We held the second in our current programme of meetings focussed on finishing off policy papers for autumn conference, on 9 June 2021. We discussed the future of power structures at regional level within England, Universal Basic Income, the natural environment and how to influence voters. Work continues to finalise motions for the autumn conference.
The first of these we discussed was the future of power structures at regional level within England. This arose from last summer’s discussions about our aims for a federal UK, agreed in a motion by last autumn conference, and a group led by John Shipley and with much involvement from the English party has been thinking very hard about what this should mean for power structures at regional level within England. The experience of the pandemic has demonstrated yet again why attempting to decide everything in detail from Whitehall does not work and re-made the case for much greater decision-making at regional and local levels. This could of course be done in a number of ways and the group has been developing a number of options. It has done some excellent work on which decision-making powers should sit at which level in England. As FPC we had some discussion with John about refining these further, and we anticipate probably bringing a couple of options to conference to decide between. All will be mechanisms for having more decisions made closer to the people they affect.
Next we talked about Universal Basic Income, where a sub-group has been working on the slightly more technical task of how this should be structured, following conference’s decision last year to support this in principle. The fundamental tension here is between proposing a UBI at a level where it makes the difference to people’s lives that we want to see, while not adding up to an unmanageable cost for taxpayers to fund it all. The ‘universal’ approach, rather than ‘targeting’ additional income on those who need it most, plays a significant role here. Thank you to everyone who completed the recent consultation survey about this; we reviewed their results with the group’s chair, Paul Noblet, and asked for some further work to be done on options for structuring UBI. We will be discussing this again before finalising proposals to bring to conference to decide upon.
Two years ago, FPC set up a working group to develop policy on the Natural Environment (not climate change, where we have done a lot of other work). The group has had a number of challenges since then, including changes in personnel, but at this meeting we were very pleased to appoint Richard Benwell as chair to re-start this group’s work. This remains a key area that we are committed to and look forward to bringing some exciting proposals to conference on this in 2022.
Finally, we had an excellent discussion with Mimi Turner, the party’s Director of Strategy, Messaging and Research, about the findings of the party’s research into voters, their views of us, and how we might most effectively influence them. Both our basic political beliefs and our body of specific policy proposals are very well established, and this leaves us a lot of scope to try and present them in a way which appeals most effectively to voters. Crucially, we are keen to present our beliefs and policies in conjunction with the party’s wider messaging strategy – in this way our policies can play an important and hopefully maximally effective part in three key tasks, of reinforcing our appeal to our existing core voters; appealing to possible Labour voters who might consider switching to us, and to possible past Conservatives who might do the same.
This discussion then very helpfully informed an early discussion about the key policy themes we want to present, and which we will bring in a motion to autumn conference. Demonstrating to voters that we share their concerns and can be trusted to act on them, and to create a society which is fairer, more caring, and greener, will be key to this.
Since this meeting we’ve then had a break, to campaign in Chesham & Amersham, before our final three meetings before the motions deadline for autumn conference.
* Jeremy Hargreaves is a vice chair of Federal Policy Committee and the Federal Board.
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34 Comments
The ‘Universal’ approach is central to the concept of Universal Basic Income. If it is not universal, it is just another means-tested benefit. The real challenge will be to find a way of not creating a huge number of people who will feel that UBI is just a con trick to remove an entitlement. For example, while we would all except that UBI set at a ‘living’ level would mean that there would no longer be need for the array of state benefits currently available, what about the Old Age Pension? If those who have contributed throughout there working lives were to see the pension they expected replaced with a payment given to everyone where they have paid into the system or not, they will feel outraged.
@Brad Barrows
The UBI for pensioners which was called the “Citizen’s Pension” has been Party policy since 2004. There is already a non-contributory factor to the State Pension with credits for people who have been carers, rather than in employment (Carer’s Credit) and the Pension Credit addition to the basic State Pension for those with small or no occupational pensions. From your comment I assume that you also want to end these.
Surely pensioners need have no immediate fear? It must be a feature of UBI that it is subject to Income Tax. The UBI must be added to everybody’s income, and THEN subjected to Income Tax, purely and simply as part of the individual’s Total Income, whether princely, pension, or poor.
Why? Because the essence of UBI is not in the end financial, it is equality of status. No — wrong word — let’s spell it in clear English: Standing. Even someone with no other income but the UBI must make, and will be aware that he or she does make, a contribution to the taxes that finance the communal world (our Commonwealth), of the public services that benefit all — the utilities like water, a decent post office, the NHS, police, railways et al. Everybody will then have the same Standing — an equal footing in national life, and the consciousness that ALL get the UBI, ALL contribute to its funding and to other state spending, and NO ONE is grudgingly or humiliatingly beholden to the comfortable classes for his right sleep dry and eat. The UBI shall be a Right. Each will help pay for it, some not much, some much more than they pay now. (More indeed, no doubt, than they do now: you could call it levelling up.) A PR House of Commons will distribute the Tax burden as it agrees appropriate.
MMT + PR + UBI [plus some initials, please , to indicate a vital Green element?]
Obviously,
My heart sank a little, Jeremy, when after reading your account of the ‘excellent’ discussion with Mimi Turner you said that it had been very helpful in informing ‘an early discussion about the key policy themes you want to present’. In aiming to please not only our core voters (few as they are known to be), but also possible past Labour voters AND possible past Conservative voters, is there not a danger that we may try to please all sides and end up exciting and inspiring not very many?
I would appeal to FPC to consider now the radical themes and programme which Michael Berwick-Gooding and I have proposed to them, derived from our proposals for a Beveridge-2 Plan within a new Social Contract. Is this not a time, after the wonderful Chesham and Amersham bye-election triumph, when our fellow citizens will be looking to us for fresh inspiration and leadership?
Jeremy,
Please can you give the dates of the next three FPC meetings after 9th June?
When you write, “This discussion then very helpfully informed an early discussion about the key policy themes we want to present, and which we will bring in a motion to autumn conference” are you talking about the Themes Paper which will include what policy development work is required before the next general election?
Is “to create a society which is fairer, more caring, and greener” our message rather than the longer and more comprehensive one of creating a liberal society where no-one lives in poverty, is held back by health issues, by discrimination, or by the lack of the education or training needed for them to obtain a job right for them, where everyone who wants one has a home of their own, where everyone who wants a job has one, and in which the challenges of climate change are tackled?
Roger Lake,
Have you read the recent consultation paper on UBI? And did you submit your views?
@ Michael BG
Dear Michael, I fear your enquiry sounds rather like a rebuke! I do understand that. Indeed, I sympathise with it. But the fact is, I am 82, currently living in a rented flat after selling our home prior to moving to somewhere more suitable, with a family in currently constant pain. My dabbling in futile politics does not go down well, understandably. But, my goodness, at this exciting political time — I mean Covid 19 and the manifest problem of a dud PM Johnson — how I wish I could take more part in LDV’s debates.
So may I respond to your question with another? My contribution above sounds silly, with its tricky slogan and ignorantly simple ‘argument’ or assertion: but what are its fundamental ignorant follies? Can we truly not start with a desired end-point, and then work out how to get there? Would the ‘end-point’ be what I describe? And if not, why not?
The Lib Dems really ought to be taking a look at what is being said about “paying for” the Covid crisis rather than carrying on about a UBI. That can wait.
The argument goes that we need another bout of austerity to reduce the deficit that th combination extra government spending and the reduced taxation revenue has created. It’s all neoliberal nonsense but that not stopped it before!
There is no inflation problem so there is no need for austerity. Period. However if Govts wants to claw back some of the accumulated wealth that has accrued to those lucky enough to have been able to save during the Pandemic, it will be a wealth tax which is needed. Not a rise in VAT or the standard rate of income tax or a rise in interest. These will wreck the economy.
Richard Murphy often doesn’t get it quite right but this time he is spot-on.
https://www.taxresearch.org.uk/Blog/2021/06/21/the-real-covid-financial-crisis-is-increasing-inequality-which-means-the-wealthy-must-pay-more-tax/
https://www.taxresearch.org.uk/Blog/2021/06/21/why-we-do-not-have-a-covid-debt-crisis/
If we’re truly Federal then discussions on the constitutional make up of England must include Scotland, England and N. Ireland. Unless we make our structure easy to doevetail into the UK we are inviting the break up of the UK. It’s nice being invited to the party even if you don’t come. I don’t want to be part of a Party that seems to be facilitating this break up.
UBI is best thought of in terms of integrating the tax and benefit system to make the tax personal allowance system more progressive as a flat rate tax and NI reducer and ensure a non-means tested Universal credit standard allowance available to all eligible claimants.
Tax and spend policy needs to be directed at maintaining sustainable public services as health and social care costs continue to escalate each year far in excess of core inflation and in ensuring increased levels of investment in public housing and productivity enhancing infrastructure while interest costs remain at low levels.
Richard Murphy’s analysis does not refer to what has been happening with money supply. There was a big jump in broad money supply from Feb 2020 to July 2020 as Coronavirus loans were rolled out by banks to corporates https://www.statista.com/statistics/320127/uk-banking-total-money-supply/, but growth has been flat since then. Increased Government spending has merely offsets to some extent declines in consumer spending during the pandemic, as it does in all recessions. It does not prevent the decline in GDP from the lockdown of the economy nor, in the absence of sustained increases in broad money supply or velocity does BofE money creation generate consumer price inflation. Increased Government borrowing offsets loan repayments/savings by households and firms with excess cash. This is why broad money supply has been flat since last summer.
Murphy is correct to observe that house and share prices are at record levels. House prices are a combination of restricted land supply, historically low interest costs and buy to let investments in an environment of low investment returns from savings and stock investments. Share prices are equally fuelled by low investment returns from savings and gilts.
When Murphy says that the money created by the government has to go somewhere he seems to miss or ignore the point that BofE money creation is offsetting deleveraging rather than creating wealth or increasing the level of broad money in the economy. That situation is likely to reverse as we come out of lockdown. It does not mean austerity, but it does mean big falls in government borrowing from current levels, a levelling off of debt to GDP ratios and a requirement for tax funding of higher levels of public service provision than is currently the case, as his blog intimates with its advocacy of wealth taxes.
@ Joe,
“When Murphy says that the money created by the government has to go somewhere he seems to miss or ignore the point that BofE money creation is offsetting deleveraging rather than creating wealth or increasing the level of broad money in the economy.”
I’m not sure why you have a problem with the statement that money created by government has to go somewhere. The alternative is for it to go nowhere or simply disappear. So what are you saying happens to it?
The concept of broad money supply isn’t that meaningful. If I borrow an amount of money from a commercial bank that will be because I want to spend it. Later when I have to repay it I will have less money to spend that I otherwise would have. That will cause the economy to be stimulated when I’m doing the spending and depressed when I’m doing the repaying. If everyone is borrowing and repaying at randomly different times they two effects cancel.
If Government orchestrates the process, by for example lowering interest rates, then we can have a boom turning to bust situation as the initial stimulus wears off. This may be a factor but there are other factors at work too. Many, who are still in work, will have used the recent opportunity to reduce their own debts.
In any case the concern of the neoliberally inclined mainstream isn’t with levels of private debt. As always it is with public deficits and debt. You aren’t grasping the point that Richard Murphy is making. There’s no real “requirement for tax funding of higher levels of public service provision than is currently the case”
Yes he is advocating of wealth taxes. Not because the Government needs the money to ‘balance the books’ or even to cool the economy. Wealth taxes probably won’t do that. We’d have to have very high taxes indeed on the super rich for them to affect their spending patterns. How big a tax bill will the Duke of Westminster need to be given to make him sell his RR and take the tube instead? As RM says “We are creating a massive wealth imbalance in the UK that right now only more tax can address.” He means wealth taxes of course.
He also writes ” it really is vital that the left get its collective heads around this. ” I’m not holding my breathe about this! It won’t be long before we have, if we haven’t already, the usual nonsense about bills having to be paid, as if the National economy were a large household.
Peter Martin,
As the Bank of England writes https://www.bankofengland.co.uk/knowledgebank/how-is-money-created “This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.”
Due to tax policies, automation, offshoring, and other factors, wealth has concentrated towards the top in the UK in recent decades. When broad money goes up a lot but gets rather concentrated, then the link between broad money growth and CPI growth can weaken, while the link between broad money growth and asset price growth intensifies.
Over the very long run, we should expect technology to continually improve and push prices down. However, money creation processes and other policy choices can create inflationary results that offset those technological price reductions and capture productivity improvements in asset prices rather than wages.
When broad money contracts significantly that can create a deflationary squeeze in the economy that has to be counteracted by the injection of bank liquidity.
The past governor of the Bank of England, Mervyn King has said that M4 (broad money) remains an important variable for influencing monetary policy. Negative M4 growth is a key factor in the justification for more quantitative easing, keeping interest rates low and attempts to bolster bank lending. When quantitative easing first began he said “the unprecedented actions of the Monetary Policy Committee to inject £200bn directly into the economy…have averted a potentially disastrous monetary squeeze”
The big jump in broad money during the pandemic has been the result of a combination of banks lending to stressed firms and larger government deficits. As that reverses there will a decline in the current level of net lending by banks and a leveling off in the broad money supply over time.
Roger,
From your reply it seems that you have not read the recent Liberal Democrat consultation paper on UBI. I don’t think being 82 should be a bar to you doing so. (You can download it from https://www.libdems.org.uk/policy_papers.) I am sorry to read that you have a family currently in constant pain. (I live with back and knee pain.) I hope your family have excellent GPs who will proscribe something to reduce the pain. My point is that to engage in a Liberal Democrat debate on UBI you should understand where the party is (and Joe Bourke does not represent the party view).
Another reason was your assertion that a UBI must be taxable. The consultation paper states we think it should not be (and I agree) but it will count as income in relation to other benefits. I can see no point in the government setting the UBI rate at a higher rate than necessary for someone to live at the poverty line, just so they can tax it.
If everyone who wants a job, had one right for them, paying a fair wage, then they could reach their full potential and in a financial sense contribute to society. But society needs to understand, as I think it did in the past (pre-industrial revolution), that a person’s contribution to society does not need to be financial.
Joe,
A UBI is best thought of as “an unconditional payment from the government to every individual”, which everyone can understand, rather than “integrating the tax and benefit system to make the tax personal allowance system more progressive as a flat rate tax and NI reducer and ensure a non-means tested Universal credit standard allowance available to all eligible claimants”.
From one of the links provided by Peter Martin, Richard Murphy shows government real borrowing has only increased by £19 billion and £336 billion has really been financed by Quantitative Easing. Therefore there is no justification for reducing pre-2020 government spending or increasing taxes to pay off any of this money. Of course when there are no Covid restrictions on business the government can stop paying its Covid related assistance. And this will reduce government spending. As Peter Martin states fiscal policies should be used to manage the economy and if inflation increases tax increases targeted to those who managed to save during the Covid crisis will be required to remove the excess demand. General non-targeted tax increases and interest rate increases will damage the economy which needs very careful managing to recover from the Covid crisis.
@Brad Barrows @Laurence Cox
The reforms of Steve Webb during the coalition era set the new basic state pension that is being phased in at the pension credit level. Essentially I believe taking (virtually) all pensioners out of relative poverty. And if you rent you can claim housing benefit albeit that is means tested. Of course we also introduced the triple lock – meaning that the pension increases by more than inflation which in turn will take more out of poverty.
Theoretically you need a certain number of years of NI contributions to get a state pension. But you get credited with NI contributions if you are unemployed or if you weren’t working and had child care etc. responsibilities. You can also buy NI contributions to increase the number of years that you have NI for – https://www.gov.uk/voluntary-national-insurance-contributions
Without having gone into the details I suspect this makes it relatively close to the “citizen’s pension” idea.
Another key reform of Webb was that people now have to opt out of a work-based pension rather than opt in and of course it’s effectively topped up by the Government by tax relief.
This should mean that more of those on lower earnings will retire with some form of private pension. In addition the triple lock is really more of benefit to future generations than today’s pensioners. If it continues those in their twenties and thirties will have a significantly greater state pension in real terms than today’s pensioners – which otherwise they would have had to have paid for privately themselves.
” This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.”
This is only true if we don’t include all the overheads and interest payments which are payable on loans. But even leaving this aside, the mainstream mistake this to mean that private borrowing can essentially be disregarded in macroeconomic terms. Whenever the topic of debt arises it is rarely about private sector debt. The EU has rule after rule about what level of debt and deficits are permissible by government but nothing at all to say about private debt.
It totally ignores reality. Whenever we have a crash or a slump the cause is nearly always a build up of private debt which creates a boom and bust cycle. Prior to the 2008 crisis it was difficult for anyone to be refused a loan by the banks. They were handing out money like it was going out of fashion. The economy boomed as people were spending freely. The same thing was also happening throughout the EU, the USA and Australia. It had to end in tears!
Prof Steve Keen explains the folly of the mainstream in greater detail here:
https://braveneweurope.com/steve-keen-what-is-the-role-of-public-debt-and-private-debt-in-the-next-great-financial-crisis
@ Michael BG,
“a person’s contribution to society does not need to be financial.”
Maybe not, but in the monetized economy of 21st century UK it is difficult to get by, as our ancestors once did, by hunting wild animals and collecting nuts and berries. That lifestyle is still just about possible in some places in the world, but the tribal rules don’t allow free riders. If you are fit and well, you are expected to pull your weight! It has to be like this because they cannot afford to waste human resources.
We aren’t any different. We might think we are making a financial contribution but what really matters is that we are engineers, teachers, nurses, doctors, factory workers etc etc. It is the work we do which is our real contribution to society. If we do the work we should share in the rewards which is where the finances come in. It’s a way of sharing out what we nearly all help produce.
Peter Martin,
what makes you think banks are not “handing out money like it was going out of fashion” now https://www.mortgagefinancegazette.com/lending-news/mortgage-lending-figures/value-new-mortgages-soars-pre-financial-crisis-levels-08-06-2021/ or that the same thing is not also happening throughout the EU, the USA and Australia.?
@Peter Martin
I am a little surprised at your comment coming from I believe a “leftie”. There are of course millions who make a very strong “financial” contribution that is either not at all or not “properly” “valued” by the market.
Vast numbers of adults that help children learn or organise activities for them. There are millions of voluntary workers and taxes would shot up without them. Carers of relatives that get far less in carers’ allowance than it would cost to pay for care workers. They either save us billions of pounds or enable those who are financially compensated for their work to earn more. And of course we have seen with covid how reliant we are on underpaid essential workers, care workers and health workers. None of these are “free riders” financially.
To use your analogy the gran that looked after the children was playing as important part to the tribe’s work as those that went on the hunt.
And this is before we come to Orwell’s essay – where he posed the question who is more valuable to society – the judge or the miner? Today it might be the Instagram influencer or the care worker?
I am not against those who are lucky, skilled, or hard working from earning a good wodge and indeed keeping a majority of it. But the democratic settlement is that they also pay a fair wodge in tax in recognition that they are reliant on the people that I have outlined in getting their riches.
And this is of course before we get to those who get their wealth and income because their ancestors stole land from the masses…. Not that I want to get into class warfare!
@ Michael1,
I’m probably more “old school” left that what passes for left at the moment. The Labour Party should be what it says on the tin. The party of the workers. I’m not opposed to having paid Scout and Guide leaders. Or, paid football coaches. Or, paying carers more for looking after those who need it. The details would be a matter for political discussion. But these payments wouldn’t be universal and neither would they be unconditional.
@ Joe,
You’re doing what you always do when you cant justify your original assertion. You’re shifting ground. The point at issue was the neutrality of private sector debt as the mainstream consider it to be. Yes, it must follow that if the banks create money by handing out a loan then it is destroyed if when they receive repayment of the loan. That doesn’t make it macroeconomicaly neutral as Steve Keen explains. It changes the spending patterns of the borrowers.
The banks may well be keen to lend at the moment but that doesn’t mean we are in the type of credit boom that we might remember was created in the late 80s or again in the mid 00s. There has also to be general sentiment to want to borrow and spend.
@Michael1
What you say is correct for those born after 5th April 1951 (if male) or after 5th April 1953 (if female). The problem is that those born on or before those dates are still on the old state pension which is much lower and they then have to claim means-tested benefits. This particularly affects elderly women, which is the point that I made at the Zoom consultation on the UBI. We can choose to ignore this as you propose, or to make redress to this group which is my preference. As there are still (in 2020) 1.9 million UK pensioners living in poverty according to official statistics, I believe that this is a group we should not ignore.
Peter Martin,
you have asked a question about how money disappears. You have been given an answer by reference to the Bank of England website explaining such matters. That is not an assertion, it is simple fact.
The point as issue is what is the purpose and effect of quantitative easing on borrowing and money supply. QE is an asset swap of one type of interest bearing government liability – bonds- for another type of interest bearing government liability – bank reserves i.e. claims held by private banks against the BofE. As the BofE writes https://www.bankofengland.co.uk/monetary-policy/quantitative-easing “The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy”. This is precisely what has been happening in the housing and share markets with borrowing and speculative investment in property and stocks reaching record levels this year.
Conservative governments will always create boom and bust in financial and property markets because they always create the conditions for such cycles. It happened with Maudling’s dash for growth in 1963-64; the Barber Boom in 1972-73; the Lawson Boom in 1986-88 and also under Labour with Gordon Brown when the last housing and consumer credit bubble popped in 2007-08.
@ Joe,
If a private bank creates money as it lends, so too does the BoE when it lends to the Govt. Just as the private money is destroyed when it is repaid so too will the Govt money when (IF ?) the Govt repays the BoE. That’s not happened yet and isn’t likely to any time soon. As it still exists, the the question remains of where it has gone? What, in your opinion, has happened to it? You’re still not saying.
The BoE also explain QE as follows:
“Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds (the investopedia websiteOpens in a new window explains more about bond yields). This pushes down on the interest rates offered on loans (eg mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.
So QE works by making it cheaper for households and businesses to borrow money – encouraging spending.”
This is true when interest rates are high enough to start with. The QE process is an asset swap of Govt IOUs (cash) which have 0% interest for IOUs with some interest. So, naturally, interest rates will fall to close to 0%. As they have done.
But once they are at, or ultra close to, 0% further QE is quite meaningless. It will just push them ever closer to 0%. Does it make any real difference if they at 0.01% or 0.1%?
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
Peter Martin,
the BofE does not normally lend to the government. It lends to commercial banks.
The increase in money supply from QE is simply replacing money previously created in the private banking system that has been destroyed through deleveraging https://positivemoney.org/how-money-works/advanced/how-quantitative-easing-works/. This is what Mervyn King was referring to when he said “the unprecedented actions of the Monetary Policy Committee to inject £200bn directly into the economy…have averted a potentially disastrous monetary squeeze”
A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the money supply. In contrast to conventional open-market operations, quantitative easing involves the purchase of more risky assets (than short-term government bonds) and at a large scale, over a pre-committed period of time. By lowering yields on sovereign bonds, QE makes it cheaper for governments to borrow on financial markets, which may empower the government to provide fiscal stimulus to the economy. Quantitative easing can be viewed as a debt refinancing operation of the “consolidated government” (the government including the central bank), whereby the consolidated government, via the central bank, retires government debt securities and refinances them into central bank reserves.
As commercial banks return to large scale lending into the economy for increased mortgage lending etc than the broad money supply begins to grow at a faster rate. It is this money creation in the banking system that inflates asset prices. The BofE can withdraw excess liquidity in the system by reversing part of its QE/Asset purchase program to maintain its inflation target. This s the stated intention of the BofE https://www.bloomberg.com/news/articles/2020-06-22/boe-s-bailey-says-he-d-shrink-balance-sheet-before-raising-rates
@ Joe,
“the BofE does not normally lend to the government. It lends to commercial banks.”
Nonsense. The BoE holds some £850 billion of Government bonds! Why would it want to do that if it wasn’t about lending to Government?
“The increase in money supply from QE is simply replacing money previously created in the private banking system that has been destroyed through deleveraging”
In everyday terms this means that many people are repaying their loans faster than usual. They are saving, or accumulating a surplus, rather than spending. This means that someone has to be running a deficit and this is Govt. This corresponds to Standard MMT and Sectoral Balance theory.
“A central bank implements quantitative easing by buying financial assets from commercial banks and other financial institutions……”
The rest of your comment seems to consist largely of sentences which you’ve copied from Wikipedia.
https://en.wikipedia.org/wiki/Quantitative_easing
Peter Martin,
It has already been explained numerous times what quantitative easing is. The BofE is not lending to the Treasury or to corporates when it buys bonds from banks and pensions funds. The BofE has always held a stock of bonds as collateral for the provision of reserves to banks. Government funding is provided by the purchaser of bonds – banks, financial institutions etc. Institutions can and do sell bonds to the BofE in exchange for bank reserves.
QE is not money spent into the economy. It is an asset swap. As noted above By lowering yields on sovereign bonds, QE makes it cheaper for governments to borrow on financial markets.
The governments liabilities include both bonds in issue and the reserves held by commercial banks that have accumulated as a consequence of the refinancing of government debt securities. The liabilities don’t go away just because bonds have been replaced by bank reserves. Interest has to be paid on reserves for the reasons noted in this paper https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/monetary-policy-and-the-boes-balance-sheet-speech-by-gertjan-vlieghe.pdf?la=en&hash=D76269239470F000514B5F6AA76500590254DBDC Figure 1 in the paper depicts the assets and liabilities of the BofE. The principal assets are public sector securities and the principal liabilities are commercial bank deposits with the BofE. Debt sustainability is an issue of interest costs vs economic growth and interest costs in an open economy are determined by conditions in global financial markets and inflation expectations.
The conclusion to the paper notes “Central banks use their balance sheets to achieve monetary policy objectives. In doing so, they affect government finances. That has always been the case, and that continues to be the case. This in no way detracts from the central bank’s independence and its ability to hit the inflation target.
The fact that you can observe a large fiscal stimulus at the same time as large QE operations is not because one is driving the other. Rather, it is because both are responding to a large economic shock, just as they were in 2009, with the mutually consistent aim of stabilising the economy and meeting the inflation target.
The UK has an institutional framework in place to make it abundantly clear that the MPC is in charge of monetary policy. Operational independence, a legal mandate for price stability, the structure of MPC, accountability to parliament and the public, an indemnity from the government, are all part of an institutional framework designed to safeguard the inflation target and the tools needed to achieve it. The MPC continues rigorously to frame its monetary policy actions in terms of its monetary policy remit.”
@ Joe,
Look, Joe, we all know there is a taboo on central banks buying bonds directly from Government. The mainstream don’t like to admit what really goes on. But there is a simple work around.
The Central Bank buys the bonds from a Commercial Bank, or other financial institution, at the same time as the Treasury is selling them new ones. The Commercial Bank is just a go between. So who is anyone trying to kid when they say “The BofE is not lending to the Treasury” ?
@Laurence Cox
I appreciate the point. It is probably sadly the case that you can’t necessarily solve all the world’s (or even country’s) problems in one bite.
Quite a large number of those who you outline are able to claim pension credit – admittedly that this is means tested. And while pension credit had its positive aspects one of the negatives was that a large number of people didn’t claim it. Indeed this was shown because it is said that if the withdrawal of free TV licences prompted people now to claim PC because you can only get free TV licences (if over 75) if you claim PC that it would cost more than the saving from withdrawing the free TV licences!
By and large it is right to phase in pension changes. The Webb changes were a little complicated as I believe it effectively increased NI so people are paying something towards a higher basic state pension and so to some degree it should be those people which get the increased pension. It also reduced the amount of state second pension (earnings related pension) people get. But this is offset by more people having work pensions (through opting out rather than in) and therefore more money in tax relief being put into it for those on low incomes…. And of course a higher basic pension with the triple lock!
We might not have sorted everything as regards pensions overnight or even in a few years but we did quite well. In the meantime Lib Dems (councillors, activists, MPs etc.) can encourage people to claim PC – in Focus leaflets, social media and individually.
Peter Martin,
Fiat currency relies on confidence.It only works if people are willing to hold onto it and expect it to have most of its value next year and the year thereafter. MMT relies heavily on a) politicians and other fiscal authorities actually increasing taxes or cutting spending if inflation picks up and b) that with all of the illusions of fiat money removed and showing what it really is, people will still treat it as a store of value rather than starting to question its worth if the government can just print as much of it as it wants without borrowing any.
Direct monetary financing pushes the system closer to the inflationary boundary, which does have advantages, but inflation tends to operate with a lag and can be hard to correct once it starts. The idea that the government will raise taxes or cut spending in order to tame rising inflation (or worse, stagflation) is unrealistic, and if inflation remains unaddressed with more and more spending, it can quickly lead to a disorderly currency reset.
HMRC sending out furlough payments to people that are ultimately paid for by issuing gilts that the BofE buys via banks newly-created reserves is basically what MMT advocates in practice. In other words, what people think of as MMT can essentially be done in the current legal framework.
As we come out of lockdown, where central bank balance sheets around the world will continue to ramp up to fund government deficits at a scale that has not occurred since World War II, it may start to break some of the illusions that the public holds about money, especially as we remain in an environment where bank accounts and Treasuries pay interest rates that are below the stated goal of 2% annual price inflation. This sort of currency confidence breaks all the time in emerging markets. When we go back to not viewing the currency as a safe place to store wealth, as in the 1970s, then there is the kind of scramble for real assets like housing or listed securities that we have seen over the past year. In a 0% interest rate environment, there’s little incentive to hold onto cash savings and there’s a lot of incentive for both consumers and investors to borrow as much as they can and to hold a lot of low-cost debt in general in their business, real estate, or other assets to maximize their return on equity and return on invested capital.
That is what creates a private debt crisis.
@ Joe,
“……. central bank balance sheets around the world will continue to ramp up to fund government deficits at a scale that has not occurred since World War II, it may start to break some of the illusions that the public holds about money….”
So we finally agree that that central banks are funding Govt deficits?
I would say that if illusions are broken then it can only be a good thing. It’s better everyone should have a correct understanding of how things work. That should apply as much to our economic system as anything else.
But I’m guessing you might disagree?
Peter Martin,
“So we finally agree that that central banks are funding Govt deficits?” I think we always have, but in the case of QE by substituting existing bonds for reserve liabilities that in turn creates space for the issue of new bonds. Without QE there would be insufficient buyers of government bonds and QE can only occur at scale during a private debt deflation i.e. when households and firms are net saving/repaying debt.
If money is debt, then government created money in the form of reserves remains as debt until they are retired by taxation, replaced with resale of bonds held by the BofE (quantitative tightening), or otherwise eroded by inflation. Neither of the first two are likely in the forseeable future and QE may continue for a time until CPI inflation is persistently in excess of 2%.
In the meantime debt, whether bonds or reserves, have to be serviced at prevailing interest rates that themselves are conditioned on inflation expectations and relative exchange rates. That is the nature of any currency as a unit of account, a store of value and a medium of exchange.
None of that addresses the additional resources that are required for the NHS, social care, education, social security, infrastructure and public housing on top of the existing spending we have going forward. That requires the allocation of skilled labour and real material resources as budget deficits are being reduced to levels consistent with inflation targets.
@ Joe,
OK so we are grinding towards an agreement on the nature of QE in a wider sense which does include the funding of Govt deficits by a central bank. In a narrower sense, and strictly from the POV of the central bank only, I agree it can be seen as an asset swap.
MMT would consider the central bank to be a part of government and conceptually even part of the Treasury. If we take this to be the case, then the assets and liabilities of the loans cancel. The Govt is then seen to be issuing bonds to push up interest rates or cash to reduce them towards zero. It’s really just an exercise to set long term interest rates to what the Govt choose them to be.
I’m still curious about your view of “illusions”. Are you saying it is undesirable for the public to be rid of them?
Peter Martin,
the gilts are an asset of the BofE and a liability of the treasury. These assets and liabilities cancel out on consolidation. The reserve balances are debts of the government to non-government banks that do not cancel out. These are due to commercial banks. Page 32 of the consolidated Whole of government accounts show that these balances amounted to £556.8 billion at 31 March 2019. This is in addition to central government wholesale debt (excluding government holdings) as at 31 March 2019 of £1,407.2 billion i.e. just below £2 trillion before the pandemic.
@ Joe
Yes we know all that.
The question was about “illusions”. Do you think they are desirable or not?
Joe,
I expect you will not read this or respond, but having read what you have posted above I just had to respond.
On 23rd June at 2.20pm you wrote, “The idea that the government will raise taxes or cut spending in order to tame rising inflation (or worse, stagflation) is unrealistic”. As recent governments have done both to try to reduce the government deficit I see no evidence for your opinion. Are you saying that between 1950 and 1979 no government increased taxes or reduced spending because they felt their economy was overheating?
On 23rd June at 3.52pm you accepted what QE actually is, and that it allows the government to issue new bonds, that is allows them to increase their borrowing. Then you return to your mistaken view that government deficits need to be reduced to control inflation. This is not to say that reducing deficits does not reduce inflation. A point you seemed to deny about 90 minutes earlier that day. Perhaps your training as an accountant does not allow you to understand that governments can borrow to fund day to day spending when it is stimulating the economy. For example if we assume that the public sector wage bill is £185 billion, a 5% wage increase across the board would stimulate the economy by about £6.25 billion after deductions of income tax and national insurance. However, this stimulus will not increase the budget deficit by £6.25 billion, perhaps only about £5 billion, then as the multiplier works on this stimulus the amount the deficit is increased by will be further reduced. If the government then believed that the economy was over heating it would find it difficult to remove this wage increase but it could increase the basic rate of income tax by 1% which according to a recent Lib Dem consultation paper raises between £7 and 8 billion and still give a wage increase to its workers.