132 Comments

• Katharine Pindar 6th Oct '23 - 2:15pm

  Michael’s patient and thorough calculations show how our policies could lead to deep poverty in Britain being ended even within this decade, if the next government takes them up, as we should urge it to do. He shows how the former calculations to pay for a Universal Basic Income (one where everyone would receive a basic sum, perhaps around £70 a week), which was our party’s previous policy, can be extended to pay for the new policy of Guaranteed Basic Income, adopted at the York Spring Conference, which will give anyone without means of subsistence a sufficient sum to live on. Michael shows that Universal Credit and the legacy benefits will continue to be paid, and increasing them will enable the build up to the GBI, the amount to be determined by an independent Commission each year. We look forward to the ending of deep poverty – less than 50% of median income – and the need for food banks, if our party will fight for this policy to be known and accepted in the country, and swiftly enacted by the next government. (See the discussion going on in the comments on the previous relevant LDV article, still listed as among the Most Read , which was posted on Monday.)

• Sandy Smith 6th Oct '23 - 6:01pm

  The definitions of both ‘poverty’ and ‘deep poverty’ suffer from the same flaw: each is linked the median income (the former being blow 60% of median income and the latter below 50%). This means that even if we quadrupled each person’s income, the poverty rates by these measures would stay exactly the same.
  We need a measure of poverty defined by what income is required to meet basic needs and not related to median income.

• Michael BG 7th Oct '23 - 12:20am

  Katharine,

  I think this article shows that we could end deep poverty within the decade without the need for an independent Commission setting the increase each year.

  Sandy Smith,

  There are other definitions of poverty such as the one used by the Social Metrics Commission, which is based on what is required to meet basic needs. Relative poverty is a better way to measure it than absolute poverty which is based on the relative poverty rate of 2010/11.

  You are correct if we quadrupled each person’s income, the poverty rates would also be quadrupled. However, if the income of the bottom 22% was increased by £70 a week and the other wages were not increased median income would stay the same as, would the deep poverty level, but the poorest 22% would have an extra £3640 a year towards getting them over or closer to the deep poverty level.

• Peter Davies 7th Oct '23 - 8:42am

  @Sandy Smith. Those measures exist. MIS (Minimum Income Standard) is defined by the Joseph Rowntree Foundation as the income required to live with dignity. Absolute Poverty is defined by the UN as “a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.” We should aspire to everyone in this country acheiving the former and the elimination of the latter world wide.

• Peter Davies 7th Oct '23 - 9:03am

  All those tax changes are necessary but they were already necessary before we passed the motion in York. We are committed to a great deal of spending in other areas and those are the taxes we expected to pay for them.

  Other changes we should introduce include LVT (obviously) and treating Capital Gains as income. Even then, I think we would need some increase in general taxation.

• Peter Davies 7th Oct '23 - 11:06am

  One thing that needs clarifying about the figures in the article is that they are based on a median equivalised household income. £283 is not 50% of the median income for a single parent of two and £236 is not 50% of the median for a couple with two children. Couples with no children typically have a much higher income than single parents. These are intended to be levels at which different types of household would have similar standards of living.

• Peter Martin 7th Oct '23 - 11:40am

  I don’t doubt that Lib Dems have their hearts in the right place on the poverty question but I can’t help feeling that there is a high degree of paternalism in the approaches advocated.

  The idea that the poverty question can be addressed by improvements to social benefits is largely a middle to upper class sentiment of wanting increased state supported largesse to those in need. If we look at how the working class themselves wish to cure poverty it is by struggling for decent wages, good working conditions and more direct action to ensure that housing is available at a fair an equitable rent.

  You might want to actually have these conversations yourself with those directly affected. It wouldn’t do any harm if we saw some Lib Dem placards on picket lines now and again!

  If Keir Starmer can bring himself to do it…….

  https://www.independent.co.uk/news/business/news/mcdonalds-strike-today-mcstrike-higher-pay-downing-street-john-mcdonnell-a9199681.html

• Joe Bourke 7th Oct '23 - 1:32pm

  The Libdem policy paper noted “Ending deep poverty requires systemic change across the board. From addressing skills gaps to tackling job security, providing affordable homes to reforming childcare – the challenge is huge. ”
  The policy (as it relates to benefits) prioritised relieving poverty by patching the many holes in the Universal Credit safety net and increasing Universal Credit allowances by £20 a week.
  A longer term objective to end deep poverty in Britain, included a radical overhaul of the welfare system, subject to economic conditions. The paper notes “There is no quick fix to tackling deep poverty. Even systemic change focused solely on the welfare state can take time, as the decade long rollout of Universal Credit demonstrates. Any radical change proposed will need to be rolled out carefully over time, with appropriate testing and scaling along the way.
  Until recently it has been argued that growing the economic pie would be the basis for increasing welfare payments i.e. that social security could be increased in real terms without the need for tax redistributions. Reality has now begun to set-in that tax redistributions will be required to address inequality.
  I think a politically acceptable way of achieving this might be a triple lock akin to that applied to the state pension, so that welfare benefits can be increased over time by more than CPI inflation at the same rate as the state pension increases.
  Tax changes will need to be carefully thought through to avoid a repeat of Teresa May’s fate with what was then dubbed the “Dementia Tax”.

• Katharine Pindar 7th Oct '23 - 5:30pm

  @ Peter Martin. Peter, it really isn’t true that our party’s attempt to fight poverty is a matter of ‘largely middle to upper class sentiment wanting state supported largesse to those in need’: it is a recognition of dire need which must be as equally obvious to working-class people as to everyone else. Just look again at my article published on Monday, describing so many cases of needs of ordinary people in this country. Do you really think that decent wages, working conditions and housing are all that matters to ordinary people? I don’t know how it is in your local community, but I know that some of my best friends, because of caring responsibilities or persistent health problems, struggle to get by with the current levels of welfare provision. There is an enormous number of ordinary people who have similar struggles – consider single parents for example, trying to juggle child care with bits of jobs, or the worker who has to give up work to care for an ageing parent – who just accept benefits as essential and wish they were more adequate. And what about so many young people renting homes, whether private or social, who must depend on LHA but find they are still obliged to live in poverty?

• Katharine Pindar 7th Oct '23 - 5:43pm

  Michael, I think the independent commission to determine the appropriate level of GBI each year should still be set up, once the increases in Universal Credit and other benefits have raised incomes to the 50% needed to end deep poverty. This should be the long-term establishment separate from UC which will for ever be the safety-net of people who perhaps suddenly have no means. They may have suddenly become bankrupt, or after a family break-up have had to surrender their home and move out. I hope GBI will be available also to refugees, victims of modern slavery, the homeless and the destitute. All they would have to prove is that they have no means of personal subsistence, and are dependent on charity.

• Michael BG 8th Oct '23 - 12:23am

  Peter Davies,

  Only one of the five tax increases I have suggested in my article were in the 2019 manifesto. The paper setting out how we would introduce a Commercial Landowner Levy states this would not raise extra income but would cost the government money over £2 billion in the first year for England and Wales. Our policy is to align capital gains and income tax rates while introducing a basic inflation or “rate of return” allowance and abolishing capital gains forgiveness at death.

  We have not reversed our policy, by passing a motion at Conference, to put a penny on all rates of income tax, that we said in 2019 would raise over £7.7 billion, which we reaffirmed in spring 2022.

  Indeed, you are correct I should have made it clear that figures from Joseph Rowntree Foundation for poverty levels are based on median equivalised household incomes.

  Katharine,

  Indeed, an independent Commission would be needed to ensure Labour and Conservative governments kept increasing benefits to keep them at least at the deep poverty level and it could be given the target to set the level of benefit increases to get benefits to the poverty level at some future date.

• Michael BG 8th Oct '23 - 12:30am

  Peter Martin,

  The level of benefits in reals terms are about the same as they were in 1966; a drop of about £20 in real terms. In 1971 the level of benefit was 20% of average earnings now it is only 10%. To restore them to 20% they need doubling to £170.18 a week for a single person and £267.14 for a couple. People were shocked by how low the rates of Universal Credit were when Covid hit. If you talk to anyone trying to live solely on benefits they will tell you how difficult it is, and if they are subject to the benefit cap how impossible it is.

  If someone is working full time I would expect them to be paid enough to live on. However, even in the 1970s some people did not earn enough to pay rent, let alone get a mortgage. It can be argued that the introduction of Tax Credits reduced wage rates. According to the Living Wage Foundation the living wage for the UK is £10.90 an hour (https://www.livingwage.org.uk/).

  If people can only work part-time there will always be a need for the state to provide money to assist them. And for Liberal Democrats this means they should have enough money to be living above the deep poverty level.

  Liberal Democrats understand more homes are needed, this is why we have targets of building 380,000 new homes and 150,000 new social homes a year.

• Peter Martin 8th Oct '23 - 4:29am

  @ Katharine @ Michael BG

  I didn’t actually say that wages and working conditions were “all that mattered”. You perhaps are confusing me with someone else. If we’re sick, for example, we need the NHS. So I’d never say anything like that.

  It is ,though, about where we place the most emphasis. Wages and conditions would be top of my list but they don’t seem to be on yours at all. I’m including unfair practices such as the imposition of ZHCs in those.

  Politically it’s also much easier to argue for fair pay and fair jobs. It doesn’t involve getting into discussions of how much taxes will have to rise to “pay for it”.

  Child poverty would be next on mine. But we don’t need a UBI / GBI to tackle that. Improved child benefits would be good start with an additional earnings related element to top it up for the lower paid.

  The other examples of social problems you mention are still important but they are best tackled with targeted payments.

• Chris Moore 8th Oct '23 - 9:32am

  I agree with Peter entirely here.

  You can end poverty more simply and more rapidly by targetting benefits.

  He’s also right that we need to be more outspoken about labour rights and pay.

• Katharine Pindar 8th Oct '23 - 1:27pm

  Peter Martin. Government can do more about securing good conditions of work than in affecting the rates of pay of workers, Peter. Our pre-manifesto paper 153 ‘For a Fair Deal’ acknowledges private enterprise as ‘the principal engine of growth and prosperity in the UK’, and says that we will work in partnership with business, and ‘Boost high street businesses and empower them to create new local jobs, including by reforming business rates.’ Among the further measures sought will be to ‘Boost productivity and empower more people to enter the job market – such as parents. carers and people with disabilities – by changing the law so that flexible working is open to all from day one in the job, with employers required to advertise jobs accordingly, unless there are significant business reasons why that is not possible.’ We also want to invest in people’s skills, and increase the availability of apprenticeships and career advice for young people. And our previous motion passed at York on a Fairer Society (F12) demanded a new Workers’ Charter with modern protections for the workforce, with a new Worker Protection Enforcement Authority ‘which would both enforce rights more effectively and give employers a simplified institutional contact’. We will be fair both to employers and to workers.

• Peter Martin 8th Oct '23 - 1:54pm

  “We will be fair both to employers and to workers.”

  This, perhaps, sounds OK when we’re referring to a small business but what about the big players like Amazon, MacDonalds, Starbucks ?

  Not that the smaller players aren’t capable of worker exploitation too. The sweatshops employing largely female labour from the ethnic minorities are among the worst.

  There are times when you do have to make a choice. Lib Dems aren’t going to win back seats like Burnley if they sit on the fence. If companies deny TU recognition you can’t possibly side with them.

  “35 out of 49 companies in the supply chain probed failed a minimum wage probe”

  https://www.lancashiretelegraph.co.uk/news/18753551.boohoo-burnley-firms-report-admits-sweat-shop-conditions-supply-chain/

• Joe Bourke 8th Oct '23 - 3:10pm

  This current Parliament has overseen the biggest increase in taxes during a parliament since records began in 1951 collecting an average of £3500 more per household UK households face tax rise of £3,500 a year by next election, finds IFS and the next Parliament may exceed this level.
  As this article notes Why UK Taxes are Rising fast rising nominal wages coupled with frozen personal allowances is bringing many more earners into higher tax brackets. even while real wages stagnate.
  Interest costs on public debt are putting increasing pressure on public budgets even while the real interest rate (Interest rate minus inflation) remains in negative territory.
  Capital spending has been chronically underfunded since the financial crisis of 2008 most notably in schools. hospitals and road infrastructure while the costs of H2 are ballooning.
  The cost of maintaining the NHS and state pensions with large rises well above inflation with an aging population and no longer the possibility of offsets from cutting defense spending.
  Another problem, is the rise in long-term sickness in the UK. Under current trends, the OBR expect health and disability benefits to more than double to 80bn Disability benefits cost could rocket, report says
  Economic growth has also slowed significantly as the UK has transitioned to a service based economy
  Taxes on tobacco, fuel (with the switch to electric cars) and North sea oil are in decline and will need to be replaced with other levies.
  The next Parliament is quite likely to be overseeing continuing declines in living standards as the impact of Brexit and the distorted housing market come home to roost.

• Joe Bourke 8th Oct '23 - 3:50pm

  Peter Martin,

  “Politically it’s also much easier to argue for fair pay and fair jobs. It doesn’t involve getting into discussions of how much taxes will have to rise to “pay for it”.

  The genius of the Beveridge scheme for Social Insurance and Allied Services was that it was based on Universal benefits and had a vision for the elimination of much of the demeaning means testing that was so resented in the inter-war years. The further we get away from that vision the more difficult it becomes to maintain social cohesion and buy-in for ever increasing taxation for social services by a working population that is struggling to keep a roof over their head and food on the table.
  As the Libdem policy paper notes “Ending deep poverty requires systemic change across the board. From addressing skills gaps to tackling job security, providing affordable homes to reforming childcare – the challenge is huge. ”
  Supply-side reforms like the provision of affordable childcare along the lines of that in Nordic countries can increase the available workforce that provides services that an increasing elderly population relies on. The largely female labour from the ethnic minorities in Burnley could be more productively employed in the provision of child, social and health care services than competing with sweatshops in Bangladesh, Indonesia or Vietnam.

• Nonconformistradical 8th Oct '23 - 4:03pm

  @Joe Bourke
  “The largely female labour from the ethnic minorities in Burnley could be more productively employed in the provision of child, social and health care services”

  Don’t men ever work in child, social and health care services? What’s ‘argely female’ got to do with this?

  ” than competing with sweatshops in Bangladesh, Indonesia or Vietnam.”

  So sweatshops are OK in other countries for supplying cheap (through exploitation) goods to us?

• Nonconformistradical 8th Oct '23 - 4:03pm

  @Joe Bourke
  “The largely female labour from the ethnic minorities in Burnley could be more productively employed in the provision of child, social and health care services”

  Don’t men ever work in child, social and health care services? What’s ‘largely female’ got to do with this?

  ” than competing with sweatshops in Bangladesh, Indonesia or Vietnam.”

  So sweatshops are OK in other countries for supplying cheap (through exploitation) goods to us?

• Joe Bourke 8th Oct '23 - 4:35pm

  Nonconformistradical,

  If you have been to China and seen the working conditions in factories there you will know that much of what you use in your daily life comes from Chinese firms supplying cheap (through exploitation) goods to us China steps in to regulate brutal ‘996’ work culture
  The working conditions would be familiar to British workers of the Victorian era when the UK was the workshop of the world supplying cheap (through exploitation) goods to the rest of the world.

• Nonconformistradical 8th Oct '23 - 5:24pm

  @Joe Bourke
  So what are you implying I might be using in my daily life which might come from China?
  You know nothing about my shopping habits

• Katharine Pindar 8th Oct '23 - 7:19pm

  Joe, while allowing what you say about ending deep poverty – or rather, I would think, lessening relative poverty generally – by such means as providing affordable housing, I would like us to have definite policies on what taxation reforms we are seeking, to pay for the projected increases in welfare benefits we are demanding. You have suggested for instance windfall profits in banking as well as in the energy sectors. Should we be also pursuing off-shore banking, and ‘terrible tax breaks depriving the public realm of £4bn’ according to the Resolution Foundation? I think we already intend equalising capital gains with income tax, but what about other proposals of Tax Justice UK, such as taxing wealth over £10m at 1% to raise £10bn a year? (Oxfam reported last January that two-thirds of the post-pandemic surge in wealth had gone to the top 1%.) Can we put together a coherent package of suggested taxation reforms to recommend to our party?

• Michael BG 8th Oct '23 - 11:00pm

  Peter Martin,

  Wage levels are not the most important thing when considering poverty. If you work part-time your wages are not likely to be enough to remove you from poverty. Without higher levels of benefits the millions of people not working-full time who live in poverty, will continue to do. As I demonstrate in my article increasing working-age benefits lifts children from deep poverty. Just increasing child benefits will not achieve this.

  You say taxes don’t need to be raised to increased wages, but economic growth is needed so wages can increase. Some companies may not be able to afford the higher wages and so go out of business making all their workers unemployed.

  I agree with you that zero hour contract should be banned, but that is not the position of the Liberal Democrats (see my 5th Oct 11.18pm post on Katharine’s article https://www.libdemvoice.org/its-time-for-liberal-democrats-to-fight-for-the-worstoff-in-our-country-74021.html) nor the Labour Party’s in 2019.

  Please see page 35-41 of Policy Paper 150 https://www.libdems.org.uk/conference/papers/spring-2023/towards-a-fairer-society to read our policies on fair working conditions, including ‘Allowing unions to have access to workplaces, as has been shown to work in New Zealand, and simplifying the rules and procedures around having a union recognised by an employer’.

  Chris Moore,

  Working-age benefits are targeted benefits. Benefits are much lower than the deep poverty level. The only way to lift people living solely on benefits out of deep poverty is to increase the level of benefits.

• Michael BG 8th Oct '23 - 11:03pm

  Joe Bourke,

  The main reason for the success of the Beveridge reforms was governments providing full employment, so if a person was unemployed they would expect it be only for a short period. We should restore this commitment, as well as providing enough resources for the NHS to reduce the number of people with long-term health issues which stop them from working.

  Katharine,

  I found this old article – https://www.taxjustice.uk/blog/five-policies-that-could-raise-37-billion-in-tax where Tax Justice UK state that a 1% wealth tax on assets over £10 million would raise up to £10 billion.

  Katharine and I submitted a motion to our recent conference which was not selected for debate which called for ‘an annual wealth tax of 2% on the net assets of individuals and trusts of over £5 million’.

• Peter Martin 9th Oct '23 - 8:17am

  nomic growth is needed so wages can increase.”

  We’ve had good economic growth for the past 70 years or so. In this time GDP per capita has increased by around a factor of 3.5. But here we still are discussing how best to remove anyone from a position of “deep poverty”.

  The ‘social wages’ we all receive are a combination of the wages we receive from employment, or other income sources, such benefits as the NHS and educational provision, UC, child benefit etc. If your argument that we need economic growth for employment wages to rise is valid so is your own argument that other components of wages need to rise.

  This is a line that was naturally always pushed by the Tories, but is pretty much what all the parties are advocating at the moment.

  Basic arithmetic dictates, however, that if you want to reduce inequality some have to get more and some have to get less. It doesn’t matter how you do it. My argument is that it is politically far too difficult to do that via the benefits system. You and Katharine may disagree but I think Joe is saying the same thing with his recent comment of “… the more difficult it becomes to maintain social cohesion and buy-in for ever increasing taxation for social services…..”

  So we have to look for other ways. More socialist ways. But as Katharine has already pointed out “Lib Dems are not a socialist party”.

  https://www.statista.com/statistics/970672/gdp-per-capita-in-the-uk/

• Simon R 9th Oct '23 - 8:37am

  @Peter Martin “But here we still are discussing how best to remove anyone from a position of “deep poverty”” – what’s the definition of ‘deep poverty’? A quick Google suggests that it’s defined in terms of median income. If so, that rather explains why increasing living standards haven’t automatically eliminated it: Every time living standards increase and therefore the median income increases, we effectively move the goal posts, by defining a correspondingly higher income as the deep poverty level! (And to be clear, that doesn’t mean there isn’t a serious poverty problem to be solved. I think it rather means we perhaps need to be more careful and aware of our definitions).

• Joe Bourke 9th Oct '23 - 12:16pm

  The pre-manifesto policy paper 149 For a Fair deal outlines the economic approach and direction of travel on taxes:
  ● Fuel economic growth, create good jobs, spread prosperity to every region and nation of the UK, whilst tackling the climate emergency – through a revolutionary green investment programme.
  ● Help people with the cost of living and their energy bills by cutting VAT to 17.5% for one year and implementing a one-off windfall tax on the super-profits of oil and gas producers and traders.
  ● Make taxes fair by taxing income from wealth more similarly to income from work, ensuring that tax burdens don’t fall disproportionately on low earners, reversing the Conservatives’ tax cuts for big banks, and clamping down on tax avoidance and evasion.
  ● Give taxpayers real value for money, by fighting fraud and cracking down on conservative waste. We will aim to recover at least half of the £4.3 billion of Covid support stolen by fraudsters and written off by the Government.
  ● Safeguard the UK’s economic prosperity, whilst making the investments the UK needs to grow the economy. We will borrow to invest in key infrastructure while making sure that day-to-day spending does not exceed the amount of money raised in taxes over the medium term, with additional flexibility during periods of economic crisis.

• Joe Bourke 9th Oct '23 - 12:22pm

  Pre-manifesto financial commitments include reinstating the £20 uplift to Universal Credit and protecting the triple lock for pensioners.
  NHS – train and recruit more GPs, funding for ambulance services, fill the 100,000 vacancies for doctors and nurses and reform funding for NHS dentists.
  Social care – properly-funded personal care, increased carers allowance and more social care staff
  Housing – to build 150,000 council years each year. More funding for the Environment Agency and Natural England.
  Transport -extending Britain’s rail network, reopening smaller stations and restore twin-track lines to major routes while freezing rail fares.
  Climate change -free retrofits for low-income homes and generous tax incentives for other households.
  Education – reinstating maintenance grants for disadvantaged students, Introducing free, high-quality childcare for every child aged two to four and children aged between nine and 24 months where their parents or guardians are in work.
  Defence and foreign policy – reinstating the 0.7% of GNI target for foreign aid and cancelling planned cuts to the army.
  Culture – protecting the BBC and Channel 4 and on Crime and Policing, restore proper community policing while Investing in the criminal justice system to clear the backlog of court cases.

• Joe Bourke 9th Oct '23 - 12:57pm

  Last years budget included £28bn in public spending cuts – much of it backloaded until after the next general election UK government spending: where the cuts will fall. The Libdem pre-manifesto rejects these spending cuts (while committing that day-to-day spending does not exceed the amount of money raised in taxes over the medium term), with virtually every government department requiring funding increases and that is without taking account of the dire need for additional funding to support local authority services.
  It seems quite possible that the tax increases required to maintain and increase the level of public services, pensions and social security services and public investment will be in the order of 4% to 6% of national income over the course of the next parliament i.e. £100bn to £150bn per year. That is on top of the increases we have seen in this current parliament.
  That is a major shift in the political economy of the UK and one that requires buy-in from a majority of the British public to have any prospect of delivery.
  On tax policy generally, it is important to make a distinction between the real economy of production, wages and consumption and the extractive economy of financialisation that sits on top of the real economy and extracts economic rents from it. It is these economic rents in the banking, monopoly industry sectors and real estate sectors that should be the subject of increased tax collection to deliver the changes required Finance Capitalism versus Industrial Capitalism: The Rentier Resurgence and Takeover

• Michael BG 9th Oct '23 - 2:11pm

  Peter Martin,

  It is an interesting graph that you posted a link to. It clearly shows the 1973-75, 1979-81 and 1990-92 falls in GDP per capita.

  If increasing the wages of the lowest paid in society was the fix you think it is, then it should have worked by now. In 1997 the minimum wage was introduced at £3.60 an hour; the National Living age is £10.42 an hour – that is 2.89 times higher than the minimum wage of 1997. GDP was £25,011 in 1997 and £33.497 in 2022 – only 1.34 times higher.

  The Liberal Democrats in government did their bit, because of them the personal allowance increased from £6,475 in 2010 to £12,570 in 2021 – 1.94 times higher.

  Now we are calling for benefits not only to be restored to their 1966 real value but increased to the deep poverty level per household type. Along with this we aim to build more homes to reduce the housing crisis.

  I would like my party to go further and commit to trying to run the economy to achieve full employment (which I define as 3% unemployed) and repair the NHS so many of the people currently who are not well enough to work can return to work. Many will need real support and so will their employers and we need to develop the policies to provide it.

• Katharine Pindar 9th Oct '23 - 3:55pm

  Joe Bourke. We must work, I believe, to have the pre-Manifesto financial commitments extended to cover the commitment of For a Fair Deal, the policy paper 153, to ‘Set a target of ending deep poverty within a decade’, as now Michael has explained can be achieved. Thank you for your comment on economic rents, with accompanying reference, and I hope we can persuade our party of the need for increased tax collection to extract finance from such rents, which with other measures we can recommend will evidently be required to fulfil this aim and help keep the NHS and other services running in the face of high demand.

• Joe Bourke 9th Oct '23 - 5:52pm

  Katharine,

  I expect the financial commitments in the manifesto will be somewhat similar to the 2019 offer Liberal Democrat Manifesto and most likely include funding for restoring the £20 uplift to Universal Credit and introducing emergency grants (not loans) but not specifying how introducing a Guaranteed Basic Income by increasing Universal Credit to the level required to end deep poverty within the decade would be funded.
  On tax raising, the Conservatives have already increased corporation tax from 19% to 25% and income tax with the freezing of allowances and set about abolishing the separate Capital gains tax (CGT) and dividend allowances.
  The pre-manifesto speaks of cutting VAT to 17.5% for one year and implementing a one-off windfall tax on the super-profits of oil and gas producers and traders.
  I would argue against that and instead eliminate most VAT exemptions including on food while significantly increasing benefits and tax allowances and the levels of the minimum wage to compensate lower income households as suggested by the IFS British tax system is in need of reform . Additionally, we should consider adopting the recommendations to make taxes fair by taxing income from wealth more similarly to income from work by combining income tax and NI into a single, unified tax on income.
  As regards tax on economic rents this begins with a making council tax more proportional to house values and incomes in local areas and introducing land Value tax (LVT) on rents (including imputed rents) as well as interest profits from lending for land purchases and would include permanent (rather than windfall) Land Value Taxes on the profits of oil and gas producers in the form of a petroleum revenue tax.

• Michael BG 9th Oct '23 - 7:14pm

  Joe Bourke,

  I note you are quoting from the autumn 2022 pre-manifesto policy paper and not the autumn 2023 one.

  The temporary 2.5% cut in VAT and the recovering of the £4.3 billion of Covid spending which has been written off are not in the 2023 version. The 2023 version includes commitments to end deep poverty within a decade with the establishment of an independent commission to recommend the annual increases to get there within a decade and the introduction of a social tariff for energy.

  I got my local party to submit amendments to motion F23 on (a) reinstating the 0.7% of GNI target for foreign aid and re-establishing a Department for International Development and (b) protecting the BBC, Channel 4, S4C and BBC Alba. I moved the first and I got Jamie Stone to move the second. Both were passed along with the motion.

  The IFS article you link to states that the reduced and zero rates of VAT cost the Treasury £64 billion in 2022-23. I suppose benefits could be increased by 25.8% to more than make up for the extra VAT they would need to pay (£22 a week for a single person and £34.50 for a couple, costing less than £12 billion). Pensions could be increased by £42.80 a week ([21%] costing about £27.8 billion). Would increasing the personal allowance by £1000 a year (costing about £9 billion a year [third year figure] be sufficient to compensate the rest of the working-age population? With these compensations the government would benefit by £15.2 billion.

• Joe Bourke 9th Oct '23 - 8:46pm

  Hi Michael,

  noted on the tax updates in the 2023 pre-manifesto and well done to your local party on the amendments to F23. The social tariff on energy in the 2023 pre-manifesto is a good initiative.
  On the IFS reforms, I think it makes sense on a redistributive basis to ensure that lower income households and pensioners are not disadvantaged by VAT increases. We would not need to compensate the rest of the working population beyond an increased allowance. That is the aim of redistribution.
  Besides the tax raising potential, the points the IFS make about simplyfying the tax system look valid
  “But VAT reductions aren’t just poorly targeted at helping those on low incomes. They also do active economic damage. When parliament designates a particular class of goods as zero-rated, this brings with it the need to police the boundary between which products qualify for zero-rating and which don’t. Such rules rapidly descend into pantomime. A gingerbread man with two chocolate eyes? Zero rated. Add chocolate smile? That will be 20% VAT. Thinking of buying a pet puppy? 20%. What about a rabbit instead? You’re in luck, they’re zero rated (thanks to the fact they are edible).

  Any tax system that leads to thousands of hours and millions of pounds being spent on legal disputes over whether Jaffa Cakes really are cakes (zero rated) rather than chocolate covered biscuits (20% rated) is one that urgently needs reform. Each year that the current system stays in place means more time, money and ingenuity wasted on such ludicrous disputes.”

• Katharine Pindar 10th Oct '23 - 10:47am

  Just one point on this helpful informative discussion between Michael and Joe, regarding an undertaking of the present version of the Pre-Manifesto motion. F23 For a Fair Deal. The agenda in point 9, lines 93-94, says ‘Repair the broken benefits safety net and set a target of ending deep poverty within a decade.’ But it does not yet add, ‘with the establishment of an independent commission to recommend the annual increases to get there within a decade’, as it should: the whole new and exciting policy of Guaranteed Basic Income passed at the York Conference should surely be spelt out.

• Peter Martin 10th Oct '23 - 10:55am

  There is an election coming up so if a Guaranteed Basic Income is going to be part of a Lib Dem pitch on poverty reduction I would have thought that a concise explanation of what this actually means would be essential.

  It could be argued that we already have a GBI in place. It’s just that it isn’t high enough to keep everyone out of poverty. When I admitted, in a previous thread, that I really didn’t know what the Lib Dem idea of a GBI was, Joe offered the comparison with the current Universal Credit system. This made sense even though I felt it was a somewhat uninspiring offering to the electorate.

  Presumably it will be UC Mk2 with at least some of the rough edges removed. Katharine has taken issue with this comparison, so maybe it’s not just me who isn’t clear just what a GBI will actually mean when comes to the detail of its operation?

• Peter Martin 10th Oct '23 - 11:29am

  @ Sandy Smith @ SimonR

  “We need a measure of poverty defined by what income is required to meet basic needs and not related to median income.”

  “Every time living standards increase and therefore the median income increases, we effectively move the goal posts…”

  You’re both making the same valid point. The median is much lower than the average, incidentally.

  However there is a similar problem of how to define what basic needs are. What might have been considered basic in Victorian England isn’t what we consider basic now. If anyone had their children running unsupervised, dressed in rags and barefoot in the streets they would probably be removed by social services. So, as GDP has increased, we all do need a higher income to survive in society than we used to.

  Immigrants from relatively poorer countries will possibly have experienced the problem of their relatives back home considering that they are living the high life in the UK on the basis of what their UK income would be worth back home. It’s not comparable on a direct exchange rate calculation.

  Rents and mortgages are so much more expensive here for starters. If we have economic growth they’ll no doubt be even more expensive. Growth isn’t the answer to all our problems contrary to what politicians like Keir Starmer will have us believe.

  Work on an alternative definition poverty level if you like but it won’t be much different from what we have now.

• Peter Martin 10th Oct '23 - 12:34pm

  I haven’t seen much discussion on the effect the conversion to electric vehicles will have on the tax take. This, even in MMT terms, will affect what the Govt can spend on poverty alleviation. The conventional view is that the Govt collects the money to spend. The MMT view is that the collection of taxes creates the fiscal space for the Govt to spend without causing extra inflation. So there is a difference, but it’s not as big a difference as some like to make out.

  At the moment EVs aren’t being taxed much at all. That’s going to have to change as they become an increasing proportion of the on-road vehicle population. There’s plenty of votes to be lost and few to be gained with this one!

• Joe Bourke 10th Oct '23 - 2:57pm

  Historically, increasing poverty levels have been associated with increasing levels of unemployment. While unemployment did rise rapidly after the 2008 financial crisis, despite weak economic growth of the past decade, UK unemployment did fall quicker than we might have expected and remains quite low today Reasons for falling UK unemployment
  The main pressure on households has been coming from cost of living increases eroding the real value of wages, particularly in the private rental sector and now significantly for mortgage borrowers. While recent wage increases have began to reflect the impact of inflation this has not been consistent over the past 15 years with many workers experiencing stagnant or falling real wages and a sharp decline in living standards over the past couple of years.
  To address living standards for the majority of the population the root causes of widening inequality have to be tackled. The share of national income going to Labour has been falling in developed economies while the share extracted in the form of economic rents both before wage payments and from after-tax household income is ever increasing Labour (wages and incomes) share of GDP

• Michael BG 11th Oct '23 - 12:34am

  Joe,

  Increasing VAT is inflationary but increasing taxes is deflationary. If a government did decide to scrap the reduced and zero rates of VAT my fear is it wouldn’t compensate those on working-age benefits enough to cover the increased costs. It is not likely that any government would scrap them all at once.

  You provide a link which shows that the share of national income going to labour has been falling in both the UK and the developed economies. Do you have any suggestions on what the government can do to reverse this?

  Katharine,

  See my post of 9th Oct 7.14pm where I quote page 22 of Policy Paper 153 where it states, ‘Set a target of ending deep poverty within a decade, and establish an independent commission to recommend annual increases in Universal Credit to achieve it’.

• Michael BG 11th Oct '23 - 12:42am

  Peter,

  I dislike the name Guaranteed Basic Income. It is a guaranteed minimum income, it sets a minimum income every household will have and delivers it for those who don’t have it via the benefit system. The Policy Paper is unclear what this new name implies. It talks of introducing it and of increasing Universal Credit to end deep poverty within the decade.

  It would be clearer if we set out all the reforms we want to make to Universal Credit:

  Reduce the wait for the first payment from five weeks to five days:
  Introduce emergency grants instead of advance loans;
  Stop deducting debt repayments at unaffordable rates by capping total deductions to repay government debts at 5% of the standard allowance and to repay all debts at 15% of the standard allowance;
  End the two child limit and the benefit cap;
  Increase the savings limit from £16,000 to £21,000 and index it thereafter and also the savings disregard;
  Increase current work allowances, reinstate the earnings allowance for those without children, introduce a new second-earner work allowance and increase support for self-employed people;
  Scrap the sanctions regime and the bedroom tax;
  Reversing cuts to ESA for the work related activity group;

  And then once we have implemented these reforms rename Universal Credit as Guaranteed Basic Income.

• Michael BG 11th Oct '23 - 12:44am

  Our other benefit changes include:

  Increase the Local Housing Allowance to the 331/3 percentile of average rents in a local area;
  Reinstate the Independent Living Fund;
  Return the Support for Mortgage interest scheme to its pre-2018 format, which makes it a benefit payment instead of a loan;
  Increase the Carer’s Allowance and the amount people can earn before losing their losing their Carer’s Allowance while reducing the number of hours’ care per week required to qualify for it.

• Peter Martin 11th Oct '23 - 7:01am

  @ Michael BG,

  “Increasing VAT is inflationary but increasing taxes is deflationary.”

  This is sort-of-true but it’s the sort of comment that will be dismissed as nonsensical by the average person.

  If there’s an increased shortage of anything then prices will rise as a rationing mechanism. There’s no getting around that. Normally the price rise will benefit the producers and encourage them to try to produce more in future which should act to bring down the price.

  This, at least, is the theory in terms of classical economics. It tends to ignore the ratchet effect of wages and prices. Once they rise, they don’t easily fall back again.

  The government can pre-empt the situation by imposing a new tax or increasing existing taxes. It still means that we are paying more and the rationing mechanism still works but at least some of the extra goes back to government. Government IOUs are then cancelled.

• Michael BG 11th Oct '23 - 12:34pm

  Peter,

  I expect most people will understand that increasing VAT increases prices and is therefore inflationary.

  Hopefully, lots of people understand that if the government increases taxes people have less money to spend and so demand falls and prices could be reduced to tempt people to buy and this is therefore deflationary.

  Perhaps I should have written, increasing VAT is inflationary but as increasing taxes is deflationary there will be deflationary pressure in the economy unless the government spends the extra revenue they receive from the tax increase.

• Joe Bourke 11th Oct '23 - 2:13pm

  Michael,

  with respect to the declining share of national income going to labour there are a number of interventions that fall under the general description of pre-distribution. Pre-distribution aims to make work pay while transforming the economy so it is a much higher skill, higher wage economy.”

  This Guardian article How to reinvigorate the centre-left? Predistribution describes three major themes of predistribution in a UK environment:
  – getting the macroeconomy right, particularly by encouraging long-term investment
  – providing good quality public services, particularly healthcare and investing in skills of the young
  – discovering new ways to control the market-economy, such as worker empowerment, steps beyond the minimum wage such as the right to know what co-worker groups earn, and the formation of worker groups other than unions.

  A second key aspect is tax reform including shifting taxation from income produced by labour and productive capital to income extracted in the form of land rents and debt interest on lending for non-productive purposes to incentivise investment in productive activities.

• Joe Bourke 11th Oct '23 - 2:36pm

  When it comes to tax reform the aim is to achieve both horizontal (equal treatment of equals) and vertical equity ( wealthier people, or those with access to more resources, should pay higher taxes.),

  I think the starting point should be the Mirrlees review
  “Based on the best available theory and evidence, the Mirrlees Review sets out a comprehensive set of proposals for tax reform. While focused on the UK, its analysis and conclusions bear directly on the policy debate in other developed countries. The Review proposes a move to a more neutral tax system. Key ingredients include adjusting the personal tax and welfare system to achieve redistribution more efficiently, imposing VAT on a broader base of consumption at a single rate, targeting environmental externalities more accurately, and aligning tax rates across all income sources while exempting the normal return to saving from tax, and introducing an allowance for corporate equity into the corporate tax system.”
  While the Mirrlees review addresses the efficiency of the tax system and horizontal equity, we additionally need to address vertical equity and non-inflationary means of stimulating economic growth with a shift towards land value taxation Post-Corona Balanced-Budget SuperStimulus: The Case for Shifting Taxes onto Land

• Jenny Barnes 11th Oct '23 - 5:36pm

  “with respect to the declining share of national income going to labour ”
  and one suspects from the state of the public realm – rivers full of sewage, thousands of vacancies and 7 million waiting list for the NHS, crumbling schools, potholes, cancellation of HS2,…that there is also a declining share of national income going to the state, despite high levels of taxation. One has to suspect that the elite ( top few per cent by income ) are extracting more than their fair share, and increasingly so.

• Katharine Pindar 11th Oct '23 - 8:31pm

  Joe, I am finding your analyses and references very helpful, and was especially struck by one of your comments on October 10, at 2.57, where you said that to address the living standards of the majority of the population, root causes of widening inequality must be tackled. You pointed out that the share of national income going to labour has been falling even as costs rise, and next day pointed out good Guardian-advised steps towards redistribution, including long-term investment, good quality public services and more skills-giving to the young, plus new ways of worker empowerment.
  It all sounded useful advice, plus your own advice on land rents and debt interest. I hope our party keeps on working on plans and policies to enhance living standards in these or other ways.

• Katharine Pindar 11th Oct '23 - 8:53pm

  Michael. Although you correctly of course quote from Policy Paper 153, my point was that the part about the independent commission unfortunately did not reach the Pre-Manifesto motion F23, as we wanted it to do. And you mischievously then make the opponents’ case of simply sticking to Universal Credit and declaring that GBI can, after achieving the aim of removing deep poverty, be renamed – as Universal Credit! Of course as you know the project will never get off the ground, if the exciting prospect of a new body to keep deep poverty in our country away for ever is diminished as being just another way of increasing welfare benefits.

• Michael BG 12th Oct '23 - 12:23am

  Joe,

  What policies would you like the government to have to encourage long-term investment?

  Would you recommend that the government not use monetary policy to achieve economic growth because it increases inequality as shown over the last 15 years?

  Do you think that workers knowing what co-worker groups earn would result in higher wage increases?

  Katharine,

  I wrote, ‘once we have implemented these reforms (of Universal Credit) (we should) rename Universal Credit as Guaranteed Basic Income’. I have not written ‘that that GBI can, after achieving the aim of removing deep poverty, be renamed – as Universal Credit’. Universal Credit is a deeply flawed benefit, and has a bad reputation with the general public, especially after Covid, therefore we need to replace it not just reform it. An early draft of the GBI proposal included, ‘this proposal (what would become GBI) – a decent level of support delivered in a decent way – would no longer be recognisable as UC. It should also have a new name’.

• Joe Bourke 12th Oct '23 - 1:54pm

  Michael,

  policies to encourage long-term investment are part and parcel of an Industrial strategy as outlined by Vince Cable when in government Industrial Strategy: Cable outlines vision for future of British industry. This does require overcoming the in-built reticence at the Treasury for major infrastructure investments Why Governments Won’t Invest
  Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied. Monetary policy can be a powerful tool in the hands of the government. Bank lending needs to be principally directed to real investment in real business assets and not to existing house trading. I would look at removing regulated residential mortgage lending from commercial banks and channel it through either a state controlled institution or regulated building societies that are mainly lending out deposits or borrowing from the central bank rather than having commercial banks expanding the money supply for housing transactions i.e. full reserve lending.
  Industrial democracy or co-ownership in industry is a long-standing Liberal approach to business organisation as expressed by Jo Grimond in The Unservile State. Worker cooperatives or worker councils are typically more transparent concerning wage scales and criteria for wage setting.

• Peter Martin 12th Oct '23 - 2:28pm

  “Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied.”

  This is what we’re asked to believe.

  However, in reality, the imposition of higher interest rates amounts to taking money from those who have borrowed it and giving it to those who have lent it. It doesn’t take any money out of circulation in the way a tax rise would. A tax rise doesn’t just remove money from the economy it removes net credits which can only be issued by government and not by private banks.

  There’s a distinction between money and government issued net credits which isn’t widely appreciated – even in the economics profession.

  A tightening of monetary policy only works insofar that it is taking spending power from those who need it the most (young borrowers and renters) and giving it to those who need it the least (the wealthy and the banks) are therefore less likely to spend it. An tax directly payable to King Charles would have the same economic effect and probably would be significantly more equitable.

• Joe Bourke 12th Oct '23 - 3:19pm

  Interest rate rises are not voluntary. They are a reaction to monetary inflation (as are nominal wage rises) and take time to work through the economy.
  Half of the interest paid by the Treasury on public debt goes to the BofE and overseas investors. The other half goes to Private financial institutions – banks, pension funds, investment trusts and also private households. So it is correct to say it is mostly not spent into the real economy when it is received, while borrowers spending on other goods and services is impacted immediately. It is the reason why increased government spending on interest is not inflationary in the short-term.
  The BofE expect inflation to keep on falling in 2024 and reach the 2% target in the first half of 2025. That means prices would still be rising, but they would be only rising gradually When will inflation in the UK come down?
  Some economists like Nouriel Roubini are more skeptical warning the BofE must raise rates to avoid stagflation
  Taxes have been increased very significantly from this year for both corporations and individuals with the freezing of personal allowances while nominal wages are rising by 8% and this will both take money out of the economy and reduce consumption. So both fiscal and monetary policy are pushing in the same direction. You could argue that a deficit of over 5% is too high with near full employment at 4%, but neither spending cuts or further broad based tax hikes this year or next are feasible, so we will have to let inflation run its course for as long as it takes before embarking on deflationary tax increases. That’s not to say that revenue neutral tax reforms cannot be introduced.

• Peter Martin 12th Oct '23 - 4:21pm

  @ Joe,

  “It is the reason why increased government spending on interest is not inflationary in the short-term”

  But what about the longer term?

  The big problem with conventional and mainstream thinking is that it’s all about the short term. When we want a stimulus to the economy we lower interest rates to encourage everyone to borrow more and therefore spend more. It works in the short term, but there’s no thought given to the increase in the extent of private debt in the longer term.

  That causes problems sooner or later. Unfortunately the longer term isn’t usually quite as long as Keynes had in mind when he pointed out that we were all going to be dead in the end. The crash of 2008 was an example of the longer term catching up with us and we weren’t all dead then!

  Governments should decide on what level of interest rates they would like and move them far less readily than they, or the supposedly independent BoE, do. It isn’t realistic to set the BoE an inflation target and then demand they adjust monetary policy to meet it. Government has to do the major share by using fiscal policy too.

• Michael BG 13th Oct '23 - 12:03am

  Joe,

  Vince’s answer was the creation of a business bank. The Coalition government created the Green Investment Bank, but it was sold in 2017 for only £2.3 billion – a pinprick compared to the size of the economy. What the coalition government did not do was turn the Royal Bank of Scotland into a business bank. It was so badly managed by the government that RBS increased fines, interest rate hikes and loan withdrawals for their business customers.

  The Coalition government did create the British Business Bank but it seems it has only lent £1 billion – an even smaller pinprick.

  You provide a link to a paper written by Vince which set out why governments don’t invest, but he doesn’t provide any answers.

  You didn’t answer my question – Would you recommend that the government not use monetary policy to achieve economic growth because it increases inequality as shown over the last 15 years?

  Was mortgage lending ever just done by building societies (say in the 1970s)? (I think my parents had a mortgage with the Co-op Bank in the 1960s and 70s.)

  You didn’t answer my question – Do you think that workers knowing what co-worker groups earn would result in higher wage increases?

• Michael BG 13th Oct '23 - 12:13am

  Joe,

  Of course interest rates rises are voluntary. Even if they were always higher than the inflation rate, lenders set the rates themselves. However, as sometimes interest rates are lower than the rate of inflation it is clear that lenders sometime lend while making a real term loss on their investment.

  I do not consider an unemployment rate of 4% as near full employment. It should be possible for the next government to carry out revenue neutral tax reforms as well as targeting taxing wealth and using these revenues to increase public spending.

  As unemployment is increasing this means that there are spare resources in the economy and if the Bank of England is correct and inflation falls to 2% by 2025, then the government should be able to increase spending without the need to raise taxes to cover the full increases. If the general election is after October 2024 the outlook for a new government might not be as dire as everyone seems to be predicting.

  Peter,

  You make an interesting case why increasing the bank rate is not a good method of reducing demand in the economy. Increased interest rates also discourages businesses from investing in their business and others from investing in increased production. Therefore removing excess demand from the economy might be better done by increasing taxes as this would not discourage business investment as much as increasing the interest rates does.

• Peter Martin 13th Oct '23 - 8:58am

  “Of course interest rates rises are voluntary.”

  As are reductions. But only for the Govt as the currency issuer.

  The conventional view is that there is a market place in interest rates. The theory goes like this: If people want to borrow they are prepared to pay for the privilege in the same way they’d be prepared to pay for a loaf of bread. The price of a loan is then set by the process of supply and demand in the same way

  So what’s wrong with it? Simple as it might be , the theory doesn’t describe what we see happening in the economy. Any scientific theory is only as valid as the accuracy by which it describes reality. Short term interest rates are set by a simple decision of the monetary committee of the Bank of England. Longer term rates by the extent of its involvement in the gilt market.

  Of course set doesn’t mean that every loan is at whatever the BoE decide. Lenders will always factor in a risk premium. So we can expect to pay more on our credit card borrowing than our house purchasing, for example.

  Nevertheless the “market” in interest rates is highly influenced by what the BoE decide short term interest rates will be. Banks won’t lend to us at 3% when then can get 4% risk free from the government.

• Joe Bourke 13th Oct '23 - 11:26am

  The last thing this Conservative government wants is to increase taxation and see interest rates hiked coming into an election. The tax and interest rate increases we have seen have not been done voluntarily, they have been done out of necessity in reaction to pandemic induced inflation and market forces, not government planning.
  If the level of taxation, interest and borrowing was set purely at the whim of the government , Liz Truss and Kwasi Kwarteng would still be in office.
  The UK economy and other developed economies have never fully recovered from the 2008 financial crisis. These problems were identified by Irving Ficher and Hyman Minsky in the last century nflation Induced Debt Destruction: How it Works, Consequences. The UK housing market has been the source of financial and economic stability for decades. We have arrived at a stage now where house prices are falling precipitously (while rents are rising) and mortgage debts are based on house prices at 8 to 9 times median earnings (higher in London).
  It is this deflation in the housing market that will most likely drive interest rates back down over time and bring economic growth to a standstill as bank credit freezes up. Interest rates won’t be reduced voluntarily. Nominal rates will be forced down by financial market conditions (although even a near zero rate can be a positive rate in real terms during a debt deflation) that will then be forcing down prices and average wages across the economy. That is the time for a reflationary fiscal stimulus to prevent large scale unemployment.

• Joe Bourke 13th Oct '23 - 12:55pm

  Michael,

  The UK economy has long suffered from a lack of access to credit for SME’s. One of the key features of the high growth post-war economies of Japan and Germany was ready access to credit from local community and industrial banks. Large banks focus their lending on large companies and the housing sector. A much wider network of locally based banks that serve their local business communities is a feature of successful developed economies. Until the mid 1980’s Japan operated a system known as ‘Window Guidance’. That was basically a system that directed credit expansion to the business sector and was channelled through a network of local banks. It was highly successful, generating double digit growth for three decades, until the Japanese authorities decided they needed to be more like the USA and massively expanded credit creation creating an unprecedented bubble in the stock and real estate markets.
  The German economic model is based on a large number of industrial and community banks serving family companies that are at the core of the German Mittelstand. This is what effective monetary policy is about. The channelling of money creation to productive investment where it supports job creation and sustainable economic growth.
  The GERMAN WORKS COUNCIL have co-determination rights on issues related to employee hiring, transfers, termination, employee conduct policies, working hours, pay schemes, and restructuring measures i.e. workers know what co-worker groups earn and the share of value created going to wages.
  For background on building societies dominance of mortgage market see Getting a mortgage: 9 things that have changed since 30 years ago

• Michael BG 13th Oct '23 - 8:20pm

  Peter,

  The Bank of England clearly has a choice each month with regard to interest rates. Therefore any rises in the rate are voluntary.

  No one forces the banks to increase their interest rates in line with the bank rate. They often choose not to increase the interest rates they pay in line with the increase in the bank rate.

  Joe,

  “The tax and interest rate increases we have seen have not been done voluntarily, they have been done out of necessity in reaction to pandemic induced inflation and market forces, not government planning.”

  The government could have frozen the price of petrol and energy in March 2022 and this would have reduced inflationary pressure. As they chose not to do this; they chose to rely on the Bank of England to reduce inflation by increasing interest rates.

  You seem to be saying it is necessary that prices and wages be forced down in the UK.

  It is unlikely that lower interest rates will lead to the economy being brought to a standstill. When interest rates are lower business investment usually increases. A Labour government is likely to take advantage of lower interest rates to invest in the economy and are unlikely to allow the economy to grind to a standstill for long.

  You still haven’t answered my question – Would you recommend that the government not use monetary policy to achieve economic growth because it increases inequality as shown over the last 15 years?

• Joe Bourke 13th Oct '23 - 10:41pm

  Michael,
  the government did subsidise energy firms to keep prices down. It does not have control over global oil and gas prices and therefore unsubsidised price controls are not practical.
  Without capital controls the government has no effective control over interest rates. The BofE reacts to market conditions in setting the bank rate. If UK interest rates were set significantly lower than the USA or Europe money moves out of UK gilts and into other higher yielding investment grade securities. That lowers the sterling exchange rate, strengthening the dollar and euro and so increasing the cost of UK imports priced in these currencies.
  Global interest rates are largely determined by the US Federal reserve and in the Eurodollar financial markets. The UK with its persistent current account deficit ultimately has to follow the USA.
  Economic growth is achieved by more effective utilisation of capital and labour resources within the economy i.e. investment driven productivity changes.
  Neither near zero interest rates, QE or large deficits have restored pre-crisis trend economic growth over the past 15 years. Nor can they as Japan’s experience shows. Monetary policy and fiscal stimulus are tools for fine-tuning of economic growth rates to either slow down credit creation or stimulate the level of spending/demand in the economy. They are not a substitute for the sustained productivity enhancing investment that creates economic growth. Demand is ever present but not the credit required by SME’s to make the necessary investments to meet that demand.
  Monetary Inflation is typically associated with excess demand in the economy, usually arising as a consequence of excess credit creation in the banking sector or private savings from large deficits being spent into the economy. To maintain stable inflation bank credit creation needs to be controlled and channeled towards productive investment while government deficits are kept at moderate levels.

• Michael BG 14th Oct '23 - 12:55am

  Joe,

  The government reduced the duty on petrol by 5 pence at the end of March 2022. It didn’t fix the price of energy until 1st October 2022. It could have fixed the price of petrol at £1.25 a litre during March by varying the duty and brought in the Energy Price Guarantee on 1st April at £1315, an increase of £38 (2.98%). And ensured non-domestic customers only had a 2.98% increase. Instead by April domestic energy had increased by 54.3% and non-domestic by more. By August petrol prices had increased by 16.67% from January. All of this inflation was caused by external factors and increasing interest rates or taxes would not affect them.

  It is clear from the Bank of England monthly reports that they fix the interest rate according to their view of inflation. It would make sense for the UK bank rate to have a relationship with the Euro zones or the USA ones, but I am not convinced there is such a clear relationship as you think. I think the US rate has increased more and the Euro less than the UK’s.

  It seems you are saying the government can’t do anything to stimulate economic growth. This has not been your position in the past.

  Indeed, inflation can sometimes be caused by excess demand in the economy, but it can also be caused by world price rises or devaluation of the currency or by high wage increases which results in higher prices.

• Joe Bourke 14th Oct '23 - 2:06am

  Michael,

  fluctuations in the market price of commodities like oil (up or down) are temporary or one off rises in specific prices. If they do not keep rising they fall out of inflation measures over the course of 12 months or so from the time of when increases stop or reverse.
  Interest rates increase as nominal GDP grows whether as a result of inflation, real growth or as is normally the case a combination of both. Nominal wage increases also follow inflation and nominal gdp growth rather than cause it. While government can reign in inflation over time with interest rate policy, it does not have effective control of the price of capital. That price (combining inflation and risk premium) is market driven.
  Government can spur economic growth with increased deficits to stimulate demand during recessionary periods, but cannot sustain economic growth with fiscal stimulus. That requires both public and private sector investment in enhancing productivity in the delivery of both public and private services. Productivity enhancing public sector investment can and should be financed via borrowing i.e. budget deficits. Government tax policy can additionally direct investment towards productive investment rather than speculation in housing and financial markets. A fiscal policy based on tax reform and borrowing for investment can generate sustainable growth.
  Monetary policy has two components. The price of money and quantity of money circulating in the economy. Economic growth can be stimulated with effective channelling of the quantity of bank credit creation. If excess credit creation is directed mainly at property and financial markets then housing and stocks will be inflated. If excess credit creation is aimed at household consumption then consumer prices will be inflated. If SME’s are given priority access to credit creation and expansion of the bank created money supply broadly tracks nominal gdp growth, then real economic growth and jobs are created.

• Jenny Barnes 14th Oct '23 - 10:52am

  Joe “Economic growth can be stimulated with effective channelling of the quantity of bank credit creation.”
  It’s an interesting theory. So economic growth is totally independent of any increase or decrease in energy input to the economy? Economic and energy consumption growth have both been around 2% per year for a very long time. Coincidence? Can energy growth at 2% pa continue? That means doubling every 35 years. Non fossil energy sources require fossil energy inputs for their creation, at least initially, which implies that we might need to stop doing something else. What might those somethings be?

• Peter Martin 14th Oct '23 - 12:33pm

  @ Joe,

  “Economic growth can be stimulated with effective channelling of the quantity of bank credit creation.”

  Only in the short term.

  The problem is that creating bank credit also creates bank liabilities. In other words the bank lends us money which has to be repaid. Government spending puts money into our pockets which doesn’t need to be repaid. See the difference?

  When the Government spends it does care what it spends it on. When banks lends, its only consideration is that we spend it on something which can be used as collateral for a loan. Housing is the ideal choice. This is why its so expensive!

  The build up of private debt has been the main and undiscussed problem for at least the last 30 years. Govts just about managed to keep the bubble from bursting after the 2008 GFC. I wasn’t optimistic that they’d be able to repeat the exercise when the next recession/crash hits.

  If the Middle East turmoil continues, the price of oil will surge and we really will be in the mire. I’d originally thought of a different word!

  So we can hope for humanitarian reasons that Israel doesn’t overdo it in Gaza and also for our own more selfish concerns.

• Joe Bourke 14th Oct '23 - 1:36pm

  Good point, Jenny.

  Access to credit for SME’s is not so much a theory as an observation that all governments make. It is well understood by accountants and business advisors that access to capital is an essential pre-requisite to firm expansion and therefore job creation. However, as you note at a macro level energy input is a limiting factor. Growth fuelled by increased use of hydrocarbons is not a practical option going forward. That just leaves renewables and nuclear. As to what we might need to stop doing, I expect that will be over-consumption, plastic use, food waste, meat and fish products, synthetic clothing etc. Perhaps more modest living standards comparable to that of the 1970s, when we could fix cars and houses ourselves and two or three pairs of shoes was more than enough.

• Joe Bourke 14th Oct '23 - 2:05pm

  Peter Martin,

  effective channelling of the quantity of bank credit creation. is what has sustained the German economic model and the Chinese economy for the past 40 years.
  Any money creation simultaneously creates an asset and a liability whether it is private or public. Whenever government spends money into the economy it is creating a liability for taxpayers, whether it is settled in the same tax year or is deferred to future years.
  Government spending puts money in some pockets while creating liabilities for taxpayers as a whole. Government spending on interest puts money in the pocket of those that receive the interest, but it is taxes that ultimately funds those interest costs.
  All debts have to be repaid or refinanced. The issue is whether they are repaid in equivalent purchasing power or depreciated currency and what are the debt service costs. The sterling debt built up in WW2 was mostly inflated away over the ensuing decades and I expect we will need a similar form of Financial repression to address today’s debt levels i.e. the debt will be inflated away by utilising yield curve management to fairly rapidly depreciate the purchasing value of money in circulation. It is that financial repression that leads to private debt build-up, rising wealth inequality and potentially stagflation.
  Private debt build-up is closely associated with the housing market and since the financial crisis low interest rates have seen a large accumulation of corporate debt replacing equity finance i.e. much higher levels of leveraging in both the household and corporate sectors. J P Morgan is warning of the risk of stagflation if interest rates reach 7% for the US economy Jamie Dimon issues two major warnings about the economy

• Peter Martin 14th Oct '23 - 4:11pm

  “effective channelling of the quantity of bank credit creation. is what has sustained the German economic model and the Chinese economy for the past 40 years.”

  These two countries are net exporters. It’s payments for net exports which create the net credits in the economy. Unfortunately whilst this model might work for the net exporters, it doesn’t work in the general case. We can’t all sell more than we buy.

  “Whenever government spends money into the economy it is creating a liability for taxpayers”

  Its actually also creating a means whereby those taxpayers can actually settle their liabilities.

  I think we both agree that too much spending creates inflation and an overheated economy. Though why you then think that inflation is primarily addressed by raising interest rates has to be a little incongruous. Too little spending means too little money in the economy which in turn means recession and too little taxation revenue.

• Michael BG 15th Oct '23 - 12:34am

  Joe,

  Every increase in inflation drops out of the inflation measure after 12 months. However, as the costs of petrol and energy had increased this led to increases in the price of everything else causing even more inflation. The increase in petrol and energy prices were part of the reason inflation increased by 2% in April 2022 and by October 2022 it was 4.9% higher than in February 2022. If the government had removed the petrol and energy inflation in April, and October, perhaps by November 2022 inflation would have been 4 or 5% lower and the bank rate would be 2% lower than now.

  I am not aware of any evidence that interest rates are increased when there is economic growth and no increase in inflation.

  If a government can stimulate demand during recessions it can stimulate demand at any time. The stimulus creates economic growth when there is spare capacity in the economy. If businesses know that the government is stimulating demand then they are more likely to invest in their businesses to increase production to meet that demand.

  You recognise that if governments borrow for investment this can generate economic growth. You haven’t answered by question clearly. You seem to be saying that increasing the quantity of money and giving it to SMEs will provide economic growth. Do you accept that if this increase in money is given to the government for investment (rather than the government borrowing the money) this can generate economic growth?

• Joe Bourke 15th Oct '23 - 2:11am

  Michael,

  increases in the money supply have time lags before they feed into inflation. During the pandemic supply was constrained and savings built-up. As lockdowns ended and supply chain blockages eased spending increased rapidly. Huw Pill, the BofE chief economist has said the Bank of England’s pandemic-era money printing programme are partly to blame for the cost of living crisis Top Bank of England official finally concedes printing money – and lockdown – fuelled inflation crisis “…even before Russia’s invasion of Ukraine in February 2022, which caused gas prices to spike, inflation was already at 6.2 per cent – more than three times the Bank’s target of 2 per cent”.
  Evidence that Interest rates follow nominal GDP upwards is presented in this paper an empirical examination of the relationship between interest rates and nominal GDP growth in the US, UK, Germany and Japan
  “Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth”.
  Stimulating aggregate demand with increased deficits in an inflationary environment is only adding fuel to the fire and one of the causes of stagflation. Focused measures that target specific outcomes are required such as job guarantees that target long-term unemployment and making credit readily accessible to SME’s who create the majority of new jobs.
  The great bulk of investment spending is undertaken in the private sector (83.5%) with the government accounting for the remainder. Government investment spending facilitates private sector investment An analysis of investment expenditure in the UK
  Sustainable long-term growth in economic output is a consequence of the increased productivity of available land, labour and capital.

• Jenny Barnes 15th Oct '23 - 9:33am

  There seems to be a confusion between the price of something rising and inflation.
  Indeed, inflation, which means increasing amounts of money chasing the same amount of economic output, causes price rises. However, the increases in the price of energy are not inflation as such. Higher costs of energy in the context of the same amount of money means that more money per unit of energy will be spent, so either less energy will be bought and the same amount of other things, or more money will be spent on energy and less on other things. No inflation, just a price rise. If you look at the price of oil over the last few months you can see the effect. Mid year, prices were rising and around 95$/bbl. Now, despite cuts in Saudi output to prop up the price, it’s around $85/bbl. So the world is buying less of it. This, btw, would indicate a global recession.

  The UK inflation has been mostly to do with the money created for the Covid interventions: furlough, eat out to spread it about, etc.

• Jenny Barnes 15th Oct '23 - 9:36am

  growth in economic output is a consequence of increased energy consumption.
  that’s where the extra productivity comes from.

• Peter Martin 15th Oct '23 - 10:02am

  @ Jenny,

  There isn’t a direct link between GDP and energy consumption. We’re quite a lot better than most in the world in that respect. The type of energy used is also a major factor. Burning coal to obtain it has to be the worst, and constructing wind turbines and fitting solar panels is of course much better. So it’s really about GH emissions rather than the use of energy per se.

  https://www.theglobaleconomy.com/rankings/energy_per_gdp/

  @Joe,

  “increases in the money supply have time lags…..”

  Unless you’re prepared to explain exactly what you mean by “money supply” this statement and all other statements about what it may or may not have are totally meaningless.

• Joe Bourke 15th Oct '23 - 1:12pm

  Jenny,

  the economist Steve Keen makes the same argument about the role of energy in production Labour Without Energy is a Corpse; Capital Without Energy is a Sculpture describing energy as a third factor of production together with Labour and Capital. From a Georgist perspective energy would be recognised as a component part of Land and natural resources as would physical capital constructed or manufactured from those resources i.e. Land comprises all base elements and the radio spectrum.

  The 18th century Physiocrats viewed the production of goods and services as equivalent to the consumption of the agricultural surplus, since human or animal muscle provided the main source of power and all energy derived from the surplus from agricultural production. Profit in capitalist production was really only the “rent” obtained by the owner of the land on which the agricultural production took place.

  Peter Martin,

  for the purposes of this discussion, money supply can be defined as the total of bank liabilities.

• Peter Martin 15th Oct '23 - 1:38pm

  @ Joe,

  Are you talking about BoE liabilities or commercial bank liabilities? Or Both.

  What about Government don’t they, for example, the Treasury, have any liabilities which might be included?

  Wiki mentions M0,M1,M2,M3, MB, MZM, So which one do you mean? Or do you have an alternative definition? MJB perhaps?

  https://en.wikipedia.org/wiki/Money_supply

• Joe Bourke 15th Oct '23 - 2:14pm

  Peter Martin,

  we are talking about CPI inflation and hence money that is in daily use for the purchases of goods and services in the economy i.e. the MI measure (by far the largest part of the money supply consists of deposits in commercial banks).
  After the 2008 Financial crisis most new money creation by the central bank was in the form of assets that stayed on bank balance sheets i.e. this money did not enter into circulation in the real economy for goods and services.
  That was not the case with the Pandemic. Then most new money creation by the central bank did enter enter into circulation in the real economy.
  In the first case the new money creation held off debt deflation after the financial crisis and reflated property and financial assets with little noticeable impact on CPI inflation measures. In the second case excess credit creation was first accumulated as savings and after a timelag spent into the economy as supply chains reopened generating core CPI inflation.
  Inflation should dissipate as a consequence of interest rate rises putting downward pressure on consumer spending and increases in savings in financial assets.
  The next government will need to increase taxation further to shore-up essential public services, redistribute income and maintain deficits at non-inflationary levels.

• Peter Martin 15th Oct '23 - 6:19pm

  @ Joe

  OK You’ve chosen M1. Fair enough.

  This includes notes and coins, travellers cheques, most bank deposits but it doesn’t include time deposits, notes and coins in bank vaults, and money deposited with the Reserve Bank (BoE in our case).

  So if Govt wants to reduce M1, why doesn’t it ask us to move what we have to those types of money which aren’t included in M1? We could buy Premium bonds, put our money into NS accounts, long term bank deposits or even keep it in bank vaults.

  We could all do that as part of our patriotic duty to reduce inflation. We’d need to be convinced that it would work though – which I’d say might be difficult.

• Joe Bourke 15th Oct '23 - 9:31pm

  Peter Martin,

  it is the flow of net new money creation via credit that is spent into the economy against the available supply of goods and services that impacts the general price level. People don’t borrow money from banks to buy Premium bonds, put it into NS accounts, long term bank deposits or keep it in bank vaults. They borrow money to spend on goods and services or invest in property, financial assets with a potential return greater than borrowing costs or business finance.

• Peter Martin 15th Oct '23 - 10:45pm

  @ Joe,

  Yes I understand that. People, as you imply, want to borrow money because they want to spend. It’s both the desire and ability to spend that sets the degree of aggregate demand. This may be inflationary if the supply of goods and services is inadequate.

  The conventional view confuses cause with effect. The cause of the demand is the desire and ability to spend. The effect is to increase the money supply which goes far beyond your chosen M1. It’s quite likely that when when money is lent by the banks to purchase housing that the sellers of the housing will purchase some Government bonds, including Premium bonds, or National Savings certs, or long term bank deposits which don’t count as M1 just as they could put it in a bank deposit which does count as M1.

  So if I were to add a new definition of money supply it would include everything that could possibly be called money. This would be just a good an indication as your M1.

  It would still be an effect – not a cause.

  The cause of any change in aggregate demand can be a change fiscal policy, a change in monetary policy or a change in the general desire to hold government IOUs or any IOUs which are denominated against them (cash, bonds, bank deposits etc). It really doesn’t matter if cash is held in a wallet or is tied up as a bond. It doesn’t take long to change it.

• Michael BG 16th Oct '23 - 1:15am

  Joe,

  I stated when we had the first lockdown that it might cause inflation. I am not convinced that the Bank of England indirectly financing the furlough scheme caused inflation. Lockdown meant that production was reduced but the money people had (especially of those continuing to work full time) was not reduced by the same amount. At the time I suggested that the government should try to get people to lend their surplus money to the government so they could try to control how these funds re-enter the economy.

  In the four years before 2020 the average economic growth was 1.9% and the highest was 2.7% in 2017. The economy declined by 10.4% in 2020 and increased by 8.7% in 2021. It would have been difficult to judge that inflation would increase above 2% by August 2021. However the Bank of England should have been increasing the bank rate to 0.25% in November and 0.5% in December 2021 and the government should have introduced a new income tax rate, for those earning over £33,000 a year, 1p higher than the basic rate. Then in 2022 the bank rate should have been increased to 0.75% in February and 1% in March. These changes along with the ones I set out above should have ensured that inflation peeked at between 5% and 6% and maybe less if the bank rate had continued to increase to 2% by August 2022.

• Michael BG 16th Oct '23 - 1:17am

  Joe,

  I never suggested that the government should stimulate the economy in an inflationary environment. (A stimulus by its nature has to be financed either by more borrowing or by the creation of money as happened during Covid.)

  In the link you provided I couldn’t see where they presented the case that interest rates do not follow inflation rates.

  You seem to recognise that government investment spending facilitates private sector investment.

  You posted 13th Oct 11.26am that there will deflation in the future with prices and average wages being forced down. You posted 15th Oct 2.14pm that “the next government will need to increase taxation”. If there is a recession the government will not need to increase taxation to pay for more government spending. If instead the economy is growing then the government may wish to increase taxation “to shore-up essential public services, (and) redistribute income”.

  Jenny Barnes,

  If more prices increase than decrease you get inflation. This should lead to less items being purchased but not to the total value of goods purchased decreasing.

  Of course increases in energy prices are inflationary. Businesses and farmers have to pay more for their energy and so will want to pass these increased costs on to their customers – thereby increasing inflation by more than the original increase to energy prices.

  To increase production it is highly likely more energy will be consumed.

• Joe Bourke 16th Oct '23 - 1:57am

  Peter,

  what matters is where the net increase in lending is channelled. Monetary aggregates don’t tell you how the increases are disaggregated between the housing and stock markets, business investment (including new builds) and consumer spending. Only the last two are components of GDP.
  Demand is the desire to spend. That desire is enabled by income and credit. Rent inflation is dependent on rising nominal incomes, principally wages chasing a constrained supply of rental accommodation.
  It is the creation of credit in excess of the ability for output to expand that creates the inflation that is seen in house prices, financial assets and/or consumer prices. When credit creation slows then disinflation or deflation appears as can been seen in the housing market now. Nominal house prices will decrease while rents rise with nominal wage inflation. Stock market valuations/nominal share prices are a function of after tax earnings and interest rates. Expansion of consumer credit or increased government deficits in excess of the capacity of economy to increase the supply of goods and services will lead to CPI inflation. CPI Inflation will dissipate as consumer credit slows, consumer spending out of disposable income decreases due to higher interest costs and/or deficit spending decreases.
  Increases in prices for energy or food costs generated by supply shocks causes a shift to a higher proportion of spending on these costs and a lower proportion of spending on discretionary consumer goods and services i.e. a shift in the composition of spending and/or a reduction in levels of household saving. It is not the increase in the general price level that persists and that is attributable to the declining purchasing power of the currency. That is a function of the quantity of money put into circulation against the level of output the factors of production are capable of producing at any given time.

• Joe Bourke 16th Oct '23 - 2:41am

  Michael,

  I think most economists would agree that interest rates should have been increased earlier, perhaps as soon as inflation spiked over 2.5% in June 2021 and kept increasing thereafter. The BofE at the time were of the opinion that the inflation was transitory and would not persist as has turned out to be the case. This parliament will have raised taxes by around 4% of GDP of=r about £100 billion UK facing permanent higher taxes. That is a steep increase to absorb in a relatively short period of time.
  I think we are likely to see disinflation (i.e. a decrease in the rate of inflation) in consumer prices and outright deflation (i.e. a decrease in the nominal price level) in the housing and stock markets.
  A government spending stimulus to address a recession is a short-term increase in deficit spending. To maintain higher levels of government spending as a % of GDP permanently without recreating inflationary pressure by approximating deficits to the level of capital spending and keeping a lid on debt service costs requires tax increases. As the IFS has written recently “Without tax rises, UK public service and benefits provision will not simply tread water, it will deteriorate. Unless levels of tax increase substantially, a reduction in the scope of the public services that the British state provides is likely inevitable” UK faces stark choice of higher taxes or decline in public services,

• Peter Martin 16th Oct '23 - 8:46am

  @ Joe,

  A detailed discussion of aggregates and disaggregates is getting away from the main issue which is how economic mismanagement is causing ever more people to be ensnared in poverty.

  During the Covid pandemic the government wasted a lot on wasteful, and some would say corrupt spending. Nevertheless it did provide much needed support to many. This was done by employing an extremely loose fiscal policy. There were some who predicted severe inflationary consequences, and no doubt they will claim their warnings were fully justified. Then we had various supply shocks due to Covid disruptions and the effects of the Ukraine war. So we can at least say that the Covid spending wasn’t entirely responsible for our inflationary problems.

  We are never going to agree on the details but no-one has argued that the inflation was caused by a over lax monetary policy. Therefore, trying to solve a partially fiscally created problem by applying an over tight monetary policy makes no sense at all.

  We’ve already seen how much of a difficulty this is to those who are struggling to pay rents and mortgage costs on their housing. We’ve yet to see the extra poverty that will be caused by the coming recession. This could easily have been avoided. The political message should have been that costs of the Covid spending needed to be recouped by a temporary rise in the rates of taxation.

• Michael BG 16th Oct '23 - 10:51pm

  Joe,

  The June 2021 inflation rate was 2.5%; it was back to 2% in July. Therefore the Bank of England could have been correct that inflation was transitory. The reason I wrote that the bank rate should have been increased in November was that by then it was clear that the inflation was not transitory with the rates being August 3.2%, September 3.1% and October 4.2%. The 2021 autumn statement did not increase tax from then.

  To pay for increasing the funding for the NHS, funding our childcare and benefit policies and our social care reforms we will need to increase government revenue. But we have not set out what tax changes and reforms we would implement to pay for them. It would be good if the Federal Policy Committee would set up a working group to bring a policy paper on our taxation policies to our next Autumn Conference.

  Peter,

  I agree that the government should have increased taxes from November 2021.

• Joe Bourke 17th Oct '23 - 12:53am

  Peter,

  the loose fiscal policy during the pandemic was a necessary response and not of itself inflationary in a recessionary episode (unless the extra borrowing had led to a devaluation of the currency). It was the extent of the QE that went alongside the borrowing in financial markets to keep interest rates pegged near zero that generated the excess money creation and build-up of savings during the pandemic Investors sceptical over Bank of England’s QE programme Without the QE a big part of the government borrowing would have just been replacing existing savings held with banks with savings in gilts and perhaps not led to the build-up of excess savings that began to be spent as lockdowns eased.

  As to whether there will be a recession, I am with John Kenneth Galbraith on this one. “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
  If there is a recession before the next election I expect the Tories will cut taxes. If it’s a Labour government then I expect we will see increased spending. Either way there is likely to be a significant fiscal response.
  If higher interest payments are trickling down from wealthier recipients to spending at lower levels of the income scale, then the obvious response would be a supplementary tax on banks net interest earnings as Margaret Thatcher did in 1981 and some European countries have done. That would aid in reducing the stimulative effect of higher deficits generated by higher public debt service costs.

• Joe Bourke 17th Oct '23 - 12:59am

  Michael,

  you are right to say it would be good if the Federal Policy Committee would set up a working group to bring a policy paper on our taxation policies to our next Autumn Conference.

• Peter Martin 17th Oct '23 - 9:22am

  @ Joe,

  Government spending into the economy is generally agreed, by all branches of economic thought, to be reflationary/inflationary unless covered, at least to some extent, by taxation revenue. The MMT view is that the imposition of taxation creates the fiscal space for currency issuing Governments to spend without adding to inflation rather than to collect money to be able to spend. It’s a different and entirely logical view but not quite as different as some would claim.

  It is the removal of the spending power which is the important factor. Of course, during the pandemic when there wasn’t much to spend our money on anyway taxation was having more than its usual effect. The amount of fiscal space generated was greater than it normally would be. This enabled government to spend more to keep the economy going without inflation rising. Our savings built up, at least in aggregate, though not everyone was so fortunate. This also translates into a Government deficit. Their deficit is, to the penny, equal to everyone else’s surplus.

• Peter Martin 17th Oct '23 - 9:27am

  cont/

  It wasn’t ideal but I think we all agree that this had to be done at the time. Consequently, when the economy restarted, there was more spending power available than there would have been otherwise. This resulted in inflationary pressures. There were other factors, too, on the supply side caused by Covid disruption and the Ukraine war. We can argue about the extent of each one but none of these were caused by a significant loosening of monetary policy during the Pandemic.

  Therefore there was no need to tighten it up afterwards. If demand needed to be reduced it should have been via the taxation system. This would have been far more equitable than increasing interest rates. It would have meant we were all ‘paying the Covid bill’ rather than just those who now face increased bills on their mortgages and rents. Yes we would all have been slightly worse off as a result but a properly designed response would have protected the least well off and prevented a rise in poverty.

• Joe Bourke 17th Oct '23 - 3:31pm

  Peter,

  when we talk about government deficit spending into the economy, it is only reflationary in the sense that it utilises/recirculates increases in household savings that are not otherwise being utilised by firms for spending on investment. For economy wide inflation to occur there has to be a debasement of the currency by devaluation of its purchasing power. That has been consistent throughout history. Borrowing existing household savings surpluses is not inflationary as such, at least in the short-term. Monetising the debt is. More importantly,. in a debt based economy it is excess credit creation in the private banking sector that is more usually the principle source of inflation.
  Inflation erodes the purchasing power of money and that is why the British pound has lost 93% of its value since 1973 The British pound has lost 93% its value since 1973
  Not everyone was fortunate enough to accumulate savings in the pandemic and government deficits do not mean that all (only some) suddenly have more savings. They do mean, however, that a future liability is created for taxpayers on the liability side of the financial assets held by those who do have savings in the form government debt rather than investments in firms. That pandemic liability has started to come due now with the personal and corporate tax increases we are seeing and the tax increases or inflation we will need in the future to contain the debt and the costs of servicing that debt.

• Jenny Barnes 17th Oct '23 - 4:37pm

  Michael BG “Of course increases in energy prices are inflationary. Businesses and farmers have to pay more for their energy and so will want to pass these increased costs on to their customers”
  But if the money isn’t there, then their customers will either pony up the increased prices and buy less of something else, or buy less of whatever the businesses & farmers produce – which might cause them to either go out of business or cut their prices.
  So, no, an increase in energy prices does not cause inflation. In fact, if anything, it’s deflationary, as it would take demand out of the economy.

• Peter Martin 17th Oct '23 - 5:11pm

  @ Joe,

  I can’t help thinking that some Economists make life difficult for themselves and end up talking a load of tw*ddle.

  If we do a simple though experiment (physicists like these), considering a simple economy with 100 participants earning £1 perday and purchasing 1kg of potatoes to consume perday everything is fine providing that 100kg are offered for sale.

  If it drops to by 5% to 95kg then the price will have to rise so that £1 buys only 0.95 kg. The new price is therefore 1/0.95 = £1.052 per kg.

  If a tax of 5p perday is applied to their wages, each will have a spending power of 95p to purchase 0.95kg of potatoes. So, now the price stays the same at £1 per kilogram. This is if there’s a supply reduction.

  If on the other hand if the government had just created some extra money, or borrowed some extra money, to pay the workers 5p per day extra, and it really doesn’t matter which, we’d have a similar imbalance which is immediately rectifiable by a 5p perday tax rise. This is contrary to your statement of:

  “Borrowing existing household savings surpluses is not inflationary as such, at least in the short-term. Monetising the debt is.”

  It really doesn’t matter. Borrowing of household savings is just swapping one type of Govt IOU for another and so can’t be called borrowing in the normal sense of the term.

• Peter Martin 17th Oct '23 - 6:12pm

  @ Jenny,

  “So, no, an increase in energy prices does not cause inflation. In fact, if anything, it’s deflationary, as it would take demand out of the economy.”

  It can be, and is, both. The process is known as “Stagflation”. Energy prices rise because there’s less of it readily available. There’s no getting around that. We then have less money to spend on other things as you suggest.

  The Stagflation of the 70s was used to discredit Keynesian economics and bring in the monetarism of the 80s. It was claimed, wrongly, that Keynesian economics had declared this to be impossible. The Keynesians should have fought their corner better.

• Joe Bourke 17th Oct '23 - 9:35pm

  Peter Martin,

  “Borrowing of household savings is just swapping one type of Govt IOU for another and so can’t be called borrowing in the normal sense of the term”. It is accurate to say that one type of debt (bank liability) is being swapped for another (taxpayers liability). Existing households savings (in excess of firms investment spending) are deferred spending that the government is bringing forward with its deficit spending to maintain demand. That is an intertemporal adjustment of the timing of spending. Contrast that with increasing the supply of money circulating in the economy (through open market operations) in excess of the capacity of real resources to generate additional output for whatever reason i.e. supply is largely fixed at the time the extra money savings are being spent . Generally indicated by high inflation and low unemployment. That is potentially inflationary. If the government is the source of the money creation in excess of capacity, then quantitative tightening (open market operations) needs to be undertaken or taxes increased to withdraw the excess money creation and bear down on inflation, as has been the case.
  If the source of the excess money creation is private banks then the quantity of bank lending needs to reduced so that loan repayments exceed new lending for a time i.e. credit tightening to reduce inflation.
  Bank lending can be reduced in a number of ways. One is by increasing the price of borrowing via interest rates. However, if that is generating higher deficit spending because taxes are not increased to cover the debt service costs, it is less effective, as while you are reducing the increase in private debt you are increasing public debt and stimulating nominal gdp rises which may itself lead to further market driven rate increases.
  Another more direct method of credit tightening is allocating lending quotas for lending into the housing market, credit card and personal loan sectors to regulated banks. Economists in China now distinguish between two kinds of monetary policy: “aggregate policies”, like interest rates, that affect the whole economy and “structural policies” that expand or restrict lending to specific sectors China leads in precision-guided central banking. Does it work?

• Michael BG 17th Oct '23 - 9:55pm

  Joe,

  During the Covid crisis many businesses increased the size of their debts; to have increased interest at this time would have brought about a recession with even more companies going bust or reducing their staff levels. The problem was the amount people couldn’t spend. This is why the government should have come up with a way for them to have that money, perhaps by having creating a special national bond which could be purchased from the banks. And of course the Bank of England should have provided the funds directly to the government rather than buying back government debt.

  It was you who wrote, “drive interest rates back down over time and bring economic growth to a standstill as bank credit freezes up. … will then be forcing down prices and average wages across the economy” 13th Oct 11.26am.

  Do you know anyone on the Federal Policy Committee who you could lobby to set up a taxation working group this year?

  Peter,

  During Covid the government borrowed money which seems to be equal to the amount the Bank of England created by buying government debt. Therefore the deficit was not equal to everyone else’s surplus.

  I agree that there were supply side issues caused by Covid disruption which fed into inflation in 2021 and 2022.

• Michael BG 17th Oct '23 - 9:56pm

  Jenny,

  We can agree that when businesses and farmers increase their prices people will have to buy less of somethings so they have the money to pay the increased prices or they will buy less. However, it is the increase in these prices which are captured by measuring the inflation rate.

  If the inflation rate is higher than the rate of earning increases then this should be deflationary unless the government or the Bank of England are stimulating the economy.

• Joe Bourke 17th Oct '23 - 10:20pm

  Michael,

  the coronavirus business loan scheme made available during the pandemic did not require any loan repayments in the first year and there were further options to extend the loan term from 6 to 10 years and pay interest only for six months after the first years payment holiday.
  There probably could have been better ways of distributing support during the Pandemic, but in the rush to get support out the furlough scheme worked reasonably well in keeping unemployment low in the circumstances.
  With an extended credit squeeze the danger to be avoided is debt deflation. Reducing the level of lending to reduce inflation can only go so far. If deflation were to take hold and nominal prices of goods and services and average incomes were to begin falling, private debt defaults would become inevitable and a banking crisis with it, requiring BofE intervention. The housing market is seeing deflation in nominal prices, but this is a reversal of the house price inflation seen during the pandemic so far. The policy objective is price stability i.e. neither excessive inflation or outright deflation.
  I don’t know anyone on the FPC to lobby re: a taxation working group.

• Peter Martin 18th Oct '23 - 9:23am

  @ Joe,

  ” It is accurate to say that one type of debt (bank liability) is being swapped for another (taxpayers liability).”

  No it isn’t.

  Money we have in a commercial bank is ultimately a government liability too. If the bank was unable to guarantee our deposits, ie its own liabilities against government credits, it would be insolvent. We just assume that our banks can do just that. We don’t normally think in terms of whose liabilities our deposits are valued in. However, this would change very quickly if we went to the ATM or teller to withdraw some cash and we were told that the bank wasn’t in a position to supply that at the moment.

  When a Govt says it is borrowing our money what it really means is that we are swapping our cash, or other BoE defined liabilities, for Treasury liabilities in the form of gilts, NS certificates or even Premium bonds. We aren’t any worse off as a consequence.

  If we consider the BoE to be an integral part of government then it’s not difficult to see that it’s just an IOU swap. Prof Wray mentioned this in the link I gave you a week or so back.

• Peter Martin 18th Oct '23 - 10:19am

  @ Michael BG,

  “During Covid the government borrowed money which seems to be equal to the amount the Bank of England created by buying government debt. Therefore the deficit was not equal to everyone else’s surplus.”

  It was still equal.

  The BoE came out of the deal at the time notionally even because they’d paid out cash on the one hand and received bonds to the same value on the other. There’s been some shift since because the bonds have changed in value since. That’s a slight complication to be resolved by the BoE and Treasury.

  The Treasury used money from the sale of new bonds to shore up the economy so the equality still applies.

• Joe Bourke 18th Oct '23 - 1:06pm

  Peter,

  money we save for a day, a week a year or more and deposit with a commercial bank is an unsecured loan we make to the bank. It is not a government asset or liability simply because it is denominated in the unit of account. The fact that deposits are unsecured liabilities is why we have deposit protection schemes. Cash you put into UK banks or building societies – that are authorised by the Prudential Regulation Authority – is protected by the Financial Services Compensation Scheme (FSCS) up to £85k.
  If a commercial bank becomes insolvent a procedure called bail-in can be applied. This allows for the write-down of debt owed by a bank to creditors (depositors) as happened with the Cyprus banks Big depositors in Cypriot banks to lose 8.3 billion euros: document
  When the government borrows money what that means is that we are moving a private loan to a bank to a private loan to the government. The concept that the private property of citizens held with commercial banks in the form of money deposits is a government asset or liability is erroneous.
  The BofE is an integral part of government and acts as a clearing house for commercial banks. However, that clearing facility via reserve accounts does not make private deposits held with commercial banks government property. When it comes to bank deposits, the legal principle of ‘Caveat emptor’ applies. Any bank deposit amount over £85k is unprotected. That is one of key reasons why investors buy government bonds. That provides the security of taxpayers as a whole to redeem the debt (that is why it is called public debt), although there is no promise that the debt will be redeemed at the same level of purchasing power i.e. it is not risk free and its value can be inflated away. That’s among the slight complication to be resolved by the BoE and Treasury that you note in your comment to Michael BG.

• Joe Bourke 18th Oct '23 - 1:45pm

  The BofE losses on Bond sales were recently estimated at £150 billion Bank of England set to incur £150bn loss from bond sales after interest rate rises “The bill will need to be paid by the Treasury out of current spending, hitting Whitehall departmental budgets, after successive chancellors failed to set aside funds to cover the losses”.
  Banks and other financial institutions holding low yielding government bonds have seen large falls in the market value of their bond holdings. These falls in market value are recognised in financial accounts if the investments are classified as available for sale i.e. there is an expectation that the bonds will be traded rather than held to maturity. If the bonds are held to maturity they will be redeemed at face value (albeit at much reduced purchasing power), but the interest earnings on those investments will be far below the rate of inflation i.e. a negative real interest rate. On the government side it has the benefit of use of the funds at low interest rates (until the time comes to refinance the debt) to offset the losses in market value incurred on the bonds and can redeem the bonds in depreciated currency.
  Financial Statements are typically prepared on the basis of historical cost accounting. However, when high rates of inflation are prevalent it is recognised that historical cost does not give a true and fair view of real changes in economic value and alternative accounting methods are applied at a time of rampant inflation Accounting for inflation

• Peter Martin 18th Oct '23 - 2:56pm

  @ Joe,

  When anyone buys a Government bond the Government ultimately wants BoE IOUs as payment just as they do when we pay our tax. We might think we’ve got the money in our Barclay’s account, or whatever, so we also think that when we write out a cheque or make an on-line transfer that the end of it.

  However behind the scenes there’s another process at work. The Government doesn’t want Barclay’s bank IOUs or liabilities. To complete the transaction Barclay’s needs to make a payment to Govt from its reserve account at the BoE. It can only do that if it is solvent.

  When the Government borrows it is simply swapping one type of Govt IOU (a gilt or bond) for another form of government IOU (cash or a liability of the BoE). Just as Prof Wray explained.

  It rather like me borrowing a bag of sugar from you. I give you an IOU for the sugar. If I want to borrow another bag it makes no sense for me to ask you if I can borrow back my first IOU so I can buy another bag. I may, however, swap that for another IOU promising that I give you 20% more sugar but you’ll have to wait 5 years to get it.

  That’s all government borrowing is. Just a swap of one IOU for another.

• Joe Bourke 18th Oct '23 - 4:06pm

  Peter,

  BofE IOU’S are paper currency. All other money (including base money)is created in the same way by making a ledger record of transactions using the same unit of account.
  When the BofE makes a loan to government it simultaneously creates an asset and a liability. The asset is the loan due from the treasury and the liability is the treasury’s account at the BofE. The BofE calls its liabilities reserve accounts. Commercial banks call their liabilities current or deposit accounts. They are the same thing. A ledger record of a liability. The treasury will meet the loan liability by depositing tax receipts or borrowing from the existing private sector money supply held by commercial banks through a combination of the issue of bonds or funds held on deposit with the BofE by commercial banks in reserve accounts.
  The banking sector as a whole had almost no excess reserves before 2007. Once QE was introduced the BofE began paying interest on all reserves from 2009 albeit at low rates. The BofE can create as much reserves for the treasury to draw on as the government authorises at any time, while recognising that the treasury is creating a taxpayer liability at the same time.
  Ultimately government spending is constrained by how much tax it can reasonably or politically impose, the level of household savings from income in the economy not otherwise employed by firms for investment, available borrowing from foreign sources and the level of new money creation in the banking sector as a whole that can be absorbed by nominal gdp growth without generating excessive inflation.
  It is true to say the QE is a swap of one type of taxpayer liability (bonds) for another taxpayer liability in the form of reserve account liabilities at the BofE that do now pay interest. However, the take up of new bond issuance (facilitated by QE) can be and is quite often financed by new money creation in the commercial banking sector for speculative investment in Gilts. It was that borrowing/leverage that almost collapsed Pension funds last October Bank confirms pension funds almost collapsed amid market meltdown
  New money creation in the commercial banking sector (not base money) to buy bonds with near zero rates that finance large deficits has obvious inflationary potential

• Michael BG 19th Oct '23 - 12:36am

  Joe,

  The coronavirus business loan scheme was only open for a year, but as the government only guaranteed 80% of the loan, there may have been problems getting them. While there was no requirement to pay interest or make repayments in the first year, the interest rates were linked to the bank rate, so if the bank rate were increased from June 2021 (this being well over a year from the start of the scheme) this would make things difficult for those businesses which took out a coronavirus business loan. As the bank rate increases these businesses are being put under increasing pressure.

  House prices have fallen in the past. I remember having negative equity in the late 1980s.

  Peter,

  You seem to be missing the point I was making. The Bank of England purchased existing government debt. The seller of this debt then purchased new government debt. My point is that the government did not borrow the money people could not spend during the lockdowns. Some people had higher bank balances and the government did not borrow this money. Therefore the government’s deficit had no relationship to these funds people couldn’t spend.

  The theory I think you are referring to is:
  (Savings – Investment) + (Imports – Exports) + (Taxation – Government Spending) = 0

  Therefore (Taxation – Government Spending) does not equal Savings.

• Peter Martin 19th Oct '23 - 6:06pm

  @ Michael BG,

  The Government deficit is actually (Government Spending – Taxation)

  Everyone else does include our overseas trading partners which accounts for (imports – exports)

  I used the term ‘surplus’ rather than savings which includes investment too. ie (S-I)

  @ Joe,

  You are pretty good at making things sound more complicated than they need be. However it’s obvious that cash is a government IOU which doesn’t offer any interest on it. A bond is a government IOU which does offer some interest. Both can serve as money. Who cares if someone wants to pay us with bonds rather than cash providing they are transferable? I must have understood at least some macro-economics at quite an early age when an aunt gave me £5 of premium bonds as birthday present. I was just as happy as I would have been if she’d given me a £5 note.

  Similarly you’ve overcomplicated the banks money creation mechanism. When banks “create money” they are obviously not doing it in the way that many imagine. Some have actually taken this to mean they can do it in a magical way. They’d never go bust if they could do that! They are weighed down by the liabilities that offset the created credits on a 1:1 basis. Technically government has liabilites too, and also on a 1:1 basis. The difference is, though, that Government can, and does, live permanently in the red whereas commercial banks cannot.

• Michael BG 19th Oct '23 - 8:46pm

  Peter,

  Indeed, I should have written,
  (Taxation – Government Spending).

  You wrote, “Our savings built up, at least in aggregate, though not everyone was so fortunate. This also translates into a Government deficit. Their deficit is, to the penny, equal to everyone else’s surplus”.

  It is clearly implied that you are talking about people’s savings. People’s savings do not translate into a Government’s deficit. It would be useful if you were more careful with your language and make it clear that the deficit is not equal to savings, but is equal to the surplus of savings over investment and imports over exports.

• Joe Bourke 20th Oct '23 - 12:40am

  Peter Martin,

  cash notes are largely irrelevant for government financing. The cash reserves of private banks held by the BofE do carry interest just like bonds. When the Treasury issues bonds it will reduce the amount of reserves held with the BofE by member banks. You could argue that bonds are a unnecessary step in government financing, but you cannot argue that the government is not borrowing the excess savings of the public/foreign exporters that are not otherwise utilised by firms for investment spending (unless you argue that QE is enabling the borrowing). That is what finances deficit spending. The money is created by commercial banks initially to finance investment spending that in turn creates money savings in the economy. If that was not the case the government would have to run an overdraft with the BofE (monetary financing) as it did during the Pandemic for a time and forget about setting interest rates to control inflation Government agrees emergency funding deal with Bank. One way or another the costs come back to the public via higher taxes or higher inflation. Ultimately, the government is the agent of the public, It’s debts are public debts and its costs including depreciation of the currency are public costs.
  When reserves held with the BofE were negligible no interest was paid on them. Once QE began that policy was changed so that the BofE could maintain influence over short-term interest rates why removing interest on reserves would ‘tie one hand behind the back of the Bank of England’

• Peter Martin 20th Oct '23 - 1:29am

  @ Michael BG,

  Stephanie Kelton often makes such comments as fiscal deficits increase private savings. So you’re saying she should be saying the sum of private and overseas surpluses instead? I think that’s technically correct but it doesn’t change the fact that we can all only have savings because the government runs a deficit.The government spends money into the economy but can never recover it all back in taxation.

  The appearance of Investment in the National accounts is something that I’ve never been totally comfortable with. If I buy a computer for my own use, its consumption. If I buy it for my business that’s investment. What if I use it for a mixture of both? If we just call everything consumption then investment drops out entirely.

  @ Joe,

  I think we nearly all agree that money is an IOU of the issuer. So if Government is a currency issuer how does it make sense to say that it can actually borrow its own IOUs? I could theoretically borrow yours as you could borrow mine. We couldn’t borrow our own though. All your technical obfuscations seem designed to dodge answering this fundamental point.

  Cash in the sense of coins and banknotes aren’t that important as you suggest. My accountant uses the term for money held in the bank too. So it does have a wider meaning than just notes and coins.

• Joe Bourke 20th Oct '23 - 5:26am

  Peter Martin,

  the government is not borrowing its own IOU’s when it sells bonds to the public. When a private bank makes a loan it is buying the IOU of the borrower based on the customers pledge of future earnings and paying for that IOU with a deposit to the customers account. It is the borrowers IOU that creates current purchasing power and the deposit. It is that current purchasing power that the government is borrowing when it sells bonds, not its own created currency.
  Similarly, if a customer sells assets and lends the money to a bank by depositing it with them the sale of bonds will transfer funds from the banks reserve account with the BofE to the Treasury’s account with the BofE. In either case the government is not borrowing funds it has created itself. It is borrowing the funds of private parties which have been created in the commercial banking system.
  The BofE is normally prohibited from monetary financing on a large scale and hence government deficits have to be financed from savings held in the private banking system. It can be argued that QE is a form monetary financing that facilitates new bond issues by reducing the supply in the market, but the BofE will argue that it is not its purpose. It’s purpose is solely to lower interest rates. As the BofE is currently disposing of its bond holdings through so called quantitative tightening, it cannot be argued that QE is financing current deficit spending. The deficit is financed from private savings not government money creation.
  Deficit spending creates net assets for some, but there is always a liability for taxpayers on the other side in the form of public debt. The interest on that debt is neutral in aggregate i.e. the interest spending of government and borrowers is income for banks and bondholders. However, neither deficit spending or interest costs are neutral in terms of distribution. To the extent higher government interest spending creates higher deficits it may stimulate economic activity to some extent but is likely to be drowned out by higher costs for mortgage holders and others. When inflation has dissipated sufficiently, the tax take will need to increase to maintain an adequate level of public services. There is no getting around that.

• Peter Martin 20th Oct '23 - 9:44am

  @ Joe,

  “…the government is not borrowing its own IOU’s when it sells bonds to the public.”

  I agree. Except, as I have already said, what it is doing is swapping one type of IOU for another. Prof Wray perhaps explains it all better than I do in the link below.

  You can bring the private banks to complicate the issue if you like but essentially when the Government is selling bonds it is swapping its bond IOUs for cash IOUs.

  The problem the monetarists have is in thinking that Bond IOUs aren’t money whereas cash IOUs are. So after the recent rounds of QE they think the money supply has increased and therefore there will be more inflationary pressure. Yes there will be more inflationary pressure because QE forced down interest rates but not because the money supply increased. Its a downward change that creates the stimulus rather than the low level of interest rates themselves.

  MMT doesn’t understate the importance of having a functioning and efficient taxation system although I do accept that some of the supposed MMTers on the periphery don’t quite get the total picture. Profs Wray and Mitchell do though. They have both been very critical of the unnecessary poverty caused by a the faulty theories of monetarist economics.

• Joe Bourke 20th Oct '23 - 12:27pm

  Peter,

  Professor Wray claims there is no functional difference between the BofE selling bonds it holds to drain private bank reserves so as to influence interest rates and the Treasury selling bonds to the public to finance government spending.
  Professor Wray is describing an environment that assumes the central bank does not pay interest on reserves. We have not had that environment in the UK since 2009.
  The Treasury is not in fact selling bonds to influence interest rates. It leaves that function to the BofE. The Treasury sells bonds to keep its account balances at the BofE positive and will continue doing so even if that pushes up interest rates further. The Treasury is selling bonds to finance the governments deficit. Since the BofE started paying interest on reserves, open market operations are less important as private banks will keep their reserves on deposit with the BofE. Open market operations in the form of QE remain important when interest rates are near zero, but not otherwise.
  The BofE is currently selling its bonds to maintain its credibility as an institution that can fend off government pressure to deliberately inflate the currency to reduce the real value of debts Bank of England begins selling government bonds
  That is not the faulty theories of monetarist economics. that is just the reality of how money markets work and how the government finances itself.

• Peter Martin 20th Oct '23 - 1:35pm

  @ Joe,

  Prof Wray was talking in the context of what happens in America, so presumably there will be some differences between what happens there and here in the UK. The overall principle will be the same though.

  Your criticism assumes that the BoE is both independent and a separate entity from the Government which owns it. MMT rejects this distinction and considers the central bank to be an integral part of government. Therefore if the BoE is selling bonds it is because the Govt wants it to. Just like Govt wanted it to buy them in the first place.

  The phrase “the Treasury is selling bonds to finance the governments deficit” needs to be viewed in the same light too. It is essentially selling bonds because others wish to purchase them. Banks and other financial institutions will want to place their assets where they get some financial return on them as Prof Wray describes. If they get a better return on the bond market they’ll buy bonds. If the returns are better in central bank deposits they’ll place their reserves with them.

  It doesn’t change the “money supply” either way except for the effect of interest and yield payments.

  So theoretically the BoE could merge with the Treasury and there would be no more need to sell bonds. The BoE/Treasury would offer interest paying reserve accounts and the money would also be recycled back to government.

  The upshot of all this is that whereas you’ve used the word “reality” MMT would substitute “fiction”.

• Joe Bourke 20th Oct '23 - 3:21pm

  Peter,

  whether the consolidated government institutions of the Treasury and BofE borrows commercial bank reserves directly or sells bonds to substitute for borrowing of reserves, it is still borrowing and paying interest either way. The USA operates the same system.
  It is a fiction to say that all money is government issued IOU’s. It is not. Most money in circulation is debt based money created in the private banking system. UK Central bank assets circulating in the economy represents about 30% of broad money supply and is a liability of taxpayers. Tax liabilities can be deferred by borrowing from the public and such deficit financing can serve to maintain aggregate demand in the economy, but the debt service costs (or inflation costs if financed by money creation) have to be borne by taxpayers to do so. In a deflationary period such as the pandemic those debt service costs are a relatively low proportion of government spending. In an inflationary economic environment, however, they can be very significant if high levels of public debt have been accumulated. High interest incomes for bond holders will exacerbate inequality in much the same way as asset price inflation does in a low interest rate environment does. That is currently the situation for both the UK and USA.
  You don’t have to guess what the true purpose of the BofE and Treasury operations are. The rationale for monetary and fiscal policy is regularly reported and explained to Parliament. The political decisions are driven by ideology rather than economic theory.
  The operational mechanics of reserve accounting don’t change the reality of these directly observable facts despite Professor Wray’s theorising to the contrary.
  To address our societal problems with underfunded public and welfare services, we need to increase taxes on the wealthy and excess savings of households should be borrowed for public investment in housebuilding and infrastructure. That is both progressive political ideology and good economics.

• Peter Martin 20th Oct '23 - 8:16pm

  “It is a fiction to say that all money is government issued IOU’s.”

  I think we’ve covered this point before. I don’t disagree.

  “UK Central bank assets circulating in the economy represents about 30% of broad money supply”

  Didn’t you say 3% previously? Whatever the true figure they are 100% of the net assets in the economy.

  “Tax liabilities can be deferred by borrowing from the public and such deficit financing can serve to maintain aggregate demand in the economy”

  The public want to lend because they don’t want to spend. It’s the not spending that makes it possible for the Government to spend instead. This is just as true if they save the money in a piggy bank as it would be if they bought Govt bonds.

  ” The political decisions are driven by ideology rather than economic theory.”

  This seems rather an odd thing for you to say but I don’t disagree. The decision to impose austerity in the period of the coalition (2010-15) was driven by a warped political ideology rather than any correct economic theory on the need to “balance the books”. It was essentially a misapplication of a counter inflation policy.

  That came back to bite the Lib Dems in 2015 election and led to the Leave vote in 2016.

• Joe Bourke 20th Oct '23 - 11:47pm

  Peter,
  The 3% is cash with 97% being bank deposits. Around 30% of those bank deposits are currently held at the BofE by commercial banks rather than invested in bonds.That will decrease as the BofE sells off or does not rollover the bonds it holds.

  Gross spending in excess of income (GDP)has to be financed from somewhere if it is not financed by increased bank lending/money creation. We talk of gross spending as being the total of government, household and firms investment spending plus what is collectively spent on imports. Gross spending is enabled by income from wages + Rental and royalty income + Business cash flow (including exports) + Net interest and borrowings for net imports.
  Net Savings (foreign sector + households–government deficit are equal to firms investment spending Difference between Saving and Investment or alternatively you can say gross savings (foreign sector + households) are financing firms investment spending and government deficits. As the trade balance widens domestic savings tend to see a fall and a greater proportion of the government deficit may be financed by the foreign sector as a consequence.

• Michael BG 21st Oct '23 - 1:17am

  Peter,

  Perhaps you should see investment as the things businesses buy to increase their production or efficiency.

  I prefer

  Consumption + Savings + Imports + Taxation = Consumption + Investment + Exports + Government Spending

  Which is only true when the economy is in equilibrium.

  As this is the basis for sectoral balances, then

  (Savings – Investment) + (Imports – Exports) = (Government Spending – Taxation)
  is only true when the economy is in equilibrium.

  Joe,

  I suggested that during Covid the government should have borrowed people’s extra savings. How would the government do this when there is no Covid crisis?

• Peter Martin 21st Oct '23 - 10:03am

  @ Joe,

  It’s pretty much all, and more, of the Govt deficit which is financed by the ROW. See link below. The connection between the two deficits is often insufficiently appreciated. If ££ are leaving the economy to pay our net import bill they have to be replenished from somewhere to keep the economy ticking over. In the long term it is only Govt which can do this.

  The mainstream err in thinking that the Government deficit/surplus works in the same way as a household. Thinking a deficit can be reduced by a mixture of tax rises and spending cuts. A common mistake of various austerity programs.

  The other is to not include bonds in any definition of money supply. Anyone can promise to pay a sum of money on a bond at some future time. Depending on the credit worthiness of the issuer it will have a value right now. There is no reason why these bonds can’t be used as money if there is a free market in the buying and selling of them. The shorter the timescale the more the bond looks like issued money. So we can say cash and bonds are effectively the same thing in the limit of t=0. Some football clubs do issue bonds for their supporters to buy so aren’t they doing what the banks do when they issue money?

  Should we ban them from doing this on the grounds they are increasing the money supply and are therefore causing inflation?

  https://gimms.org.uk/fact-sheets/sectoral-balances/

• Joe Bourke 21st Oct '23 - 2:31pm

  Peter Martin,

  Professor Wray begins his article “The most basic macroeconomic rule is that one person’s spending equals another person’s income.” However, one person or a country can spend more than their own income through borrowing while another saves. That is the foundation of wealth inequality.
  In the Keynesian depiction of the circular flow of income and expenditure, leakages are the non-consumption uses of income, including saving, taxes, and imports. Leakages are equal in quantity to injections of spending from outside the flow at the equilibrium aggregate output. The model is best viewed as a circular flow between national income, output, consumption, and factor payments (Wage, interest, rent, and profit payments for the services of scarce resources). Savings, taxes, and imports are “leaked” out of the main flow, reducing the money available in the rest of the economy. Imported goods are one way this may happen, transferring money earned in the country to another one.
  Debt fuelled consumption (public or private) is not of itself a desirable social outcome. Investment in public infrastructure, housing and productive capital is. While economic growth may be largely determined by global conditions, more positive social outcomes, including full employment, can be achieved with intelligent industrial policy and steering of private credit creation towards productive investment and new housing supply rather than inflating of the existing housing stock or aggregate household consumption in excess of capacity for domestic output of goods and services as a deliberate policy aim.

• Joe Bourke 21st Oct '23 - 2:42pm

  Michael BG,

  I felt that the Post office Girobank was a good service for many people. I think encouraging small savers to use a post office savings account would be helpful for many people who either do not have a bank account or cannot get any kind of decent interest on their savings with commercial banks. Japan’s postal bank is very successful. With the Japanese public being prolific savers, it is one of the biggest banks in the world and has ATM’s near most train stations and at post offices throughout the country. Japan has financed first class public transport, schools, hospitals etc., with this souce of capital. Restoring the Girobank could draw a lot more deposits into government savings at lower rates of interest than are paid on commercial bank reserves by the BofE.

• Peter Martin 21st Oct '23 - 10:13pm

  @ Joe,

  “one person or a country can spend more than their own income through borrowing while another saves.”

  Prof Wray would probably also say it’s a basic economic rule that you shouldn’t mix the micro (as with an individual) and the macro (as with a country).

  I’m thinking you are meaning that countries like the UK and USA are the borrowers (=bad) , whereas countries like Germany, Taiwan, China South Korea are the savers (=good).

  Another basic rule of economics is that the purpose of exporting something that you’re good at is to be able to import other things which you’re not so good at. However the savers take it much further than that. At one time they’d have saved by accumulating gold bullion. Now they can only save by accumulating the IOUs of their trading partners.

  I really don’t know why they think this is in their interests in the longer term.

• Michael BG 22nd Oct '23 - 1:42am

  Joe,

  I like the idea of injections and leakages into the economy, hence the equation I posted yesterday. I remember having questions about what would happen to these values if one of them changes, and having to work out the effects of changes. These questions did not consider what increased government spending would be spent on, the important thing was the increase and how that increase works its way through the economy because of the multiplier.

  Girobank was privatised in 1990. National Savings and Investments still exist and see themselves as the ‘government savings bank’. I remember they used to advertise on the TV. They are the successor to Post Office Savings Bank, but they don’t do current accounts only savings. Therefore having such a financial institution does not make ‘excess savings of household’ available to the government to invest in new homes and infrastructure and so doesn’t really answer my question.

  Perhaps the problem are the rates NS&I offer. The Bank rate is 5.25%, but Premium Bonds is equal to 4.65%, their instant access and bonds are paying only 3.65% and their direct ISA only 3%. However government gilts don’t seem to be paying 5.25% either. If the NS&I were paying 4.65% on their instant access and 5% on their ISA people might change to saving with them.

• Joe Bourke 22nd Oct '23 - 2:38pm

  Peter Martin,

  you only have to look at Norway’s sovereign wealth fund or Japan’s positive net investment position compared to the UK’s negative investment position to see the benefits of an improved balance of trade; or even the UK when it still had a strong manufacturing sector and was not so reliant on the export of services.
  Exports, Investment and government expenditure are injections into the circular flow of income that exert an expansionary pressure on national income
  When imports consistently exceed exports the deficit on the current account increases foreign liabilities. Over time, the deficit will be increased by the interest payments on the capital surplus. The longer the deficit goes on the higher the level of investment income that will leak overseas. This means that in the future the economy will need to attract capital flows just to pay off the investment income due to overseas investors as well as the deficit on goods and services.
  The UK has been selling off its public infrastructure, companies and property to finance current account deficits for decades and accumulating debt services costs to overseas investors How Britain has sold more than half its companies to foreigners and foreign investors have large stakes in the banks that hold the mortgages on UK property. Now overseas private equity firms are buying up UK rental properties.
  Countries with a trade surplus don’t need to sell what Macmillan described as the ‘family silver’ or build up large overseas debts. Their public debt is financed by domestic savings. A large and persisent current account deficit is often a signal of other underlying problems such as a dearth of investment in productive capital stock and lack of international competitiveness.

• Peter Martin 22nd Oct '23 - 6:59pm

  @ Joe,

  Norway only has a population of 5.4 million so have something like 12 times more oil and gas reserves and revenue, per person, than the UK. So there isn’t really any valid comparison to be made.

  If you want to have an improved balance of trade you can let free markets determine how our economy operates. You’ll need to keep the exchange rate down for starters.

  It’s just basic arithmetic that for every surplus in trade must be balanced by a deficit. Therefore those countries which game the system to run a surplus will also dictate that those who don’t will run a deficit. They are the problem. Not us.

• Peter Martin 22nd Oct '23 - 7:02pm

  @ Joe,

  I meant you “you can’t let free markets determine how our economy operates”.

• Michael BG 22nd Oct '23 - 9:41pm

  Joe,

  “A large and persisent (sic) current account deficit is often a signal of other underlying problems such as a dearth of investment in productive capital stock and lack of international competitiveness.”

  In the 19th century the UK had a balance of payments surplus. After 1925 the pound was valued to high. In the 1950s and 60s it was again overvalued. After 1997 lots of Pacific Rim countries devalued their currency.

  It seems that history shows that a persistent current account deficit is often a result of an overvalued pound.

• Joe Bourke 23rd Oct '23 - 12:08am

  Peter Martin,

  Japan has almost double the population of the UK and no oil and gas reserves. Under a free floating currency, capital can flow freely and domestic discretionary monetary policy is possible, but at the expense of the security and stability of exchange rates. A weaker currency has not had any significant impact on the exports of Japan or the UK over the past decade.
  Japanese firms responded to a soaring yen during the financial crisis period from 2007 to 2009 by transferring production abroad. Many firms off-shored their production of low value-add products to foreign subsidiaries and shifted to producing only high value-add products in Japan.
  The yen began depreciating in November 2012 after the Bank of Japan began printing unlimited quantities of yen in an effort to raise inflation. Between November 2012 and March 2022, the real effective exchange rate depreciated by almost 40 per cent. There has been only a relatively small increase in Japan’s high value exports and only a small decrease in imports. Crude oil imports did not decrease in the face of a weakening yen. This is because the price elasticity of demand for oil is low. Japan needs oil, and will not reduce its oil imports even as the yen depreciates. A weaker exchange rate and higher oil prices place a burden on oil-importing countries such as Japan and the UK. That is not gaming the system that is just the terms of trade to which domestic consumption must eventually adjust. If you fix exchange rates you cannot have both a discretionary monetary policy and free international capital flows. That is the impossible trilemma.

• Joe Bourke 23rd Oct '23 - 12:40am

  Michael BG,

  the 19th century UK economy was pretty straightforward. Import commodities from colonies, sell textiles and manufactured goods to the rest of the world and use the accumulated capital to invest in domestic and foreign infrastructure projects that produce investment returns on capital. Free trade across sea routes was enforced by the Royal Navy and International debt payments by gunboat diplomacy when necessary. Classical economics, international telegraphic banking and accounting systems were developed to support this trading system.
  The costs of the Great War depleted much of British capital and export markets in South America and Asia were picked off by the USA and Japan in WW1 while bringing an end to the first era of globalisation. Britain’s return to the gold standard in 1925 did overvalue the currency until the economic strains of the great depression forced the final departure in 1931.
  Under the post-war Bretton-Woods system, the pound was devalued in 1949 and 1967 until being allowed to float after 1971. In the 1950s and 1960s, the balance of payments on current account moved into and out of surplus. The problem was that domestic recovery resulted in increased imports and pressure on exports, leading the government to impose a ‘stop’ with higher interest rates – but exports did not increase rapidly to replace domestic demand with the result that unemployment rose above the politically acceptable level of about 2.5 per cent, leading to ‘go’ of lower interest rates.
  We have seen two large depreciations of sterling in the aftermath of the financial crisis and Brexit referendum but it does not seem to have had that much impact on the level of UK exports that are now dominated by financial and business services.

• Peter Martin 23rd Oct '23 - 10:18am

  @ Joe,

  The US authorities rightly suspect there to be currency manipulation when a country runs a large current account surplus as the article in the link below describes. One way to lower the exchange rate is to export capital. The Japanese themselves claim that their current account surplus ” is due primarily to income from Japanese companies’ overseas investments and not a massive trade surplus.”.

  This would still be an indication that their capital account is in deficit and therefore they must be exporting capital to keep down the value of the Yen. Possibly this doesn’t count as “manipulation” in WTO rules but it certainly is in the normal sense of the word.

  The article concludes with the comment ” nudging the direction of the yen in one direction or another remains one of the finance ministry’s most important roles”. The term “nudge” might be somewhat of an understatement!

  It’s curious that the article claims “A stronger yen makes imports more affordable, but there are fewer imports for Japanese shoppers to buy compared to other developed countries. In 2018 Japan’s imported goods and services were 18% of GDP, compared to an OECD average of 30%.”

  Why so few? Japanese money is as good as any other. Are there other tariff barriers affecting their trading position?

  https://www.tokyoreview.net/2020/05/japans-currency-policy-in-times-of-uncertainty/

• Peter Martin 23rd Oct '23 - 10:37am

  @ Michael BG,

  “In the 19th century the UK had a balance of payments surplus.”

  I’m not sure that really means much in an era when gold was used as the ultimate standard. So the UK could just buy up gold bullion with the surplus rather than exporting capital for overseas investment or collecting the IOUs of deficit countries.

  Of course if you count the purchase of gold as an import then there isn’t a surplus. I don’t know for certain but I suspect it wasn’t.

• Joe Bourke 25th Oct '23 - 4:24pm

  Michael BG,

  you comment above re : injections and leakages. “These questions did not consider what increased government spending would be spent on.
  The twin deficits hypotheses says “Some economists believe a large budget deficit is correlated to a large current account deficit. This macroeconomic theory is known as the twin deficit hypothesis. The logic behind the theory is that government tax cuts, which reduce revenue and increase the deficit, result in increased consumption as taxpayers spend their new-found money. The increased spending reduces the national savings rate, causing the nation to increase the amount it borrows from abroad.
  When a nation runs out of money to fund its fiscal spending, it often turns to foreign investors as a source of borrowing. At the same time, the nation is borrowing from abroad, its citizens are often using borrowed money to purchase imported goods. At times, economic data supports the twin deficit hypothesis. Other times, the data does not.”
  In short, when the stimulus of a fiscal deficit results in increased spending on imports with little impact on exports, it suggests there is inadequate spare capacity in the economy to increase domestic output of the kind of products at the kinds of prices desired and the extra demand created is satisfied by increased imports. Increased imports without corresponding increases in exports have negative multiplier effects Negative multiplier effect

• Michael BG 26th Oct '23 - 10:09pm

  Joe Bourke,

  When government expenditure is increased and taxation is not I would expect the savings ratio to either stay the same or increase not decrease. A decrease would mean that people decided not to save the same proportion of their extra money. Reducing the amount the government receives in taxation is a change on the other side of the equitation. It is a known problem in the UK that the ratio to buy imports seems to increase when government spending increases. Peter Martin always points out that if foreigners lends to the government in the government’s currency this is not a problem. You have said that it is bad thing if foreigners buy assets with the currency they receive from their exports, so it must be better if they lend that money to the government.

  The article you link to is an example of the multiplier effect if government spending is cut. Of course this produces a larger reduction in the economy, as an increase in government spending because of the multiplier effect produces a larger increase in the economy.