A gentle ramble through Mrs May’s arithmetic…

I’m a mathematician by training, and work professionally with numbers. And, because I find testing arithmetic projections entertaining, I thought that I might play with the proposed “£20 billion for the NHS”. See what you think.

Firstly, I should note that that £20 billion isn’t for you, Scotland, Wales and Northern Ireland, although the Barnett Formula might mean that there is more money available for you too.

I’ll assume that the BBC’s figure of £114 billion for NHS England’s budget is accurate, and note that the Office for Budget Responsibility is predicting that inflation will be fairly constant at 2% per annum over the next four years.

Over five years, in order to keep pace with inflation therefore, the budget will need to increase by about 10.4%, or £11.9 billion. Now, we are told that, of the £20 billion, £9 billion will come from the “Brexit dividend”, with the remainder – £11 billion – coming from tax rises and additional borrowing.

It looks to me, therefore, that all of the real terms growth is dependent on the existence of a “Brexit dividend” and that all of any such dividend will be spent on the NHS. Given that some of it will need to be spent on creating British equivalents of various European regulatory bodies, and additional staff in areas of government such as HM Revenue & Customs, where between 3,000 and 5,000 extra staff, and a new Customs system are required, according to its Chief Executive, Jon Thompson, that does seem to be, how can I put it, optimistic.

It seems even more optimistic when you take into account the Government’s own predictions about the impact of Brexit on the UK economy, which suggest a shrunken tax base over the next five years.

In other words, the Government is proposing to borrow and tax more simply to keep pace with inflation, and any real terms growth will depend entirely on the achievement of a profit from leaving the European Union that has been described by the likes of Paul Johnson at the Institute of Fiscal Studies thus;

If he’s right, and he has a pretty good reputation, there is no money for the real terms growth element, and the Government needs to find another £15 billion, presumably in extra tax rises and borrowing, to plug the gap in the public finances, or cut a whole bunch more stuff.

There is no doubt that this is very good politics in the short term, as it places a burden on those seeking to remain in the United Kingdom to explain why they are trying to deny the NHS all of this money. In the long term, though, either the Government are going to have to get a very good deal, better than even their projections envisage, or hope that they’ll have someone else to blame when the money doesn’t materialise.

And they might just get lucky…

* Mark Valladares is the Monday Editor of Liberal Democrat Voice.

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  • Peter Martin 18th Jun '18 - 8:49am

    @ Mark,

    As a mathematician you should know better than to make so many assumptions. If you have several variables in an equation you can’t assume you can change one and the others will be held fixed. Partial derivatives aren’t the same as general derivatives. If the Government spends more its tax revenues will increase too.

    Dianne Abbot was widely criticised for attempting a similar back-of-envelope type calculation as yourself when she mentioned recruiting 1000 police officers who were paid £30k each. ‘How silly was she!’ was the general conclusion. Everyone should know that will cost £300 million pa.

    But not so fast! What about the tax and NI that these officers will pay? So about a third will go back to Treasury straightaway. So is the cost now £200 million? And what about all the VAT and other taxes that are collected as that extra money circulates in the economy. Maybe her £80 million wasn’t too far off the mark after all!

  • Key point being that even if there is some amazing Brexit benefit for the NHS, it will be for England only.
    Either they think Welsh (etc) voters won’t notice there’s no promise of anything for us.

    Or, they are only doing it to put emotional blackmail pressure on MPs to support Brexit. Any ‘rebel’ MP on Brexit can then be portrayed as ‘undermining’ the NHS.

  • It is gratifying to see that the papers are not letting May get away with this deceit and it is a clear indicator of direction that a Tory PM would attempt this kind of subversive activity.

    Seeing how ConservativeHome are rejoicing in Dominic Cumming’s masterminding of this NHS move, it seems clear that May is now totally under the control of the hard brexiteers and they will reopen the well of lies to achieve their ends.

    The reality, once the Brexit withdrawal bill is passed and the negotiation moves onto free movement of people will become clear. In Ireland, EU free movement of people and the U.K. Common Travel Area overlap. There can be no Brexit that delivers what the PM has promised without a hard border in Ireland, especially given her reliance on the DUP and their refusal to countenance one in the Irish Sea.

    It is hard Brexit or no Brexit. The maths is largely meaningless because, as Cassie says, this isn’t about the maths, it’s about preventing the meaningful vote rebellion by positioning those MPs as NHS wreckers.

  • As I failed to complete my Bristol University Mathematics degree in the 70s, I may not be as much of a mathematician as you and Mark, but just to point out that if you employ 1000 police officers on £30,000 each it will cost you £30 million not £300 million.
    Err no Mark, it will cost significantly more, you omitted the on-costs. Whilst I have no idea of just how much it costs to provide a single police post, I’m reasonably confident it will be north of £60,000, whether it is in the region of £300,000 is open to discussion – but given the increasing amount of technology being used, per job costs of £150,000~200,000 are not unreasonable.

  • Yeovil Yokel 18th Jun '18 - 11:23am

    When I heard this news my initial reaction was: “This is a lie”. Thank you, Mark, for confirming that it is still a lie. And thank you, Lyn N, for expressing my thoughts more eloquently than I could have done.
    Peter Martin, your post doesn’t mention the NHS once.

  • Peter Martin 18th Jun '18 - 12:28pm

    Simon Shaw

    Yes you’re right! 30k x 1000 is 30 million. I’m suitably embarrassed! Maybe DA said 10000?

  • Mark,

    my understanding is the £20 billion is a real terms requirement on top of cash funding required to keep pace with inflation and represents an annual average real terms increase of 3.4% over the next five years.

    Libdem Policy is currently to increase income tax by 1p as a starting point and longer-term proposals include a hypothecated NHS tax based on national insurance that would increase by 1% for both employees and employers. Additional funding may be sourced by extending national insurance to over 65’s who continue working beyond retirement, subject to a possible cross-party agreement on NHS funding going forward.

  • Peter Martin 18th Jun '18 - 1:04pm

    @Simon Shaw,

    Yes you’re right.1000 x £30k = £30 million.

    I’m suitably embarrassed!

    When I used to play darts in the pub as a youngster, and was slow with the arithmetic, I didn’t like to say I was studying maths as part of my Physics course. 😉


    You’re obviously right in that overheads do have to be included. But that doesn’t change the fact that a Govt’s income is dependent on its expenditure. If it cuts its spending it cuts its income and vice versa if it raises its spending.

    All Govt spending comes back as taxes sooner or later. Where else can it go? Maybe someone throws coins in the ocean or the Bullingdon club members have a desire to light a cigar with a £20 note. But apart from that…..

    Yeovil Yokel,

    OK. I could have said NHS nurses instead of police officers. The principle is the same.

  • Richard Allanach 18th Jun '18 - 4:49pm

    @ Peter Martin

    “All Govt spending comes back as taxes sooner or later. Where else can it go?”

    If only …

    To take just one example if I am employed in the police force and decide to spend my income on a holiday in Spain my expenditure in Spain will not come back to the UK government.

    Keynes said that when there were high levels of unemployment due to a lack of demand then it was sensible for the government to step in and buy more goods and services. He did not say that in all economic circumstances we could spend ourselves rich.

  • Yeovil Yokel 18th Jun '18 - 8:10pm

    Peter Martin – “OK, I could have said NHS nurses instead of police officers. The principle is the same.” I understood exactly what you were getting at. But instead of responding directly to Mark Valladares’ points about NHS funding and the lack of a Brexit dividend you chose to go off at a tangent onto the subject of Dianne Abbot’s abilities as a mathematician and the funding of police officers. So, can I have a straight answer from you, please? – is Mark wrong, do you think that there will be a Brexit dividend, and if so can it be used to improve the funding of the NHS, as we were promised two years ago?

  • Or what about the large chunk of the defence budget spent buying equipment from the US, or spent with Microsoft for all the Government computers, or pharmaceuticals from Switzerland for the NHS, or interest payments to foreign holders of UK Government debt, or……

  • Innocent Bystander 18th Jun '18 - 9:07pm

    I am retired but was an engineer and director once and was keenly interested in lean manufacturing and business efficiency,
    I have recently spent two days in the hands of the NHS and two things made strong impressions.
    Firstly, the real dedication and commitment of all, I mean everyone, of the rank and file staff. Truly heart warming, even humbling.
    Secondly, the vast amount of blindingly obvious inefficiency involved in almost everything they do.. No wonder it costs so much.
    I’m also old enough to know that if you throw money at an inefficient system you get more, and better inefficiency. You don’t get any form of improvement – you just get more bad practice.
    Love them though I do, there was not the smallest trace of modern methods and thinking. The same information collected multiple times, often simultaneously by different people on opposite sides of the same bed, Essential materials seemingly in random locations with no MOQs obvious, no date order control, notice boards with what looks like instructions but no valid dates, scopes, authority etc. I could go on but this, to me is in the most dire need of a systematic, work team driven improvement programme first and just throwing money at it will make it worse and more Byzantine than ever.

  • Little Jackie Paper 18th Jun '18 - 11:19pm

    How about instead of relying on some nonsense about the EU we have a real argument about health and social care reform? Just a thought.

    All I can say is that from my time in the NHS, £20bn is the equivalent of pouring water onto sand. And, yes, I know a lot of people on here won’t like that. But then if you are not prepared to think long, hard and with a radicalism rather more than £11bn or £15bn then you are talking about not much more than a few years.

    The NHS has been in crisis for about 4 decades and had remain won in 2016 we’d still probably be having this argument.

    Anyway, I’ll let everyone spit vitriol at me now.

  • Peter Martin 19th Jun '18 - 6:51am

    @ Richard Allanach,

    If you, or any newly recruited Police Officer or NHS nurse, go on holiday to Spain then you’ll exchange your pounds for euros. So someone will want your pounds, and at the current exchange rate, has to be prepared to give you 1.14 euros each for them. So why do they need them?

    Possibly they’ll want to come on holiday to the UK themselves. Or they want to buy something we sell. That’s all included in the current account. Those pounds then start recirculating in the UK economy and will get picked up very quickly in the government’s tax net. Or they will end up as part of the flow of money which constitutes the capital account. They’ll end up helping to purchase Govt bonds perhaps. Any tendency towards imbalance in either the current or capital account combined will cause the exchange rate to move until balance is restored.

    So capital money may take a little longer but assuming that those savers who buy bonds will spend it – eventually, it will get back to Govt – also eventually. If they never do spend it then that’s even better for Govt!

    You’re right that increased govt spending (as often favoured by the left) or reduced levels of taxation (as often favoured by the right) aren’t always the best options. Either and both, if overdone, can cause too much inflation.

  • Peter Martin 19th Jun '18 - 6:58am

    @ Yeovil Yokel,

    I don’t know if Mark is right about the £20 billion. He’s probably wrong. He’s treating the UK national economy as if it were a household. In a household, income and expenditure is almost totally independent. In a national economy, a government’s income is almost totally dependent on its spending.

    In any case, £20 billion does sound like a lot of money but considering that the UK GDP is some £2 trillion, it’s only 1% of GDP ( I hope my arithmetic has improved!) and so is neither here nor there in the overall picture.

    I favour leaving the EU, not because its a capitalist club, but because it’s not a very successful capitalist club. If we still had the EEC I’d be happy to be a part of that. The euro experiment is a disaster and can only be rescued by the formation of a United States of Europe. I’ve zero confidence in the ability of the EU PTB to pull that off. Possibly if Macron was given free rein he could do it, but the German conservatives will never allow that.

    So the best course for the UK is to separate ourselves from the EU as much as we possibly can. Of course we can still stuff up our own economy if we run it badly. It will all depend on what we do after Brexit.

  • William Fowler 19th Jun '18 - 7:18am

    I would like to know the yearly cost of frontline staff in the NHS compared to the overall cost of the NHS (don’t get me wrong, they deserve every penny they get), just to get a rough and ready idea of how much money besides this cost is disappearing into the NHS?

  • We, on here don’t need to ‘rubbish’ May’s maths; Jeremy Hunt has, within hours, done the job…
    Jeremy Hunt, the health secretary, admitted that the “Brexit dividend” would not be “anything like enough” to fund the £20bn extra for the NHS promised by the prime minister.
    But Hunt also said “This commitment that we’re making is not conditional on this or that outcome on economic growth. We are making a firm commitment to the NHS for the next five years.” He also said taxes would rise to fund the extra NHS investment (Amazingly, or not, he refused to give details), but he said, “A lot of thinking has gone on at the Treasury to make absolutely sure this can be afforded. We are clear that there will be an increased burden of taxation.”

    So there, from the horse’s mouth, so to speak, we have the confirmation that, if it actually happens (which I doubt, given the history of May’s promises) it WILL be paid by increased taxation.

  • Richard Underhill 19th Jun '18 - 9:46am

    Please do not assume that the currency is fixed or extremely stable.
    When the result of the 2016 referendum was announced the £ sterling fell on the currency exchange markets with a consequent change in the price of cocoa, which we do not grow in the UK.
    All the newspapers commented on price increases for chocolate or reduced sizes for chocolate bars, focussing on the mountainous shape of a bar of Toblerone.
    This was a message to Nigel Farage, “Look what you’ve done!”
    When chocolate was in short supply during World War 2, US soldiers became increasingly popular, although for the discerning Hershey bars were and are inferior to Cadburys or Frys. There was an alleged effect on choices made by girls of marriageable age, known as GI brides, including a cousin of mine who became an air hostess at Pan American Airways.

  • The Kings Fund states
    Is the NHS inefficient?
    Reports of waste in the NHS often hit the headlines. But is the NHS really inefficient compared to other health systems or the wider economy?
    Measuring efficiency
    It is difficult to accurately measure or fully capture the efficiency of the NHS. However, a recent review by the Office for Budgetary Responsibility (OBR) estimates that the productivity of the health care sector grows by 1.2 per cent a year on average over the longer-term. This indicates that the NHS is producing more (eg, hospital activity) for the resources it is given.
    This growth in NHS productivity is lower than the 2.2 per cent long-term growth in the productivity of the wider economy over the past 40 years, though a recent study found the NHS has successfully maintained its productivity growth since the 2008/9 recession even as whole economy productivity has stagnated. Lower growth in the long-run may generally be expected in industries like health care that focus on outcomes (such as producing years of healthy life and wellbeing) rather than manufacturing goods or products. Health care services are also heavily based on human interaction and customised care, and may be less amenable to efficiency improvements through automation.
    It is hard to make comparisons across different health systems. The NHS is generally regarded as a well-performing health system on a number of indicators, and has fewer doctors and hospital beds per person than comparator countries.

    i think the key phrase there is “has fewer doctors and hospital beds per person than comparator countries”.

  • I know it’s fashionable to urge people to do with more with less but they tried that with the police and this happened

    “The figuges also suggested only 4% of robberies were solved in England and Wales in 2017, compared with 9% in 2013. The burglary detection rate halved from 6% to 3% in the same period”. If you want to pay less that’s fine just stop complaining when you get the service you pay for and no amount of squealing “do more with less will help”

    Jackie quick point as the FT said in September last year

    “Britain has fallen from the top to the bottom of the league of G7 leading economies in the year since the Brexit vote, with official data on Friday showing slower growth than previously thought.”

    and since then it has got worse. Just think what the government could have done with the extra taxes, money for the NHS, few more police perhaps.

  • @expats – from the official announcements reported on last nights late news, the horse’s mouth has also confirmed, there will be no Brexit dividend worth talking about. So this announcement has done two things:

    1. Buried bad news in a good news story.
    2. Turn the Brexit bill vote, into a support the NHS vote…

    Personally, I suspect ways will be found to simultaneously increase funding to the NHS and reduce the total NHS budget…

  • Peter Martin 19th Jun '18 - 12:07pm
  • Peter Martin 19th Jun '18 - 12:27pm

    It’s pretty depressing that the state of national comprehension of the issues involved with funding our government, including the NHS, are so low, but education is going to be a long haul with no official help.

    So, if it’s not as difficult to fund the NHS as many claim, why doesn’t the Govt do it? If they can create £400 billion, from “thin air”, to bail out the banks without causing high inflation why not a tenth of that for the NHS?

    It may be that the government does not understand. Or want us to understand – more like! The government wants to shrink the size of the state and therefore does not want to use the capacity that the government has to increase public services. And, despite what they say, the Govt does not want people to believe that it could be free at the point of delivery without penalty.

    Imposing an extra tax, to “pay for the NHS” is a deliberate act to make people feel that privatisation is not so bad after all. The Lib Dems are helping out the Tories undermine the NHS when they suggest doing just this.

  • Roland 19th Jun ’18 – 11:[email protected] – Personally, I suspect ways will be found to simultaneously increase funding to the NHS and reduce the total NHS budget…

    My thoughts exactly!

    I remember, when May was home secretary, she was asked by Andrew Neil (in 2011?) about her funding of the police authorities. Her reply, in answer to the question regarding their affects on police numbers ‘on the beat’, was along the lines of this budget will increase ‘front line services’…As we know those budget cuts resulted in over 20,000 LESS police but May still insisted ‘front line services’ had been safeguarded.

    “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

  • Peter Martin 19th Jun '18 - 4:02pm

    @ Joe B,

    “……. a low unemployment rate of 4% ”

    The problem is in the way unemployment is defined. Anyone who has few hours work per week isn’t counted. Anyone who isn’t eligable for benefits isn’t counted. There’s a long list! Haven’t we been though this before? I just don’t accept that the economy is anywhere near as rosy as this figure would suggest. Then we have a large difference in the regions. Only a targeted fiscal stimulus can reduce unemployment in the more depressed regions without causing inflation in the SE of England.


    “Money creation” and “the money supply” intrinsically don’t affect the economy. The government or the banks can create all the money they like but unless it is spent it has zero effect. If Government swaps cash for bonds the only effect is to reduce the yields on the bonds it acquires, plus all other bonds. ie Interest rates are lowered. That’s all. If the Govt swaps bonds for cash it pushes rates up. Its then the other way around.

    Say the yield on bonds dropped to 0% (its actually negative in some countries) what would be the difference between just creating cash and creating bonds to swap for cash? Answer: None at all.

    So-called money creation by banks, said to happen when they lend, doesn’t have any different effect than peer to peer lending providing the spending pattern of the lender is unaffected. This is hardly ever. Lenders just lend out their spare cash. The spending pattern of borrowers is certainly affected. There’s no point borrowing money unless you are going to spend it. So a credit splurge can stimulate the economy. In the short term. In the longer term the borrowing doesn’t increase total spending. The initial increased spending is balanced by decreased longer term spending. This can cause debt deflation in the economy as first described by Fisher.

    We are due a dose of debt deflation. Falling asset prices etc, if we aren’t already getting it! It can happily all be blamed on Brexit! But nothing to do with it really!


  • William Fowler 19th Jun '18 - 4:59pm

    Once you get a house mortgage free you really don’t need to work very hard to live a reasonable life so many of the people who aren’t counted as unemployed but only do a few hours a day (or even a week) do so out of choice, they may even do it that way to limit their income to the personal allowance so as to avoid supporting various dreadful governments and their mad money printing/spending ways. You may whine about this but by not working full time other people have a chance to make money, etc.

  • Peter Martin 19th Jun '18 - 9:46pm

    “What you are advocating, however, is that the government create new money by spending it into the economy.”

    The time to have done that was when the QE program was at its height a few years ago. The current crisis has been several years in the making. It is the result of the NHS spending being cut back during the coalition years. You can see that in the graphs on the link I sent to Jane H-J earlier. Then the economy needed a stimulus and some extra spending on the NHS would have been a useful way to achieve that.

    Now that interest rates are ultra low (Govt pays less than 1% on 5 year bonds) there’s no pressing need, just now, to create any “new money”.

    Fiscal stimulus can be very precise. If there’s a particular region of London where there are acute social problems then the Government can target its spending there. Monetary stimulus has virtually no precision. As you say a lowering of interest rates has the negative effect of raising asset prices.

    I think the suggestion is that the Govt should run the deficits – not particular NHS trusts! There is a big difference! Govts have to run deficits and be in debt so that everyone else has financial assets in the local currency. That responsibility shouldn’t be offloaded on to the NHS even if it is Govt owned!

    The NHS shouldn’t be directly involved in fiscal management of the economy any more than the Treasury/BoE should be directly involved in health care!

  • nigel hunter 19th Jun '18 - 10:35pm

    Joseph Bourke Yes Seacroft Hospital in Leeds had surplus Land. It was sold to Leeds Council. Did this money go to the NHS or the Chancellor? The land has been used for housing. I do not know how many are affordable or council rent.. This puts further pressure on the transport system ie increase in car use. Whilst Leeds is growing it leads to less land for hospital expansion City wide. Social care at home MUST be co-ordinated with hospital discharges to alleviate future overcrowding. The closing of local Community Hospitals should stop. These can provide the expansion.

  • Deprivation in London is spread across the city in small pockets, sometimes a handful of streets on otherwise affluent areas https://www.theguardian.com/uk/datablog/2012/apr/12/deprivation-poverty-london. Seven of ten local authorities in England with the highest level of income deprivation among the elderly are in London.
    The NHS isn’t directly involved in fiscal management of the economy, but when government departments exceed budgeted spending the treasury needs to cover the deficit or as it did with the defence department cut equipment procurement to reign in spending.

    As to “Govts have to run deficits and be in debt so that everyone else has financial assets in the local currency.” Most financial assets are held principally for capital investment including shares, corporate bonds, financial derivatives, property investments, gold, fine art etc.. Capital gains or losses on these investments are not included in GDP. There accumulation is not dependent on government deficits and debt. They increase as interest rates fall (as they did with QE) and decrease as interest rates rise.

    The greatest proportion of bank lending is related to borrowing for investment in financial and property acquisitions. GDP is a measure of how much is produced e.g. new housing construction but not secondary house sales. Sectoral balance analysis based on GDP does not capture this non-productive economic activity that accounts for the bulk of financial assets in the economy.

  • William Fowler 20th Jun '18 - 7:01am

    Having doubled the debt by the time of the next election, a huge chunk of spending is going in servicing that debt rather than anything useful, hopefully the bulk of it is not inflation linked or we will really be trouble somewhere down the line.

  • Peter Martin 20th Jun '18 - 7:25am

    @ JoeB @ William Fowler,

    If we have the three of us in an island economy, which issued its own currency then at least one of us, in that currency. would have to be in debt. I’d volunteer to be the King and I would issue banknotes with my picture on it. I’d be the one in debt, and I’d ‘selflessly’ do that so that you could have assets in my issued currency.

    As I was the King, I’d be able to impose taxes on you! But, even so, on paper, I’d be the poorest of the three of us.

    But on the other hand you couldn’t force me to ‘repay the debt’ because I’d be the KIng. And even if you did succeed, it that would mean increasing my taxation demands to such an extent that I would remove all your financial assets. Is that what you’d really want?

  • Peter Martin 20th Jun '18 - 7:45am

    @ JoeB

    You can’t argue, although I see you’ve just tried, with a little bit of obfuscation such as introducing real assets like gold into the picture, to argue against the sectoral balances. As Wiki says:

    (S – I) = (G – T) + (X – M)


    ” All these relationships (equations) hold as a matter of accounting and not matters of opinion.”


  • Peter,

    I can and do argue that GDP is a representation of production in the economy. However, much economic activity is rent-seeking predominantly through the creation of financial assets and land rents. Banking and credit was privatized in the UK in 1844. A bank license allows for the creation of money though lending. Interest income on this money in excess of banks cost of capital and overheads is a form of seigniorage or monopoly profits. This is what the former head of the Financial Service Authority, Adair Turner, was referring to when he said “much of the trading activity in the financial services industry provides no economically useful benefit https://harr123et.files.wordpress.com/2010/07/futureoffinance-chapter11.pdf. It is also part of the rationale for the banking levy and supplementary corporation tax charge on banks.

    If you want to read a critique of MMT and its interpretation of sectoral balance analysis this one by Joseph Huber is quite well argued http://www.paecon.net/PAEReview/issue66/Huber66.pdf

  • Peter Martin 20th Jun '18 - 8:28pm

    @ JoeB,

    “A bank license allows for the creation of money though lending”

    This sort of statement causes much misunderstanding. Let’s consider two example scenarios:

    1) A person borrows peer-to-peer to buy a car. The lender can afford the loan without his spending pattern being affected. No new money has been created. The borrower repays the loan by instalments. Principal plus interest.

    2) A person borrows the same amount of money to buy the same car from a bank. Same interest rate. Same repayment arrangements. The ‘positive money’ crowd would say new money had been created.

    However, the effect on the economy has to be exactly the same with each scenario. Yes the lending has an effect but It has to be the spending that matters. Not the supposed creation of new money.

  • Peter,

    the peer to peer lender has to have cash on deposit to lend to the car buyer. The bank does not. Money deposited with a bank is a liability of the bank and cannot be used to create credit. By virtue of a banking license it simply credits the car buyers account with a deposit. The new money created is destroyed over time as repayments are made. However, where new lending expands rapidly in excess of repayments the money supply will expand well beyond the actual growth in the real economy. Much of such lending finds it way into financial and property speculation

    Lavoie in his critique https://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf concludes as follows:
    “Neo-chartalism carries some excess baggage, which must be gotten rid of.
    In trying to convince economists and the public that there are no financial constraints to expansionary fiscal policies, besides artificial constraints erected by politicians or
    bureaucrats that believe in mainstream theories and in the principles of sound finance, neochartalists end up using arguments that become counter-productive.
    There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; that government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.
    All these counter-intuitive claims are mostly based on a logic that relies on the
    consolidation of the financial activities of the government with the operations of the central bank, thus modifying standard terminology.
    I believe that such a consolidation leads to the avoidance of crucial steps in the analysis of the nexus between the government activities and the clearing and settlement system to which the central bank partakes, and hence leads to confusion and misunderstandings. And so do references to a leveraged vertical component of the money supply.”

  • Peter Martin 21st Jun '18 - 8:41am

    @ JoeB,

    “The bank does not (have to have cash)…”

    Oh yes it does. If there’s money in your bank account, which I would agree are the IOUs of the bank, then I’m sure you’d expect the teller at the counter (or the ATM), to hand over crisp new BoE notes on demand!

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