The idea of devolving power to the “lowest possible level” is about as unifying an idea as there is for Liberal Democrats. But, as often happens with the best ideas of politicians, the current system of devolution to the regions is failing spectacularly.
This is because politicians, across both old parties, who become mayors, when they fail to deliver an improvement, have the get out clause of claiming its all the fault of central government for not funding them properly.
The latest example of this trend is the recent declaration by Mayor of London Sadiq Khan, that the blame for the current wave of crime in London should be laid at feet of the current government. I am prepared to believe Mr Khan on this one (though of course one could point out that crime was higher under Livingstone than Johnson, and the latter apparently had austerity to deal with while the former didn’t).
And local councils frequently blame central government cuts for their inability to provide some services (though Liberal Democrat controlled council managed to avoid closing sure start centres in the coalition years when austerity was apparently at its height).
So if the ability of devolved politicians to achieve manifesto commitments is almost entirely dependent on the actions of central government the question must be, do we need them? If the leaders of devolved administrations can’t part of the solutions, is their existence just a way for the political class to create more jobs for its own?
Can we make devolved administrations more powerful and accountable?
It can’t just be a case of granting them more powers, for that would just be to provide more areas of complaint about lack of resource to implement the broader remit. Central government simply writing a cheque is not devolving power to the lowest level, because the true power remains with the central government.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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39 Comments
The problem with Devolution is a bit like the protective parent who refuses to let go. For real Devolution to work, the devolved areas have got to be allowed to get things wrong.
So, if we ever do get regional government in England on a par with that in Scotland (and possibly Wales and Northern Ireland eventually, these ’governments’ have got to have major tax raising powers, with a much smaller amount of income tax going to the Federal Government, as, for example, in places like Germany, Canada or Australia.
From my experience in local government Westminster politicians tend to hard a fairly low opinion of councillors. The recent example of Tory led Northamptonshire County Council comes to mind and the unanimous reaction of the County’s Tory MPs to its difficulties. No understanding there, I’m afraid.
@ David Thorpe:
“This is because politicians, across both old parties, who become mayors, when they fail to deliver an improvement, have the get out clause of claiming its all the fault of central government for not funding them properly.”
It’s not just a “get out clause”. It’s true. Why else would the neoliberals in central government want to have devolution? It is so they can say to voters who complain to them of poor schooling, poor health services, or whatever, that it isn’t their problem any longer and they should take it up with local or devolved government.
Household economics does apply to these governments. If they don’t get in the taxation in or they aren’t properly funded from central government they’ll always have to cut back and deliver an inadequate service. But, household economics don’t apply to central government. It is the currency issuer. It can always spend whatever it likes providing that inflation in the overall economy is kept to its overall target.
David,
Tim Oliver at the LSE has written on the issue of devolution for London http://blogs.lse.ac.uk/europpblog/2016/01/30/the-uk-needs-a-devolved-government-for-london/.
All, regardless of political stripe, of the Metro Mayors have called for greater devolution of powers, paticularly with respect to raising taxes and finance to deliver the infrastructure and housing that their local areas require https://www.london.gov.uk/press-releases/mayoral/mayors-unite-to-call-for-major-devolution-to-citie
GLA assembly member, Tom Copley, issued a report last year on trialling a Land Valuie Tax for London https://www.london.gov.uk/about-us/london-assembly/london-assembly-publications/tax-trial-land-value-tax-london
Making devolution effective requires lifting the treaasury cap on local authority borrowing; devolving local tax raising powers to combined authorities and putting metro mayors in a position to exercise compulsory purchase powers at existing land values for strategic town planning. The income stream from ground rents on public authority housing land and LVT combined will allow for the creation of a viable municipal bond market throughout the UK.
There are currently approx 54,000 households in temporary b&b accommodation across London at costs in excess of a billion a year in London alone. Ever rising housing benefit absorbs an increasing proportion of the welfare budget that would be better directed to the provision of social rent housing. These are the kind of issues that need to be tackled at a local authority level and invariably get deadlocked at central government level.
Peter Martin
All too true.
peter,
i wasnt trying to imply that all of the occasions that politicians use that line they are lying, just sometimes, but whether they are or not, my idea stands up
Devolved power? Talk to anyone who wants to do anything with regard to planning and how awkward councils are about sticking to their little rule book which has nothing to do with central govn edicts about freeing up the planning rules. Let local govn tax and confiscate people’s properties until everyone is reduced to the equality of 40m2 per person (okay extrapolating on the last one)? Fantastic! Reality, unless you have connections to the political elites, the further away the centre of real power and greater the disinterest of that power in people’s lives, the better off normal people are.
Having said that, having an English parliament along with the other three with full tax and spend isn’t a bad idea as long the main parliament is then reduced right down to reflect that it will be doing just defense, immigration, etc and the house of lords would be abolished as the main parliament would act as a balance to the four parliaments, all within sensible economic limits to stop the smaller parliaments getting carried away with their power and bankrupting their bit of the kingdom.
@ David,
Yes I agree. Especially when you say:
“Central government simply writing a cheque is not devolving power to the lowest level, because the true power remains with the central government.”
There will be those who will say that Switzerland manages to have successful devolved governments. However, Switzerland is a relatively small country which doesn’t have the same level of economic disparity between the more and less prosperous regions as we see in the UK. We do need a strong central government to provide an effective fiscal equalisation. This isn’t going to come voluntarily from devolved regional government. For example, a SE England regional government (were one to exist) wouldn’t want to hand its taxpayers money over to a Welsh or Northern Ireland government.
The UK is a net importing country. There is a flow of money outwards to pay for our overseas purchases. To prevent the economy running out of spending power, the UK central government has to recycle the inward capital flow back out into the economy, and at the same time levelling up regional imbalances, by deliberately running a budget deficit. Switzerland, as a net exporter, doesn’t have the same requirement.
Politicians at every level will always look for scapegoats, people to blame when they cannot do something or things go wrong. In many ways devolution increases the number of such scapegoats and it works both ways. Just listen to Theresa May have a go at the Welsh NHS in PMQs. The value of devolution is in what you can achieve. If those exercising devolved power are realistic and pragmatic then they can deliver a distinct set of policies tailored to their own area. Both Scotland and Wales have done this successfully. Taxation powers are part of the necessary accountability that must go with this. Devolved administrations must be made to own their mistakes instead of blaming others for them. Of course devolved politicians will always want more power. It is the nature of politics. And whilst we have an uneven constitution in which different parts of the UK exercise different responsibilities then devolution will always look uneven and unfair. That is why a properly federal state is essential, irrespective of what model is adopted.
To answer the question: Devolution- what is it good for?
It can deliver more responsive and efficient government than trying to run 50 million people as a unit. Decisions are taken at the level that suits the issue best – subsidiarity. More localised decision-making means that the people effected can be in closer touch with those that make the decisions.
There are inevitable tensions between different tiers of government, with gut feeling by many that the people in the top tier are somehow ‘in charge’, even when they couldn’t have the expertise to do anything sensible; Brexit is an example of this feeling, where Brussels was blamed for the failures of Westminster. The way to take the sting out of this is a proper constitution for each tier, including Westminster, so that, if necessary, the courts can sort out disputes between levels, as opposed to ministers in Westminster imposing their whims on local tiers. Also having a tax base for each level, which, in general, allows them to sort out finance in consultation with their electorates, without being dependant on central government ‘grants’.
My belief is that the UK is too large to work efficiently as a single unit, and so is England. I think the largest size is about a population of 5 million; this makes Scotland just about in, and Greater London a bit too big (but a very clear unit).
Switzerland has been mentioned (ironically with a total population close to my 5 million figure.) It has much less centralised structure than most countries. I believe, for instance, that there is strictly no such thing as a Swiss citizen – one is a citizen of one of the 23 cantons. The cantons are very diverse in history, language, ethnicity and religion. Perhaps this diversity is one of the things that makes it economically successful, together with the accessibility of the canton government.
Devolution in Scotland has produced the situation where the Scottish parliament has voted on the issue of what happens about powers returning from the EU in the event of Brexit. There is deadlock between the Westminster government and Holyrood.
The Welsh have agreed with Westminster, but currently lack a leader, which can be solved electorally.
The situation in Northern Ireland is a constitutional disgrace. The Assembly was elected in January 2017, but has not yet met. A committee of Westminster MPs has noticed and urged the Northern Ireland Secretary to get on with it.
Forming an administration under the procedures in the Belfast Agreement cannot be short-circuited. Even if the DUP and Sinn Fein were to agree (they don’t always) the other elected members must be allowed to do their jobs and possibly provide ministers.
The DUP’s support for the Tory government at Westminster is an additional complication. Opinion polls among Catholics in the North, taken for the DUP, show overwhelming opposition to any change in the border situation.
BBC2 Newsnight showed an example of a woman who owns a micro-brewery. Delivering beer to Dublin involves crossing the Border twice because of the road network.
Excise duty is payable in the North, so the beer cannot be sold locally, it needs to go to Belfast first.
An exemption for small businesses might be thought desirable, but this would be the external border of the EU27.
The previous Northern Ireland Secretary resigned for credible health reasons, is now better and has returned to government in a different post.
Ian Sanderson (RM3) 22nd May ’18 – 9:49am. Switzerland also has a long history of referendums, partially affected by the Roman Catholic Church.
Referendums around the World (the growing use of direct democracy) edited by David Butler and Austin Ramsey, published by Macmillan, ISBN0-333-63368-7 hardback, ISBN 0-333-63369-5 paperback, chapter 4, pages 98-149. Copyright owned by American Institute for Public Policy Research, Washington DC 1994.
Although it is surrounded by democratic friends who are all in the EU it would have difficulty becoming a full member because of the constitutional arrangements. Should the EU become more like Switzerland?
Rather than blame govt for “not funding them properly” these mayors and such-like should blame the govt for not giving them direct tax-raising powers so that they can get elected on their tax-and-spend policies and be held to account at the ballot box. If they threw that accusation around more often people might begin to realise that “proper devolution” should mean that central government would tax us less (as a portion of our overall tax burden) while lower tiers of government would tax us more, and this transfer of financial responsibility would be matched by legislative and administerial responsibility by the elected bodies concerned.
Regional powers in England on par with Scotland and Wales? It’s insulting that this could be suggested, as insulting as the only time May mentions Wales is to attack Labour’s record on the NHS or there even needing to be conversation about money saved by not investing rail lines in Wales automatically going back into Wales travel development.
There is an issue with Westminster being populated with English politicians who mistake the UK and England as the same body. It weakens the union of the UK, it weakens the Celtic nations, in fact the only group it benefits really is Conservative politicians. We are four distinct nations in a Union together, not England and (insert one of Wales, Scotland, NI).
@ DJ Well said.
The EU, as it currently exists, is, in essence, an extreme form of devolved governments. There is no central government at all to speak of. In the eurozone, governments no longer have control over their monetary policy, and their ability to vary fiscal policy is severely restricted by the terms of the Stability and Growth Pact.
The end result is that when countries like Greece, Spain and Italy etc hit tough economic times they no longer have the ability to apply economic policies that will get them out of the mire. Their only option is to threaten to leave, default on debts and try to persuade the stronger countries, ie Germany, to bail them out with yet another loan. Germany tries to involve the IMF but they really don’t want that. Germany threatens that “this is definitely the last time”, the protesting country promises it will be and the system limps along for another few years until the next crisis hits.
Of course, none of this would happen, or be necessary, if the EU had a strong central government.
“The EU, as it currently exists, is, in essence, an extreme form of devolved governments. There is no central government at all to speak of. In the eurozone, governments no longer have control over their monetary policy, and their ability to vary fiscal policy is severely restricted by the terms of the Stability and Growth Pact.”
Governments have complete control over how much they spend – as long as they tax fully to cover the cost of that spending. When the govn breaks the rules they have the option to leaver the Euro/EU and sort things out by having a hugely devalued currency that then devalues the debt they have created. Sensibly, the citizens of Spain and Greece decided not to go the hyper inflation route and stay in the Euro/EU – their choice – and have had to reset govn spending. Seems like a reasonable system resulting in the overall Eurozone debt and defecit levels that the UK can only dream about!
To avoid this blaming and also the practice of favouring councils that a Party controls when in government, councils need to be self funding. Local Value Taxation as well as the existing business rates and council tax is the way to do this. The Local Government Organisation or some neutral body could be tasked with redistributing the money to poorer councils though there would need to be some accountability.
@Peter Hirst
If councils were to be (fully) self-funding how would you address the problem of councils in areas of deprivation – seems to me they’d bring in less in local taxes of whatever sort..? While they might actually be in greatest need.
@ Wlliam Fowler,
Governments have complete control over how much they spend – as long as they tax fully to cover the cost of that spending.
If they did that there’d never be any money in our wallets and bank accounts. Government creates money by spending it into the economy. It can never retrieve all it has created by taxation. That’s why it is always in debt and nearly always in deficit.
The annual deficit, to the penny, is exactly equal to the money we have hung on to keep the tax man from getting hold of it in any one year. It is money we have saved. The National Debt is the sum total of everyone’s savings in ££. If Govt deficits and debts are undesirable then so are our savings.
Peter,
the former Portugese colony of Macau is one of the wealthiest regions of the world in terms of per capita GDP. It has its own currency and independent customs and monetary arrangements. With a GDP of $45 billion it has no national debt.
So too the British Virgin islands that uses the US$ as its currency. Liechenstein like Macau has a very high GDP per capita but uses the Swiss Franc as its currency.
Brunei is also one of the richest countries in the world in terms of GDP per capita. It has an independent currency, the Brunei dollar and no government debt.
Net government debt is defined by the International Monetary Fund as “gross debt minus financial assets corresponding to debt instruments”. Financial assets corresponding to debt instruments include currency and deposits, debt securities and loans (in MMT terminology net financial assets).
Australia is another country with a high GDP per capita. In the early 1970s, the Australian government had net financial assets (i.e. net public debt was negative). The government could have paid off national debt in full but the financial sector needed a safe form of liquid investment, so a limited amount of government bonds were kept in circulation. Borrowing rose in the late seventies/early eighties during a period of economic slowdown and retreated back to 4% of GDP by 1990. By 2007, aided by strong economic growth generating low unemployment and a run of solid budget surpluses, Australian net debt was again negative at minus 3.8% of GDP (i.e. a surplus of financial assets over public debt).
The worldwide recession saw a return to government deficits and net borrowing (and crucially the effect of monetary and fiscal stimulus measures on land prices) has seen public debt increase to around 19% of GDP, still relatively low by International standards.
@JoeB,
I’d just make the following points in reply:
1) Countries are often inconsistent in how they define so called ‘National Debt’ and ‘Public Debt’. For example, in the USA they apparently’forgot’ to include the coinage. So, theoretically, the US Govt could issue 20 trillion dollar coins (you can Google the term), each made with a few dollars of platinum, and be ‘free’ of their National Debt. It’s really just a technicality. Then there is the question of banknotes and other accounts at the central bank which, in other countries, may or may not be counted as Govt debt.
2) Countries like the Virgin Islands and Lichtenstein which use someone else’s currency can be in overall credit. They are just like you and I, or a company, or local authority, in that respect. But if the Virgin Islands are in overall credit then someone else has to assume the liability. That’s going to be the currency issuer. ie the US Federal Govt.
3) Say the Virgin Islands wished to introduce their own currency, say they issued a V$, and they spent V$100 bn into their economy. If they recovered V$80 bn in taxation there would be a deficit of V$ 20bn which would be the assets of the holders of those V$ and the debt of the VI govt. It’s just simple arithmetic.
4) Assets may or may not be properly calculated on a country’s balance sheet. We all know that the UK govt has a “National Debt” of around £2 trillion and the US has a “National Debt” of around $20 trillion but what about the assets in terms of land, minerals, buildings, gold, and other countries’ currencies as reserve holdings etc? If you want to claim, like Macau, that you don’t have a debt or you want to minimise it, it’s quite easy to just change your accounting method.
Peter,
as noted above “Net government debt is defined by the International Monetary Fund as “gross debt minus financial assets corresponding to debt instruments”. Financial assets corresponding to debt instruments include currency and deposits, debt securities and loans (in MMT terminology net financial assets).” Tangible assets do not come into it.
Notes and coins are only of econmic value to the state to the extent that the represent Seigniorage . Seigniorage gives a country the potential to turn a profit when money is produced. Seigniorage is defined by the difference between the cost of printing new paper currency and the face value of that same currency or the amount of goods or services a government can acquire through the printing of new notes.
The production of currency can result in a loss instead of a gain for the government creating the currency e.g. in the production of coins because the metal used to produce the coin has its own inherent value. This melt value, may be higher than the denomination it originally represented; or, when combined with production costs, may result in a loss. For example, the U.S. penny was shown to cost 1.5 cents in 2016 with a face value of 1 cent. Notes and coins need to be in small enough demominations to facilitate day yo day cash transactions. That is their principasl purpose – a medium of exchange.
The reason why goverments lile Macau and Brunei with high per capita GDP do not require any public borrowig is relatively staightforward. Most money in circulation in those economies is created in the private sector banking system and not via government spending. Taxation fully funds public spending without the need for recourse to debt funding. This was the case in Australia as well for several years prior to the advent of the financial crisis in 2007-08.
JoeB,
“Tangible assets do not come into it.”
But they used to! Gold used to back the major currencies so that when countries issued their currency there was no reason to consider it as debt because the central banks used to keep enough gold in their vaults to cover the overall value. But now there is no gold! But the old accountancy standards are still in place. Issued money isn’t counted as debt. But it should be.
We’ve had £400 billion of QE in the last decade and there are three ways of looking at that. The first is to say that we are ‘living beyond our means’ and ‘printing £400 bn’ is an increase in our real debt. The second is to say that cash is not part of the National Debt. We’ve ‘bought back’ part of the National Debt and as its now owned by the BoE we are £400 bn less in debt. The third is to say it’s just an asset swap (one type of Govt IOU has been swapped for another) and therefore there is no change in National debt.
I would say the third explanation should be correct but technically , according to the way debt is defined, or mis-defined, it should be the second explanation. If we have enough QE we eliminate our debt.
So unless we clear up, and standardise, our accounting methods we can’t say who’s in debt and who isn’t. Any currency issuer has to have a real debt in its own currency – otherwise it can’t have issued anything!
Incidentally I notice that Singapore has a National Debt of 117% of GDP. Does this mean that its in a much worse position than Brunei? Of course it doesn’t. Just why one is a lot higher than we might expect and the other is much lower will take some delving into to find out for sure. But my money would be on the different ways the two countries define debt.
https://www.nationaldebtclocks.org/debtclock/singapore
Peter,
that’s why it is net debt that is important. Countries like Saudi, UAE and Norway issue public bonds but have negative net debt. Their sovereign wealth funds exceed the value of publc borrowing by some measure. Their borrowing is used for reinvestment not deficit financing.
Singapore does not borrow to fund its fiscal policy: The Singapore Government operates on a balanced budget policy and does not need to finance expenditures via the issuance of Government bonds. It has enjoyed healthy budget surpluses over terms of Government in the past decades.
Singapore only borrows domestically and does not have any external debt. It has a negative net debt position i.e. surplus of state financial assets over borrowings. The purposes for the debt are:
Singapore Government Securities (SGS) are marketable debt instruments issued for purposes of developing Singapore’s debt markets. The principal objectives of SGS issuance are to: i) build a liquid SGS market to provide a risk-free benchmark against which other private debt securities are priced off; to foster the growth of an active secondary market both for cash transactions and derivatives that enable efficient risk management; and to encourage issuers and investors, both domestic and international, to participate in the Singapore bond market.
Singapore covers its public spending primarily through property taxes, a low income tax and customs duties.
Brunei is funded principally by by oil and gas revenues and its currency is exchangeable with the Singapore dollar.
@ JoeB,
Saudi Arabia, the UAE and Norway all have large oil reserves ! Not all countries are so fortunate.
Singapore runs a current account surplus of 19% of GDP. So naturally it won’t need to run a budget deficit. That means another country, somewhere else (like a relatively small island off the coast of Europe!) has to run a penny for penny deficit. We can’t all run a surplus. The arithmetic doesn’t allow it!
But nevertheless Singapore has a National Debt of around 120%. Japan has a National Debt of over 200%. So that’s OK as long as the borrowing is domestic?
Peter,
The UK had similar oil reserves in the North Sea to that of Norway in the 1970s. Norway invested their windfall. In 1974, Oslo laid down the principle that oil wealth should be used to develop a “qualitatively better society”, defined by historian Helge Ryggvik as “greater equality”. Ten oil commandments were set down to ensure the industry was put under democratic control – which it remains to this day, with the public owning nearly 70% of the oil company and the fields.
The oljefondet (the government pension fund of Norway) owns over 1% of the world’s stocks, a big chunk of Regent Street and some of the most prime property in Paris. A sovereign wealth fund equivalent to over £100,000 for every citizen. The UK government by contrast has no such assets. We used the windfall to cut domestic taxes and the resulting higher disposable income to bid up house prices or more precisely land prices for the benefit of landowners and mortgage financiers.
Japan has a relatively low net debt after offset of financial assets held by the Japanese government and the amount of Japanese government bonds held by the central bank i.e. the net debt position. As with Singapore, much of Japan’s public debt is held domestically and interest payments are recycled domestically, so have little impact on the current account deficit.
A significant proportion of UK Debt (about 30%) is held by overseas holders of UK gilts. Unlike these other countries our debt has not been invested in assets that generate a return greater than the interest payments made or in economic infrastructure. The borrowing has been used principally to finance current budget deficits and the interest payments to foreign holders of gilts serve to increase the level of the current account deficit as more and more UK debt accumulates overseas worsening the trade imbalance each year.
@JoeB,
I think we agree on the fact that UK largely squandered the oil assets whereas Norway has handled it better. That said, the population of Norway is 5 million compared to 65 million for the UK.
Your comment:
“Japan has a relatively low net debt after offset of financial assets held by the Japanese government and the amount of Japanese government bonds held by the central bank i.e. the net debt position.”
Reinforces the argument I was making earlier that such terms as National Debt aren’t at all a good indicator of what debt actually means to a currency issuing country. Anyone looking up Japan’s National Debt just sees a figure of 253% of GDP ! How does a bond being held by the central bank make all the difference? The average voter doesn’t have much of a clue at all, and the average neo-liberal politician, IF they understand it themselves, has no interest in explaining it. They just want us, with a debt of 90% of GDP to think that we are “living beyond our means” and need to cut back.
If we add all the world “National Debts” they total some $72 trillion. We don’t owe that to the Martians! Debt is an essential part of our monetary system. All money is created by crediting and debiting accounts, and that money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated in the unit of account of that jurisdiction, so that all debt as someone’s liability is someone else’s asset, which nets to zero. Since money is not only someone’s debt (a payable) but also someone else’s credit (a receivable), it is just as true to say that the world owns over 72 trillion in financial assets, expressed in USD, as it is to say that the world owes 72 trillion in financial liabilities.
If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and exchange of goods and services would be reduced to barter.
Peter,
what matters is two things:
1. Who is the debtor and who is the creditor
If the financial wealth in the world is held by a small % of the population then the great majority of the working population will spend a large % of the income derived from their labour on interest payments or taxes to meet interest payments.
2. What is the debt used for.
If most of the debt incurred by working people relates to the purchase of a piece of land to live on, then the great majority of the working population will spend much of their income on rents i.e. the right to occupy a piece of land for a time or in perpetuity.
A society organised on this basis is a rentier society where much of the surplus value produced is accumulated by the holders of non-productive assets, as in feudal times.
Debt invested in productive assets is real capital. The continual incurring of debt for current consumption or the acquisition of land and non-productive assets merely serves to depress household incomes for the great majority and exacerbate inequality.
@JoeB,
I’m not unsympathetic to the idea of a less unequal society. If that’s what you want then you need to tax away the wealth of the rich to balance things up. Mind you, they are quite good at avoiding those taxes. There is the additional problem that there’s lots of UK money held by the Bundesbank and Peoples’ Bank of China. Good luck in redistributing that wealth via the tax system. So we, us MMTers if you like, are saying that If holders of UK money aren’t doing anything with it we don’t actually have to take it from them via taxes. We just pretend we’ve got it and spend it as if we had. It doesn’t make any difference to the economy in the short term.
If the ultra wealthy are holding UK property and keeping it empty, (there’s lots of empty property in Knightsbridge but just yards away there is also severe overcrowding) that is more of a problem. There needs to be definitive action to prevent that.
I’m not convinced that holding land is a problem per se. If it is it can be compulsorily purchased. The Nation State isn’t quite so feeble as many imagine. If it needs to knock down houses to build a road then they and the land they are on will be compulsorily purchased and knocked down. Even if they are owned by a rich multinational company. It’s the Nation State that still makes the laws, has the police, the army etc.
Peter,
“—— The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. […] Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price) […] exercices a destructive influence on the condition of the wage labourer […] and forcible
expropriation […] of peasants, artisans, and in a word, all elements of the lower middle class.”
Karl Marx, Capital, Vol. 1, Chapter 31
The UK has a long history of managing public debt. Public debt appeared during the 1690s – during the War of the League of Augsburg (1688-1697) and gradually accumulated during the whole eighteenth century along with the successive wars: the War of Spanish Succession (1701-1714), the War of Austrian Succession (1740-48), the Seven Years War (1756-63). The explosion of public debt during the War of American Independence (1775-1783) and – above all – during the Wars with France (the War against Revolutionary France from 1793 to 1802 and with Napoleon
from 1803 to 1815). After the wars of the eighteenth century, public debt stabilised in nominal terms – hence decreasing in terms of national income. ( with a blip
(in nominal terms) during the Crimean War (1853-1856).
The industrial revolution saw exponential GDP growth in the 19th Century and the 20th century post-war economic boom allowed for the debt burden of the first and second world wars to be ameliorated over time.
In peacetime, however. a more prudent approach is waranted with respect to the relative share of public spending funded by taxes and borrowing with a close eye on the anticipated level of future interest rates (as largely determined by US, European and International capital markets).
@ JoeB,
So you, as a Georgist, are quoting Marx to me on a Lib Dem blog! Thinking has moved on a bit since the 19th century. Marx lived in a time when money was intrinsically linked to gold and silver. The word ‘money’ in many languages is still based on their word for one or the other of these metals. If he was right in his theories then, which he was to some extent, it doesn’t mean he’s right now. Money is now purely an instrument of Government. A monopoly creation. They don’t have to get the gold in any longer before they can spend it.
In fact most of the erroneous thinking of taxation, and economics generally, comes from thinking that money is still on some kind of a precious metal standard.
Peter,
the gold standard was always suspended when the demands of war required it. It was suspended during the Napoleonic wars and at the outbreak of world war 1 and ultimately abandoned during the 1930s.
Governments with insufficient tax revenue suspended convertibility repeatedly in the 19th century. Inflation took off during WW1 with price levels doubling in the UK and US, tripling in France and quadrupling in Italy. Since 1971 and the end of Bretton Woods, sterling has been a free floating currency i.e for almost 50 years now. The UK has plenty of experience of the impact of currency fluctuations on the economy over that period of time.
Walpole used public debt to reduce the land tax from 20% to 5% in the 18th century. Marx in the 19th century was merely pointing to the fact that risk free interest payments on public debt to a monied class were paid for by taxes on working class staples like salt and bread.
Government spending that generates value for money is constrained by available resources – most notably labour. At low levels of unemployment (below 5%) it becomes increasingly difficult for fiscal policy to effectively stimulate economic growth without spurring increases in general price levels and/or asset prices (land and share values).
Targeted (and funded) spending directed at long-term unemployment is likely to be a better economic tool in this case e.g. local authority administered job guarantee programs.
A credible public finance policy manages the level of spending, taxes and borrowing through a budget process that seeks to balance current expenditures with tax levels and borrows against the proceeds of economic growth to invest in productive assets and economic infrastructure; thereby maintaining deficits at manageable levels. That credibility is what keeps inflation at moderate levels, maintains confidence in sterling in International financial markets and ultimately creates the conditions of stability and confidence that brings forth the business investment that grows the economy.
@ JoeB,
Yep. MMT too says that payment of interest on bonds is a form of ‘corporate welfare’. I’m not sure I agree with everything that might be in an MMT textbook though! I would say it also depends on the level of inflation at the time. Yes I understand that gold convertibility was often suspended during wartime as an emergency measure. The same thing happened in the USA during the civil war. The dollar went back on to gold afterwrads though.
I don’t disagree with you on the importance of controlling inflation. I just don’t agree with using interest rates as the primary ‘control lever’. Now they are clsoe to 0% we don’t have any option in any case. The fiscal lever needs to be rediscovered! I’m not sure that we need 5% unemployment. Especially if we have an influx of EU workers who can damp down inflation.
Not that I’m happy with the idea of having even 2% unemployment! We need to find a better regulator of inflation than deliberately creating working class unemployment.
Peter,
I don’t think it is so much a question of deliberately creating unemployment. It is rather that fiscal stimulus has proven to be ineffective in addressing unemployment other than cyclical or demand deficient unemployment in a downturn.. This is an issue that pre-dates the recession of 2008-09.
With a current unemployment rate of 4.2% in the UK, there is little if any real cyclical unemployment. With perhaps 2%-2.5% frictional unemployment present in the UK economy at any time (as people are moving between jobs) the remaining unemployed appear to be concentrated among the longer-term unemployed (out of work for six months or more). That is a structural problem that requires structural measures such as targeted regional job guarantees to address.
@ JoeB,
“It is rather that fiscal stimulus has proven to be ineffective…”
It’s as effective as the Govt wants to make it. There are only two ways to regulate aggregate demand in the economy.
1) Monetary. The Govt adjusts interest rates which in turn adjusts the amount of money we borrow. A reduction in rates increases borrowings and brings forward consumption. This leaves us with longer term debts which decrease consumption.
2) Fiscal. Adjust the level of overall spending by adjustments in taxation and spending levels.
There really no other option than the latter now. Unless you want to slow the economy with higher interest rates.
The extent of unemployment cannot be gauged by your figure of 4.2%. There’s lots of hidden unemployment. People have 1 day’s work when they’d like 5 days. Or people who would like to work but just can’t cope with dealing with the appalling way the Govt treats those who are seeking interim benefits.
Peter,
the 4.2% is the official unemployment rate based on the Internationally adopted Labour Force Survey. Under-employment is not a new phenomenon. It has always existed and is measured by the ONS.
The standard Aggregate Demand formula is expressed as: AD = (consumer expenditures on goods and services) + (investment spending on business capital goods) + (government spending on public goods and services) + (exports – imports).
Any aggregate economic phenomena that cause changes in the value of any of these variables will change aggregate demand.
Government spending on public services cannot be easily varied in the short-term while the level of imports and exports are impacted by exchange rate fluctuations in International currency markets.
Consumer expenditure on goods and services and investment spending on business capital goods can be influenced by the incidence of taxation. All taxes on income and consumption have a deadweight impact on the supply and consumption of goods and services.
Land available for commercial or residential use is in fixed supply. The incidence of taxation on land cannot change its supply and does not reduce demand for the available supply in the way that taxes on produced goods and services do.
@JoeB,
The question is how reliable in the ILFS and how much influence can the actions of the UK Govt have on collected figures. If Job Seekers are treated harshly at Govt centres, and many are discouraged from using them, is there likely to be an effect? I would suggest that there is and that is why the Govt is deliberately treating job seekers in a harsh way.
How many changes have there been to the way the numbers are counted since Mrs Thatcher famously declared that unemployment was too high at 5% and that “Britain Isn’t Working”.
Underemployment and underemployment should mean the same thing. If you have no work for 9 months of the year but then find seasonal work for the other threes months, you are counted as being unemployed in those 9 months. But if you have 10 hours work in one week but don’t have work for another 30 hours, that you’d like, in the same week you aren’t counted as unemployed at all.
But over the year there’s really no difference. There’s no consistency in our approach to measuring unemployment. There’s too much politics and massaging of the figures and not enough science.
On the question of the figures of the National accounts, I’m not sure what your point is. Are you saying that the algebra is too hard for neolibs to cope with and therefore we don’t try to regulate the economy?
The current system of devolution was flawed from the outset. A very top-down system was imposed in London with a Mayor barely responsible to anyone between mayoral elections. It was better done in Scotland and even Wales, but then, they were funny places that weren’t even English. George Osborne offered city regions devolution on condition they did it exactly the way he laid down, which included powerful mayors and boundaries which might not always make sense.
We’re not hugely better ourselves. How often do you come across a genuine effort in the party to devolve power?
How about a series of local conventions to decide what power they wanted to cede UP to higher levels? I’ve thought a lot about how this idea might work, but this isn’t the place to set that out.