points to (via Vince) it dug its own hole.
David Raw,
Vince Cable (an economist who knows whay he is talking about) could not be clearer about the catastrophic consequences of a no-deal Brexit. Let Peter Martin drink the kool aid if he so wishes – the rest of us should pass up the offer to join him.
As I mention above – we need to raise taxation (local and national) to levels sufficient to maintain vital public services and increase borrowing to invest in infrastructure and social housing. This is clearly reflected in party policy https://www.libdems.org.uk/economy.
You have been around long enough to know the routes available to local paries for input to policy development. Membership has more than doubled over the last couple of years with a new base of younger activists engaging. There are like-minded individuals in both the commons and Lords that Libdem Parliamentarians can fruitfully work with on a cross-party basis. Try a glass half-full approach to life from time to time, it will be far better for your general mood and peace of mind.
@ JoeB,
“Vince Cable (an economist who knows what he is talking about)”
Is this the same Vince Cable who has admitted to causing Brexit?
https://news.sky.com/story/sir-vince-cable-admits-regret-coalition-austerity-policies-may-have-led-to-brexit-vote-11499891
Peter Martin,
The link you post to is perfectly clear that it is the cutback in public investment (that started in 2009/10 and continued throughout the coalition years that has impacted leave voting Northern communities more than most.
Capital spending budgets are under the control of the Chancellor of the Exchequer. In 2009/10 Alistair Darling, from 2010 to 2016 George Osborne and since then Philip Hammond.
Vince Cable consistently argued for both increased capital spending and an industrial strategy before the 2010 election, during the coalition years and since.
The Sky news report quotes him as saying “…One of the aspects of austerity that did most harm was the massive cutback in public investment. I know that it’s the emotive stuff around social security spending that gets people angry. But the thing that did harm was the big cutbacks in investment and that’s what has caused many of these northern communities to continue to decay.”
As the Libdem manifesto points out – a major programme of capital investment and research & development is about improving Britain’s poor levels of productivity and stimulating innovation and entrepreneurship across the UK as a means of redressing profound regional and structural economic imbalances.
If reading that as Vince Cable admitting causing Brexit makes you happy- so be it.
@JoeB,
I suppose you can argue that it was all the fault of the Tories in the coalition years. Nevertheless, the 2010 Lib Dem manifesto shows the Lib Dems were, if they still aren’t, a right wing and neoliberally inclined party. For example we can read:
Dealing With The Deficit
The health of the economy depends on the health of the country’s finances.
Public borrowing has reached unsustainable levels, and needs to be brought
under control to protect the country’s economic future.
A Liberal Democrat government will be straight with people about the tough
choices ahead. Not only must waste be eliminated, but we must also be bold
about finding big areas of spending that can be cut completely. That way we
can control borrowing, protect the services people rely on most and still find
some money to invest in building a fair future for everyone.
We have already identified over £15 billion of savings in government spending
per year……..
This passage is riddled with neoliberal misconceptions about how the economy operates. The Governments deficit equals everyone else’s savings. You can’t reduce it by cutting Govt spending and/or increasing taxes. You can only cut it by persuading people to save less. ‘Borrowing’, which in any case is a misnomer and is just the swap of one type of Govt IOU (bonds) for another type of IOU (cash), hadn’t reached unsustainable levels.
The Government never needs to “find some money”. The Govt isn’t a household. The multi billion £ bailout of the banks wasn’t done with “found” money!
Peter Martin,
the passage you reference is exactly how any responsible government would and should approach the issues of an unsustainable deficit in excess of 10% of GDP. As the section concludes its purpose is to “control borrowing, protect the services people rely on most and still find some money to invest in building a fair future for everyone.”
There were certainly mistakes made in the early years of the coalition in cutting public investment, but by 2012 voices like that of Vince Cable came to be heeded and policy was quietly reversed spurring recovery from 2013 onwards.
The economy does not operate as you outline above. Functional finance cannot work effectively in an open and free economy – it needs controls on capital movements, prices and incomes to be effective. All policies that have failed outside of a wartime command economy. The UK is dependent on International trade for its well-being. Autarky is a recipe for much lower living standards.
MMT misinterprets Wayne Godley’s sectoral balance analysis in grouping households, firms and the foreign-sector into one homogenous group and the government as another separate entity. If you want to analyse the economy effectively then individual households can be considered a separate entity. All wealth and money is ultimately owned by individuals, whether domestic or foreign. Firms and governments are pass-through entities that act on behalf of human beings. The state and its institutions are the monopoly providers of currency, defence, policing, health services and education etc because these are decisions we collectively make as a society. Credit provision and money creation in the economy is dominated by the private banking sector, not the government.
When the government spends money it creates an obligation that has to be met by taxpayers either in the near future through taxes or in the longer term through retirement or rollover of debt.
The government deficit does not equal everyone else’s savings. It represents the amount of savings that are not invested in other saving alternatives, whether they be the financial securities of domestic or overseas firms or US treasuries and other foreign bond markets. Without capital controls, the office of debt management has to compete with overseas issuers of financial securities and offer real returns that are competitive with other sources of risk-free investments.
The deficit has been reduced by fiscal consolidation (around 3% in real terms), increasing some taxes like VAT and by the impact of historically low-interest rates on economic growth – see IFS analysis for detail https://www.ifs.org.uk/publications/7983.
If the coalition failed in some respects it was as the IFS report concludes – in failing to implement substantive structural reform to address the long-standing weaknesses in the tax system identified by the Mirrlees Review – some of which (such as increasingly unsustainable council tax valuations and ill-targeted fuel duties) are becoming ever more pressing.
“All wealth and money is ultimately owned by individuals, whether domestic or foreign.”
Yes this is true. I suppose we can say the overseas currency reserves of the Bundesbank are owned by the German people. So just considering the money part of the wealth, we can say these individuals own the positive numbers. However, and according to the laws of double entry bookkeeping, everything has to sum to zero. So who has liability for the negative numbers? That’s where the Govt comes in!
So if we define the money part of everyone’s wealth as their total savings, we can say that the change in the negative numbers in any time period, the govt deficit, is just te amount that ‘individuals’ have net saved in the same time period.
Now, technically, I know that if the Govt issues bonds it is counted as debt, but if it just issues ££ it isn’t. It should be. But that’s a mistake on the part of the mainstream economics profession.
Peter Martin,
the Bundesbank or the ECB, in this case, will only hold such level of liquid foreign currency reserves as they require to meet 3 to 6 months of imports, usually in the form of sovereign debt. Other International reserves may be held in the form of gold or IMF special drawing rights. Excess foreign currency (over and above the amount required to pay for imports) earned by a countries exporters and from overseas investments will be exchanged for local currency on the foreign exchange markets. The great bulk of liquid foreign reserves held by central banks are in US dollars (around 2/3rds(, about a quarter are held in Euros and the balance primarily in Japanese yen, Sterling. Chinese Yuan and Swiss Francs.
Sovereign bond yields (real rates of return after expected inflation and currency devaluation) are subject to the laws of supply and demand just as other investments are. If there is excess currency being exchanged in FX markets that will put downward pressure on the exchange rate and upward pressure on interest rates. If there is a shortage of currency relative to demand that will put upward pressure on the exchange rate and downward pressure on interest rates.
Joe Bourke 5th Feb ’19 – 5:07pm: Unless the politicians wield “the big bazooka”.
@JoeB,
You forgot to mention that the BoE is a player in the market. So if the Govt wants lower long term interest rates it instructs the BoE to buy up gilts/bonds and if it want higher rates the BoE should sell.
I think this is what Richard Underhill means by his ‘big bazooka’ comment but I wouldn’t put it that way.
Going back to a previous comment MMT doesn’t misinterpret Wynne Godley and sectoral balances. You can have a many, or as few sectors as you like -providing you have at least two. Often it’s the Government Sector, the Private Domestic Sector, and the Overseas sector. But it doesn’t have to be. You can divide up the PDS however you like to create additional sectors.
Peter,
the BofE doesn’t target the exchange rate, it targets the inflation rate and will use open market operations to manage sort-term interest rates to that end.
I think the Big Bazooka Richrd Underhill refers to is the Eurozone fund created to defend the Euro against market speculation in the wake of the Greek debt crisis. The Eurozone fund is backed by individual member states and German backing is what gives it credibly. Wolfgang Schauble was writing about this in the FT in 2017 https://www.ft.com/content/f17a6464-db3d-11e7-9504-59efdb70e12f
The EZ banking union is still a work-in-progress.
Wynne Godley was quite clear that sectoral balance analysis does not infer causation. What it does is highlight when imbalances are building up in the economy. Richard Murphy, an advocate of MMT, appears to appreciate this point at least https://www.taxresearch.org.uk/Blog/2015/11/11/on-sectoral-balances/
A key feature of sectoral balances in the run-up to the financial crisis in the UK was the decline in the household surplus as mortgage borrowig in particular escalated and the build-up of surluses in the corporate sector that were not being reinvested in productive assets, but rather recycled into evermore household borrowing.
@ Joe B
“the BofE doesn’t target the exchange rate”
I didn’t say it did.
Wynne Godley was quite clear that sectoral balance analysis does not infer causation.
I didn’t say that either. However we can say that if the Government considers its deficit is too high then it must also consider that everyone else is saving too much and/or borrowing too little. That’s why there was a huge reduction in interest rates after the GFC. So the spin was that the deficit was being reduced by spending cuts and tax rises, whereas in reality, any reduction in government borrowing was being achieved by encouraging everyone else to save less and borrow more.
Peter Martin.
The government can no longer instruct the BoE to do anything, because that institution was given independence by the last labour Government. Perhaps you hadn’t noticed but the movement of the base rate is no longer dealt with by the chancellor but by the monetary committee of the BoE.
The direction of which you speak was certainly in force prior to 1997, but is no longer.
Peter Martin,
in my opinion your analysis is based on flawed assumptions. People (households) were borrowing too much in the run-up to the financial crisis. They had no choice as a result of inflated land prices in the housing sector. Mortgage interest rates of 8% on inflated land values were generating huge profits in the banking sector that the Labour government relied on to fund its programs.
After the crash, the housing bubble was reflated to prevent the meltdown that deleveraging was causing in the banking sector.
It was not the government wot dunnit – it was the banking sector lending on inflated land values. All the government can do in the longer term is try to restore confidence by bringing its expenditure closer in line with the level of tax receipts that have been relatively stable at around 36% of national income and use its borrowing capacity to invest in increasing the productive capacity of the economy.
Until the issue of Land values is grappled with the cycle of boom and bust will continue to repeat itself.
@ Mick Taylor,
So you believe this fiction, I see. You believe the BoE bought up £400 billion or so of assets entirely of its own volition? The BoE thought they were a good investment?
The central bank has a degree of control when everything is ticking along reasonbly well but they are still essentially just another part of government.
If you google {myth central bank independence} you’ll get plenty of hits!
@ Mick Taylor “The government can no longer instruct the BoE to do anything, because that institution was given independence by the last Labour Government.”
Yes, in 1997 – with the full support of the Liberal Democrats and our then finance spokesman, Alan Beith.
I well remember the collapse of Northern Rock debate back in 2007 when Alan said, “There were clearly failings in the regulatory system, including due to the division between responsibility for regulation and the position of lender of last resort. The Prime Minister created that division when he was Chancellor, alongside his commendable action of giving the Bank of England independence over monetary policy, for which I had long argued, but it has proved, in this instance, to be an unsatisfactory division of responsibility”.
Peter Martin
As a trained economist I actually rely on the facts, not conspiracy theories on the internet. And no, I’m not a traditional economist but a heterodox one and believe that there is not always one solution but usually a combination of many.
You can read about how monetary decisions are made by the BoE, because they publish their minutes and tell you which members of the committee voted which way. Funnily enough there are no mentions of government instructions and no dictation by the governor which could be cover for them. It’s a sharp contrast to the opaque workings of the treasury or the cabinet.
David Raw. I support the independence of the BoE. One of the better decisions by the chancellor to take interest rate fixing and other monetary policy out of his hands. Alan Beith was quite right to support it.
@ Mick Taylor
It sounds like the BoE are independent when the govt wants them to be but still have to do the govt’s bidding like when there’s a need to intervene in the gilts market!
It reminds me of the sort of independence that driving instructors allow their pupils in those dual controlled cars.
@ Mick Taylor,
If you accept that the economy has to be regulated by a combination of fiscal and monetary measures then isn’t it better to have both of these under the same control? Otherwise we can have the situation of having two drivers of the car. Govts have tended to run a too tight fiscal policy, and the BoE has been trying to compensate by having a very loose monetary policy which had led to recent ultra low interest rates and still a low growth economy.
The on another level we should always question removing power from our elected representatives – even Tory ones!
PS I’ve just been reading the BBC news on the internet. I hope it’s not all conspiracy theory!
http://bilbo.economicoutlook.net/blog/?p=29770
@Joe B,
As usual, you are far too fixated on the question of land.
That’s lots of other reasons for borrowing money: house purchases and improvements, business investment, cars, foreign holidays, stocks and shares, general consumption on credit cards etc.
There’s nothing particularly wrong with some of these. Many of us will have borrowed money to buy a house or car. The problem arises when governments are over reliant on private credit creation as a means of stimulating the economy. All they are doing is bringing forward spending rather than increasing it overall. So the cost of encouraging more spending now is to have less spending in the future and that’s when the debt deflation problems become apparent.
Peter Martin,
the stats for household debt in the UK show total household debt of £1.6 trillion. Of this circa £1.4 trilion realates to mortgage debt and £200 billion to consumer debt. ONS stats indicate the proprtion of house prices that relateto Land is around 70%.
According to the Office for Budget Responsibility’s October 2018 forecast, household debt is forecast to reach £2.258 trillion in Q1 2022.
The money charity https://themoneycharity.org.uk/money-statistics/ advises that based on November 2018 trends, the UK’s total interest payments on personal debt over a 12 month period would have been £51,243 million. That’s an average of £140 million per day. Over 60% of this interest is related to mortgages on land.
A land value tax that recoverd these interest payments on land for the public purse would generate a sum equivalent to the total of council tax receipts across the UK.
@ Joe Bourke,
I haven’t checked your 70% figure for the average cost of land in house prices. But say you had you way and all land was nationalised without compensation. In the case of house owners who didn’t have the freehold, instead of paying ground rent to a landlord, they would pay it to the Govt as a LVT. Nothing would change re the price of these properties and the level of borrowing associated with the purchase of them.
In the case of freehold owners, they’d have to start paying some ground rent/LVT which would have only a small effect on the value of the property. From what I remember during my househunting days the lack of a freehold didn’t have a significant effect on the asking price of a house.
But politically you must know that this is non-starter. Can you imagine the Lib Dems asking their largely middle class property owning voters to have to give up their freehold rights?
@ Peter Martin I asked Joe several months ago to explain why Lloyd George was forced to back down by the party on similar proposals in the 1920’s……………. I’m still, waiting for a response.
…Over 60% of this interest is related to mortgages on land.
A land value tax that recoverd these interest payments on land for the public purse would generate a sum equivalent to the total of council tax receipts across the UK.
What?
A LVT would only get added to the interest payments, there is no recovery of monies. To recover monies the government would have to cap interest rates and go directly to the lenders and dip its fingers in the till. What you are actually proposing is a transaction tax/surchange on interest payments relating to the purchase of property, which gets paid by the purchaser.
An interesting side effect is that this LVT is only due if there are outstanding interest payments; clear the mortgage and no LVT…
Roland,
mortgage loans are based on a multiple of income. increased taxes on interest earned from land does not change that. The absolute amount of interest paid is relative to the price of the property. When interest rates are lowered house prices increase when interest rates increase significantly house prices stagnate or fall. The absolute level of interest that can be paid from disposable incomes doesn’t change only the rate of interest and the size of the mortgage loan.
Currently, banks and other lending institutions pay a corporation tax surcharge of 8% on top of the main rate.
Howard Sykes headlines his article “£8 billion funding black hole will swallow up popular council service”. This is how the hole can be filled. It will have no direct impact on house prices or interest costs. It will reduce the level of economic rents in the form of executive remuneration and bonuses that is extracted by lending on naturally produced assets like land and redirect a significant proportion of those economic rents to the provision of essential public services.
David Raw,
this is an academic paper answering your question https://www.nuffield.ox.ac.uk/Politics/papers/2005/McLean%20Nou%20Beggars3%20050617.pdf
“Home Rule for Ireland occupied essentially the whole Parliamentary timetable until 1914. The Government of Ireland Bill was bound to be (and was) rejected twice by the Lords; therefore it could not be enacted until 1914, by which time Ulster Protestants had created a private army to resist it with the connivance and perhaps the financial support of the leader of His Majesty’s loyal Opposition, Rt. Hon. Andrew Bonar Law. His Majesty himself was more loyal to his Opposition than to his Government. For this and other reasons, Chancellor Lloyd George was unable to return to the subject of land taxation until his Budget of 1914.
By the time Lloyd George introduced the 1914 Budget, the land valuation register enacted in 1910 was still incomplete. Treasury (as in 1909) and Inland Revenue (unlike in 1909) senior officials were unhelpful to their Chancellor. And the Liberals no longer held a single-party majority in the commons, which made Lloyd George vulnerable to a revolt of landowning MPs in his own party.
The revolt forced him to withdraw his site value rating proposals in June. Within the month, Archduke Franz Ferdinand had been assassinated in Sarajevo. An all-party coalition government was created in 1915, to be succeeded by a Coalition LiberalConservative coalition in 1918. In the wartime coalition, partisan domestic politics were muted; in the 1918 Coalition, Prime Minister Lloyd George held relatively few seats and the Conservatives on their own held a majority. Unsurprisingly, all the 1909 and 1914 land taxation provisions had been repealed by 1920.”
@Joseph Bourke – Nice politicians answer! but it doesn’t actually answer the question raised by your original comment. I suggest you get some Monopoly money out and walk things through.
A lot of this thread has been about LVT as a panacea for council or other funding. I have another suggestion. Why is it that people are allowed to store their private property on the public highway, maintained by the council, for free? I refer of course to on-road parking. A typical rent for a space on someone’s drive round my way is around £100 a month – if all the cars parked on the roads were paying that to their local council it would bring in enough to fix a lot of potholes, and pay for a few other things to. Also, people would then start parking their cars off-road where they can, rather than blocking up the public highway.
Roland,
banks already pay a corporation tax surcharge on profits from interest. There has also been an additional levy on banking profits in recent years of several billion pounds during the coalition government. The world doesn’t come to the end when economic rents are collected and applied to finance public services.
PS: The game of monopoly actually began life as a simple illustration of why land value tax was needed. The player that acquires all the high rent sites will ultimately acquire all the property available on the board. When the other players can no longer pay the rent when they land on a square or need to pass go, they are out of the game.
Jenny,
much of London is dotted with controlled parking zones for which residents pay an annual permit fee of around £100 to park on the road.
A relatively new form of council levy is the workplace parking charge. This has been introduced by Nottingham council https://bettertransport.org.uk/blog/better-transport/winning-policy-nottinghams-workplace-parking-levy.
To continue something raised, by another poster, on another thread….
Joe Bourke, I notice you have posted 4 posts between 4.18 and 5.33; do you have a special dispensation from LDV?
I note that there are a few here who manage to post far more often than I. Is there any point in asking, yet again, “Why?”..
Joe – So in your original comment you didn’t mean “recovered” you actually mean getting a slice of the monies, just like Gordon Brown took a slice off pension fund earnings, by placing a tax either on the actual amount of interest paid and/or on the profits accruing from interest payments.
So if someone is currently paying £100pcm in interest repayments they can expect their repayments under your scheme to go up – can’t see the banks simply absorbing the new charges/taxes. As you indicate this would replace existing council tax receipts, so there may be some overall levelling. However, as I indicated, a scheme where effectively only those with outstanding mortgages pay council tax does seem to be a non-starter.
re: Monopoly – Thanks for the reminder, it is funny how you forget stuff and then some comment brings it all back, I remember asking back in the 80’s as to whether a LVT variant of the game existed and not getting an affirmative reply. Perhaps the time is right to create a set of LVT rules that use the Monopoly board to bring LVT to life.
@ expats The gentleman concerned has at least four (if not five or six) different but very similar pseudonyms that he posts under – which seem to get past the system. Very naughty – but somewhat repetitive on land tax…. and when pushed dodges why LLG dropped land nationalisation under party pressure in the mid 1920’s. John Marriott and I are far too honourable and old fashioned to do something like that.
If it was left to me I would have an LDV tax on postings (please note, dear LDV controllers that is not a Land Development Valuation tax)..
You’ve been found out, Joe. Time to fess up and mend your ways. You’re a very naughty boy.
he’s a very naughty boy! – YouTube
https://www.youtube.com/watch?v=plZRe1kPWZw
Video for not the messiah a very naughty boy youtube▶ 0:10
28 Feb 2011 – Uploaded by Entropy
Roland,
I do mean recovered. Increases in Land values are the result not of individual effort or enterprise, but rather the consequence of public investment in infrastructure and the effect of the concentration of economic activity in urban centres. Increasing council tax or business rates because an individual increases the value of a property by improving it or a business invests in developing industrial or commercial property is counter-productive.
Capturing for the public benefit increases in Land Value that arise as a consequence of the grant of planning consent or as a consequence of public investment in road and rail infrastructure, parks, schools, hospitals and community facilities etc, that all make a location desirable and in demand is just that – a recovery of public spending that generates the increase in land value in the first place.
Much of the increase in land values is captured in the financial sector via mortgage interest payments on ever higher house prices. Many of today’s homeowners will find that the value of their property has trebled over the past 25 years. They will also have made payments of principal and interest that equates in total to three times the principal amount of their original mortgage loan (based on an 8% average mortgage interest over the last 25 years). The effect is that virtually all of the increase in land value has been captured by interest payments made over the best part of the working life of homeowners buying in their mid-thirties. On the other hand all of the public investment that created the increase in land values is paid for by taxpayers. Yet each generation of homebuyers is having to pay ever larger amounts of interest payments for the privilege of occupying a small plot of land on which a shelter can be constructed. Those that do not have the means to pay the mortgages or rents required are literally left out in the cold.
David Raw,
The First World War was the great interruption for Lloyd George and the land campaign. After the war, the fire of his youthful radicalism was largely extinguished by the compromises of coalitionism; in 1920, he agreed to the abolition of the land taxes that had been introduced only a decade earlier.
The Liberal History Group has published a long article on the resistance and obstacles that the Lloyd George Land Taxes faced in the Edwardian period that concludes: “The irony of the situation was complete. Lloyd George, head of the government at whose instance the duties and the land valuation were repealed, had been the instigator of the same duties and valuation eleven years earlier. We may only speculate as to what were his real thoughts on the matter. In the debate which followed Austen Chamberlain’s budget speech, Asquith proposed that the epitaph on the duties should
be ‘not Requiescat but Resurgam.’ Sometime, perhaps, we will see the Day of Resurrection.”
Now would be a good time to heed Herbert Asquith’s epitaph and Vince Cable’s speech to conference in 2010:
“It will be said that in a world of internationally mobile capital and people it is counterproductive to tax personal income and corporate profit to uncompetitive levels. That is right. But a progressive alternative is to shift the tax base to property, and land, which cannot run away, and represents in Britain an extreme concentration of wealth.”
@ Joe, Joseph, Joe B et al Sorry, Mr Bourke. You keep walking round the subject. Lloyd George campaigned for land nationalisation after the 1923 parliament but was forced to drop it. Why ? Please address this question if you can.
@ David Raw,
I haven’t looked at the history of Lloyd George’s campaign on land nationalisation but I’m sure the reason he was forced to drop it will turn out to be that it annoyed enough people with enough land and enough influence to be able to force him, or bribe him, to drop it. Maybe that’s too obvious and too radical an explanation for Joe. He’ll have trouble expressing an answer within the word limits of a LDV post.
The Labour Party, too, have blown hot and cold on the idea over the years. It could have some merit along with a Mansion tax. Whose idea was that? I’m sure that will annoy a few people too.
So maybe the way forward is to flesh out the idea with few details. Would someone in a house worth, say, £200k have to pay a LDV on their house plot? Would it replace council tax? Would farmers have to pay at the same rate as everyone else?
I’m personally, at least provisionally, OK with the idea providing I can get a grip on exactly what is being proposed, and providing we get away from the nonsensical idea of the ‘single tax’.
Land nationalisation was not a great success in the USSR – why would it work here ?
Taxes have to be paid out of income unless the owner is forced to sell his assets – why would that be a good idea ?
There is something wrong with this site. Why do I have to type my comments twice ?
Land Natioanalisation is a red herring and completely contrary to the principles underpinning Land Value Tax (LVT) and the collection of economic rents from land and other natural resources. The economic principles of LVT are well established and advocated by economists of all stripes like Joe stiglitz https://henrygeorgedevon.wordpress.com/2015/04/20/stiglitz-on-land-rent-and-george/
Senatr Elizabeth Warren (a Harvard Law Professor) may well be the democratic nominee for president this year. Her 2003 book “The Two Income Trap” argues that the combination of precarious family finances with poorly regulated credit markets created opportunities for predatory lending. Many more women joined the workforce boosting household incomes. The Increased incomes coupled with deregulated credit markets bid up the cost of housing, particularly near good schools, making households more financially vulerable not less.
Senator Warren thinks government should be in the business of correcting market failures to arrest inequality , not just through redistibution, but through predistribution to tackle lopsided incomes at their source. This is what economic reform based on Land Value Tax is all about and why Stiglitz in the link says:
“Driving the growth of inequality – you have to conclude that minor tweaks in the economic system are not going to solve the problem … the underlying problem is the whole structure of our economy which has been oriented more and more at increasing rents [economic rent] than increasing productivity – [rather] than real economic growth that will be widely shared with our society … A tax on land, rents, will address some of the underlying problems. This is an idea that Henry George had more than 100 years ago …”
@ Joe B, Joseph Bourke, Joe Bourke et al……..
Dismissing a question as a red herring is quite different to actually answering the question. Why did Lloyd George drop his land proposals in 1924 ? Can’t you answer this ?
David Raw,
We have been through this before. There was a sizeable group of Edwaedian Liberal Radicals that favoured Land Nationalisation. Many of these radicals joined the Labour Party after WW1 e.g MP Josiah Wedgewood, who switched his party affiliation from Liberal to Labour.
Opposing these radicals were a sizeable group of Liberal backbenchers that were worried about the political costs of the progressive taxation needed to deliver te social reformsintroduced before WW1, like old age pensions and unemployment/sickness insurance. To win elections Liberals needed to retain a large element of the middle class, many of whom were hostile to redistributive taxation.
On the eve of the First World War, David Lloyd George was poised for political triumph with his ‘Land Campaign,’ which proposed a Ministry of Land and intensive rural development. But the war was a complete disruption, and in the four years after it ended, the market did what Lloyd George had not been able to do. With wartime price constraints gone, much land changed hands, flowing from old aristocratic families whose sons had died in the war, to the families of tenant farmers. To people at the time it appeared to mark the end of the long aristocratic and gentry dominance in society and politics.
After his defenestration at the behest of the 1922 committee Lloyd George was scambling about for a campaign that would bring him back to power. By 1924 he understood that his 1913 Land Campaign was not going to do it.
Rural land nationalization had been a central tenet of the Socialist party, and along with land-value taxation on urban land, had become part of the Labour party’s program in the 1920s. Even in the face of the need to maximize soil productivity during the Second World War, land nationalization never moved from policy plank to practice. The Labour manifesto of 1945 stipulated that the party believed “in Land Nationalisation and will work towards it”. By the 1950s the enthusiasm for nationalization had thoroughly receded, calling into question the extent to which it had ever been an authentic commitment.
@ JoeB,
You’ve just said that Nationalising land is a “red herring” but in your usual fashion you haven’t explained why. As David Raw says you haven’t answered the question.
The point of owning large areas land is usually to obtain some income from it, rental value, by virtue of ownership. So if the Govt wants a share, too, it is effectively claiming a share of ownership. If Govt wants all the rental value then it will need to nationalise it.
Then the question arises of how much compensation to pay. If the compensation is ‘fair’ then it could be argued that this will exactly negate the rental value lost by the landlord.
For those with an interest in the history of Land Value Tax in the Liberal Party there is a detailed essay available at http://schalkenbach.org/georgism-and-the-decline-of-liberalism-in-interwar-britain/.
The author writes “Lloyd George returned to the land in an effort to rescue his political fortunes. The land committees of 1923 reported in 1925, and offered two different agendas for urban and rural land that helped to launch Lloyd George on a final land campaign which, despite the fact that it appeared to be a return to the pre-war radicalism, was ultimately to end in failure. The rural report, also known as the ‘green’ book, called for investing possession of all agricultural land in the hands of the state, which would then transfer individual holdings to tenant farmers. Landlords would be compensated through a government annuity based upon the rents accruing to the state. Among the two reports, site value rating was limited to the policies for non- agricultural land outlined in the ‘brown’ book. Under the proposals for urban land, local authorities were to be allowed the power to purchase land and to implement planning schemes. Local rating authorities were to be required to assess the site values of land based upon market prices and to levy rates which would provide at least 10 percent of their total rating incomes. Lloyd George focused most of his attention on the rural report in an effort to improve Liberal electoral fortunes, but between December 1925 and February 1926, was forced to retreat from the controversial proposals of the rural report after opposition arose within his own party. While the hopes of some progressive Liberals such as Masterman seemed to have returned with the land campaign, Lloyd George was soon to face renewed struggle within the Liberal Party.
Opposition arose from a number of quarters. Many “progressive” Liberals had already left the party by the mid-1920s, and among Liberals remaining, there was fear that Lloyd George’s proposals were far too similar to the nationalization of the Labour Party. Edward Hilton Young and Sir Alfred Mond, who had been uncomfortable with what seemed to be a lack of a firm stand against socialism within the Liberal Party, bolted for the Conservatives. Other Liberals, followers of Asquith, were simply frustrated by having yet another set of policies seemingly forced upon them by Lloyd George.
Peter Martin,
nationalise land and you will get the same results as Hugo Cavez in Venezuela or Mugable in Zimbabwe. Collect economic rents from natural resources as we did with petroleum revenue tax on North Sea Oil and public services can be properly funded, if they are sensibly adminstered and invested in public infrastructure, as Norway has shown and as Joseph Stiglitz argues in his speech to the Institute for New Economic Thinking.
Joseph Burke,
That’s rubbish and you know it. You should know you’re is some serious trouble with your reasoning when you have to bring Zimbabwe and/or Venezuela into the argument.
Put yourself in the position of a landlord who is making an an income from their ownership of land. On the one hand you are saying that its OK to some of it by taxing it away, that’s all very responsible, but it will be National bankruptcy if the State buys the land off them at a fair price. That’s probably what they would prefer and actually gives them a better deal!
Theoretically, we can equate such things as oil in ground, the radio spectrum etc, with land but that ignores history. No-one actually has previously owned the radio spectrum whereas someone has, rightly or wrongly, owned pretty much all the land. You have to deal with that politically. One way or the other.
Peter Martin,
In Chavez’s Venezuela, nationalization took the form of state control of the Oil company and other key industries as well as the creation of thousands of farming cooperatives that produced next to no food at great cost to the public purse. In Mugabe’s Zimbabwe, the same thinking led to the dispossession of white farmers and the collapse of food production in one of the most fertile regions of the African continent.
The state has no business acquiring private land that it does not need for the provision of transport infrastructure, public housing or the provision of other public services. Compensation for land acquired for public purposes should be based on its existing use value. The state can always acquire any land it needs for these purposes. It is simply swapping one asset – public money (in the form of currency for which it is the monopoly producer) for another asset – public land. As long as the land is acquired at fair value and produces benefits in the form of transport, housing or other public services – it is simply an investment in public infrastructure. There is no such thing as national bankruptcy for a fiat currency issuer using its own currency to acquire domestic assets. That only occurs when you are over-borrowed in foreign currencies or spending excessively on domestic consumption.
The taxation of rents from land has long been privileged in the UK. Letting businesses are not subject to Class 4 national insurance in the same way that income from other forms of self-employment is. They are also free of the business rates that all other businesses have to pay. Real Estate Investment Trusts managing commercial property can disburse dividends directly to shareholders without incurring any corporation tax on profits. Capital gains on the sale of a principal private residence are free of capital gains tax. It should come as no surprise that property constitutes such a large share of the estimated 13 trillion household wealth in the UK.
Stiglitz estimates that roughly 25% of GDP (national income) is extracted by economic rents with wages and returns to productive capital constituting the rest.
The larger part of Land rents is captured by the financial sector in the form of mortgage interest on lending on land. It is here, in the taxation of excess returns to the banking sector, that we can begin to look at the kind of economic reform that Joseph Stiglitz, Vince Cable, and Elizabeth Warren are calling for.
@ JoeB,
Look. Just forget Chavez and Zimbabwe and all the rest of it and start to THINK about what you want to do here. In the UK. I don’t expect you to solve all the world’s problems.
Say I own £1 million worth of land. I get a 5% net return on that which gives me an annual income of £50k. Lucky me!
So, even though I point out that I pay income tax like everyone else, Lib Dems don’t like the idea of my getting an income for doing nothing. I get the point. I understand where Lib Dems are coming from politically.
So, other than annoying me by getting the local Lib Dems to sing rousing choruses of “The Land, The Land” outside my bedroom window when I’m trying to get to sleep, just what exactly are you proposing to do about it?
Peter Martin,
this is the data you would need:
Location: West London. Number of bedrooms: 4. Value of property: £1m – proportion attributable to Land value 70%. Land rents @ 5% = £35,000. Mortgage – Assume 50% i.e. £500,000 loan outstanding at beginning of tax year.
1. Businesses i.e. mortgage lenders and Landlords would be assessed to business rates on their allocated share of land rents i.e. 50% each. Business rates are a tax-deductible expense. For 2018/19 rates are 49.3p in the pound, 48p if a landlord has only one business property. For smaller landlords that have a property with a rateable value below £12,000, they would not have to pay business rates only income tax on profits.
In the case above the bank would pay rates of £8,600 against their interest earnings on the mortgage and corporation tax on profits after deducting business rates costs. The Landlord would pay £8,475 rates on his rental income of £50,000 and income tax on profits after deducting business rates just as other businesses do.
2. Owner-occupiers. Instead of paying council tax they would pay land value tax on £35,000 of land rents less a homeowners allowance (equivalent to local housing allowance for 4 bedrooms in West London) of £22,335. The homeowner would be assessed to LVT by the local authority at the basic rate of income tax. In this case, the property owner would pay 20% of the taxable amount of £12,665 = £2,533. If the property was in council tax band H they would currently be paying council tax of £2,924 and in the next lower band G £2,437.
We used to say that we didn’t want to balance the budget, we only wanted to balance current government spending, which means that the forecast budget deficit of £31.8 billion for 2019-20 when capital expenditure is removed is a surplus of £33.7 billion. We should be able to say that we would fund the £8 billion black hole from this £33.7 billion. Problem solved.
Howard Sykes points out that £1.7 billion government support for Council Tax Benefit has been cut. This only affects people of working age and includes those who are not in employment. This cut was supported by our MPs when in government in 2012. £1.7 billion is a very small proportion (0.2%) of the £842 billion forecast for the government to spend in 2019-20. It should be a no-brainer for us to support central government funding completely a restored national Council Tax Benefit scheme as we had before 2013.
JoeB,
I can’t help thinking you are always determined to overcomplicate matters. Let’s suppose I don’t own any property. Just the land. £1 million. No mortgage. The yield is 5%. I’m not sure if 5% is reasonable at today level of interest rates. Maybe that should be 3%?
No rates.
Michael BG,
have you accounted for general government depreciation in total government expenditure https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/general-government-depreciation/ forecast to be £31.2 billion for 2018-19.
Forecast net capital expenditure of £62 billion less depreciation of existing assets of £31 billion would suggest a deficit of £31 billion represents a balanced current expenditure budget with borrowing for net additions to the capital stock.
Peter Martin,
there is nothing complicated about it. Businesses pay rates. If you are in the business of holding and speculating in land you should pay rates too. Rateable values are based on the market rents that land and property can be let for in any given area and are assessed as a proportion of those rents. There are some exemptions for agricultural property, Charities and places of worship etc. There does not need to be any exemptions for businesses holding development land with planning consent out of use over long periods of time to make capital gains or to rent out.
Joe, you like to make things more complicated than they are. Did you actually read the page you provided the link for. “Central government depreciation” is forecast to be £18.6 billion for 2018-19. It also states that government depreciation increases AME spending, but is directly offset – ”these effects all net off in terms of public sector net borrowing”.
According to table 1.6 of the 2018 budget book the figures are “excluding depreciation”. It seems I made a mistake and used the wrong year’s figures. For 2019-20 the Total Capital DEL is forecast to be £77.7 billion, and “Public Sector Gross Investment in CDEL” figure (which I was meant to use) is £61.6 billion.
Therefore for us Liberal Democrats there is at least a budget surplus of £29.8 billion forecast for 2019-20 and £38.8 billion forecast for 2020-21.
@ Joe B,
Yes I know businesses pay rates and you might well be justified in saying that landowners should have to pay rates too. But that’s not what I asked you.
I just want to know what effect your proposed LVT will have on my, sadly hypothetical, £1 million land holding on which I make a net 5%. Or, maybe that should be 3%.
So I’m not interested to know what VAT, or any other tax, I may have to pay if you think I should have to pay those. Just LVT thanks.
Of course if you don’t want to answer then just tell me you don’t. Otherwise I might start to think that you don’t know what you are talking about and can’t answer.
Michael,
you refer to Libdem Policy as being to borrow to invest. When we speak of a balanced current expenditure budget that includes recorded expenditure on depreciation of public assets. The link provide reads “we expect general government depreciation in 2018-19 to amount to £31.2 billion (with £18.6 billion of central government depreciation and £12.7 billion of local government depreciation).”
“Public Sector Gross Investment in CDEL” figure (which I was meant to use) is £61.6 billion. Deprecation of existing assets is £31.2 billion. The borrowing required to match the net increase in the capital stock is (£61.6-£31.2 billion) i.e. £30.4 billion. This is the deficit level that will deliver a balanced current expenditure budget and why we see references in the media that the current budget has been brought into balance.
Peter Martin,
the LVT is the business rates, but applied to land rents only excluding rents attributable to buildings or other improvements. Business rates on commercial property for 2018-19 for property with a ratable value below £51,000 is 48p in the pound. The Land rents in your example are £35,000. The LVT/Business rates on your rents of £50, 000 woud be £17,150 (£35,000 land rents only @ 48P in the pound). If your rents from land and buildings are less than £50,000 your LVT/Business rates will reduce proportionately. If the total of rateable values is below £15,000 you will be eligible for smal business rate relief.
Any income tax or corporation tax you pay on your business profits would be after deducting the LVT/Business rates of £17,150 and any other business expenses from your rental income.
Joe, please note “that government depreciation increases AME spending, but is directly offset – ”these effects all net off in terms of public sector net borrowing”. So just to be clear government depreciation does not have to be included in the National Debt or the budget deficit. Also you seem to be using total figures and not the central government figure of £18.6 billion.
Of course if the government produced accounts like a business then depreciation would appear as a current cost and would reduce the total assets each year. In 2017 government assets were valued at £1,903 billion. However, depreciation is not an expenditure. If I buy a car for £30,000 and depreciate it over five years, I haven’t spent £6,000; my assets have just been reduced in value by £6,000.
From the link you provide Research and Development depreciation is between £4.2 and £5.5 billion, single use military equipment depreciation is between £4.1 and £5.3 billion, and the railway network depreciation is between £1.7 and £2.5 billion – “In total, the changes increased general government depreciation by around £10 billion a year”.
So to be clear adding deprecation to the national debt or budget deficit is just wrong. It does not need to be done because it is taken into account in other ways and that is why it does not affect the national debt or the budget deficit.
@ JoeB,
“the LVT is the business rates”
So LVT is just another term for business rates?
If the total of rateable values is below £15,000 you will be eligible for smal business rate relief.
And who has decided this? Is this just your idea?
Look, I was genuinely interested in understanding just what you had in mind, in % terms, but, and I’m really none the wiser. Don’t bother trying again. I give up.
Michael BG,
depreciation is included in the current expenditure budget. The £842 billion of forecast government spending for 2018-19 you refer to above includes both cental and local government spending inclusive of depreciation and new capital spending for both.
The projected capital spending in this total is £61.6 billion. The non-cash expenditure for depreciation is £31.2 billion. The net cash spending on increases in the capital stock is £30.4 billion. This is why the forecast budget deficit for 2018-19 is £31.8 billion. The deficit represents capital spending net of depreciation of existing assets.
Libdem Policy is to increase new capital spending to £100 billion to be funded by increased borrowing. This requires increaing the forecat budget deficit from the projected £31.8 billion to circa £70 billion i.e. approximately 3.5% of GDP.
All government spending has to be funded by taxatiion either now or in the future. Public borrowing is simply a means of smoothing or deferring taxation. This is quite appropriate. If we spend an extra £40 billion on new infrastructure investments with an average life of 40 years, this will ultimately be paid for by additional taxation of £1 billion per year. This matches the collection of taxes with the consumption of the assets that the borowing funded. The taxpayers benefitting from the use of the public assets will be the same taxpayers paying for those assets.
Peter Martin,
Libdem policy on changing the taxbase of Business Rates to Land Rentals only is set out here https://www.libdems.org.uk/autumn-18-f26-taxing-land-not-investment. It is call the Commercial Landowners Levy rather than Business Rates or Land Value Tax.
Small business rate relief was introduced in 2005 under Gordon Brown https://www.gov.uk/apply-for-business-rate-relief/small-business-rate-relief. It is currently available on property with a rateable value below £15,000.
Joe, you are wrong, government spending can be funded from revenue or borrowing or the issuing of currency. The National Debt has increased since 1692 and there is no expectation to pay it off. It is rare for the National Debt to be reduced from one year to the next. You seem to be trying to apply business accountancy to how government finances work. And just as government finances are not like household finances, they are not like business finances either. (Even in business finances there is an amount of money which is invested in the business which is never paid back and they are called shares).
You seem to have failed to understand that government depreciation increases AME spending, but is directly offset – ”these effects all net off in terms of public sector net borrowing”. Therefore there is no need to add in either the £18.6 billion or the £31.2 billion figure to the deficit.
As I stated, depreciation is not real spending. It is an accountancy tool. There is no expenditure on depreciation.
The £842 billion expenditure figure is for 2019-20 not 2018-19. The next pie chart gives government receipts of £810 billion, making a deficit of £32 billion. Table 1.2 gives a deficit of £31.8 billion. Table 1.9 gives total managed expenditure of £841.6 billion of which £89.7 is total public sector gross investment. Therefore the budget deficit is £31.8 billion but if we ignore total government investment this turns into a surplus of £57.9 billion.
By the way £31.8 billion is only 1.2% of GDP in 2019-20. So £70 billion is about 2.6%
Please can you refer me to where it states in either a party policy paper or motion or manifesto that we aim to increase the amount the public sector invests each year to £100 billion?
Michael,
government debt is continually being repaid and new debt issued. Public sector accounting follows the same basic principles of double-entry bookkeeping as commercial accounting.
If £30 billion of old debt is repaid from taxes in 2018-19 and £100 billion is borrowed to fund new infrastructure then net debt will increase by £70 billion.
Government debt was over 200% of GDP at the end of the war including large loans raised from the US and Canada that were repaid over 50 years. By the end of the 20th century public debt to GDP was down to 29%.
This is the 2017 Libdem manifesto https://www.bbc.co.uk/news/election-2017-39946809.
Policy on the economy includes:
– £100bn package of additional infrastructure investment
– Boost the economy with a major programme of capital investment
– Eliminate the deficit on day-to-day spending by 2020 to control the national debt, and then borrowing only to invest.
Joe, I am sure you are aware that what you wrote makes it clear that the total size of the National Debt in pounds rarely is reduced from one year to another. Of course I accept that economic growth over the long term should reduce the National Debt ratio to GDP. The economic policies followed after the Second World War in the UK to provide full employment is a great example of a government not bothering about the size of the debt, and instead being concerned with the people.
By the way our National Debt to GDP was 38.52% in 1999. In 2002 it was 30.05%. In 2010 it was 65.77% (https://www.ukpublicspending.co.uk/spending_chart_1692_2020UKp_XXc1li111tcn_G0t).
On page 36 of our 2017 manifesto only your bottom two are included in “our priorities”. The £100 billion of additional infrastructure investment is spread over five years and is not a commitment to increase investment spending to £100 billion a year. The costing document table has £14.115 billion of non-funded extra spending but has nothing for infrastructure investment. However on page 7 in the text there is a commitment to an extra £5 billion of capital spending for housing, energy and infrastructure. This is a long way from “increasing new capital spending to £100 billion a year”. No wonder I missed it.
Michael,
there were several years in the post-war period where loan repayments on the US debt had to be deferred.
The manifesto commits to boosting the economy with a major programme of capital investment. The most recent economic statement to my knowledge was the speech made by Vince Cable last November https://www.libdems.org.uk/vince-cable-economy-speech-full-text-november-2017. This builds on the 2017 manifesto:
” Given the constraints surrounding the budget I would advocate the following:
1. A freeing up of government capital spending, separate from decisions around the day-to-day budget.
Two main areas suggest themselves. One is greater operational freedom for Network Rail and devolved transport authorities like Transport for London to finance their investment programmes, where they can raise capital cheaply.
That would mean faster decisions to press ahead with projects like Crossrail 2, and the potential to move on bringing about a rail revolution in the North with HS3.
The second is to use the Government’s balance sheet to finance large scale housebuilding by a government agency operating on the Development Agency model, used in different ways in the Docklands and Liverpool and for the New Towns.
The Communities Secretary has partially backed a plan originally put forward by Respublica for a £100bn programme over ten years, to build homes for sale or rent.
Such a programme could be complemented by greater freedom for councils to borrow to build..”
Commitments for an additional £100bn infrastructure fund over 5 years coupled with accelerating rail projects; £10billion of direct investment into social homes and freeing councils to borrow to build independently, on top of the existing capital spend of £61.6bn, is going to push capital spending to or above the £100bn mark.
Based on forecasts this would entail additional borrowing of circa £70billion. With a GDP of just over £2.04 trillion for 2017, that is a deficit of 3.5% of GDP or slightly less as GDP grows. This is broadly in line with target inflation of 2% plus the current forecast growth of 1.2% for 2019-20 combined. As a consequence, debt as a % of GDP should not see a significant increase. Importantly, it leaves some fiscal room for increased borrowing for current spending when the inevitable downturn arrives and interest rates start to increase.
Joe, I can’t see where Vince says we would spend an additional £20 billion a year on infrastructure. I have an idea that in a recent policy paper we committed to there being only £5 billion to replace EU regional funding. Vince doesn’t have the power to make policy (and that is a really good thing), but I would welcome the party having a policy for there to be £10 billion a year available for local government to build council houses.
Your maths is poor as you have only identified £30 billion a year making £150 billion over five years. 30 + 61.6 = 91.6. We do not have a stated target of £100 billion for government capital spending. We don’t even have a policy setting out how much we want to increase capital spending by. Table 1.9 of the 2018 budget book states that in 2023-24 government capital spending will be £102.2 billion.
There are a number of places in Vince’s speech where I disagree with him: I haven’t been convinced that “fiscal rules” are a good thing, or monetary policy should not be controlled by the elected government rather than bankers and economists. I note, “attempts to separate the structural and cyclical became increasingly difficult”. The reason for this is because there is no such thing as a structural deficit. There is no fixed structure to government spending and revenue, all are choices. Vince still seems to think we followed the correct economic policies during the early years of the Coalition, which is wrong. He also doesn’t sound like he thinks “austerity” should end. He only supports this because of public opinion.
@ Michael BG,
It’s a misguided concesssion to the neolibs to separate out capital spending (good) from current spending (bad) . Say we build a new bridge to Northern Ireland as some have suggested. We employ lots of builders and engineers and end up with a nice shiny new bridge worth £N billion. So we put that down as an asset on our balance sheet.
Then we congratulate ourselves for not wasting our money, like we could have done by just giving people jobs in schools and hospitals.
We perhaps decide that the bridge has a political purpose and we don’t want to charge tolls. Just like the main motorway network. But we still leave the N billion on the balance sheet, and so is a capital cost, just like the costs of building the motorways has been classed as capital cost. No-one is going to buy them though!
At the end of its lifetime, maybe in a couple of hundred years, we’ll pull it down and build another one or replace it with a tunnel. All we’ll have done is employ a lot of people to build it and a lot of people (maybe) to pull it down. We won’t have any bridge to show for it.
That’s no different from current spending. Because there really isn’t any difference.
Michael,
like all manifesto’s not every policy is fully costed. The costing document sets out tax rises and £14.115 billion of borrowing for current expenditures and an uncosted major programme of capital investment, coupled with a commitment to eliminate the deficit on day-to-day spending by 2020 and then borrowing only to invest.
The speech by Vince just fleshes out what that programme of capital investment would entail:
– 100 billion additional infrastructure program over 5 years as per the manifesto.
– Financing projects like Crossrail 2, and HS3 in the North.
– Large scale housebuilding and New Towns development citing the Respublica £100bn programme over ten years, to build homes for sale or rent.
– Freedom for councils to borrow to build social housing.
These programs are uncosted, but adding £20 billion per year for infrastructure spend; £10 billion per for new towns development and building homes for sale or rent; accelerating HS2; developing HS3 in the North; and making finance available for local authority social housing spend on top of the £61.6 billion of current capital spending is easily going to require £100 billion per year at current levels of spending, more by 2023-24.
As to my maths, I can calculate that £70 billion is 3.5% of a £2 trillion GDP.
Independence of the monetary policy committee of the Bank of England is established party policy at present. What Vince speaks of is a change in the mandate from inflation targeting to nominal GDP targeting that aligns monetary policy targets with fiscal policy objectives.
The structural deficit refers to that level of deficit which continues to exist at the full employment level, not the structure of government spending and revenue.
The manifesto and the speech are clear about eliminating the deficit on day-to-day spending. This is traditional Keynesian economics. Outside of recessions, using borrowing to invest in increasing the productive capacity of the economy not for current consumption.
Peter Martin,
there is no need for convoluted efforts to distinguish between spending on goods and services that are consumed immediately and spending that is consumed over several years. The first is paid for by taxation at the time the services are consumed; the second is paid for by deferring taxation through borrowing to align the collection of tax more closely with the consumption of the service.
Public debt in the UK has an average maturity of around ten years. As debt matures it is either repaid from taxes or rolled over by refinancing with new debt. Debt as a % of GDP will increase as automatic stabilisers kick-in during recessions and hold steady or decrease when the economy recovers and returns to steady growth.
Either way, it is not the government that ultimately determines the health of the economy. Governments can only create the conditions for growth (no communist command economy has ever been successful wherever it has been tried). It is firms and consumers that collectively determine the state of the economy by virtue of their individual decisions around investment, consumption, saving, borrowing, exporting and importing.
Michael BG,
re: your comment “The National Debt has increased since 1692 and there is no expectation to pay it off.”
Once you strip out the £425 billion of bonds held by the Bank Of England from the national debt of circa £1.8 trillion, the current debt is about £1.375m. That is equivalent to the cumulative amount of deficits incurred since 2002. All prior debt has been effectively paid-off. The current debt is financing the last 16 years of deficits.
Up until the financial crisis, debt was being incurred primarily for much-needed capital spending, principally on hospital, schools and transport infrastructure. Since the financial crisis, until recently, debt has been incurred to maintain current spending and capital spending has been somewhat depleted.
Austerity is the result not the cause of economic problems. The issues with the UK economy are structural and stem largely from a lack of strategic investment and long-term industrial policy. Regional imbalances; an over-reliance on the financial services sector to generate GDP that makes the bulk of its profits from mortgage lending on inflated house prices; a large trade deficit that recycles foreign surpluses into household borrowing; and a low wage service economy that struggles to match the productivity levels of international competitors.
Vince Cable gets this and Libdem policy rightly seeks to address the real issues that need tackling.
Joe, you wrote, “Libdem Policy is to increase new capital spending to £100 billion to be funded by increased borrowing”. Now you are saying that we haven’t stated how much extra capital spending we will do, but the total capital spending will be more than £100 billion by 2023-24. Indeed if capital spending is already forecast to be £102.2 billion for 2023-24, as I have already pointed out, then increasing it will mean it will be still over £100 billion. It seems clear that your initial post was mistaken. Why can’t you just accept that you made a mistake in your earlier post?
I am quite happy to “pay off” the national debt by creating more money if done with caution. I would be happy for part of the deficit to be funded by the creation of money. This is MMT I think. It is good to see you coming round to see how useful it could be.
There are a number of problems with the UK economy, unemployment and underemployment being top of my list. I think we need to invest more in the poorer regions. On Monday a Channel Four programme made the case that HS2 to the north was not the best investment to benefit the north. As well as more and better regional investment my solutions involve regional minimum wages of 70% of regional medium income to encourage businesses to invest where labour is cheapest, benefits set at the poverty level not below it, and providing training for the long term unemployed tailored to them and the needs of their regional economy.
Peter, I agree with you. However, as the Liberal Democrats have a policy of only balancing current spending, it is important to get members to recognise what this means for financing our spending plans. In 2019-20 it is forecast that £80.1 billion of government expenditure is capital expenditure and we can reduce the deficit by this amount. So we have £48.3 billion more which we could spend on current government expenditure. Not that I am advocating increasing government spending by so much. I would want to keep the increase in current government spending to half of the difference between 3% and the forecast growth rate, to see how this would affect the economy (about 0.8% for 2020).
Michael BG,
I have given you the links you have asked for and reiterate that balancing current spending includes depreciation/amortisation of prior period financing of capital expenditures.
Vince Cable in concluding his speech sums up the Libdem policy approach quite neatly:
“Disillusionment with our current economic performance, and the model which underpins it is acute. Any Brexit would make the problem worse, and a ‘no deal’ Brexit would cause severe destabilisation .
The danger is that this provokes a further growing appetite both for populist fiscal policy – sometimes described as the magic money tree – and for retreating to a much more state controlled and inward looking model.
Both could be catastrophic for our country.
So what is needed is a serious strategy for growth and prosperity, and in today’s politics only the Liberal Democrats are offering it.”
Michael BG,
It’s a waste of time trying to have a sensible discussion with anyone who uses the term “magic money tree”. They want you to think that money has been created by God who has left strict instructions that we shouldn’t ever create any more otherwise we’ll end up like Zimbabwe or Venezuela or which ever other bad people they can think of. But they know themselves just where it comes from. If the banks need a few billion to recapitalise them they don’t need me to tell them where to get it!
The fact is that Government spends by creating IOUs. Sometimes they bear interest (bonds) and sometimes they don’t (cash). Just like you and I, when they receive their own IOUs back they tear them up.
That’s all there is to it. Just when they should issue bonds and just when they should issue cash is a discussion we should be able to have, but you’re unlikely to get anything sensible out of JoeB.
@ JoeB,
“The first is paid for by taxation at the time the services are consumed; the second is paid for by deferring taxation through borrowing to align the collection of tax more closely with the consumption of the service.”
So this means that doctors, nurses, teachers etc have to be paid for out of taxation, but electricians , builders, architects etc who are working on the construction of new buildings can be paid for out of some notional borrowing because we are ‘consuming’ the products of their labour at some future date.
This is just nonsense. What about teachers who are creating the educated work force of the future? Or doctors who are creating a healthy person of the future?
Either the spending can be afforded or it can’t. If we are making demands beyond the productive capacity of the economy and are creating too much inflation then we maybe can’t. Then we should cut back. But whether we cut back on capital spending or current spending doesn’t make any difference. Except, having said that, we shouldn’t make excessive lurches in any time period. We can’t expect electricians to suddenly become doctors!
PS I realise I am breaking my own rule in trying to discuss these points with you sensibly. But you could yet surprise me!
@ Perter Martin “It’s a waste of time trying to have a sensible discussion with anyone who uses the term “magic money tree”. They want you to think that money has been created by God”.
Very much agree with that, Peter. The funny thing is that whenever someone shakes the magic money tree a disparate amount of fruit seems to drop into the pockets of that lot wot already have plenty of it. Take, Sir Philip Green…………………., yes, please do, and take him somewhere to rattle out his pockets…..let’s have his knighthood back.
Remember this ?
Sir Philip Green to examine government spending – BBC News
https://www.bbc.co.uk/news/uk-10961240
13 Aug 2010 – David Cameron talks to Sir Philip Green … Billionaire Topshop owner Sir Philip Green is to lead a review of government spending …
Oddly enough, I remember who was First Secretary to the Treasury at the time……
Peter Martin,
as always you present heterodox theory as fact. Vince Cable is quite right to point out the problems with saying. as Michael BG does above, “I am quite happy to “pay off” the national debt by creating more money if done with caution. I would be happy for part of the deficit to be funded by the creation of money.”
Banks recapitalise with share issues. Both HSBC and Barclays raised funds directly from the private markets. The most distressed banks RBS & Lloyds were recapitalised by the government taking equity stakes in them and in the case of Northern Rock taking it over before returning it to the market. The BofE as lender of last resort provided liquidity to banks against the collateral of assets banks hold as did the Federal Reserve in International dollar markets.
None of these recapitalisations/liquidity involves spending in the economy. The spending had already occurred when the banks made the loans to households and investors.
QE has inflated house prices and rents taking an ever greater proportion of disposable income from working families. The low-interest rates decimate the savings of pensioners and reduce the annual value of annuities that can be purchased by retirees. These are the consequences of unregulated credit markets and printing money.
As Milton Friedman once said there is no such thing as a free lunch https://www.youtube.com/watch?v=gYYAv5vfj0A. Printing money in an economy experiencing labour shortages across all sectors (as the UK is) is simply another form of taxation – an inflation tax.
John Maynard Keynes wrote in ‘Economic Consequences of the Peace (1919)’
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the
process impoverishes the many, it actually enriches the few.”
David Raw,
The reason we have so many people unable to pay rent in this country and that housing benefit is not keeping up with escalating rents is a blinkered approach to economic management and continually confusing bookkeeping with economics.
Spending your days criticizing every decision ever made by a Libdem minister is playing at politics. To actually achieve something useful, you need people that have some experience of economic management and some clue as to what to do about the problems the country faces.
Refusing to understand that it is working people that pay taxes and it those taxes that fund public services is tooth fairy stuff. Good for bedtime stories but of no use in dealing with real-world problems.
There are a hundred thousand unfilled vacancies in the NHS. more in the care sector, Labour shortages in construction, defense, hospitality and across the board. We have a rapidly ageing society where health and social care costs will keep rising. You can print all the money you want, it will solve nothing. You need real people producing real goods and services to drive an economy and a fair distribution of the value created with a greater share going to labour and a smaller share being captured by rent-seeking activities.
Joe, I have stated that depreciation does not cost either you, me or the government anything. It is an accountancy practice which governments think assist business investment decisions. Please see above my example of buying a car for £30,000.
It is disappointing that Vince does not recognise that there are three “magic money trees”, especially as he is supposed to be an economist and should know better. Two of which can cause huge problems, but still exist. The first is that as the economy grows so does government income and this enables government to spend more in real terms if there is economic growth. The second is that governments can borrow money to spend, however this has to be used cautiously and most of the time the total deficit should be less than the total amount that the economy grew by. And the third is the printing of money. As you state Quantitative Easing of about £425 billion has happened since 2008. By 2009 the UK GDP was about £1.68 trillion. If your estimate of the current GDP of £2.04 trillion is correct then all of the increase in GDP has been due to Quantitative Easing (i.e. the creation of money).
I note you seem to have misunderstood me when I talked about it being fine in principle to fund both the deficit and the national debt by creating more money. I was not advocating funding all of the national debt this way or all of the deficit this way, just that funding part of them is acceptable. I assume you think it is acceptable for the Bank of England to ‘hold £425 billion of bonds’. The use of Quantitative Easing has caused economic problems which if some of the money had been used to finance some of the deficit instead they might not be so bad.
‘In March 2018 there were 28,998 adveritsed vacancy full-time equivalents in (the NHS in) England’ (https://digital.nhs.uk/data-and-information/publications/statistical/nhs-vacancies-survey/nhs-vacancy-statistics-england—february-2015—march-2018-provisional-experimental-statistics) out of a total of 1.23 million full-time equivalents (https://digital.nhs.uk/news-and-events/latest-news/nhs-workforce-increases-by-1.6-percent-in-a-year). This is 2.35% and I think that is an acceptable level. Also in the previous year the number employed in the NHS in England had increased by 19,800 so we should assume that some of these vacancies are for new posts. Can you tell me how many vacancies there were in the UK in 1968 compared to the number unemployed?
@JoeB
“I would be happy for part of the deficit to be funded by the creation of money”
I would say it depends on circumstances. At the moment, with interest rates as low as they are I would say its probably not necessary to do it this way.
“QE has inflated house prices and rents taking an ever greater proportion of disposable income from working families.”
Well at least you’re admitting that its not all down to land prices! The snag with this theory, though, is that house price inflation was at its highest, both in the USA and the UK, several years before QE was implemented.
“Refusing to understand that it is working people that pay taxes and it those taxes that fund public services is tooth fairy stuff.”
Well no because logically the spending has to come first then taxes follow later. If the Govt doesn’t initially spend money into the system there’s no money to pay our taxes. That has to be fact. Taxes are necessary to give a value to the currency and prevent inflation. So taxes only ‘fund’ Govt spending in the sense that they create sufficient fiscal space for it to be non-inflationary.
https://www.nakedcapitalism.com/2014/05/randy-wray-taxes-mmt-approach.html
Michael BG,
The government repays maturing bonds and raises new finance every week just as it spends and collects billions in taxes every day/week. It is a continual process.
When we speak of running a balanced current expenditure budget, we refer to day to day spending and loan repayments that relate to prior period capital expenditure. That element of prior period capital spending being paid for in the current period is calculated as the amount of depreciation accounted for in the current expenditure budget. In the link above (9/2 – 7.19pm) it states “depreciation does increase the current budget deficit”.
The Libdem manifesto and Vince Cable’s speech is based on borrowing to spend on Investment – a traditional Keynesian approach to economic planning.
The QE program did not involve direct spending by the government. It’s purpose was to reduce long-term interest rates on government bonds by the Bank of England buying back gilts held by private banks or other financial institutions https://www.bankofengland.co.uk/monetary-policy/quantitative-easing. By creating this ‘new’ money via financial asset purchases, it was hoped to stimulate spending and investment in the economy. However, the side effects of the program was to inflate stock prices and reflate property prices.
Government spending on real goods and services continued to be financed by taxes and the issue of gilts by the treasury’s debt management office.
Dr Jennifer Dixon, the chief executive of the Health Foundation noted https://www.theguardian.com/society/2019/jan/07/nhs-to-outline-plan-to-save-half-a-million-lives-over-next-decade. “The NHS is already short of 100,000 doctors, nurses and other staff. While there are initiatives in the plan to build the workforce, they need to be matched with action from central government to secure training budgets and a supportive migration policy to allow international recruitment that is vital to staffing the NHS.”
This what is going to have to happen. Just as we relied on inward migratiion from the Commonwealth in the 1950s and 1960s to staff the NHS and run the buses, we will have to do so again to meet the health and social care needs of an ageing population with a dwindling proportion of adults of working age. On the NHS staffing crisis alone it is being predicted that the NHS ‘could be short of 350,000 staff by 2030’ http://www.theguardian.com/society/2018/nov/15/nhs-could-be-short-of-350000-staff-by-2030.
Peter Martin,
QE is a relatively short-term economic fluctuation that has reflated house prices to their pre-crisis levels and beyond. The long-term trend in real UK house price inflation remains unchanged. It is double that of European counterparts in the period 1970-2016 and the highest of the OECD countries.
Government spending and tax collection happen virtually simultaneously with borrowing making up any shortfall . the Debt Management Office’s cash management objective is to ensure that sufficient funds are always available to meet any net daily central government cash shortfall.
The Exchequer’s cash flow has a fairly regular seasonal and monthly pattern; but it is also subject to considerable uncertainty, associated largely with unpredictability in the timing of some tax and expenditure flows. The DMO’s approach is to rough tune the seasonal pattern of flows mainly through weekly issuance of Treasury bills and bilateral dealing in a range of money market instruments.
The variation in the forecast of Exchequer flows means however that there is usually a need to fine tune the flows and this is done through bilateral dealing on a daily basis, mainly in the secured markets.
The government creates currency and via the banking system spends money into the economy that accounts for approximately 16.5% of employment and the production of goods and services. The majority of the money in the economy is created in the banking system to service the private sector economy that employs 83.5% of the workforce https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/publicsectorpersonnel/bulletins/publicsectoremployment/march2018
@ JoeB,
“The QE program did not involve direct spending by the government. It’s purpose was to reduce long-term interest rates on government bonds by the Bank of England buying back gilts held by private banks or other financial institutions”
This is sort of true. It really depends on whether you take a narrow technical view or take the broader view. In the broader view the Government is instructing the supposedly independent BoE to buy up securities at the same time as it is selling new securities into the market. This avoids the supposedly cardinal sin of of instructing the BoE to buy up bonds directly from Govt but the net effect is the same.
“QE is a relatively short-term economic fluctuation that has reflated house prices to their pre-crisis levels and beyond.”
Yes it has played a part by, as you say reducing interest rates. It’s not , though given the banks “more money to lend out” as some would argue. This ties in with what I was saying earlier that the house price bubble has been caused by too lax monetary policies.
“The majority of the money in the economy is created in the banking system to service the private sector”
The banks don’t have magical powers to create money. For every asset they create they have to generate a liability too. These net to zero. You and I could do exactly the same but, even if our ‘money’ was accepted in the same way as the banks, it wouldn’t make us any better off. Neither does it make the banks any better off.
The Govt, in an accounting sense, is in the same position in that they too have to accept liabilities. The difference is that you, I and the commercial banks cannot exist in a position of negative equity whereas governments can and do. All the time.
Peter Martin,
No, the banks don’t have magical powers but they do have the power to engage in Ponzi financing and give us a financial crisis.
Dr Wray’s article is quite pragmatic. However, he writes ” A country like the US (with a current account deficit at full employment) will probably have a budget deficit at full employment (equal to the sum of the current account deficit and the domestic private sector surplus). A country like Japan (with a currrent account surplus at full employment) will have a relatively smaller budget deficit at full employment (equal to the domestic private sector surplus less the current account surplus).”
A domestic private sector surplus will occur where there is a significant level of demand being satisfied by imports that is not balanced by production for export. Here, I would agree, the government should seek to make-up the shortfall in private sector investment with public investment in normal times and deficit financing of the current expenditure budget during downturns to maintain aggregate demand in the economy.
The current account deficit (trade deficit) is financed by the capital account. The great majority of capital account investment will be made into private sector financial instruments or property with only a relatively small fraction finding its way into government bonds (mostly sterling reserves held by foreign central banks) and the holdings of international bond investors/traders.
Most of UK government debt is held by domestic pension funds, Insurance companies and Investment institutions that need to maintain a pre-determined weighting of risk-free investments in their investment portfolio. I think approximately 20%+ of UK debt is held by overseas investors i.e. the equivalent of 4 or 5 years of current account deficits.
The consequences are there is a limit to the appetite of both domestic and international investors for low yielding government bonds. If the government wants to increase borrowing when this limit is reached or there are higher returns available on US Treasuries (for example), then yields have to increase to attract investor funds. If the yields increase then this exerts upward pressure on the currency which can see exports decline and imports increase exacerbating the problem. This is the so-called trilemma or impossible trinity https://www.youtube.com/watch?v=oLbfAfCVG_4
Joe, I will ask you again what I asked you days ago – Did you actually read the page you provided the link for. … It also states that government depreciation increases AME spending, but is directly offset – “these effects all net off in terms of public sector net borrowing”. Which means that depreciation does not affect how much money the government has to borrow.
I agree with you that the side effects of Quantitative Easing “was to inflate stock prices and reflate property prices”.
You quote Jennifer Dixon of a think tank and I quote government vacancy figures. It might be correct that the NHS needs a 100,000 extra staff, but that is not the same as saying, which you did, “There are a hundred thousand unfilled vacancies in the NHS”. There were only “28,998 adveritsed vacancy full-time equivalents” in March 2018.
As you didn’t take issue with me, can I assume that you agree that the government can fund extra spending (not only by increasing taxes) but also as the result of growth in the economy, by borrowing more and/or by creating money, and that the last two if not used sensibly can cause huge problems in the economy?
Can you tell me how many vacancies there were in the UK in 1968 compared to the number unemployed?
Michael BG,
the link to depreciation above reports “These effects all net off in terms of public sector net borrowing, but depreciation does increase the current budget deficit. In the past, governments have used the current budget balance as the main fiscal target (for example, the Labour Government’s ‘golden rule’ from 1997 to 2008 and the Coalition Government’s ‘fiscal mandate’ from 2010 to 2015).”
Under a balanced current expenditure budget, capital expenditure is initially financed by borrowing. but uktinately paid for from taxes as the assets are consumed/depreciated and the initial borrowing is repaid.
The Guardian article citing the report from three leading healthcare tinktanks notes:
“Unless new NHS staff can quickly be recruited and trained, the NHS simply will not have the workers available to meet the demand for healthcare expected over the next decade.”
The NHS in England is already short of over 100,000 staff, including 10,000 doctors and 40,000 nurses, official figures show. However, on current trends, analysts project that the gap between staff needed and the number available could reach almost 250,000 by 2020.
“If the emerging trend of staff leaving the workforce early continues and the pipeline of newly trained staff and international recruits does not rise sufficiently, this number could be more than 350,000 by 2030,” according to the briefing by the King’s Fund, Nuffield Trust and Health Foundation.
A lack of 250,000 staff would mean that about one in six of all NHS posts were unfilled. The NHS employs about 1.2 million people.”
Government spending generally increases automatically in line with long-term growth in the economy. This is why public spending is measured as a % of GDP. The issue in a mixed economy is what services are best delivered in the public sector and what services are best left to the private sector.
Neither borrowing or creating money wil deliver economic growth of itself. Economic growth can come with increased population from inward migration but this does not, of itself, deliver increases in living standards. The purpose of borrowing for investment is to maintain and/or enhance the producive capacity of the economy. It is only by increasing output per worker though productivity enhancing investment that per capita gdp increases and underlying weaknesses in productivity and International competitiveness can be tackled.
Joe, it is good to see that finally you have recognised that, depreciation “nets off” in terms of increasing borrowing (i.e. the National Debt). It is also good to see that you recognise that there are not 100,000 unfilled vacancies in the NHS as you initially claimed. The Guardian report does not state that official figures show “The NHS in England is already short of over 100,000 staff, including 10,000 doctors and 40,000 nurses”. Please can you post a link to these official figures?
A way of encouraging businesses to invest to improve productivity is to increase minimum wages and ensure we have full employment, so it is harder for businesses to just increase their workforce to increase their production. I think this would be more successful in increasing productivity than building more roads or railways.
I am not aware that Keynesian economics regarding the idea that increasing aggregate demand in the economy should increase production has been disproved and accepted by all economists in all situations
Please can you tell me how many vacancies there were in the UK in 1968 compared to the number unemployed?
Michael BG,
I have simply pointed out that you have ignored the way capital spending is amortized through depreciation and how the current budget deficit is calculated in the initial comment you made above on Feb 9th (“We used to say that we didn’t want to balance the budget, we only wanted to balance current government spending, which means that the forecast budget deficit of £31.8 billion for 2019-20 when capital expenditure is removed is a surplus of £33.7 billion. We should be able to say that we would fund the £8 billion black hole from this £33.7 billion. Problem solved.”)
I hope the links and explanations are of help to you.
The Guardian article on the report by the King’s Fund, Nuffield Trust and Health Foundation is linked at the foot of the comment above (14/2 4.31pm) http://www.theguardian.com/society/2018/nov/15/nhs-could-be-short-of-350000-staff-by-2030.
The Low Pay Commission is an independent body that advises the government on the level of minimum wage that can be set without pricing low paid workers out of the Labour market. It is not the objective of a Liberal government to make it harder for employers to increase their workforce; rather it is to facilitate full employment and economic growth through innovation and technological advancement. Living standards cannot be improved by fuelling aggregate demand when the economy is operating at or near full employment. We don’t really need economists to tell us that, we have decades of past experience in the UK and around the world to draw on.
Joe, I note you have failed to provide a link to official figures showing that the NHS has a shortage of 100,000 workers. If this was so I would expect the NHS to be running surpluses and not deficits on its budget.
I don’t recognise we have full employment. I would still like you to provide the figures for the number of vacancies in 1968 and the number unemployed so we can compare full employment figures with the current figures. It is not party policy to achieve full employment. I wish it was.
I don’t think I was advocating making it harder for companies to employ more people just more expensive. I was clearly talking about encouraging them to invest to improve the productivity of their workforce. The effect of increasing aggregate demand over the short-term is likely to be for businesses to employ more people. The clever policy aim would be to increase demand in the regions with the highest unemployment figures (North East 5.5%, West Midlands 5.2%, Yorkshire and The Humber 5% and East Midlands 4.6%. I would expect London 4.5% would need different policies [August 2018 figures]).
I think it is a political decision to have the National Living Wage and for it to be 60% of national medium earnings by next year. There has not been a reduction in the number of people in employment since it was introduced. The Living Wage Foundation state that the Living Wage for London is £10.55 and for the rest of the UK £9 per hour.
The National Living Wage will be £8.21 per hour in April. If we assume a 40 hour week the national average earnings figure is £14.225, the highest regional figure is London at £17.83 per hour and the lowest is the North East at £12.67. I advocate phasing regional living wages in with an aim to get them to 70% of regional earnings. If we assume no increase in earnings to make the figures easier to compare, we can assume a national living wage of £8.54 next year. If the regional figure was introduced at 54% or the national figure whichever is the highest then only one region would have a different rate, London £9.63. The next year it could be increased to 58% and again only London would have a different rate £10.34. It could then be increased by 2% every year for the next five years. Taking London up to £12.48 but the North East up to only £8.87 per hour.
I think it would be possible to increase the minimum wage rates by the same figure in pennies that the National Living Wage is increased by. So the new rates could be: the 21 to 24 rate £7.76 not £7.70; the 18 to 20 rate £6.28 not £6.15; the under 18 rate £4.58 not £4.35 and the Apprentice rate £4.08 not £3.90.
Full employment is not a panacea to all ills if pay levels are so poor. A third of the clients at my local food bank are employed on low pay (and many with children).
If Liberals theoretically believe in the rational autonomy of the individual, then this will never be achieved on the current low pay levels.
In 1968 according to ONS figures the average unemployment rate for 1968 was 2.5%. I wasn’t working then, but people who were used to talk about how easy it was to get another job, saying they could start a new job within a week of leaving their last job and in most cases only a few days. I don’t recall my mother having any difficulty in finding work.
Having an unemployment rate of less than 3% would mean employers would have to pay more money to recruit new staff and look at ways to increase their production which doesn’t rely on just employing more people.
David, you are correct “full employment is not a panacea to all ills”, however with it most ills can be addressed more easily.
David Raw,
I would agree with your assessment. I think you know my views that land and rents are at the heart of the problem. The Libdem policy paper on better jobs is 58 pages long https://d3n8a8pro7vhmx.cloudfront.net/libdems/pages/43501/attachments/original/1533290057/Policy_Paper_133_-_Good_Jobs__Better_Businesses__Stronger_Communities.pdf?1533290057 I would highight key point from the paper at 1.3.2 to 1.3.4
“At the root of Britain’s disappointing economic performance is historically low productivity compared to other leading Western countries. British productivity per hour worked was already about 15% behind the G7 average before the 2008/9 crash, and since then it has hardly grown at all. In the long run it will be impossible to see a general improvement in incomes without boosting productivity.
Like all Western countries the UK faces the challenges of an ageing society, with the proportion of the population in the prime earning years steadily falling. This trend would be much worse if it were not for migration, but the current government’s self-destructive anti-immigrant stance risks making the demographic pressures much worse.
While the UK is relatively good at producing highly-skilled graduates, we lag behind in technical, intermediate and basic skills, and we also fail to give people opportunities to retrain mid-career which are increasingly needed in the knowledge-basedeconomy.
Michael BG,
Barbara Castle replying to questions in 1968 reported there were 514,081 adults registered as wholly unemployed, and 193,891 notified vacancies for adults remaining unfilled, in Great Britain.
https://api.parliament.uk/historic-hansard/commons/1968/jul/01/unemployment
Note the caveats “wholly” unemployed and ‘notified’ vacancies. This was at a time when large parts industry were nationalised, restrictive practices ensured massive over-manning in loss making industries and married women were excluded from unemployment figures.
For those harking back to the 1960s, it is worth watching Ken Loach’s televised play ‘Cathy come home’ https://www.imdb.com/title/tt0059020/
“Full employment is not a panacea to all ills if pay levels are so poor.”
OK this statement is literally true as far as it goes. But, we need to ask why we don’t have full employment. We wouldn’t capitalists want to employ as many people as possible to maximise their profits?
They want to have a level of unemployment as a disciplinary measure. Anyone doubting this might want to take a look at:
https://en.wikipedia.org/wiki/NAIRU
The alternative is not to have a pool of unemployed but instead a pool of employed workers on a Job Guarantee.
In other words we want full employment so that workers can vote with their feet and move to another job if pay and conditions are poor. The ability to be able to do this is worth much more than any minimum pay laws or workers rights directives coming out of Brussels. Which is, of course, why the neolibs don’t actually want full employment.
@ Joseph Burke,
I don’t think married women are counted now if their husbands are working. There has been constant fiddling of the unemployment figures, over the years, to massage them downwards.
For example, 172,000 were removed in 1982 due to an arbitrary change in the counting method.
If someone receives just one hour per week of paid work they are counted as employed.
https://tinyurl.com/yxg8yej7
Peter Martin,
Although they cannot be compared precisely, I would suggest unemployment levels today are broadly comparable to that of the late 1960s. The claimant count today is around 3% of the workforce and the vacancy level almost equal to that at just under 3%.
In May 1968 the claimant count given by Barbara Castle was circa 2.5% (i.e wholly unemployed not working any hours at all). The vacancy level cited was 37% of the registered unemployed. The register excluded the great majority of unemployed married women who generally opted out of contributions to unemployment insurance. The 1966 census indicated that there were 120,000 women, most of them married, who regarded themselves as unemployed and seeking work but who were not on the register. The 1971 census showed 230,000 such women. The opt-out for married women was phased out in 1978. Since then they have been eligible to register for unemployment on the basis of their national insurance contribution record and married women without children often do during periods of unemployment.
Unemployment figures today on a like for like basis are broadly comparable with the unemployment figures during Harold Wilson’s first administration. Then as now, part-time workers who wanted more hours were not on the unemployment register and millions of migrants had joined the workforce in the preceding 15 to 20 years.
The unemployment we have today is largely structural and frictional, not cyclical. It is only cyclical unemployment that can be targeted with regional fiscal stimulus measure. To target structural unemployment, particularly long-term youth unemployment, I would agree that the MMT job guarantee is the appropriate policy measure. This has the dual benefit of providing a targeted unemployment program directed to where it is most needed and acting as both a safety net and automatic stabilizer to support demand during downturns when cyclical unemployment needs to be addressed.
@Peter Martin
The figures that are used are from the Labour Force Survey – this surveys 59k households and does not use claimant figures. The 4% unemployment rate recently in the news – and the lowest since 1975 was from the LFS
Anyone is classed as unemployed if they don’t have a job and have been looking for one in the past four weeks.
It does mean that there are some people – probably mostly those who are part of a couple and probably with parenting or caring responsibilities who are not economically active and not looking for a job but who might take a job if a suitable and suitably paid job came along and these do form some “reserve”. But I would guess this to be far far smaller than in the ’70s as female participation in the workforce has shot up since then.
On “zero hour” contracts, technically those without a minimum guarantee – Fullfact reports that a third consider themselves full time and only a third want to work more hours.
@ Joe Burke,
According to figures there are 1.56 million people classed as unemployed. You yourself quoted a figure of 514,081 unemployed in 1968.
The IES seem to have some problem calculating percentages. They can probably manage to calculate that if a worker is unemployed for 6 months in the year then they are unemployed for 50% of the time. But ask them a slightly harder question: ie If a worker would like 40 hours work per week but only manage 1 hour, how much of the time are he/she unemployed and they are totally stumped! They have to abandon arithmetic and move to geometry. ie drawing lines!
“Choosing whether to define someone as being in employment or not can be a bit of a conundrum, says Tony Wilson, director at the Institute for Employment Studies.
Why pick one hour? Well, because if you put the bar higher, you might end up classifying people as unemployed even though they’re working.
‘You have to draw the line somewhere,’ he says.”
https://www.bbc.co.uk/news/uk-46264291
Peter,
as Michael 1 notes the current 4% unemployment rate is based on the Labour Force Survey. This is the lowest official figure since 1974/75. The claimant count figure that is broadly comparable with the late 60’s is currently a little under 1 million i.e. circa 3% of the 33m workforce. Adding back unemployed married women excluded from the 1968 employment figure gives you a broadly comparable figure of 3%+ of the 23m workforce in 1968. If the Labour force survey was available for 1968, I suspect we would see a similiar figure of 4% (920,000 people then) as classed as seeking work including students looking to top up their grants with part-time work and so on.
Statstics aside, if the MMT job guarantee policy is implemented it will address any hidden unemployment that may exist and put a floor under the minimum working hours that are made avalable to workers. So, I think the policy works either way.
@ Joseph Bourke,
Here’s a report that i probably starting to get a towards a truer picture:
Professor Steve Fothergill, who led the research, said: “For more than 20 years successive governments have hidden the true scale of unemployment, especially by parking vast numbers on incapacity benefits.”
https://www4.shu.ac.uk/research/cresr/news/real-level-unemployment-almost-35million-new-report
Then he could have mentioned the number of supposedly “self employed ” workers who aren’t fully employed in the true sense of the term.
Another rarely mentioned factor is the large pool of unemployed who currently aren’t resident in the UK but are resident in the EU. Free movement means they have almost the same effect on the UK labour market as if they were resident.
Earlier on, you bemoaned the UK’s poor productivity performance. Little most neoliberals you look at the problem the wrong way around. You argue that productivity is defined by the skills of an individual worker. Whereas, the alternative way, and I would argue the correct way, is to say that productivity is largely defined by what it costs to employ an individual worker. For example, if you’re a strawberry grower and labour is cheap it makes sense to hire human strawberry pickers. But if labour is more expensive then you wouldn’t want to do it that way at all. Google {robots youtube strawberries} to see what you should be doing.
Therefore poor productivity is very much a tell tale sign of considerable slack in the UK job market and a confirmation of a buyers market.
Peter Martin,
unemployment trebled in the 1970’s to 1.5 million under Callaghan, reaching 3m under Thacher until coming back down to around 5% on average from the mid 1980’s forward.
Work capapability assessments were introduced in 2008 under Gordon Brown. After a decade of incredibly rigorous assessments (many having to be overturned on appeal), claims that vast numbers remain parked on incapacity benefit to hide the real scale of unemployment are not really credible, even if this was the case for many years after the mine closures of the 1980s.
The UK’s productivity problem is long-standing as the full fact check points out https://fullfact.org/economy/very-old-problem-productivity-britain/ “This isn’t a new problem; things were much the same in 1991, suggesting that there are some fairly entrenched problems underlying this.”
There is no quick fix it takes work and a long-term committment to delivery. The House of Commons research report discusses the issues in detail https://www.google.com/search?client=firefox-b-d&q=history+of+UK+productivity writing:
“International comparisons of labour productivity show that the UK was ranked fifth of the G7 countries, with Germany top and Japan (which makes extensive use of robotics) bottom. In 2015, UK productivity was 19 percentage points below the rest of the G7 average, the same as in 2014 and the widest productivity gap since at least 1995 (when the data series began).”
Joseph Bourke 16th Feb ’19 – 10:02pm……..unemployment trebled in the 1970’s to 1.5 million under Callaghan, reaching 3m under Thacher until coming back down to around 5% on average from the mid 1980’s forward………….
Really? Throughout the 1980s unemployment averaged about 10% ( the lowest figure being a brief drop to 7% in 1990). The ONLY time unemployment averaged 5% was between 2002-08.
@ Joe Burke,
Expats is quite right. Margaret Thatcher won the 1979 election on a slogan of “Britain isn’t Working” when the unemployment rate was about 5%. Even after she’d fiddled the figures she consistently did much worse.
There’s plenty of data on the net. There’s no excuse for getting it wrong!
https://www.economicshelp.org/blog/780/unemployment/unemployment-rates-history/
@ Joseph Bourke unlike you, I don’t believe exclusively that ‘ land and rents’ are at the heart of the problem. I believe that hUman greed and power plus inherited privilege reflected in a political party based on this are at the heart of the problem.
@Peter Martin
This sub-thread is about how the current unemployment rate compares to the ’60s and how close to “full employment” we are.
As has been pointed out the LFS survey if it had been used in the 60s would probably as now have reported a higher unemployment rate close to that reported now by the LFS.
The Sheffield Hallam paper you cite is complicated. It is 7 years old. And the question is whether there is in addition to the claimant and the LFS unemployment, there are additional unemployed people “parked” on incapacity benefits and ESA etc. that are unemployed but not actively seeking work because they get benefits and therefore not counted in the LFS.
Firstly the paper notes that as it was being written ESA was becoming more means-tested which probably means the number has dropped in the subsequent years. Secondly as Joe mentions it was my experience as a caseworker for an MP that it was difficult to pass the Work Capability Test etc. Finally it is doubtful how many of these people who are on ESA but are “fit enough” would actually work even if they weren’t on ESA. Many couples will make a decision on which of them will work and if one has slightly dicey health it may well mean that they will be the one not working but undertake household management tasks etc.
There is a final point that EMPLOYMENT has soared since the 60s with more women working when in the social norms then it was common for married women not to work (paid at least) but to be the homemaker/housewife etc. and indeed before the Equal Opportunities Act employers would specifically advertise jobs for men (or women).
In any economy there is a range of “employment” – if an economy worsens people will work fewer hours, take lower paid and lower skilled jobs, “opt out” of the employment market, take temp jobs or “zero hours” contracts etc. And the reverse when it improves.
And I am not convinced that we are fully at “full employment” yet.
David Raw,
we have gone a very circular route here to addressing the issues posed by Howard Sykes in his article. I wouldn’t say that ‘ land and rents’ are “exclusively” at the heart of the problem, but I would say they are the most important factor driving inequality in the UK.
I belive that devolution of powers to regional authorities and reform of business rates/council tax to make them proportional to Land rental values would go a long way to solving many of the issues arising from the cuts to Local authority budgets.
Unemployment is not the issue we face today – it is inequality, low wage growth, declining living standards and regional imbalances.
The policies required to address these issues require more than left wing good/right wing bad chants. They require some careful thought and analysis based on actual data. I believe that the Libdems undertake that careful thought and analysis and have the policies required to adress these issues, while both the Conservatives and Labour will only make things worse.
Unemployment dropped to 7% in the mid 1980s, returned to double digit figures for time after the recession of the early nineties and then fell steadily towards 5% where is held steady in the years prior to the financial crisis.
It has now fallen to 4%. That is somerhing we should be welcoming, as it offers millions of UK citizens and migrants from the EU and other coutries a route out of poverty. It may well be that unemployment returns as a problem in the near future and we should be prepared to tackle it as and when it presents a serious problem, but lets not spend our time attackig imaginary giants thar are in fact windmills.
Joe, thank you for trying, but unless we knew what proportion of total job vacancies were notified to the Department of Employment the figure of 2/5 of those unemployed doesn’t give us a figure to compare today’s figures with. Lots of jobs were not advertised or only advertised at the work site. In the 70s I remember a work colleague getting jobs for two of her friends, then one of them got a job somewhere else and then got them jobs there. I even got jobs for two of my friends. None of these would have been “notified”.
Do you really believe that today’s school leavers are not as well educated as those who left school at 15 (which I think ended in 1974)?
Do you think it would it be great if it were Liberal Democrat policy to provide free training (to whatever level is required) for everyone who is unemployed for more than three months? And provide a guaranteed suitable and relevant job to everyone who has been out of work for 6 months or more (non-compulsory)?
Have you heard of the Young Person’s Guarantee, which the Coalition government scraped?
It seems that you think 3.5% was an acceptable level of unemployment in 1971 – 500,000 men and 240,000 women. According to the latest report from the ONS only four regions have unemployment rates below 3.5% – East (3.1%), South East (3.2%), South West (3.1%) and Northern Ireland (3.4%) (https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/regionallabourmarket/january2019).
Unemployment under Labour doubled to just over 1 million not 1.5 million and from September 1977 was falling (5.3% by April 1979), under Thatcher it reached 11.8% and under Major 10.6%. The lowest level of unemployment under the Conservatives was 6.9% in 1990, a long way from your 5%. Even between 2000 and 2008 it was mostly above 5% (https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/timeseries/mgsx/lms).
Joseph Bourke 17th Feb ’19 – 12:31pm….Unemployment dropped to 7% in the mid 1980s…
Joe, again, where do you get your figures? In the mid1980s (1985) unemployment was at over 11%; it only fell to 7% for a short period around 1990.
There are umpteen sources for that information; why do you keep getting it wrong?
@ Joe Bourke you say, “I wouldn’t say that ‘ land and rents’ are “exclusively” at the heart of the problem, but I would say they are the most important factor driving inequality in the UK.” Really ? Not in the world I recognise.
What about the widening earnings gap ? This is exacerbated by privatisation and outsourcing firms paying poverty wages (see the current dispute at Vince’s old Department.
FTSE 100 executives earn 133 times more than average UK worker
https://www.independent.co.uk › News › Business › Business News
4 Jan 2019 – The average earnings of FTSE 100 bosses will, as of today, surpass the annual remuneration of the average UK worker, emphasising extreme …
PS On the issue of the 1970’s, Messrs Wilson & Callaghan had to deal with the OPEC crisis.
David Raw,
In the 1970s it was actually Ted Heath who had to deal with the 1973 Opec Oil crisis. In Germany, the registered unemployment rate rose from around 1% in 1973 to 4% in 1975 and was reduced to 3.3% by 1979 https://fred.stlouisfed.org/series/LMUNRRTTDEA156N
The oil price rise was a temporary shock. The UK’s problems in the 1970s and 1980s were self-inflicted and the rising unemployment took a long-time to reverse.
The financial crisis of 2008 was a much greater shock than the Opec price rice but unemployment has come down relatively quickly.
The economist Joe Stiglitz has written extensively on the subject of economic rents. Some of his conclusions are noted here ttps://www.landandliberty.net/joseph-stiglitz-responds-to-thomas-picketty/
“There is increasing recognition that the increase in the wealth income ratio and inequality is related to the increase in rents, and in particular the value of land, and to our financial system. Indeed, as Galbraith has suggested, our financial system is at the heart of the creation of inequality in our modern economy. …these two phenomena are in fact linked with each other; that the increase in the value of land and the distribution of ownership claims may be related to the provision of credit by our financial system—and that changes in the rules governing that sector and the conduct of monetary policy may have played an important role in the increase in inequality.”
“…a tax on land, reducing the value of land, it reduces wealth inequality, for the workers’ savings is given by their wage plus transfers, and with wages unchanged, transfers increased, and interest rate unchanged, their savings increases, and their wealth-holdings crowd out those of the capitalists. Thus, as Henry George argued long ago, land taxes can be an important instrument for increasing equality. He explained how such a tax was non-distortionary. But in many of the models presented here, we obtain a stronger result: a land tax actually leads to higher wages and a higher level of national output.”
Michael BG,
the unemployment numbers and unemployment rate for the period 1971 to 2011 is here https://fullfact.org/economy/has-labour-ever-left-office-lower-unemployment-it-started/.
I am sure lots of jobs were not registered with the emploment cente in 1968 or today for that matter. It remains the case, however, that unemployment today is very likely broadly comparable with that of 1968 when you consider the number of women excluded from the 1968 figures that considered themselves unemployed in the 1966 Census (120,000) and 1971 Census (230,000).
As to job guarantees, this is precisely what I would advocate for tackling the long-term structural unemployment that exists in unemployment hotspots dotted around the country. There is always going to be frictional unemployment of circa 2% to 2.5% in a highly mobile labour market like the UK.
What I would not advocate is ’tilting at windmills’ or proposing fiscal stimulus policies for a problem of cyclical unemployment that does not exist.
Joe Bourke “In the 1970s it was actually Ted Heath who had to deal with the 1973 Opec Oil crisis”.
No, Joe. He was faced with it, got himself in a mess with it, and then lost an election (on ‘who runs the country’) – leaving Harold Wilson to deal with it.
The Opec oil embargo was declared on 19 October, 1973 – and, yes, Heath was Prime Minister (for the next 132 days, during which the country ended up with a three day week – until the February 1974 Election). After a bit of tip toeing around with Thorpe, Heath resigned and Harold Wilson became PM. Wilson settled the coal strike, ended the three day week – and then had to deal with the Opec crisis. He was followed by Jim Callaghan in April, 1976 until May, 1979.
I remember it all very welll including putting my kids to bed by candle light. I was a Liberal Councillor in Kendal – later Tim Farron’s seat. It was a 45 years ago. What were you doing at the time ?
PS. Thorpe (nearly ?) became Home Secretary – which would have produced a wonderful dilemma for MI5 – knowing what they then knew about Thorpe.
David Raw,
I was 19 in 1973 and working in my first job after leaving school as a trainee accountant in a metal plating factory. Most of the senior management and factory foremen had been young men during the war and labor relations were good. The metal polishers and factory workers did twelve-hour shifts (both day shift and night shift) during the three day week. I went to work by bus partly due to a lack of petrol for my 1950s mini that was pretty much on its last legs anyway when I bought it for a tenner.
By 1980, (about a year after the election of Thatcher), I set-off to explore the world. I did a year in Dublin, 11 years in the United States and 3 years in Japan before returning to the UK in1995 to share with our Local LibDem party the benefit of all the worldly experience I had gained, whether they wanted it or not.
@ Joe Bourke “The economist Joe Stiglitz has written extensively on the subject of economic rents. Some of his conclusions are noted here”.
Joe, I do wish you wouldn’t assume you are the only person to have read Stiglitz – or for that matter Piketty. I don’t know, but I’m pretty sure expats and Michael BG will have – and I can assure you I don’t use The Price of Inequality: How Today’s Divided Society Endangers Our Future – or Capital in the Twenty-First Century or – The Economics of Inequality as door stops……. though they would be as useful acquisition for that sort of purpose. Oddly enough I read the first one at a time when the UK Government was reducing the top rate of tax and introducing the ‘Welfare Reform Act’ in 2013.
Clearly, though, the Lib Dem Whips office must have been using them only as doorstops.
David Raw,
on the contrary, I would expect both Stiglitz and Piketty are widely read- Piketty particularly having been top of Amazon.Com and New York Times bestseller lists in 2014.
When I comment that land and rents’ are the most important factor driving inequality in the UK, that assertion is based on the writings of economists that have made the issue a focus of their research like Stiglitz and those who have gone before him. That is the reason for citing them.
I understand your point of view and I share the view that the Welfare reform act is deeply flawed in parts; that Universal credit has been poorly implemented and that the withdrawal of funding from 2015 has undermined much of the stated original objectives. I think Stephen Lloyd’s view that leaving people trapped on benefits (for generations in some cases) is an equally valid viewpoint that deserves equal attention and positive action where it can be achieved.
When it comes to issues like the top rate of income tax, any thinking person is going to quickly appreciate that the relatively small % of high earners cannot pay for all the public services that low and middle-income earners would like to have. Whether the top rate is 45% or 50% is more symbolic than actually confronting the issue of funding the increasing level of public service provision required by an aging population. The truth is the tax contribution of the top decile was increased significantly by the coalition government, but that source of income tax has already been heavily tapped and will not furnish the kind of tax funding needed in the coming years.
Michael BG,
you might find the recent report of the Peabody trust of interest https://www.peabody.org.uk/news-views/2019/feb/peabody-index
“Low earners in London have seen a real terms decline in their incomes since 2010.
This is despite slight real income growth and growing levels of employment in the last year. In the same period Londoners’ wage growth has lagged behind the rest of the country, leaving people on low incomes in the capital worse off and unable to meet their rising living costs.
Full-time employees with bottom decile wages have seen their incomes increase by 15 per cent in ten years, but inflation was 25 per cent over the same period . In real terms wages have fallen.
Private rents in London have risen by 27 per cent in the last decade: almost twice as fast as the median wages of full-time employees.
Why work isn’t paying
While wage inequality has narrowed in the rest of the country, it has increased in London. Moreover, those on low incomes disproportionately work in industries and occupations where wage growth has been most sluggish. In addition:
Lower income households in London have not benefited from increases to the minimum wage (‘National Living Wage’) to the same extent as elsewhere.This suggests that without some additional support (such as social security or submarket rents), living in London doesn’t pay for those on low incomes.
Despite high employment rates, half of Peabody’s working tenants earn below the London Living Wage and 53 per cent said they had not received a pay rise in the last three years.”
Simply mandating increases in minimum pay will not deal with the issue. Private sector rents have to be addressed at the same time. Without that it is like pouring water into a glass with no bottom. Higher pay at one end disappeares into higher rents at the other end.
Joe, I am sure that the survey of job vacancies is as accurate as the Labour Force Survey and it produces figures close to the true figure for the number of vacancies, but the notification system used in 1968 would have produced a figure much lower than the true figure, for the reasons I gave, which do not apply to the survey.
I am not aware of a census in 1966. I am not aware of you providing a link to unemployment figures in the 1971 census. However, I took your figures as accurate enough for this debate – 500,000 unemployed men in 1968 being 2.5%, 240,000 unemployed women in 1971 on a larger working force comes out at 3.5% This figure would then be comparable to the unemployed ratio in the Labour Force Survey of 4.1%. However, my point was that you stated that the 740,000 unemployed people in 1968/71 was acceptable and this was 3.5%. Therefore we should look at which regions of the UK have an acceptable level of unemployment according to you and I listed the four.
In my first post on this thread I advocated an increase of government spending of £9.7 billion, while later you talked of an increase in government spending on “investment” of £30 billion. It could be argued that you are advocating a larger “fiscal stimulus” than I am.
In another of my posts I wrote, “I would want to keep the increase in current government spending to half of the difference between 3% and the forecast growth rate, to see how this would affect the economy (about 0.8% for 2020)”. I believe that the economy should be able to grow at 3% each year as it did in some years before 2008. Increasing current government spending is not an aim in its own right, the money is targeted, as you wrote, “The (2017 Lib Dem manifesto) costing document sets out tax rises and £14.115 billion of borrowing for current expenditures”. In your terms that is a £14.115 billion fiscal stimulus.
A job guarantee where a person uses their existing job skills would do nothing to remove the problem of structural unemployment, it would just hide the problem. However, my idea of providing free training (to whatever level is required) for everyone who is unemployed for more than three months so people will have the skills needed for the jobs in their area would deal with structural unemployment.
David, I remember in 1973-74 most people were banned from using their cars on a Sunday.
Joe, it would appear that you believe 2% of the North East’s 5.5% is structural unemployment while in the East (region) they can have a level of unemployment which is 0.4% below your 3.5% level of cyclical unemployment.
I was surprised to read that you were 19 in 1973 as according to your Lickedin page you left school, after doing your A levels, in 1971, when I would have thought you were 18 or nearly 19. I also note that in 1971 you started work in July which is the same month that the school year ends, which is evidence for how easy it was to find work in the 70s.
I did point out that earnings in London are higher than the rest of the country. This is why I was suggesting introducing my regional minimum rate of 70% at 54%, then going to 58% the next year before getting to 60% (the national living wage rate) in year three. With the poverty level (excluding housing costs) at 60% of average earnings someone living on the poverty line in London would need to earn more money than someone living in the North East. I stated that 70% of average earnings is £12.48 an hour in London and £8.87 in the North East.
Michael BG,
fiscal stimulus normally implies increasing deficits for the purposes of expanding demand in the economy. The costed spending comittments in the Libdem Manifesto for 2017 require additional borrowing for current spending of £14 bilion in 2018-19 and a balaced current expenditure budget from 2020. The manifesto also makes it clear that both taxes and capital spending are to be increaed. At an estimated £100 billion or so of capital spending with a balanced capital expenditure budget, this would require ongoing borrowing of circa 70 billion or 3.5% of GDP. That appears a perfectly reasonable policy position to me and likely to start addressing the productivity issues that underline productivity weaknessess in the UK economy. I am not critical of the manifesto and similar Libdem policies as others here appear to be.
As regards the minimum wage, I would support a phased increase to the Living wage by the low pay commission, but make the point that increased minimum wages have not made much of a dent in deprivation (particularly in London as the Peabody trust points out) mainly due to the large and increasing share of earnings, working tax credits and housing benefit that housing costs in the private rented sector.
This is the thrust of the argument. We have low unemployment but significant levels of poverty and deprivation despite many more people in work. The reason, in my view, is not inaequate levels of government speding but rather out of control housing costs. Focus on addressing the issue of rents and we might actualy be able to start improving the lot of large numbers of people in need in this country.
@ JoeB,
“….fiscal stimulus normally implies increasing deficits for the purposes of expanding demand in the economy.”
No. It doesn’t work like this. Say the government cut the standard rate of income tax resulting in £N billion of less tax revenue and the govt deficit increased by the same amount. This would mean that everyone else, including our overseas trading partners, was saving exactly the same amount extra too. The net change in aggregate demand would be zero.
In other words, we’d all have been given a tax cut but we’d just put the extra into the bank and inevitably the bank would go out and buy some Govt bonds. Or if we were spending more we spent it on imports and the exporting countries didn’t reciprocate by purchasing more of our exports.
So the trick to getting a fiscal stimulus to work is to increase Govt spending and/or cut taxation rates, and at the same time not end up with a higher govt deficit. This point should appeal to you neoliberals – but probably for the wrong reasons!
Peter Martin,
I suggest you read the economist leader this week – Millenial Socialism.
“Some on the left peddle the myth that vast expansions of government services can be paid for primarily by higher taxes on the rich. In reality, as populations age it will be hard to maintain exiting services without raising taxes on middle-earners.
—moderm monetary theory says that governments can borrow freely to fund new spending while keeping interest rates low. Even if governments have recently been able to borrow more than many policymakers expected, the notion that unlimited borrowing does not eventually catch up with an economy is a form of quackery.”
I find nothing in the editorial to disagree with.
Joe, any increase in the deficit be it via current spending or capital spending is a stimulus to the economy if it involves employing people or increasing benefits or buying things produced in the UK. Therefore the £14 billion of extra current spending and the unspecified amount of extra capital spending in the Lib Dem 2017 manifesto which we both support are fiscal stimuli.
I believe that we could increase the basic benefit level to the poverty level over a period of about 5 years from the result of extra government revenue due to economic growth (I accept if economic growth is very weak it will take longer). I want to restrict the extra government spending in relation to the forecast economic growth level and my ceiling of 3% to allow the economy to grow but not stimulate inflation.
Having basic benefit levels at the poverty level (excluding housing costs) and regional minimum wages for those ages 25 and over of 70% of each regions average earnings would remove everyone in work out of poverty.
The only way to control housing rents in a free economy is to increase the supply of housing. Therefore Lib Dem policy of building 300,000 new homes in the fifth year of winning an election is a policy I support while recognising that we need to increase it further, even beyond the Shelter target of 317,000 for 2030.
Restoring LHA to their pre-Coalition pegging with private rents and scrapping the Benefit Cap, both Lib Dem policies, would help lift people out of poverty by ensuring the government pays the true housing costs of people receiving housing benefit.
@ JoeB,
I suggest you do two things:
1) Answer the point that I’ve raised. Rather than addressing some hypothetical, and probably non existent, person who might have claimed that Govts can spend without limit. Often know as a ‘strawman agument’.
2) Think for yourself instead of being swayed by the economic ‘mainstream’.
“…..any increase in the deficit be it via current spending or capital spending is a stimulus to the economy ”
Not quite. Consider the case that the Government spends 110 billion into the economy and gets back 100 billion in taxes. The deficit is 10 billion. The 100 billion in taxes is a measure of the level of economic activity. If activity was higher, the tax take would be higher. If it was less active the tax take would be lower.
So say the Govt increased its spending by 10 billion and still only got back 100 billion in taxes. The deficit would increase to 20 billion but the economy wouldn’t be any more active than previously. However if the tax take increased to 105 billion then it would increase in activity by 5%. The deficit would increase to 15 billion. But it’s not the increase in the deficit that has caused the extra activity.
Peter Martin,
The idea that governments should run ever larger deficits to provide overseas investors with a risk-free investment for their trading surpluses in the form of government bonds is too ridiculous to warrant any serious consideration. Foreign investors (firms and individuals) will decide where and what form of investment they want to invest surpluses in or simply keep exchanging sterling surpluses until the pound can buy so little no one wants to be left holding sterling any longer.
It is thinking for ourselves that allows us to recognize and dismiss quackery for what it is.
Michael BG,
increased spending is a one-off stimulus only in the year spending is increased to the extent that there are spare resources in the economy. With the economy near full employment, it is not a stimulus. It is a transfer of existing resources of Labour and Capital from the private sector to the public sector. Running a balanced current expenditure budget after the first year maintains spending at a constant level. Financing capital spending investment at a level that maintains the debt at a slightly reducing level of GDP, leaves some room for fiscal stimulus when the economy enters a downturn.
increasing welfare benefits, health services, schools funding, social care provision, housing benefits etc., requires increasing taxes.
Rents are inflated by land values and this is what absorbs pay increases and increases in welfare benefits and housing benefit in the private sector rental market.
If taxes have to increase to fund the programs you advocate and the increasing levels of health spending that an ageing population requires they will have to come from areas like Land Value Taxes.
As the Economist editorial points out – “as populations age it will be hard to maintain existing services without raising taxes on middle-earners”. The taxes cannot be paid by a dwindling number of workers from stagnant or declining wages.
@ JoeB,
Before you cry ‘ridiculous’ answer this question: How are you going to stop overseas countries running trading surpluses with the UK?
There a few possibilities.
1) Impose tariffs to discourage their exports.
2) Intervene in the forex markets to force down the pound
3) Depress the UK economy to such an extent that we just cannot afford to purchase so many imports.
The last one is the neo-liberal ‘solution’. Except it’s obviously no such thing.
Running a trading surplus is what happens when a country wants to spend less than it earns and recycles the proceeds via the UKs capital account. It’s no different in principle to you or I spending less than we earn and buying some Premium bonds.
@ Michael BG @ JoeB,
“as populations age it will be hard to maintain existing services without raising taxes on middle-earners”.
If we need more nurses, more teachers, more carers etc then we’ll need to employ more to do that work. Raising taxes alone isn’t going to solve the problem. That’s not going to change a single dressing in a nursing home unless additional human resources are provided to do the work.
That’s why we should welcome the ‘rise of the robots’ rather than worrying about what we are going to do with the people who may be displaced in supermarket checkouts, or on the production line etc.
In a sensibly run economy we’ll know what to do with them! We don’t pay them a UBI for doing nothing!
Peter Martin,
In a word patience. Imbalances are not forever. In the 1980s and 1990s, Japan’s huge trade surplus was a popular target for American and European protectionists. No longer. Japan’s merchandise trade moved into the red in 2011. It bounced back for a time and returned to deficit in 2018 https://mainichi.jp/english/articles/20190123/p2g/00m/0bu/039000c Japan remains among the world’s biggest net foreign creditors. Income from its assets more than offset the trade gap, keeping its current account in surplus. The ageing Japanese population will be clipping dividend coupons from overseas investments for quite some time yet. Ultimately, the output of goods and services declines as the working population declines and the decline in output can only be slowed to an extent by increased investment in automation. japan like the UK will have to move resources from a dwindling pool of labour in the private sector to provision of healthcare and social care services in the public sector.
The loss of resources in export industries may be mitigated by greater levels of workforce participation by Japanese women and/or opening up to immigration from neighbouring Asian countries, but the demographics are forcing a rebalancing of the economy away from a focus on exports towards the provision of domestic services.
“How are you going to stop overseas countries running trading surpluses with the UK?
There a few possibilities.
1) Impose tariffs to discourage their exports.
2) Intervene in the forex markets to force down the pound
3) Depress the UK economy to such an extent that we just cannot afford to purchase so many imports.”
How about??
4) Go back to succeeding at ‘stuff’. Whether it’s manufacturing, financial services, agriculture. tourism, whatever, and pay our own way in the world again.
5) Then resolve to ignore this bizarre dogma that says some nations have to fail so it might as well be us. Some have to get poorer while others get richer so the British should deliberately decline in order to balance the global balance sheet (because, hey, some nations need to be in the red).
6) Next clear out, wholesale, that top layer who continually let us down by mass sackings of the senior ranks of the Civil Service, the Quangos and the Universities
Again, I draw the attention of all those who are anxious about trade surpluses/deficits to the principle of comparartive advantage……
The UK has trade surpluses with some countries and deficits with others. We do not need to wring our hands about the former or punch the air about the latter.
I’m not a mercantilist.
@ JoeB,
Patience? That’s no answer. If other countries manipulate their currencies they’ll always run a surplus. If other countries let their currencies freely float they’ll nearly always run the deficits. The only possible exceptions to this rule will be the large oil and mineral exporters who stash their surplus $$ in so-called sovereign wealth funds.
Or can you think of other exceptions?
@Innocent Bystander
“some nations have to fail so it might as well be us”
No. If we run trade deficits it doesn’t mean we’re failing. That is providing we don’t unnecessarily depress our economy in response.
@ chris moore,
We have to distinguish comparative advantage form a more basic “race to the bottom” in terms of workers’ wages. Holding down your own currency is just one way of keeping wages lower than they would otherwise be. That’s how Germany does it. Taxes are also high there which depresses domestic demand.
The process of de-industrialisation that began in the 1970s hasn’t arisen from any notion of comparative advantage. The industries that we’ve lost since have mainly gone because wages elsewhere have been lower.
Peter, I don’t accept your examples could happen. If the government increased it’s spending by £10 billion to £120, then the economy will have increased by £10 billion. You are always asserting that government spending comes first. If we assume that the government receives 50% of the increase in the economy we would end up with government spending £120 billion, government revenue £105 billion, and the size of economy of £210 billion (£10 billion more than when we started). I accept that there is a multiplier effect so that this extra £10 billion in the economy would grow the economy some more maybe a further £2.5 billion. Therefore we would have an economy of £212.5 billion, government spending of £120 billion, government revenue of £106.25 billion and a deficit of £13.75 billion. You often say that governments get back some of their stimulus in taxation and I agree with you.
In the nineteenth century working hours were reduced. They seem very static nowadays. When my parents started work they had to work on Saturday mornings, but when I started work that had ended and 5 working days was the accepted norm. It should be possible to reduce the working week further.
Joe, even you must accept that economic growth increases the government’s revenue. You talk about automatic stabilisers, so you must recognise that when the economy declines government income falls and when it grows government income increases. Therefore in the same way that it is possible to reduce the deficit from economic growth, it is possible to finance better services from economic growth.
It is possible for a government to produce an economic stimulus when the economy is at “full capacity” (not that I really accept an economy has a full capacity) and this would cause inflation. From 1994 until 2008 economic growth in the UK was mostly above 3%. Therefore assuming the economy can always grow at 3% a year is a good working assumption. This should be true even if we had full employment because growth should come from increased productivity.
It would be interesting to know how much spare savings there is the economy. It is possible that the investment is not equal to savings. So it is possible there could be spare savings in the economy which the government could spend (either as current or capital spending) and so grow the economy.
I know you believe that high Land Values is the cause of high rents and the answer is to tax rents, however I believe like Ricardo that if you tax rents then rents will increase. I accept we should tax commercial Land Values to bring unused land which we want to see used into use. I believe the level of rents is a simple supply and demand issue. If there were an extra 6 or 7 million homes in the UK (of which at least half were for rent) then I think rents would not be so high.
@ Michael BG,
“….even you must accept that economic growth increases the government’s revenue.”
I wouldn’t be too sure about anything. Neoliberals have a big problem in that what they have been taught doesn’t match up with what they see happen in the economy. So they end up being ‘puzzled’ by things they shouldn’t be puzzled about at all. Like the so called ‘productivity puzzle’. They don’t have any coherent theory of money, but when you do try to explain where it comes from they start jabbering about ‘magic money trees’ and Zimbabwe.
Bill Mitchell calls it brainwashing.
http://bilbo.economicoutlook.net/blog/?p=41542
“If the government increased it’s spending by £10 billion to £120, then the economy will have increased by £10 billion”
Only if everything remains constant which is often where people go wrong. You can’t usually assume that. But say total spending did rise by 10 billion (I’m not saying this is the UK BTW so we don’t have any specified currency) then the tax take will rise in proportion to the extra spending. Its a reasonable assumption that the tax take will be approximately proportional to total spending. Therefore the deficit won’t rise as you have previously assumed it might.
So you can’t have it both ways. If the spending does stimulate the economy then the deficit won’t rise. It’s only when the extra spending doesn’t stimulate the economy, ie when people save their money that the deficit rises.
The neolibs have actually grasped this point too. To be fair to them. So their solution to lowering the govt deficit and increasing total spending is to discourage saving and encourage private sector borrowing. So they deregulate and lower interest rates. Which works OK, sort of, until interest rates get so low that they can’t lower them any further. Then they’re stumped and starting talking about the ‘special case’ of the ‘zero bound’.
It’s not really a special case at all. It’s something that will inevitably happen after a few decades of neoliberalism.
Michael,
I do accept that economic growth increases the government’s revenue, but not that increasing government spending increases economic growth. The economy grows by incresing the output of goods and services. If there is high unemployment then people are not producing and stimulus in the form of automatic stabilisers and/or pump priming can reboot economic growth. Average UK growth over the period 1070-2016 was 2.3%. There are 32.6 million in work and an esrimated 1.36 million seeking some form of work per the Labour Force Survey. The last households savings rate I saw for the UK was 0.16% of disposable income. This compares with 9.96% for Germany.
Ricardo advocated free trade and removing tariffs on corn to reduce the price of bread He demonstrated, like Adam Smith, that land taxes would not increaese rents. Regretably, when the Corn Laws were repealed, Income taxes were brought into to replace the loss of govenment revenue rather than Land taxes and we have had economic problems ever since.
I read once that real wages reached there highest level in the latter half of the 14th century and the 1st quarter of the 15th centtury. A labourer could meet all his basic needs on abou a 1/3rd of his wages. Barring another Black death we are unlikely to see the kind of labour shortage that the plague caused, but we will continue to see wages and benefits swallowed up by rents and mortgages. Supply is a big part of the issue and so is the incidence of taxation.
@ Chris Moore,
Just some more thoughts on ‘comparative advantage’. Just what does it mean? We can think that it is just about possible for the UK to produce wine from homegrown grapes, and it might even be more possible in the future with global warming, but it’s countries in warmer climates that have the comparative advantage in this respect. We shouldn’t rely on viticulture but we could, instead, be reasonably successful in growing barley or potatoes or raising cattle and sheep etc. We have good access to fishing grounds so that gives us a comparative advantage in fishing. Or would do if we hadn’t lost control of our own waters! That’s another story.
The industrial revolution occurred in areas near to coal fields and also with access to metal ores. If there wasn’t enough iron ore available locally it could be shipped in to nearby ports. Canals were built to move goods. So in that sense the North of England and especially Lancashire which could import cotton from the USA via Liverpool had a comparative advantage over everyone else.
Fast forward to the 21st century and that concept is less meaningful. We can ship huge amounts of materials across the world quite cheaply. So there isn’t anywhere near the same geographical ‘comparative advantage’ in manufacturing as there used to be. Instead it’s wage rates which are most important to industrialists. If wage rates are lower in Slovakia than they are in Sunderland then it makes sense to make cars in the former rather than the latter. The fact that Sunderland is on the coast and so cars can be easily loaded on to ships, whereas Slovakia is land locked, isn’t a big factor any longer.
@ JoeB,
“I do accept that economic growth increases the government’s revenue, but not that increasing government spending increases economic growth.”
A country’s gross domestic product can be calculated using the following formula:
GDP = C + G + I + (X-M)
C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures (X-M = Exports – Imports).
So no-one is saying that Government expenditure is the only factor in producing economic growth but just like consumer spending, investments and exports and imports it is a factor. If C+ I + (X-M) is too low G has to be increased. If C +I +(X-M) is too high then G should be decreased. That’s just simple algebra.
Peter Martin,
simple algebra will tell you in conditions of near full employment and labour shortages across all sectors as now (or as in a wartime economy), increaed government spending reallocates resources from private sector consumption to public service provision. It does not increase economic output. The output of public services increases goes up, while the output of goods and services of domestic private sector goes down or is replaced by higher levels of imports and greater levels of private sector borrowing.
Economic growth comes from increasing the output of real goods and services. That is achieved by increasing productivity of the existing workforce through strategic investment or bringing in more skilled and semi-skilled migrants.
@ JoeB,
“Economic growth comes from increasing the output of real goods and services. That is achieved by increasing productivity of the existing workforce through strategic investment or bringing in more skilled and semi-skilled migrants”
OK so if that’s all there is to it, why don’t Greece and Italy fix their economies that way?
You know why they can’t do it as well as I do. They cannot do it because they have lost control of their fiscal ability to be able to stimulate their economies.
Orthodox Keynesians would say ‘kick start’ their economies. And that’s a reasonable way of putting it. The only way to cope in the eurozone is to run a trade surplus so that there is always a net inflow of euros into the economy. But if that condition is ever disrupted, if the engine ever stalls, there’s no kick start possible.
And as I always point out not everyone can run a trading surplus.
Maybe you could name one trading deficit country in the EZ which is doing reasonably well?
Peter Martin,
Spain and Portugal had similar unemployment rates before the financial crisis. Since then, the Spanish rate (aggravated by the property bubble)skyrocketed to the historical figure of 26.3% in mid-2013, while Portuguese unemployment rose to 17.5% during the same period. From 2013 on, both rates followed parallel courses, dropping to 14.5% in Spain (11.8 percentage points down) and to 6.7% in Portugal (down 10.8 pp). Portuguese unemployment levels are currently below those of 2008, whereas Spain’s still has a way to go. Greece and Italy are comparable economies with Portugal and Spain respectively.
The simple fact is that economic recovery has come about in the EU Mediterranean countries and UK while deficits have been reduced. Portugal and Greece have exited their bailout programs.
UK unemployment has fallen to a decade’s low rate of 4%. That may have less to do with government policy than global economic conditions but that applies to all economies across the world.
There is an argument that a bigger dose of Keynesian stimulus may have spurred a faster recovery and reduced unemployment quicker in some domestic economies. However, in a world of integrated global economies, we are all dependent on each other. Economic growth in the big economies of the US, China and the Eurozone may be more important than any domestic policy levers at the UK’s disposal. On the downside, economic contraction in these major economic centres may be also a more important factor than any monetary or fiscal measures at the UK’s disposal.
Peter, sorry I assumed the pound sign! :). And you are correct I have assumed everything else remains constant. I am not sure I have ever equated increased government spending to the increase in deficit. I think I have often pointed out that if the government increases their spending then a proportion of it will return to the government in revenue (again with the unspoken assumption that the government does get some income from taxing some economic activities).
Your second linkage can’t be correct. I think MMT state that S + T + M = I + G + X. However, I think this is only true when the economy is in equilibrium. Therefore when this is not true the economy will move to make it true.
If we have, once we have added C
80 + 4 + 10 + 6 = 80 + 4 + 10 + 6
And then increased G by 10 we would have
90 + 4 + 10 + 6 ? 90 + 4 + 20 + 6
Then move to
98 + 4.4 + 11 + 6.6 ? 98 + 4 + 20 + 6
To reach equilibrium at:
120 + 6 + 15 + 9 = 120 + 4 + 20 + 6
So the economy has grown by 50, while the deficit is now 5, savings has only increased by 2, while the trade imbalance has become 3.
Joe, I am glad that you accept that economic growth increases the government’s revenue.
If the government employs an extra person the economy has grown by the amount that person is paid. Do you think that a pension is not counted as part of the economy because the pensioner does not produce anything? I think it has been demonstrated that it doesn’t matter what the person employed is doing, what is important is the extra demand in the economy.
If everyone in the UK was employed do you really think we couldn’t grow the economy?
What is important for economic growth is not necessary the number of people unemployed but the capacity for the amount being produced to be increased (i.e that supply can be increased). From what you have written about productivity I am sure you are aware of this, you have just forgotten it.
We have had this discussion before and Ricardo demonstrated that land taxes would increase rents just like VAT increases the price paid for things.
I don’t accept that public investment reduces the amount of private investment. This seems like the economic argument for cutting government investment in 2010 which led to us nearly having another depression at the end of 2011 and the beginning of 2012. Private investment is governed by other factors, such as business confidence, and the demand for one’s product. If a business thinks if it produced more, then the extra goods will be purchased at a profit, then it would increase its production. The price of money currently would not be a major factor, but I expect it would have been in the late 1980s and early 90s when interest rates were high (https://www.economicshelp.org/wp-content/uploads/2017/09/uk-base-rates-79-17.png).
Michael BG,
I don’t just accept that economic growth increases the government’s revenue, I have said all along that increasing per capita national income is the only way to increase living standards. Increasing government spending does not increase output in a full employment economy. There are no significant idle resources of labour and capital available to do so.
If the government employs a person who would not otherwise be employed to produce goods and services that would not otherwise be produced then output (GDP) can be increased. If the government needs more public sector workers and has to recruit from the existing workforce in the private sector then less private sector goods are produced domestically and they have to be imported to maintain consumption spending. The net effect is there is no increase in GDP, just a reallocation of total spending in the economy between government and net imports.
Pensions are transfer payments from the working population to retirees affected by taxes. Taxes simply reduce the consumption spending of one party and transfer that consumption spending to another. That’s the purpose of redistribution. The same amount of spending occurs and the same level of goods and services are produced whether it is the worker doing the spending or the pensioner.
There is work of some kind available for almost everyone in the UK (and beyond) who want’s to be employed. There will be a relatively small fraction of long-term unemployed who would benefit from government assistance in the form of a job guarantee to equip them with the necessary skills to enter the job market. There will also be a good number of JSA claimants on the unemployment register who should really be on ESA or disability benefits.
VAT will increase the price of produced goods and services. Land has no production cost. It sells or rents for whatever the market will bear as determined by supply and demand https://news.ycombinator.com/item?id=9263742. As the supply of land is inelastic there is always excess demand that cannot be satisfied. Consequently, both rents and mortgage payments are determined by income levels. As growth in demand outstrips supply the proportion of income paid in rent increases. In the 1960s/1970s rents accounted for about 10% of take-home pay in the UK and 15% in London. Today those figures are at 30% and 40% respectively.
That is achieved by increasing productivity of the existing workforce … or bringing in more skilled and semi-skilled migrants.
Joe, you wrote that.
Therefore when you wrote, “Increasing government spending does not increase output in a full employment economy. There are no significant idle resources of labour and capital available to do so” you must be mistaken.
If aggregate demand is increased, then the extra demand in the economy will stimulate businesses to produce things to meet this demand. It doesn’t really matter if the producer does this by employing more people or increasing the productivity of their existing workers. However, as you think productivity is so important, your position should be that creating this extra demand to encourage business to increase productivity is a good thing.
The supply of houses for rent is not fixed. If there were only 30 million people living in the UK and the same amount of housing for rent, then rents would be less. This is why I can state, “If there were an extra 6 or 7 million homes in the UK (of which at least half were for rent) then I think rents would not be so high.” As long as demand is greater than supply, the suppliers can increase their rents. If their costs (such as a land tax) increase they will pass this on to the tenant. If council tax paid by the tenant is replaced with a land tax paid by the owner, then even under your theory the owner will be able to pass on this to their tenant so the tenant is not better off.
Joe, I don’t know where you got your UK saving rate from, but by using Trading Economics figures it is 17% over the last 4 quarters.
For the year 2018-19 Government expenditure is expected to be 38.2% and £812.8 billion making the total economy £2127 billion. The deficit is forecast to be £25.5 billion making government Taxation £787.3 billion (37%) In March 2018 eXports were £620.2 billion (29.2%) and the current account deficit was 3%, making iMports 32.2% or £684.9 billion. We should be able to work out what C is and then what I is.
Y = C + S + T + M
To find C using percentages
100 = C + 17 + 37 + 32.2
C = 100 – 17 – 37 – 32.2 = 13.8
To find I using percentages
Y = C + I + G + X
100 = 13.8 + I + 38.2 + 29.2
I = 100 – 13.8 – 38.2 – 29.2 = 18.8
The Multiplier is 1/0.862 = 1.16
I am surprised how low it is.
Michael BG,
productivity is increased by investment in innovation and technology, principally by private sector firms. The governments role is in providing pubic goods in the form of infrastructure to enable a thriving economy. The Libdem Manifesto includes the following in this respect:
– Help with building 300,000 homes a year by 2022
– A major programme of capital investment aimed at stimulating growth across all areas of the UK
– The Installation of hyperfast, fibre-optic broadband across the UK
– Investment in road and rail infrastructure
– Bringingin more private investment into renewable energy
– Puting £5bn of initial capital into a new British Housing and Infrastructure Development Bank.
Stimulus to increase demand in a full employment economy generates destabilisig inflation and unemployment not economic growth,as both Tories and Labour learned to our cost in the 1970s.
For Household savings rate see these links https://www.ftadviser.com/pensions/2018/10/08/uk-households-continue-to-spend-more-than-they-save/ and http://obr.uk/economy_categories/household-saving-ratio/. Average savings as a % of take home pay (which is after pension deductions) has been negative in 2018.
David Ricardo’s Law of Rent shows, a tax on land cannot be passed on to renters.
“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.” – Adam Smith, Wealth of Nations
“A tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers. The landlord could not raise his rent, because he would leave unaltered the difference between the produce obtained from the least productive land in cultivation, and that obtained from land of every quality.”
– David Ricardo, On the Principles of Political Economy and Taxation
Rent means what is currently paid i.e. the rent paid to the landlord and the council tax.
The LVT neither increases or decreases the amount of rent paid – that is determined by the income of tenants. Through a tax on rents It captures value that is generated by invesrment in public services and the economic activity of the local commumity. It can aid in increasing the supply of land by bringing land held out of use in landbanks onto the market.
Joe, the experience of the 1970’s is not evidence that increasing the deficit (your economic stimulus) has to generate inflation. I was taught that during the early part of the Heath government, the money supply was dramatically increased generating inflation, then the oil crisis of 1973-74 generated even more inflation. If the fiscal stimulus is too large then this can lead to higher inflation, just like if the increase in the money supply is too large it can lead to higher inflation.
I agree that investment is needed to increase productivity. If there is more demand for a company’s goods and they can’t employ any more people, then they are likely to invest to increase productivity. I think your position is illogical in that you believe a fiscal stimulus would result in a company employing more people but not in their investing to increase productivity to meet the increased demand.
I think the economic role of the government is to manage the economy to achieve full employment in all regions of the country and to ensure that no one lives in poverty.
The FT article still does not provide your 0.16% figure, but it is not really talking of total household savings.
The Trading Economics figures are: 4.2, 4, 4.5 and 4.3 (ending I think Q4 2018) making 17%, while using the link you provided and drilling down the OBR figures are 4.5, 4.6, 4.4, 4.2 (ending Q2 2018) making 17.7%, including pensions.
I think you have accepted that rents would increase with a Land Tax replacing Council Tax, when you wrote, “Rent means what is currently paid i.e. the rent paid to the landlord and the council tax”.
As VAT increases the price of goods, so a land tax will increase housing rents.
Michael BG,
the Barber boom of the 1970s was an unsuccessful “dash for growth” that led to inflation and confrontation with the unions. Anthony Barber tried to add 10% to the UK’s growth in two years with a fiscal stimulus when employment levels were similar to today.
Inflation soared, boosted by the newly-floated pound and then the oil crisis hit in 1973 exacerbating the high inflation that had been developing since the 1967 Wilson devaluation. The government was forced into an incomes policy (wages freeze) to try to control inflation which led to a confrontation with the miners. The UK’s economic performance continued to deteriorate during the 1970s,
This and a similar attempt by the Wilson government led James Callaghan to tell the Labour Party Conference in 1976 “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
This is an explanation of the household savings ratio https://www.economicshelp.org/blog/848/economics/savings-ratio-uk/. It was recorded at 1.7% in the 1st quarter of 2017 and was negative across the year. The links above show it has been negative for the first three-quarters of 2018 i.e. households in aggregate are borrowing and spending more than they are saving.
I have explained many times why a Land tax will not increase housing rents. This is a simple fact accepted by economists everywhere. Rents mean costs of occupying a property. Some Landlords pay council tax and include it in rents (typically in shared accommodation), some occupiers pay no council tax (students), some tenants pay council tax on top of contract rent paid to landlords i.e. their total rent.
This is NOT good news!
https://www.bbc.co.uk/news/business-47318862
If the Govt is taking money out of the economy at the same time that money is leaving the economy to pay our import bill there can only be one outcome!
Peter,
January is always a surplus month with self-assessment tax payments coming in for the2017-18 tax year. High employment figures and corporate profits generate higher taxes too. The surplus is 4.9 billion over forecast and may go into reverse if the economic growth has been as weak as suggested in the last quarter of 2018 and early part of 2019.
I expect the spending review next month will remain on the cautious side unless there is a breakthrough that can deliver some certainty around the Brexit negotiations.
@ JoeB,
You’re right it “may go into reverse” just like it went into reverse in 2008. In other words, there was an economic crash.
It probably won’t be quite as severe as then, but with the recent falls in the stock market, the decline in house prices, the fall in car sales, and the general downturn we see worldwide, the signs aren’t looking at all good.
The problem for the neoliberals is that their chosen ‘monetarist’ method of stimulating the economy won’t work any longer. Lowering interest rates isn’t an option. It’s the fiscal control lever or nothing. And it won’t just be a temporary ‘pump priming’ measure. The economy will have to be regulated this way for the foreseeable future.
You can only have a monetary stimulus if interest rates are high enough in the first place to be able to lower them. I just can’t see how that can ever happen short of a prolonged period of high inflation which wipes out the debts of the private sector.
PeterMartin,
I would agree that neither negative interest rates or QE wil prevent a global slowdown impacting the UK economy or spur a domestic recovery. And yes, quite possibly a prolonged period of high inflation may be the only answer to excess private debt in the economy. Steve Keen puts a lot of focus on the rate of increase in private sector debt acumulation. If the rate of increase decelerates (as it has to when it reaches unsustainable levels) he argues that demand will fall off and a downturn ensues.
I also agree with your assessment that it will be fiscal measures that will be required to maintain demand. I would like to see those fiscal measures directed towards the kind of increased capital spendig outlined in the Libdem manifesto and rely primarily on automatic stabilisers with respect to curent spending budgets i.e. no spending cuts and no tax increases on incomes from employment or self-employment.
In a prolonged period of high inflatiion, low and middle-income earners will see a seqeeze on real incomes and support for those on low incomes (especially for rent payments) will be required.
Joe, the money supply was increased with the liberalisation of the banking system under the title “Competition and Credit Control” 1971-73. I note no link to your claim Barber was aiming to grow the economy at levels unknown in recent history. However, if you are correct and Barber’s aim was to try to increase growth to 5% in a year during an inflationary period caused by the reform of the banking system then he was a fool, and it is a classic example of how not to manage the economy. This is not evidence that a fiscal stimulus always causes inflation. It is evidence that where the fiscal stimulus is too large inflation increases. Barber made inflation worse by floating the pound in 1972 and not as a result as you claim of the devaluation in 1967.
According to the Guardian (https://www.theguardian.com/news/datablog/2009/nov/25/gdp-uk-1948-growth-economy) growth was 3.8% in 1976, 1.9% in 1977 and 3.4% in 1978. If Labour has won a general election in 1978 then we could have avoided Thatcher wrecking the economy.
I have quoted the ONS figures for household savings including pensions. It is the total amount saved each quarter which is important not who is doing the saving. Savings is a leakage out of the economy according to Keynesian theory like buying imports.
If a landlord includes the Council Tax in the rent they charge, when the Council Tax increases the rent goes up too. Basic demand and supply theory works for homes for rent as it does for cars. The price in theory is set when demand and supply meet.
Peter, it could be bad news, but if the extra income is then used to increase government spending over the year it could be neutral. If it means that the tax take is over estimated and even more is spent back into the economy by the government to stimulate it more because of the downgrading of economic growth forecasts it could be beneficial.
Michael BG,
Anthony Barber was no fool. He served in the RAF during the war, studied law at Oxford and became a barrister. He held various posts in government under Harold Macmillan, including Economic Secretary to the Treasury, Financial Secretary to the Treasury and Minister of Health. As Heath’s Chancellor of the Exchequer he oversaw liberalisation of the banking system and introduced Value Added Tax. He announced to Parliament in 1972 that his Budget would add 10% to the UK’s growth in two years. Of course it did not and you might say it was foolish to do so. But both Conservative and Labour politicians at the time believed fiscal stimulus could deliver real economic growth, even when at full employment. They were wrong as Jim Callaghan subsequently recognised.
The cash basis Household savings ratio excludes pensions. The gross figure includes the net change in pension entitlements i.e. the difference between what is saved in pension funds and what is withdrawn by those who have retired.
The cash savings ratio is close to zero or negative. The gross ratio adding-in pension savings is circa 4%. Both are at historic lows for the reasons explained in the economics help article. You do not add quarterly percentages together to get an annual total of 17%, that is basic schoolboy arithmetic.
Basic demand and supply theory does not work for homes for rent as it does for cars. Production of cars can be increased to meet demand. That is why car prices increase in accordance with general inflation. House prices and rents have increased far in excess of general inflation. House prices increase far in excess of CPI inflation as a consequence of restricted supply and interest rates. Rents increase as a consequence of restricted supply and are only capped by the level of income i.e. the maximum amount tenants in any given area can pay.
@ Joe B. Interested to hear you mention Anthony Barber, Joe.
He was in Stalag Luft III with my Uncle Mark, along with the comic actor Peter Butterworth (appropriately, of Whitehall Farce & Carry On fame). They were all involved with the Escape Committee… fortunately not in Roger Bushell’s Great Escape group when so many were executed after recapture. They raised money for the RAF Benevolent Fund after the war for the victims.
I gather Barber got a First when a POW through the Red Cross and my uncle always rated him as a very bright nice bloke. Small old world sometimes – thanks for the reminder.
But both Conservative and Labour politicians at the time believed fiscal stimulus could deliver real economic growth, even when at full employment. .
Joe, they were correct, when inflation is under control a fiscal stimulus can deliver real growth, but it can’t grow the economy more than is normal for that economy. If a UK government provides a fiscal stimulus which is less than 3% minus the forecast growth figure minus the addition due to the multiplier then it should grow the economy and not cause high inflation. For 2019 economic growth is forecast to be 1.6% therefore assuming a multiplier of 1.2 government total expenditure could be increased by 1.1% about £23.4 billion. This is why the Liberal Democrat policy of increasing the deficit by £14.115 billion by increasing current government expenditure is acceptable to me.
If the production of cars had been restricted then this would also have led to inflated car prices. The supply of homes for rent is not fixed. In a recent article by you (https://www.libdemvoice.org/a-land-value-capture-approach-to-social-housing-provision-59645.html), you were supporting increasing of the number of homes being rented by 3.1 million! I wrote something similar, “If there were an extra 6 or 7 million homes in the UK (of which at least half were for rent) then I think rents would not be so high”.
@ JoeB,
“Basic demand and supply theory does not work for homes for rent as it does for cars.”
That’s true – but I’d go further and say it doesn’t work in the housing market generally. When prices are rising it actually makes more sense to own a bigger property, or more properties, than actually needed. The more property you own the more money you make. The occupancy level per home is probably lower now than it ever was. If market forces were to be relied on we’d have to come up with a system that encouraged everyone to downsize to save money when property was in short supply. Probably nationalising, without compensation, the entire housing stock and renting it out again at market rates would do the trick but this proposal might have some difficulty being accepted. Both by the Lib Dems and the wider electorate!
At least we’ve reached a situation where owners aren’t making much, if any, money now that the market has peaked. The bubble is slowly deflating but that’s not going to be without cost to the wider economy.
@ Michael BG,
“This is why the Liberal Democrat policy of increasing the deficit by £14.115 billion by increasing current government expenditure is acceptable to me.”
It would be acceptable to me too. But all it means is that everyone is saving £14.115 billion more than they were previously. If they are saving they can’t be spending. Which, as I’ve tried to explain previously, isn’t at all what we want to get the economy moving!
The neoliberals are quick to use the term ‘deficit denier’ but there’s nothing really to deny. The government’s deficit is everyone else’s savings. Period. Unless we want to legislate to prevent savings we have to accept we can’t control the govt deficit.
It’s often said, rightly, that the sectoral balances can’t be used to imply causality from one sector to another. The same argument applies within a sector. The Government has full control of its spending but it has far less control of its revenue. Therefore it can’t say just what its deficit or surplus will be.
Having said this, the Govt can try and influence it. If, for example, it is running a surplus because exports are higher than imports and the private sector is saving modestly then that’s probably OK. However if we are running a significant current account deficit and still the government is in surplus, or even if the govt deficit is too small, it is a sign that the private sector is borrowing too much.
This is a dangerous condition! It could lead to a crash. This is what happened in 2008.
Peter, four days ago I posted an example of how an increase in government spending would work. In my example government spending was increased by 10, but once that increase had worked its way through the economy the deficit was only increased by 5, while Savings was only increased by 2. You didn’t comment on it. My example shows that it is unlikely that an increase in government spending and the deficit would mean that Savings would increase by the same amount as the deficit as you seem to claim.
It should be remembered that the increase of government spending by £14.115 billion would not happen all at once but would be phrased in across the whole year. Therefore the government would not borrow all of the £14.115 billion at once, it would do it in stages, but as we both recognise some of this extra spending comes back to the government in taxes, reducing the need to borrow the total amount.
MMT still has a multiplier and still states that an increase in government spending not financed by increased taxation will increase the size of the economy assuming that it doesn’t increase inflation.
Peter Martin,
House prices in the UK have increased by more than double that in comparable European Counties since 1970. Rents have increased by three times average earnings rising from 10% of income (15% in London) to 30% (40% in London).
Occupancy levels are lower not least due to the large increase in single person households.
Nationalising private property would be a disaster. The value in use of a property right that is conferred by the community is not diminished by collecting Land Value Tax for the community. Neither is the use that can be made title to land compromised.
In contrast, where such Land rental value is not collected for the community but is allowed to be retained or collected by an individual, the property may be held out of optimum use for speculative purposes – as is evident with land speculation. Alternatively, it may be underused and enterprises that is not actually adding value to the community may merely ‘milk’ the community created property value to generate profits.
The objective of Land Value Tax is to re-balance the economy. Over-relianceeavy on taxes on productive enterprise and low taxation on income from uplifts in property values encourage rent extraction and discourage the creation of real wealth and provision of public services. Shifting taxation towards a greater payment of land rents and away from wage income would move in the opposite direction and mean that unearned income from property would be much less attractive and productive activity much more viable. This would rebalance the distribution of wealth addressing the many problems now identified with excessive inequality and particularly provide opportunities for greater earned prosperity for those now in the lowest portion of the income scale.
@ Michael BG,
“MMT still has a multiplier and still states that an increase in government spending not financed by increased taxation will increase the size of the economy assuming that it doesn’t increase inflation.”
An increase in government spending will all other things being unchanged either result in increased inflation or will increase the size of the size of the economy or a mixture of both.
But you can’t assume that all other things will remain unchanged.
Yes there is a multiplier, or their can be, but it doesn’t really change anything. The money the Govt spends into the economy all ends up being saved (even its only in a piggy bank) in which case it adds to the deficit, or it comes back to the Govt in taxes.
http://bilbo.economicoutlook.net/blog/?p=6949
@ Joe B,
I wasn’t suggesting nationalising property or land. Just musing on the possibility. I would have thought you’d have picked up on that. However, if Govt was coming after me with a LVT I might welcome the opportunity for them to buy my land at an existing valuation rather than have it depreciate in value due to the imposition of a LVT. If the LVT was severe enough, ownership of land would become a net liability.
I remember a case of shares having a negative value in Australia. People had bought shares to construct a railway extension to an airport which was wasn’t doing well financially. The owners of the shares found that there was a clause in their agreement which obliged them to participate in subsequent share issues to buy out the State govt stake in the project.
The Govt had to back down when they realised that it wasn’t illegal to sell the shares to someone in Bangladesh living on a few dollars a day. Or rather they’d have to pay to get someone to take them off their hands.
Now, I’m not saying that would happen with only a modest LVT, which I agree could be a sensible addition to the existing range of taxes. But, on the other hand a modest LVT, isn’t going to change things very much.
Peter Martin,
Australia is a good place to observe the effects of Land Value Tax. This article discusses the bill of the Australian Capital Territory to transition to LVT and increase revenue from this source by 45% over five years in Canberra https://www.canberratimes.com.au/politics/act/bill-to-help-increase-act-land-tax-by-45-per-cent-over-five-years-20180412-p4z98j.html
The money the Govt spends into the economy all ends up being saved (even its only in a piggy bank) in which case it adds to the deficit, or it comes back to the Govt in taxes.
Peter, as my example showed this is not true.
Of course if everything else remains unchanged. This is normal. Therefore what I wrote is true. For what you wrote earlier to be true you need to state what has changed. I assume you have read the blog you have linked to.
80 + 4 + 10 + 6 = 80 + 4 + 10 + 6
80 + 4 + 10 + 6 ? 80 + 4 + 20 + 6
The first 10 increases consumption
90 + 4 + 10 + 6 ? 90 + 4 + 20 + 6
Even if on the next round it is all saved there is still the initial growth
90 + 14 + 10 + 6 = 90 + 4 + 20 + 6
This is a very unlikely scenario.
For there to be no multiplier or for the multiplier to be negative is a very unlikely thing.
If instead of increasing government spending the government had cut taxes by 10 and no one decided to buy anything extra, but just saved it all you would be correct.
80 + 4 + 10 + 6 = 80 + 4 + 10 + 6
80 + 14 + 0 + 6 = 80 + 4 + 10 + 6
@ Michael BG,
You can only figure this out for yourself, correctly, if you analyse everything in double entry terms. Incidentally some years ago, at a somewhat higher level, Steve Keen had to concede the same point and revisit some of the conclusions he’d incorrectly arrived at by only considering single entries.
So say we start off at time t=0 We have
Govt =(0,0) Private Domestic Sector = (0,0) Foreign Sector = (0,0)
(assets, liabilities)
The the government Creates 100 bn units of currency. We have
G= (100,100), PDS= (0,0 ), FS = (0,0)
It spends these into the economy and gets 80 back in tax
G(80,100) = G(0,20) , PDS(20,0), FS (0,0)
The PDS sector buys some imports
G(0,20), PDS (20,10)= (10,0), FS(10,0)
Note that at each stage assets (+ve) and liabilities (-ve) all add to zero.
You can play around with this yourself to add what happens in each subsequent year.
Mainstream economists get into a muddle about the nature of debt. To them Govt bonds are debt but Govt currency isn’t. The sectoral balances don’t work unless you count it all as debt and use double entries as you go along.
Warren Mosler puts it as “The public debt is nothing more than the $ spent by gov that haven’t yet been used to pay taxes. They sit in the economy as cash and as $ in reserve accounts and securities accounts (tsy secs) on the Fed’s books. It functions as the net money supply.” The public debt being just the sum of all previous deficits.
https://twitter.com/wbmosler/status/1013072821327671297
Peter, I don’t know what point you are responding to, but it wasn’t my last post. You don’t even have an entry for savings. I have explained why increasing government spending only, would not result in an equal increase in savings; while pointing out that a reduction in taxes could.
The ’20’ in the PDS is the ‘savings’ as we are only considering year1. If you carry on its the difference from one year to the next.
Peter, nothing of your previous post makes sense with regard to economics and it doesn’t counter what I wrote.
G(80,100) = G(0,20) , PDS(20,0), FS (0,0) is not true. 80 does not equal 20 nor does 100 = 20.
G(0,20), PDS (20,10)= (10,0), FS(10,0) is not true. 30 does not equal 20.
I don’t think you can use double entry book-keeping to explain the economy, just like you can’t use a household’s budget to explain the government’s budget.
C + S + T + M = C + I + G + X is true, when in equilibrium.
@ Michael BG,
Just do a check that the sum of all the assets is equal to the sum of all the liabilities. That’s the underlying principle of the double entry system.
Unless you can find an example of a financial asset not having an equal and opposite financial liability then the double entry system must be valid.
If you Google you’ll find Quadruple Entry in connection with MMT too but I must say I’m not totally convinced on the need for this.
https://www.nakedcapitalism.com/2018/10/randy-wray-modern-monetary-theory-came-mmt-include-mmt.html
Peter, you have ignored consumption. In G – T = S – I – NX, C – consumption has been removed. This is why you don’t seem to understand that when a government increases its spending it increases consumption, unlike when it decreases taxation, then consumption can be increased by others in the economy, or can just be saved as you suggested.
@ Michael BG,
Consumption has been removed because it drops out in the algebra.
1) GDP = C + I + G + (X – M)
GDP is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).
Also:
2) GDP = C + S + T
which says that GDP ultimately comes back to households who use it to fund consumption (C), saving (S) or to pay taxes owing to the government (T).
You can play around with these to get the usual sectoral balance equation
3) (S-I) + (T-G) + (M-X) = 0
So what we can say is that (from1) an increase in government spending will increase GDP providing that the other factors in the equation don’t conspire against it.
Also (from 2) that an increase in GDP is very likely to increase T also. Note it isn’t certain to cause it to rise. It’s possible that S could rise instead.
So what happens to the the deficit (G-T) if an increase in Government spending (G) causing GDP to rise and, in turn that rise in GDP causes govt revenue (T) to also increase?
Peter, you know I know why C consumption can be removed to get to your equation. I remember pointing this out to you a long time ago.
When using C + S + T + M = C + I + G + X it is assumed that the marginal propensity to: Save; spend on Consumption; spend on Imports; and taken in tax all remain unchanged. If the amount taken in Tax is reduced I have stated that it is possible that with a change in the marginal propensity to Save all of the amount from T could transfer to S without any growth. However, even if the marginal propensity to Save changes, if Government spending has increased this has to be spent somewhere, it is often assumed on internal Consumption, it cannot be spent on Savings.
I looked at how a change in the marginal propensity to Save would affect all aspects of the equation and I concluded that it could not remove the initial increase in consumption. It could only do this if the propensity to Save changed, which is very unlikely.
If you look at my calculations as posted on 19th February you can see what we should expect to happen when government spending is increased by 10, the economy has grown by 50, while the deficit is increased by 5, saving has only increased by 2, while the trade imbalance has increased by 3.
We could use my estimates of 20th February for the UK economy if you prefer
C + S + T + M = C + I + G + X
13.8 + 17 + 37 + 32.2 = 13.8 + 18.8 + 38.2 + 29.2
Increase G by 10 and we could assume that the marginal propensities are applied straight away
15.18 + 18.7 + 40.7 + 35.42 ? 15.18 + 18.8 + 48.2 + 29.2
Moving to 15.37 + 18.93 + 41.21 + 35.86 ? 15.37 + 18.8 + 48.2 + 29.2
Then to 15.39 + 18.96 + 41.21 + 35.92 ? 15.39 + 18.8 + 48.2 + 29.2
Ending at 15.4 + 18.97 + 41.29 + 35.94 = 15.4 + 18.8 + 48.2 + 29.2
The economy has grown by 11.6, Consumption by 1.6 and the deficit by only 6.91.
OK But you still have C on both sides of the equation and you might as well just cancel them out.
Also its probably better to try to get the feel of the way things work rather than getting too bogged down in the mathematics of it all.
The important point about deficits is that they are just everyone else’s net savings
Or if you prefer: (G-T) = (S-I) +(M-X)
Or (savings – investment) of the Private Domestic Sector plus (imports – exports)
The latter is the amount the overseas sector earns from us but doesn’t spend.
So the take home message is that yes we keep an eye on the Govt’s deficits but we don’t beat ourselves up about them They are quite normal for economies like the USA’s and the UK’s.
Peter,
I pointed out that when government expenditure is increased it is impossible for all of it to end up being saved. It is also very unlikely that all of it would be spent on imports. Therefore consumption will have to increase. This is why Consumption has to be in the equation for you to understand this. I hope your “OK” is your acceptance of all of this.
@ Michael BG,
If Govt increases its spending, it’s not impossible, but I agree it’s extremely unlikely, that it ALL will be saved. But it is only the portion that ends up being saved, either domestically or by our trading partners who may decide not to spend the £ they earn from their exports that contributes to the Govts increased deficit.
You can’t just add consumption to an equation because you want it to be there. There’s no point in having C on both sides of an equals sign as you had in your post of 27th Feb ’19 – 3:34pm
Peter, if you do not include C consumption in the equation, then by using your equation you cannot have C increase when government spending increases. You only seem concerned with debt and not GDP. To consider the whole economy you need to include C on both sides of the equation.
You might just as well put any random number you care to think of on both sides of the equation. It doesn’t mean anything at all.
@ Michael BG,
I’m sometimes criticised for making too much of the sectoral balances. People, like JoeB for example, tend to point out that they don’t say anything about the rate of inflation, the rate of growth of GDP or the extent of unemployment / underemployment etc. And that’s quite true. They don’t.
They are just a set of identities, but which do explain why we do have debts and deficits. And that in itself is very useful. They show that austerity economics is quite pointless essentially. It’s impossible to aim for everyone to be in surplus. Someone has to be in deficit.
So it’s not that I’m unconcerned with these matters, it is more that I do accept that the sectoral balances don’t tell us everything.
Peter, it seems to me that you are no longer aware of what the point of yours I was countering. I don’t deny the general MMT position on (G-T) = (S-I) + (M-X), as I pointed out to you some time ago that you can get to this from the Keynesian equation C + S + T + M = C + I + G + X.
What I last posted has to be true, if you don’t include C consumption in your equation then it can’t change when you change one of your variables.
It would be helpful it you could accept that if Government Spending is increased it has to be spent on something and it can’t be directly saved. You accept that the government receives some of this extra money back in taxes and some of it would be spent on imports, and if using my equation some of it would be spent on internal consumption. You need to have C consumption in the equation for that variable to able to change when the amount spent by the government is increased.
It IS depressing that when the coalition government cut local authority funding disproportionately heavily, it was not one of the subjects that brought Liberal Democrat activists out in protest. It seemed to go almost unnoticed outside councillors themselves.
The point about discretionary services is well-made: these are the things local authorities have done on their own initiative, mainly in response to public demand. Leaving no funds for them is anti-democratic.
As for restructuring local government, of course any restructuring would hurt us in places and help us in others. But we should not buy the idea that it must mean bigger councils. The equivalents to district councils in France, for example, are much smaller.