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I’m an enthusiastic Thursday 8pm clapper. The NHS and key workers deserve it. And its good to see our neighbours more than usual.
But there comes a point when one has to ask: Well, do we keep on clapping every Thursday or actually show our support for the NHS and Care Homes where it counts – through our bank accounts?
Time and time again, over the last seventy years, the public have rejected greater public spending including for the NHS. Just a whisper of an income tax rise has been enough, in most cases, to ring the death knell on the chances of a party coming to power. Time and time again, governments have kicked the ball of proper public funding of elderly care into the long grass.
German comedian Henning Wehn recently made this quip:
We don’t do charity in Germany. We pay taxes. Charity is a failure of governments’ responsibilities.
Germany spends 11.2% of GDP on healthcare, we spend 9.8%.
Germany funds its elderly care through hypothecated social insurance.
It is really great that the public are generally showing appreciation for the work of the NHS, care workers and key workers generally.
But we need to back them by properly funding the NHS, stopping the decades-long serial reorganisation of it and listening to what NHS staff tell us.
Dr John Puntis,Co-chair, Keep Our NHS Public wrote on 19th April:
Over 50 NHS staff have now died from this infection. I think we will look back and see that it is not only the failure to stockpile equipment, the privatisation of NHS logistics, the dependency on importing foreign-made personal protective equipment, and the inability to rapidly repurpose local industry, but also the inadequacy of Public Health England recommendations in terms of protecting staff, that will have led to many avoidable deaths.
Dr Rachel Clarke wrote on 2nd May:
Alongside last week’s minute of silence to remember the frontline staff who have died so far of Covid-19, for example, at least three national newspapers are campaigning for all NHS staff to be awarded a medal for our bravery in “fighting” the virus. Medals, I imagine, are a matter of glory. But right now, my needs are frankly more prosaic. What I crave is sufficient masks and gowns.
An anonymous doctor wrote in the Guardian on 21st May:
It would also be nice to have worked for the past 10 years in an adequately funded NHS, staffed by people listened to by the government. It would be nice to see appropriate remuneration for the low-paid staff holding the service together, to see that the value of immigrants to the NHS is appreciated, and to have a health service integrated with a functioning social care service.
What I don’t find nice, and I really don’t need, is people clapping. I don’t need rainbows. I don’t care if people clap until their hands bleed with rainbows tattooed on their faces. I don’t even (whisper it) need Colonel Tom, lovely man as he clearly is.
I know many of my colleagues appreciate the clapping, saying that they feel moved and grateful, that the coming together of the community to support the NHS warms the heart. There are others, like me, whose response is that it is a sentimental distraction from the issues facing us.
Even those who liked it at the beginning are becoming wary of the creeping clapping fascism, the competition to make the most obvious and noisiest display, the shaming of non-clappers. Some argue that it unites us, that we’re all in this together. But when, for whatever complex reasons, we hear that poorer areas have double the death rate, with people from ethnic minorities disproportionately affected, I think: are we really in this together? Maybe people should clap a bit louder in inner-city Birmingham than in Surrey.
Are we still allowed to complain about poor resources and potentially unsafe working conditions now we’ve had clapping, rainbows, free doughnuts and a centenarian walking round his garden for us? How dare we?
The NHS is not a charity and it isn’t staffed by heroes. It has been run into the ground by successive governments and now we are reaping the rewards of that neglect, on the background of the public health impact of years of rampant inequality in the UK.
So with that in mind, why don’t we put our national energy into significantly increasing income tax, say by five pence in the pound, to properly fund the NHS and elderly care?
If we don’t, we will need to look back with shame on our Thursday clapping.
Finally, I note that the founder of the “Clap for carers” has called for it to end this Thursday.
* Paul Walter is a Liberal Democrat activist and member of the Liberal Democrat Voice team. He blogs at Liberal Burblings.
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83 Comments
I don’t think a rise in income tax will do very much as it will hit over revenues that will fall due to lack of spending power resultant from the govn taking another chunk out of people’s pay packet at a time when many companies are going to be in dire straits. An IHT levy on all inherited money would be fairer, no allowances or means of avoiding it and collected by lawyers at probate. Given that it is an emergency situation, though not popular it will be understood by the populace.
The way to support our health service in way that would help it more and not cost taxpayers a penny, would be to reduce the demands we place on it.
Smoking is one of the biggest causes of death and illness in the UK. Every year around 78,000 people in the UK die from smoking, with many more living with debilitating smoking-related illnesses. Smoking increases your risk of developing more than 50 serious health conditions.
The overall cost of obesity to wider society is estimated at £27 billion. The UK-wide NHS costs attributable to overweight and obesity are projected to reach £9.7 billion by 2050, with wider costs to society estimated to reach £49.9 billion per year.
Alcohol related illnesses and deaths………well, you get the picture.
One of the reasons no political party has got to grips with the state of the nation’s health, including our own party, is that it is easier to blame the politicians for not funding the NHS, than to blame the public for abusing it.
There is no point in clapping the NHS; then overeating, smoking and drinking to much and all agreeing that the actual problem is that the government don’t fund it enough.
The Lib Dems have always gone wrong, and lost electoral support as a consequence, through tying in government spending to the level of taxation. So we have a penny on income tax for this another penny for that etc.
When government cuts its spending in the first place it also cuts its taxation revenue as the economy slows. So increasing taxes doesn’t then give it back the money was cut from its spending in the first place. That just slows the economy even more.
If inflation is the main issue then the government should raise taxes and cut spending to slow the economy. If it isn’t then it should do the opposite. Its really not that difficult. Just what the spending should be on is a matter of political judgement.
No-one can be sure what the effect of the covid-19 outbreak will be yet. Both demand and supply are much lower than they were. If demand recovers faster than supply we could see inflation being a big problem once again.
Might we consider making healthy living, personal self care and community attitudes and skills etc. central to the “National” curriculum?
Might reducing avoidable demand and increasing financial and personal investment benefit all those without vested interests?
@Frank West
Loading the extra cost of care on to IHT, which is paid by around 5% of estates at present and only raises about £5.3 billion in total, is not practical. 1p on all rates of income tax will raise around £7 bn according to the Party’s own figures.
We would do much better by raising income tax on unearned income and capital gains tax to the same level as on earned income (including National Insurance contributions). As late as the 1970s there was a 15% unearned income surcharge (which raised the top rate of income tax to 98%).
@ Laurence Cox There is nothing illiberal in differentiating between earned and unearned income.
Asquith introduced it in his 1907 Liberal budget.
No serious conversation about the future of the NHS (and social care) can be had without everyone accepting that it does need more funding as we live longer and adopt the new treatments that help us to live better for longer. There are arguments to be made for using technology to improve efficiencies and so on, but they need to be within the context of accepting that good health and social care is expensive, and that the NHS is already one of the most efficient (if not effective) health services in the world.
A big problem is that most people can’t fully grasp just how expensive it is, and in this country we tend to be squeamish about spelling it out, in case people feel bad about it. But unfortunately this just means that services stay underfunded.
In part, people underestimate the actual costs of particular treatments, but also most of our personal share of NHS spending comes towards the end of our own lives, so we become convinced that we’ve put in much more than we get out, made worse by our general squeamishness to talk about end of life care, or the complexities of some serious illnesses.
I have a vague recollection of a documentary series a few years ago that gave various examples of different things you can get for £50,000, but I don’t think it got into the nitty gritty of complex cancer care, and instead focused on things like better prosthetic limbs and so on.
Not so long ago there was a lot of talk about how much US insurance companies charge for certain drugs, and Brits were asked to guess how much, inevitably shocked by the actual results. Yet some guesses were naively low, to the point that they’d cover manufacturing costs, never mind distribution and R&D.
So I say, yes, let’s push for better funding of the NHS, but we need a public awareness campaign so people know why it’s required.
As with you Paul, clap each week, so too, feel with you, there ‘s a real issue with this.
The fact is no country has our model. Top down national public health service, yet, local private social care.
There is lack of capacity and money, flexibility, autonomy, for patients.
The left of this party and labour criticised choice, which every country has in its delivery, throughout.
Left as right are the cause, lack of fluidity and choices, lack of capacity and funds.
We hear the second only. The first is as important. Quote other countries and you see patients are first, not systems. Italy, France, Germany, specialists available on the high street, as with the Us, but funded better and for all, but not like our service, only in big centres, run by impersonal authority. Those who get emergency care are in support of our model, those on lists, are not. The facts need discussion.
This Thursday will probably be the last time my wife and I will be ‘clapping’. It’s really becoming no substitute for actually putting our hands in our pockets and properly funding health AND social care.
I accept that just raising the basic rate of Income Tax may just mean that this increase, together with appropriate adjustments to higher rates, might just disappear into the Treasury’s black hole. Therefore, I would advocate a ring fenced health and social care surcharge, perhaps a kind of compulsory insurance, which would take account of an individual’s ability to pay. Politicians have been tossing this hot potato for far too long. It’s time for consensus and action, not prevarication. As I have written many times, many Brits expect Scandinavian levels of health and social care at North American levels of taxation.
Have to say I don’t trust politicians (including our own) when it comes to healthcare nor do I trust the general public.
John Barrett 25th May ’20 – 10:24am
Low alcohol cider is available, under 1%.
Cheaper, refreshing,
John Marriott
As I have written many times, many Brits expect Scandinavian levels of health and social care at North American levels of taxation.
Indeed, this is one of the biggest problems with politics in this country: government spending and government taxation are treated as if they are two unrelated things. The Conservative Party talks about keeping tax down, without saying the difficulties that will cause in public services. The Labour Party talks about providing public services without explaining how they will pay for them. Both like to push the idea that they are such wonderful parties that they will increase the economy to there can be more public services without a need for more taxation.
Our party needs to come out and talk honestly about the link between the two, and that yes we do want good public services, and yes that will involve taxation. We need to work properly with all the population get an acceptance of what is the best way to pay for things.
The fact that this was not done was one of the causes of the damage caused to us by the 2010-15 coalition. People seemed to think it would combine Conservative policies on keeping tax down, and Liberal Democrat policies on good quality public services. We needed to state clearly that, no, it could not work like that. But, no we didn’t, and that is why people got do angry with us about student fees.
What we should have done is made it clear that we could not get the Conservatives to increase taxation to pay for universities all by direct government payment. If we had insisted on that, it would have had to be paid by huge cuts, in other services and in universities themselves. So maybe what we did: accept Conservative wish to increase student fees, but concentrate on insisting that there is a full generous loan system for everyone that only needs to be paid back after they earn enough, was the best we could get.
We never said anything like that, so our party collapsed with angry accusation about us, as people seemed to think high government payment for universities would not have any affect on anything else and so could easily have been done.
The Barker review in 2014 set out what needs to be done. The Kings fund oroduced an illustrated summary of the report https://www.kingsfund.org.uk/publications/new-settlement-health-and-social-care/summary
The Barker commission concluded that tinkering with the existing system is not enough to address existing problems with the NHS and social care. We need a new settlement based on an Integrated health and social care system. Overall, the government should assume that public spending on health and social care will increase from 9.6% to 11–12% by 2025. The commission believes that in the long run this is affordable and sustainable.
Paul Walter in his article writes “why don’t we put our national energy into significantly increasing income tax, say by five pence in the pound, to properly fund the NHS and elderly care?” The problem is who is going to pay this income tax. The younger generation struggling to meet rent and mortgage payments that take 50% of their disposable income or those that best meet the costs and will be using the bulk of the services?
The Barker Commission suggestions for paying for it:
– Prescriptions should be made much cheaper but most exemptions removed.
– restructure national Insurance to collect more from those over 40, those over state pension age and high earners.
– Limit Winter Fuel Payments and free TV licences to older people on low incomes
– Review taxes on wealth and consider reforms to inheritance tax, wealth transfer tax, capital gains, property tax, etc.
Dilnot, in his review, concluded “a tax is needed to provide lifelong adult social care that is not means-tested.”
A residential Land Value Tax approach may offer a solution to these expressed aims in the funding of adult social careAs part of the review on wealth taxes the party must consider land value taxation to fund social care https://www.libdemvoice.org/a-residential-land-value-tax-approach-to-funding-adult-social-care-59639.html We are already paying surcharges on council tax for this purpose. A regressive tax that becomes more so as each year passes.
It’s going to be pretty difficult to tax the all the unemployed and closed businesses created by locking down to save the NHS.
I am solidly behind health and care workers but I have refused to clap from day one. We have a government that thrives on distraction, which is why, while I agree with many of the points made above, my personal choice is to eschew a gesture that the Prime Minister wants to continue as long as possible. In the short term the delay in providing adequate protection is, for me, reason enough to avoid what I have come to see as the Johnson clap. Others will see things differently but it is worth noting that significant numbers of health and care workers will accept thanks from anyone but have pleaded for their real needs to come to the fore in preference to a focus on clapping.
@ Geoff Reid Agree, Geoff. They will use any distraction to draw attention away from the fact they introduced lock down nearly two weeks after Germany, Denmark and Norway. How many lives did that cost and what pressure did it put the NHS under ?
@ Joe Bourke I suggest you have a look at this report from Professor Bob Hudson..
The failure of privatised adult social care in England: what is to …chpi.org.uk › CHPI-SocialCare-Oct16-Proof01a
PDF
The failure of privatised adult social care in England: what is to be done? The Centre for Health and the Public Interest (CHPI) is an independent think tank committed to health and social care policies based on accountability and the public interest.
We have been here so, so many times before, but here are just a few observations.
Do we really think there are many votes in raising income tax by 5% ?
As Lorenzo says, our health care system is one which no other country has copied. We might do well to look to some of our European neighbors for inspiration.
Reform of the NHS is off the table as it will be derided as privatisation, neo liberal plot. etc. We are where we have been for decades. In a fix.
Joseph Bourke
The younger generation struggling to meet rent and mortgage payments that take 50% of their disposable income
This is one of the biggest issues in our current society. The freedom of young people has been hugely decreased by what has happened to house prices. House prices are pushing up house prices, because most people now use inheritance from sales of houses to buy houses. Meaning the price of a house is not just a multiple of income as it used to be, but a multiple of income plus a proportion of a price of house.
Also, what used to be the alternative, getting a council house, has disappeared. It used to be possible for most people to get their own modest housing as council housing. Now, thanks to it being sold off, there is hardly any left for anyone, and what is left goes only to those withe huge emergency issues, not ordinary people. When council houses were available for everyone that was a much more freedom, being able to have one’s own house. It kept house prices down as well, because if they were too high, people would not buy them but instead have a council house.
So, the proportion of young people with their own home has hugely decreased. Having to give most of your income to rent if you do need to move from your parents means enslavement by poverty. Which is one of the key things our party is meant to be against, yet these days hardly mentions.
Personally, I feel there is a strong case for a big increase in inheritance tax to deal with this. Or, with Land Value Tax, the argument against it is that it is unfair for old retired people who have big houses but not much income. That can be dealt with by allowing it to be paid by older people in a form which means the actual cash will go through from the inheritance. However, I find it is hard to get other people to accept this sort of thing.
That is why we need honest talk about it in politics, the issue of taxation needed for government services, with the NHS being a key aspect of that. I think we in the Liberal Democrats should take the lead in doing this. Given the way our party has been destroyed anyway thanks to not responding properly to the Coalition and then supposing that all that mattered was a vote for us being a like a vote in a referendum to stay in the EU, we have nothing to lose.
@Matthew Huntbach
Yes you are right, a huge house building scheme and increased council house ownership would be one of the most popular and effective policies we could have. I think we have support from “social democrats” to “orange bookers” for this. It would be a huge vote winner so long as the public had enough trust in us to believe that we could achieve it and so long as we fully understood how we would implement it in practice.
No solutions to the funding of improved public services can realistically be addressed in the longer-term without addressing the housing crisis. Vince Cable in his booklet of essays ‘Beyond Brexit’ https://www.libdems.org.uk/beyond-brexit-booklet discusses the issue from page 57. It outlines the steps required to implement a practical affordable housing policy.
Vince begins his essay saying “There is a big (negative) gap between the realistic expectations of young people born after the millennium and those born a generation earlier. Millennials now face the prospect of less secure employment, inferior or
non-existent pension arrangements and – most serious – a sharp reduction in the availability, security, and affordability of housing with good space and amenity standards
He concludes with the observation “In the 1950s, faced with post-war rebuilding, housing was regarded as one of the highest government priorities, and successive governments delivered. We now require a similar level of commitment.”
When it comes to healthcare then I don’t think there are any easily available politically practical solutions to current problems. Challenging the monolithic nature of the NHS would be attacked by the Labour party as a neoliberal plot. I believe the NHS spending model is kept by politics within a natural upper and lower boundary where left leaning voters will tend to demand more spending and right leaning voters will tend to see spending as money thrown into a “bottomless pit”. Ultimately the less money the NHS has the more “efficient” it is in £’s spent per life-year gained while higher spending will provide more life-years at cost of “efficiency”.
What seems popular at the moment is to “solve” the issue by separating the “deserving ill” from the “undeserving ill”, public opinion deciding that certain people who have behaved in a socially irresponsible manner should be discriminated against in the offering of treatment. The theory goes that if everyone took more care of themselves then the NHS would have more money to divide between a smaller number of recipients. To me this is against liberal principles and the attempted implementation would lead to bureaucratic overhead, unfair discrimination and a break down in trust between healthcare workers and the public as well as between the public themselves.
Care is another matter, the current situation leads to great variation in quality of care and unequal access based on means, yet there is big difference between the “medical model” and “social model” in care, and making care part of the NHS could see people spend the final years of life as “patients” rather than providing them the support they need to get the most out of their old age. Ultimately I don’t believe simply expanding the NHS remit to cover care is the solution but also the current situation is unfair and puts huge burden on older people and their families.
@ Andrew T,
“…… a huge house building scheme and increased council house ownership would be one of the most popular and effective policies we could have.”
You might want to test this out on a focus group of your voters in say Richmond Park or Twickenham. Try them out on the idea that you’re wanting to build lots of low cost or council housing in the constituencies to relieve the pressure of high cost housing in London.
@ Andrew T
It’s not as simple as you suggest in response to me. Everyone will say, yes, we need to solve the problem by building loads more houses. But where are they to be built? The places where houses are most needed are those where there is not much land left to build them.
During the years I was a councillor in a London Borough, and on the Planning Committee, EVERY plan to build a collection of houses resulted in mass opposition from local people. What seemed as a boring open space that could easily be used for building by everyone else was always argued by people who lived close to it as a lovely and necessary green space that they really needed and should not be built on.
The common belief is that councillors are in full control over planning control. In fact that is not the case, a proposed plan can only be opposed if there is a legal case to do so. Otherwise, if the council opposes it, the builders can make a legal case against the council, and the council ends up having to pay for that.
The consequence of this was that in the Planning Committee, the council administrators would often tell us that we should not vote again a plan because there was no legal case against it, and it would just result in more cost for the council if we did oppose it. But then if we accepted that and did not oppose the plan, the local people who spoke against it got really angry with us, told us it was terrible that we accepted the plan even though all local people who responded to it opposed it, and claimed that the real reason we must have accepted it is that the builders has secretly paid us to do so.
The other issue is that if houses are just built and sold, then they are sold to whoever is willing to pay the most money for them, and that is almost never those who most need housing. So what happens is that either big luxury housing is built, because it’s wealthy people who have lots of money to pay for it who will then by it, though they don’t have a real need for more housing. Or, wealthy people who want to buy housing to rent it out will always offer more money that those who really need it, so they buy it, and are subsidised by government support for renting to do so. That is what I noticed as well: every building of a set of new housing led to them, shortly after they were offered for sale, all being advertised for renting.
@Andrew T
I understand your concern about labelling people as ‘deserving’ or ‘undeserving.’. I certainly have no wish to label anyone or deny them treatment, but I do think that many people take things for granted and do not consider the consequences of their behaviour
(I include myself in all if this.). Perhaps we all need to be better informed or reminded about the cost of things and what trade-offs have to be made. For example, I did read somewhere that it costs Network rail more than £5 million p/a to clean graffiti from the underground system alone. What else in the public sector could this money pay for? If people were able to refrain from ending up in A&E on Friday or Saturday nights in consequence of consuming too much alcohol, how else could that money (saved) be deployed in the NHS? I don’t think it is unreasonable or illiberal to inform people about this or ask people to think carefully when making decisions with the freedom that they have.
When the Conservative government made it compulsory for councils to enable those in council houses to buy then cheaply, I was leading the Young Liberals where I lived, and the Housing Minister was an MP nearby. So I wrote to him saying that while it was nice for those who had council houses to be able to be able to become owners of them, would that not cause a serious problem for the next generation who would then be unable to get council housing.
He wrote back to me saying I was foolish to think sale of council houses would cause a problem, because the houses would all still be there.
So, who was right, he or me?
When the 2010-15 Coalition set a system where students would have to pay full cost for university education (albeit paid in effect by government borrowing to give them loans to do so), one of the arguments that was being strongly pushed to support this was that this would help reduce university costs, because then there would be a market competition, and universities would keep costs down in order to attract applicants.
My response to this was that, no it would not work like that. Instead, I suggested that young people applying for university would tend to think that the higher the cost, the better the quality. So, while the government suggested that the maximum cost would be unusual, and most university places would charge less than that, I said I thought that almost all universities would go to the maximum cost, because not to do so would make them come across as poor quality and would lead to losing applications rather than gaining them.
So, who was right, the government or me?
@Matthew Huntbach
Appreciate the response – nothing is as simple in practice and you’re right as is Peter Martin I think in alluding to house building often being locally opposed – but we have to be bold if we want to win national support and solve the problems the country faces.
@Krissib
How much graffiti have you put on the London Underground? How often have you ended up in A&E due to alcohol? I only ask because graffiti is usually done by bored youths who will grow out of the habit and most people that end up in A&E once don’t do so again for their own sake. When I looked at alcohol related NHS costs before, it turned out the costs were dominated by the treatment of long term health conditions caused by years of overuse of alcohol rather than acute alcohol consumption. Long term alcohol use (as with smoking) appears to be lower in the younger generations which ought to mean less young people now will become older people needing treatment caused by alcohol.
That all said, I don’t disagree with the sentiment but we need to be careful.
Like many in our society, I shall be applauding the doctors, nurses, carers, porters and cleaning staff who’s selflessness, bravery and dedication has been so impressive. The pandemic has certainly given me pause for thought on the inherent weaknesses of our provision of health and social care. It has certainly made me think how as a party we need to think not simply about the NHS but how we create a healthier society.
A combination of dedicated taxes, diet, exercise and technology should be at the heart of our approach. Taxing “bads” from tobacco to fast food, high fat, high sugar and processed foods should underpin health and social care funding. These regressive measures need to be tempered with readily available fresh food across our towns and cities.Cooking from scratch with seasonally appropriate food needs to be embedded into the school curriculum along with regular exercise. Let children nudge adults.
From a technology perspective, we need to balance privacy with the need to personalise healthcare. Personal health plans, app based that mix family health history, pre-disposition to certain conditions with dietary and exercise recommendations are well within the realm of possibility. Blockchain should ensure security.
Health and social care needs radical devolution to allow scope for experimentation while maintaining national minimum standards. There will be howls of protest from the left and right.
My eighty year old neighbour managed to get her husband, on the edge of dementia, admitted to hospital on spurious grounds and the NHS then offloaded him on to a £1000 a week care home, at the taxpayers expense, as they needed the hospital beds due to coronavirus… otherwise she would have lost her house. Nice old chap who she can only talk to on the phone, apparently asking her out for an expensive meal in an attempt to win her back.
I once went to visit a council care home to see an elderly aunt, a sea of white haired ladies I did not have a clue which one was the aunt. We did eventually track her down but on leaving my brother-in-law opined that please shoot him in the head if he got to that stage rather than putting him in a home. The aunt got free council care in exchange for giving up her large council house, BTW.
There probably is no answer to the problems…
@ Andrew T @ Matthew
Yes I do think that there would be resistance to building more in the SE.
In any currency union, money will tend to gravitate towards the already wealthy areas. So, in the UK, that’s obviously the SE of England. Wages and Salaries are higher, there’s generally no shortage of jobs. But there is a shortage of houses, roads, schools and general space to live as that’s where people move to find the jobs they need. In other words, the economy in the SE is overheating with high house price inflation being the major symptom.
The centre point of the UK, in terms of population, is somewhere in Lecestershire, and continually moving towards the SE, whereas the centre point geographically is much further to the North in Lancashire.
The Govt is not doing enough to correct the balance and stop or slow the population flow. There needs to be more emphasis on “warming up” the economy in the English regions,Wales, Scotland and NI where Govt can safely spend more without inflation being a concern.
https://en.wikipedia.org/wiki/Centre_points_of_the_United_Kingdom
@ Matthew,
“Indeed, this is one of the biggest problems with politics in this country: government spending and government taxation are treated as if they are two unrelated things.”
It’s not a problem at all. Because, unlike for you and I which are ‘households’ in economic terms, they are in fact separate processes for a government which creates money as it spends it into the economy and destroys it as it taxes. It always creates more money than it receives back in taxation. If it didn’t there wouldn’t be any in the economy for us to spend.
It’s not that difficult, but many people seem to have some kind of mental block. But its plainly obvious that government spending causes taxation that matches the spending to the penny for any positive tax rate. And it does that instantly, unless, people slow down the process by holding onto their money for a period of time. A process known as “saving”.
Saving is having money in your hand. Any pause between earning and spending, no matter how short, causes saving to occur. And that saving, when netted off against loans issued, has precisely the same short term economic effect as taxation.
Of course this doesn’t mean that the Govt can spend without limit. But the constraint is the extent of the real resources in the economy that can be utilised. If we try to exceed this then we generate too much inflation.
So how many spare resources do we have for the NHS? That’s the right question to ask.
Peter Martin
It’s not a problem at all.
Yes it is a problem, because what you are saying, that taxes can be kept low because that has nothing to do with government services, is essentially encouraging people to vote Conservative.
It is worth looking up”We Own It” of 21 5 2020 – it shows an example of NHS expenses The privatised NHS Supply Chain is meant to “procure and deliver” and there are 4 levels of profit while getting the equipment to the staff.
I remember noticing somewhere that at the NHS Virgin made a profit of 3 million- though I do not know for what or for how long.
@ Matthew,
No it’s just the opposite of encouraging everyone to vote Conservative. They are even worse that you guys when it comes to wanting to balance budgets and making sure that every penny spent was covered in advance by taxation revenue. At least that’s would have I said before the General election and Ed Davey’s commitment to run a budget surplus, which really made no sense at all even at the time.
Since then, during the Covid outbreak, the govt has torn up its own rulebook big time. Because it knows it can do!
You might want to read Richard Murphy now and again. He doesn’t always get it quite right, IMO, but generally speaking he’s on the right track.
https://www.taxresearch.org.uk/Blog/2019/11/17/the-libdems-are-promoting-the-most-hard-right-neoliberal-callously-indifferent-economic-agenda-of-any-mainstream-party-in-this-election/
@ Katerina Porter Have a look at what’s happened in the associated area of Social Care in a report by Professor Bob Hudson, Katerina :
The failure of privatised adult social care in England: what is to …chpi.org.uk › CHPI-SocialCare-Oct16-Proof01a
PDF
The failure of privatised adult social care in England: what is to be done? November 2016. Page 2. The Centre for Health and the Public Interest.
In 1690 French Warships briefly took control of the Thames estuary. William III’s credit was shot in London. To finance the building of a new navy the Bank of England was incorporated and subscribed by private shareholders https://www.intriguing-history.com/bank-of-england-history/.
To induce subscription to the loan the Bank was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank notes. The lenders would give the government cash (bullion) and issue notes against the government bonds, which can be lent again. £1.2 million was raised in 12 days; half of this was used to rebuild the navy. The security for the loan was customs duties collected by the state. The bank was nationalised after WW2 but the basic principle remains the same. The bank raises loans from private individuals when it is no longer practical or desirable to raise taxes and it is future tax collections that are the security for the loan. The level of future tax collections are a product of economic growth. It is for this reason that borrowing is best directed at investment in reversing recessions and enhancing future economic growth rather than current consumption. In 1694 spending on construction of ships and reequipping the navy generated economic activity as well as reinforcing the ability to secure maritime trade
Today that investment would be focused on renewable energy and public housing development. Here also, the spending on construction generates economic activity that provides security for lending. This is the key reason why borrowing needs to be directed at productivity-enhancing infrastructure rather than current consumption as the Resolution foundation discusses https://www.resolutionfoundation.org/publications/rewriting-the-rules/
“the country has turned the corner away from a shrinking state, and is heading for a bigger one. While that includes some loosening on the current budget, the country is mainly heading for much higher investment spending – and higher borrowing as a result. This is necessary, but not sufficient – we also need a much more serious debate about ensuring it’s spent on the right priorities and in the right ways. That is the task whoever wins the coming election.”
Peter Martin
No it’s just the opposite of encouraging everyone to vote Conservative.
What you are saying is that there is no connection between taxation and what the government provides in terms of services and support for those in poverty. So therefore you are saying that one should vote for whoever wants to keep taxation low, as taxation serves no purpose except to be nasty in taking money away from people.
We have moved from one of the most equal countries in Europe to one of the most unequal countries. The other countries have higher taxation which provided better services which leads to a more equal society. You are opposing that. I.e. you are supporting what the Conservatives stand for.
Being unable to support rises in taxation needed to help support a better NHS comes about because what people like you say. Any party which proposed what might be needed to properly improve the NHS will lose votes thanks to people like you. The Conservative will mostly win every election thanks to this. That indeed is what has happened for decades.
Peter Martin
In any currency union, money will tend to gravitate towards the already wealthy areas. So, in the UK, that’s obviously the SE of England. Wages and Salaries are higher, there’s generally no shortage of jobs.
You think that?
You have no idea what it is like to be a poor person in the SE of England. You probably don’t even know they exist.
I grew up in a family living in poverty in SE England. That’s the main reason why I joined the Liberal Party, as Labour seemed happy with an electoral system which meant we had no-one to represent us, because most (and ALL when I was young) of the seats where I lived had Conservative MPs.
@ Matthew,
You’ve still not quite grasped what I’m saying. If everyone is pulled in a SE direction economically that isn’t really a good thing for anyone, including the people who have always lived there. Especially if it means they are priced out of the housing market.
@ Matthew,
I’ve just noticed your earlier comment. You haven’t understood what I’m saying about taxation and spending either. Maybe it’s just me not explaining myself very well. Have you read the article that I linked to by Richard Murphy? Do you understand what he’s saying?
@ JoeB,
“The bank raises loans from private individuals when it is no longer practical or desirable to raise taxes and it is future tax collections that are the security for the loan.”
The nature of the BoE has changed considerably since the late 17th century. Then money was gold or silver. You can see the history of this in language. The French for money is l’argent (silver). In German it is geld (gold). Now there’s no metallic connection at all. It’s just an IOU of government or a tax voucher. Does it make any sense for Tescos to borrow their own shopping vouchers? Does it make any sense for the Govt to borrow their own tax vouchers?
Different times need different thinking but your’s is stuck in the late 17th century too!
David Raw -have been told that thousands of nursing homes have been bought up by very rich American who intends to be even richer……..
Am trying to get Professor Bob’s Hudson’s report .
Peter Martin,
money is much the same now as it was when the Bank of England was founded whether the medium of exchange is metallic, paper or electronic. It is a legal promise that a currency can be exchanged for goods and services to the value designated by the coin, note or bank deposit i.e. a debt that falls in value when more is created than tgoods and services of equivalent value increase. When issued by the government it is backed by the power of the state to raise future taxes. When debt instruments are issued by private banks they are backed by future cash flow from lending and/or collateralised on assets or guarantees. If Benjamin Franklin were alive today he would probably be saying “in this world, nothing can be said to be certain, except death, taxes and debt instruments that are ‘not worth a continental’
Katerina Cut and paste this into search o n google.
The failure of privatised adult social care in England: what is to …chpi.org.uk › papers › reports › failure-privatised-adult…
23 Nov 2016 – The failure of privatised adult social care in England: what is to be done? … Bob Hudson is Visiting Professor in Public Policy in the Centre for …
Also look up HC-One on Wikipedia to see their offshore links in the Cayman Islands and Jersey :
HC-One is a British healthcare management company. The name stands for Health and Care.[1] It is Britain’s largest care home operator. HC-One operates 329 care homes throughout the UK specialising in dementia, nursing, residential and specialist care for elderly people.[2]
Peter Martin
Have you read the article that I linked to by Richard Murphy? Do you understand what he’s saying?
Yes, and in effect he’s saying that if we work hard to create a more equal society by taxing the rich in order to provide more services and wealth for the poor, that makes us extreme right-wing.
Nonsense.
As I have said many times, I believe we need more taxation on property and inheritance in order to create a more equal society. There has been a huge rise in enslavement by poverty due to the way that house prices have risen, and council housing is no longer available to ordinary people. This has been particular so in the south-east.
I appreciate this is a hard point make. People with power tend to jump up and say it is unacceptable to have this sort of taxation. And they are supported when the argument is put out that government spending on things like the NHS and universities can be increased without there being any need for taxation to do it.
We need directly to work with poor people, to show we understand them, and have plans that will lead to a more equal society. We used to do that, and that was what gave us our core support in most of the place where we were winning seats.
But we threw all that away. First by not properly explaining that the 2010-15 coalition was very far from what we really wanted. Then by letting the Conservatives get away with getting poor people to think the problem of inequality and rule by the wealthy was down to membership of the EU, so the way to solve it is Brexit. Then by supporting the Conservatives even more by just insulting and dismissing those who voted Leave for that reason, rather than showing a proper understanding of their concern, and an explanation of why leaving the EU would not give then what they thought.
When I grew up in southern England Labour was often dismissed by poor people as it was seen as more a party of intellectual elite types than a truly left-wing party. That was in the days when Labour was still the party of trade unions, but that didn’t impress people in southern England where trade unions were much weaker than in northern and industrial areas. These days, that thought is more general across the country.
That is why coming out as left-wing Liberals in supposedly safe Conservative places worked so well to win votes. But from Clegg onwards, our party leaders have had the opposite belief, and have wrecked our party in that way.
Mathew Huntbach
“I believe we need more taxation on property and inheritance in order to create a more equal society”
Never in a million years will you win a general election with policies like that.
The last manifesto set out a 5 point plan;
– Introduce a 1% raise in income tax, generating £6bn a year
– Ring-fence ALL of this for the NHS and care, investing efficiently and effectively in social care, primary care, mental health and public health
– Consolidate all health and care taxes into a single, dedicated Health and Care Tax, showing on people’s payslips exactly what we spend it on
– Establish a cross-party health and care convention, consulting and working with patients, the public, NHS staff and care workers, to ensure our health and social care is sustainable and integrated
– Introduce an independent agency to monitor health and care budgets, which would report every three years on how much money the system needs to flourish.
A review by the Health Foundation https://www.health.org.uk/news-and-comment/blogs/what-does-the-liberal-democrats-manifesto-mean-for-health-and-care noted:
“While a clear improvement on current spending plans, the money pledged doesn’t quite go far enough in key areas of the health budget – including training for new doctors and nurses, capital spending on new buildings and equipment, and public health.”
“Staffing, as much as money, is the major issue facing the NHS and social care in the short term. The workforce crisis is chronic: the NHS is currently down around 100,000 staff. The gap in social care is more like 120,000..”
“The social care system in England is currently failing some of the most vulnerable people in society. The Liberal Democrats’ pledge to establish a cross-party convention on social care funding could help generate consensus behind reform – and it is good to see that the party would back a cap on care costs as their preferred option. This would provide protection against catastrophic care costs, and already lies on the statute book. But we’ve been here before. There has been a long line of government reviews, commissions, and policy papers on adult social care dating back decades – yet there has been no solution to the crisis. What the system needs now is firm action, not just a plan for another plan.”
@JoeB,
” It is a legal promise that a currency can be exchanged for goods and services ….”
It used to be. It was that the pound was exchangeable for a fixed amount of gold. Not any longer though. Maybe you’d like to tell us what it is now?
As far as I can make out they BoE might give you two fives for ten, if you ask them nicely, but that would be about it.
@ Matthew,
I think I can safely say that you don’t understand what Richard Murphy is saying. Some people just don’t get it. But maybe you’d have better luck with Bill Mitchell? He’s in favour of taxing the rich too but not quite for the same reasons you are:
http://bilbo.economicoutlook.net/blog/?p=38440
UK Spending in healthcare has doubled from 3.6% of GDP in the early 1970s up to 7.2% over the last decade and is estimated to need to rise to between 9 and 10% of GDP by 2025 https://www.health.org.uk/news-and-comment/charts-and-infographics/health-spending-as-a-share-of-gdp-remains-at-lowest-level-in?gclid=EAIaIQobChMIjqLmm9fS6QIVRPhRCh1fXQFxEAAYASAAEgJPBfD_BwE
The staffing and funding issues of the NHS and adult social care are not going to be addressed without moving significant human and capital resources previously deployed in the private sector to the public sector. That almost certainly requires improving pay and conditions in both sectors. If there were lots of idle resources in the economy you wouldn’t have this level of staffing shortages. Perhaps that will change as unemployment begins to increase. Either way, a larger proportion of national income needs to be devoted to the public sector generally. That ultimately means higher levels of taxation. Funding current spending with debt monetization only works for a short time when the economy is experiencing negative or stagnant growth and will generate inflation when money is spent on consumption rather than debt repayment. Borrowing from the public does not need to generate inflation, but is limited to the extent that there are alternative low-risk investments at any given time in domestic or international financial markets. In an economic crisis there is a flight to safety but as the economy recovers that capital starts to move elsewhere and is not a substitute for permanent funding.
We’ll never get anywhere with healthcare in this country until the NHS is brought back down from its status as a national religion. Nobody seems to want to do anything other than exalt the ‘heroes’ who work in it and promise to pump in more money (though not necessarily actually do that). Any suggestion of doing things differently, especially if it involves the private sector is automatically painted as sacrificing the health of the nation for sinister motives.
I don’t know how that gets done though. Private providers aren’t automatically bad. Profit isn’t necessarily wrong. Other countries manage to fund and deliver healthcare with a lot less noise and hysteria than we do but to me it looks almost impossible to climb down from where we’ve got ourselves.
@ JoeB,
“If there were lots of idle resources in the economy you wouldn’t …..”
There is quite a lot of contradictory thinking on this by Lib Dems and others on the so-called progressive left. On the one hand the standard line is that resources are very tight and we can’t do without a copious supply of overseas workers, on the other it is that the robots and automation are taking our jobs , we’ll all end up with little to do, and we have to provide everyone who is displaced with a UBI to compensate.
We have discussed this point before but there is plenty of evidence that the official figure for unemployment is severe underestimate.
Prof Fothergill says ““For more than 20 years successive governments have hidden the true scale of unemployment, especially by parking vast numbers on incapacity benefits.”
In any case counting those who are in irregular work as fully employed doesn’t give us a good indication of the extent of potential resources which we do have which are lying idle. The report I have linked to below asks:
“But just how much unemployment is there?”
A better question is to add the words “and underemployment” to the question.
The political right, and some of their allies in the supposed centre ground, are far too complacent about the problem.
https://www4.shu.ac.uk/research/cresr/news/real-level-unemployment-almost-35million-new-report
@ Joe B,
“Borrowing from the public does not need to generate inflation……….”
No form of borrowing generates inflation per se. If I lend you an amount of money for safe keeping, which I don’t want to spend , the process is economically neutral. However if you choose to spend it then it isn’t. Normally borrowers want to spend the money they have borrowed and that’s what does activate the economy.
But is the Govt a borrower in the normal sense of the term? Possibly, if say the loan is in a foreign currency, but very rarely. Normally they are in the same position as a bank which takes in a deposit from a saver. Technically they are borrowers too but we don’t usually think of it this way. The saver, by definition, doesn’t want to spend the money so the Govt has to make a decision whether to spend it to keep the wheels of the economy turning. If the economy is overheating then it shouldn’t. But otherwise it should. The latter is the more usual case. The amount of money available to the Govt in this way isn’t a limitation, if it needs to create and spend more then it can and should providing the inflationary implications have been fully considered.
malc
Never in a million years will you win a general election with policies like that.
Well, there we are. The rich are getting richer, the poor are getting poorer,and enslavement by poverty is growing, and there is nothing that can be done to resolve that, because if you try, you will never win a general election.
Peter Martin,
staff shortages in the NHS and care sector have been a long-standing problem. The budget is available for recruitment but the problem remains that many people choose not to apply/take jobs available in a sector that is associated with low pay and strenuous work conditions. It is a sector, perhaps less affected by automation than areas like manufacturing.
Saving by definition is the deferment of consumption to the future. Most saving in the economy takes the form of saving for retirement and building equity in housing. As people retire they are no longer producing they are drawing on the production not consumed by the working population as are children. So too with housing equity. Current consumption is reduced to repay mortgage loans. New housing needs to be constructed or major renovations and refurbishing undertaken to absorb these savings.
If savings are not invested in maintaining and developing economic infrastructure and new housing but rather consumed then the productive resources are not their to meet the needs of retirees and affordable housing becomes scarcer and scarcer.
When Jimmy Stewart (in the film ‘its a wonderful life’) was explaining to customers of his saving and loan where their savings were; he told them their money was not in the bank vaults, it was in each others houses and businesses. If he had said it has all been spent on ice cream, the crowd may not have been quite as relaxed about being able to get their savings back in the future.
Individual households will borrow to smooth out personal consumption. Businesses will use overdrafts for seasonal or short-term financing and governments will use short-term borrowing to smooth troughs in the economic cycle.
However, for investment in house purchases; business investment or public infrastructure spending you need long-term borrowing that can be serviced from cash flow. For households that is their earnings; for firms their profits and for governments their tax receipts. Without tax receiots there is no government borrowing. Without borrowing their is no investment. Without investment there are no savings.
“Jimmy Stewart….. told them their money was not in the bank vaults, it was in each others houses and businesses.”
With all respect to James Stewart, or the writers who scripted his lines, he/they aren’t right.
A house is a object like a lump of gold, or a painting or an antique. They may or not be stores of value. Most cars are scrapped but some go on to be collectors’ items. So, when Chippendale made a chair he would have received his money and spent it. The present day owner of that chair won’t find any money in the padding but he can sell it and receive a good price from someone who has earned that money in the present day economy and he will of course benefit from that.
But the rest of your explanation of why we have a shortage of workers in the NHS is symptomatic of the right wing belief that unemployment and underemployment isn’t really a problem and in many ways is desirable as a counter inflation measure. Why bother trying to make use of stroppy indigenous workers who object to working for a pittance on minimum wages when we can recruit workers from overseas who’ll just get on with it?
@ Matthew,
Of course Malc has a valid point. Both Labour and Lib Dems lose working class votes to the Tories because they fear that they’ll be the ones who’ll be targetted to “pay for” various proposed social programs.
So “there’s nothing to be done”? How about a different approach? We need to think smarter. Take another look at the Bill Mitchell article I sent.
Peter Martin, Matthew Huntbach, malc – you don’t even need to take a look at Bill Mitchell. There is Justin Trudeau on the other side of the Atlantic who won by promising higher social/infrastructure spending while effectively downplaying tax increases (there were tax increases but most were either raising top rates or actually closing loopholes). He also managed to make CPC “critics” look ridiculous.
Thomas,
didn’t the Tories just win here by promising higher social/infrastructure spending while effectively downplaying tax increases – so-called levelling up.
David Raw – This morning’s New York Times has a very long and full article on what has and is happening with our care homes. Privatised by Mrs Thatcher “for profit” homes now control 86% of the British market. “A decidedly American export….corporate giants based
in offshore tax havens……..trying to wring profits out of an ageing population”.HC-One,
the biggest chain, between 2017 and 2019 paid 50 million pounds in dividends. With the arrival of the virus the needs of the NHS hospitals came first. To free beds patients were sent on to nursing homes. Some were infected, and what followed was disaster. Costs went up so even HC-One had problems. In the article there is a great more.
Peter Martin
Why bother trying to make use of stroppy indigenous workers who object to working for a pittance on minimum wages when we can recruit workers from overseas who’ll just get on with it?
Yes, and many poor people in this country think that’s what left-wing and liberal politics is all about. Thinking that helps the Conservatives win votes. It was one of the reason for attracting many poor people to vote Leave in the referendum, and then Conservative in the 2019 general election.
I finds these debates frustratingly vague.
1. What on earth does ‘properly funded actually mean? Some waiting lists? No waiting lists? Doctors and nurses paid better or really well? Free hospital car parks? All of the newest treatments? Some of the newest treatments?
2. What does good look like? Germany is often cited but misunderstood. I lived and worked there for a while, and their system is partly private and comparatively multi-tiered. The NHS is egalitarian by contrast.
3. Finally, 5% on income tax to pay for it all. Personally, I am completely opposed to any proposal that shifts more national wealth to the elderly. Salaries have already lagged behind inflation for 10+ years and every younger person already pays a ‘tax’ to their elders every time they rent or buy a house. Graduates face a combined 40% tax/NI/loan repayment rate after £21000.
The Kings fund undertakes regular assessments of NHS funding and health outcomes. Its recent report https://www.kingsfund.org.uk/projects/nhs-in-a-nutshell/nhs-budget notes:
“In July 2018, the Prime Minister announced a new five-year funding deal that would see NHS funding rise by £33.9 billion in cash terms (ie, not adjusted for inflation) by 2023/24 compared to 2018/19, a rate of increase that is closer to, but still lower than, the long term average. This long-term funding deal only applies to services within the scope of NHS England’s mandate, and excludes important areas of the Department of Health and Social Care budget such as capital investment, public health and the education and training of NHS staff.”
“In the September 2019 Spending Round and March 2020 Spring Budget, the government announced increases to budgets for capital investment, public health and the education and training of the NHS workforce. But funding for these important areas of spending has not been determined beyond 2020/21. These budgets have come under substantial pressure in the past five years, as day-to-day spending on NHS services was prioritised instead. This has led, for example, to cuts in budgets for public health services and rapid deterioration in the condition of NHS buildings and equipment. ”
“While the new NHS funding deal will ease current pressures, it is not enough to both restore performance against key waiting times standards and deliver widespread changes to services to deliver better care.”
Peter Martin,
I think Jimmy Stewart’s scriptwriter was probably quite prescient. Money circulates in a country as long as there is trust that it will continue to have value to acquire goods and services. It is this confidence in government regulation of the economy and banking that makes the system work. Maintaining this confidence is why central banks were made independent of the treasury, as the post-war experience has been that Chancellors cannot resist the temptation to inflate the economy just prior to an election and deal the consequences later when the government has been safely reelected.
As to staffing vacancies in the NHS, the average nurse salary is £25,578 within the UK. Fully qualified nurses can expect to earn at least £22,000 rising to over £28,000 on Band 5. Compare that with the minimum wage that would be paid in a job guarantee scheme that you say you support and then ask yourself – who is it that is advocating low paying work here?
Bill Mitchell needs to make an effort to engage with fellow economists in the field and be able to offer a credible explanation as to why virtually none accept his arguments. This survey of leading economists in the US last year http://www.igmchicago.org/surveys/modern-monetary-theory/ asked two simple questions:
Question A: Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt? All disagreed.
Question B: Countries that borrow in their own currency can finance as much real government spending as they want by creating money? All disagreed.
Joe Bourke, Matthew Huntbach – we should shift debate from balancing budget to managing Debt-to-GDP ratio, especially in the post-Corona world, where you cannot commit to a balanced budget at least in the medium term.
@ Joe B,
Bill Mitchell would, I think, agree with question A in its literal sense. He would probably add the proviso that just because Govt can do something it doesn’t necessarily follow that they should.
He too would disagree with B even in the literal sense. Many perhaps wouldn’t notice the word ‘real’. I doubt Bill would miss that.
It’s bad enough in a real car when my wife is constantly straining to see the speedometer so she can tick me off for driving too fast! It would be even worse if she had partial control! But that’s how we’re running the economy.
The BoE is in supposed control of monetary policy. The Govt is in control of fiscal policy. So we create the problem that the BoE is putting its foot down on the accelerator with loose monetary policy, creating a debt bubble in the private sector backed up by the collateral of high house prices, at the same time as the government is trying to slow things down with a too tight fiscal policy. aka Austerity economics.
@ Thomas,
If you add up all the world’s National Debts they total some £80 trillion. We don’t owe that to Mars! The Governments owe it to everyone else. They are our savings essentially. I’ve own a little bit of UK National Debt with some Premium bonds we bought.
Would Lib Dems like me to help reduce the ND by selling them and buying lots of whisky so that the Govt can collect the tax?
@ JoeB,
I just Googled the questions you posed in your last comment. Randall Wray is even more scathing about them than I was! He describes it all as a troll poll!
In other words frame the questions to completely distort any message which you want to discredit.
The Lib Dems are supposed to be at least central in political affiliation but here you are lining up with an ultra conservative economic “think tank”!
http://neweconomicperspectives.org/2019/03/a-conspiracy-against-mmt-chicago-booths-polling-and-trolling.html
Thomas,
the resolution foundation fiscal rules do not entail balanced budgets. It is the job of the central bank to ensure there is sufficient money in the economy to meet demand at any point in time so that prices can be held relatively stable. As with any bank when they create money they create both an asset and a liability. When the BofE buys government bonds in the secondary market they acquire an asset and simultaneously create a liability by crediting bank reserve accounts or non-bank accounts.
At present, there is a problem with debt deflation i.e. a contraction in the money supply in excess of the contraction in the supply of goods and services. That can be countered by debt monetisation. This requires public spending, not financed by borrowing, but by direct money creation that is not repaid. Once prices are stabilised the government returns to debt financing of its spending to avoid high levels of inflation. A large debt-financed stimulus package will be required to return the economy to operating somewhere near to full capacity i.e. roughly where it was pre-crisis. It is only at this point when the economy is operating under normal conditions that current spending and tax receipts need to be broadly in balance to maintain financial stability – deficits continue to finance investment spending as before.
So I think you are right to say we should shift debate from balancing the budget to managing Debt-to-GDP ratio, but even then the real issue is the cost of servicing debt versus the loss of economic output that may arise.
in the post-corona world, we really need to be rethinking the wisdom of driving consumption ever higher at the cost of environmental sustainability. If this cannot be tackled now it never will and then it will; be too late, just as going into lockdown was too late to save many. This article discusses the issues https://www.carbonbrief.org/leading-economists-green-coronavirus-recovery-also-better-for-economy concluding:
“A shift from the immediate Covid-19 public health and economic crisis towards longer-term recovery brings the potential to invest in productive assets for the long term. Our research shows that this investment could help decouple emissions from growth, avoid stranded assets – and stranded jobs – and redirect the global economy towards a more prosperous net-zero emissions pathway.”
@ Joe B,
“It is the job of the central bank to ensure there is sufficient money in the economy to meet demand…….”
And whose stupid idea was it to give this responsibility to the BoE in the first place?
All the BoE can do is set short term interest rates. That’s why they are ultra low and going on negative. They can engage in some QE to set longer term rates but they can’t, and don’t, make decisions on their own to buy up hundreds of billions worth of financial assets.
The management of the economy, including the regulation of aggregate demand, is not the responsibility of the central bank. It is the responsibility of Government. Period.
@ Joe B,
“Money circulates in a country as long as there is trust that it will continue to have value to acquire goods and services. It is this confidence in government regulation of the economy and banking that makes the system work.”
It’s nothing to do with trust. Suppose the worst happened and we were hit with a virus that was so deadly it wiped out half the population. The productive capacity of the country would be destroyed but the banking system would probably remain intact. Many survivors might superficially feel better off having been bequeathed large sums of money by the victims.
The problem is there would be nothing much to buy with it and hyperinflation would almost certainly be the result. So the trust in the currency will be shot. Does this mean that money would no longer circulate and we’d all revert to barter? That could happen for a short time but more likely is that even more money could circulate as we used wheelbarrows full of cash to buy a loaf!
But it would all settle down after a while according to a new normal. We’d perhaps have a New Pound to save us adding all those noughts to prices but that would be about it. We wouldn’t revert to gold coins or start using US dollars. Or the New dollar that they’d probably be using!
The pound is essentially a tax voucher of the UK govt. We all need to pay our taxes and that’s why there is a demand for the currency which gives it a value.
Peter Martin,
And whose stupid idea was it to give this responsibility to the BoE in the first place?
Gordon Brown as Chancellor http://www.bbc.co.uk/news/special/politics97/news/05/0506/morgan.shtml
The Government sets the banks mandate and the bank carries out the instructions it is given in its mandate. The management of government spending and tax policy (fiscal policy) remains with the treasury. Both the Bank of England and the Treasury are public institutions.
As a public body, the bank is answerable to both the UK parliament and public. One way they are held accountable is through public meetings with the House of Commons Treasury Committee. These meetings typically happen when the bank publishes its reports on the state of the economy and the financial system.
These reports also explain any changes in policies (such as interest rates) to support the economy. They are accompanied by a press conference on the day they are published, where the Governor and other senior officials answer questions on the banks assessment of the economy, the latest policy decisions and which factors fed into the decisions.
To understand why money depends on trust see this short Bank of England article explaining why https://www.bankofengland.co.uk/knowledgebank/why-does-money-depend-on-trust
@ Joed Bourke “And whose stupid idea was it to give this responsibility to the BoE in the first place? Gordon Brown as Chancellor.
I’m sure you’ll correct me if I’m wrong, Joseph, but I have a distinct memory of the Lib Dem Treasury spokesman, Alan Beith, M.P., championing independence for the Bank of England in the late 1990’s. Are you saying he was stupid too ?
@ JoeB,
And to understand why giving the BoE this responsibility is a stupid idea, try Googling the phrase “Myth of Central Bank Indepndence”. The FT just about makes it on to the first page with this contribution by John Redwood. Sometimes there’s no getting away from the fact that those who are in a different party are right and those who are in the same party get it all wrong!
https://www.ft.com/content/cdf8dd6e-af6c-11e8-87e0-d84e0d934341
To understand why money isn’t just a castle built on the sands of trust try Googling the phrase “taxes drive money.”
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
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David Raw,
I don’t think it was a stupid decision at all and Alan Beith was right. The decision to give operational independence over monetary policy to the Bank of England was, in major part, the result of concern about the short-term politicisation of long-term economic decisions, particularly ensuring price stability. While ultimate control remains with the government, central bank independence engenders a high degree of confidence that mpney will not be debased for short-term electoral gains.
Gordon Brown in 2017 said “High levels of growth and employment…are not possible unless you avoid taking economic decisions for political reasons….we were putting Britain on a long-term path. Since the independence of the Bank, inflation in the UK has been kept low and stable.”
Vince Cable was an advocate of central bank independence while cautious about the overuse of quantitative easing in the wake of the financial crisis. Prior to the financial crisis, he was warning about excessive consumer debt years before anyone else tumbled to the problem. In November 2003 he challenged Gordon Brown about “the brutal truth” that “the growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level?”
We seem to have reached much the same point again at the onset of this crisis. Let’s hope we have learned the lessons of living on credit and understand that the sticking plasters of zero interest rates, quantitative easing or reflating an overpriced housing market are not going to resolve the fundamental structural problems of the British economy. We need a much more focused and targeted approach to the labour and housing markets to get out of the hole this time around that actually does endeavour to put the UK on a long-term path to environmentally sustainable prosperity.
@ David Raw,
The thing about economics is that it can cause otherwise intelligent people to believe in stupid things. We all know where babies come from. There’s very little squeamishness, these days, about Storks or Fairies or any of that nonsense. My kids asked the questions and they were given the answers. They didn’t seem unduly scarred by the knowledge! But when it comes to where money comes from, that’s different. It has to be something else other than it is just the creation or the IOU of central government. That’s just not politically acceptable to many. OK so we don’t have Storks but it’s not far off! To them, its all built on something called ‘faith’ even though they like to use the word “confidence”.
It’s not just a UK thing. The PTB in the EU had the stupid idea that they could create a currency without a government to run it. All they would need was a central bank! They were warned as long ago as 1992 but they didn’t listen.
“It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe. But there is much more to it all.”
Well yes there is! And its not the European Parliament either!
https://www.lrb.co.uk/the-paper/v14/n19/wynne-godley/maastricht-and-all-that
Peter Martin,
Randall Wray titles his article ‘Taxes drive money’ then spends the rest of the article arguing that taxes must be settled in government-created currency (notes or coins). The caveat he uses is “While it appears that taxpayers mostly use checks drawn on private banks to make tax payments, actually, when government receives these checks it debits the reserves of the private banks. Effectively, private banks intermediate between taxpayers and government, making payment in currency (technically, reserves that are the IOU of the nation’s central bank) on behalf of the taxpayers.” He seems to make no distinction between currency and money on the one hand while on the other he appears to consider bank reserves (and paper money) as currency but not private bank deposits.
Chartalism is a bureaucratic German view of money from the early 20th century. It says that money is legally a creature of the state, incorporating a modern central bank. Money becomes the means of exchange because the state rules that it must be used to pay taxes. In his Treatise of Money, Keynes (1930) observed that Chartalism ignores the fact that the state gives itself the right to rule that money must be used for payments connected with all contracts, not just tax obligations. It uses its “monopoly on legitimate use of violence” (the German sociologist Max Weber’s phrase) to enforce the rules. The taxation trope is irrelevant for all practical purposes.
When it comes to the issues we face today including how best to deal with long-standing staff shortages in the NHS and Care sector despite high levels of employment over the past few years the obsession with theories of what gives money value is doubly irrelevant. The NHS and Social Care need long-term resources i.e. people, buildings, equipment, training and drugs. That will come from a tax enabled reallocation of real resources from the private sector to the public health and care sector in the coming years. The issue is where the burden of those taxes will fall – on accumulated wealth and carbon taxes or on wages and profits.
@ Joe B,
Randall Wray is saying that money is an IOU of the issuer. So theoretically, anyone, including the banks, can write out IOUs and they can serve as money. But Barclay’s bank will only accept Lloyd’s bank IOUs for a limited period. This is usually for a period of a working day when accounts are cleared. Mainly by contra. Any imbalance can be requested to be paid from bank reserves. These are accounts held at the BoE and are in themselves just IOUs of the BoE. The govt’s own bank. So just like any the bank the Govt/BoE doesn’t want to hold anyone else’s IOUs for an extended period.This concept applies to tax payments too.
Keynes is right to say that the State can make any rulings it likes along these lines. But in the age of the internet there’s nothing to stop anyone conducting transactions in any currency they choose. We could engage in a transaction priced in Vietnamese dongs if we both wanted to. This happens all the time, especially in international trade. But everyone and every company has to present their accounts for tax purposes in ££ so this is naturally the currency of choice in the UK. Even drug dealers, who probably don’t pay much tax, fall into line!
So is an “the obsession with theories of what gives money value is doubly irrelevant.”? I’d use the word understanding. But maybe you want to keep everyone in the dark?
We often hear that we can’t afford this or that because the Govt “doesn’t have enough money”. But if we understand the nature of money we can know that the Govt can neither have nor not have any money in the sense we are familiar with. When there is a huge crisis, as there is now, the Govt is simply creates hundreds of billions and many are quite puzzled about that.
But what about when much smaller amounts are required in normal times? Why is it OK to create hundreds of billions to bail out the banks, or the system generally, but not a much smaller amount to fund the NHS? Maybe it could be OK. Maybe not. We need to understand what we are doing to be able to make that decision.
@ Joe,
This is a useful explanation of “the pyramid of liabilities” which has central bank money at the top, which has total acceptance, with commercial bank money underneath that, and underneath that the credit notes, cheques and other forms of “money” that we all can generate from time to time.
Incidentally your earlier comment “taxes must be settled in government-created currency (notes or coins)” isn’t quite right. Government created currency can be digital too.
https://creditwritedowns.com/2011/09/the-pyramid-of-liabilities.html
Peter Martin,
taxes are settled predominantly by payment from private bank accounts i.e. bank-created money. How money is created is also explained by the BofE https://www.bankofengland.co.uk/knowledgebank/how-is-money-created As noted – “Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans.”
There is no government currency versus private currency and hence no pyramid of liabilities – there is simply the circular flow of money around the economy and exchanges of goods and services occur. There is only one medium of exchange, virtually all of us use in the economy. The Bof E provides a clearing system for private banks acting as a settlement agent for inter-bank transactions. https://www.bankofengland.co.uk/payment-and-settlement
“The Bank of England acts as a settlement agent to enable financial institutions to make payments to each other. The Bank also operates CHAPS – the UK’s high-value payment system.”
The operation of the money system is as explained by the BofE. It’s not rocket science and it doesn’t need the invention of a new vocabulary to explain it.
@ Joe Bourke,
It may not be rocket science but you’ve still managed to get hold of the wrong end of the stick. There’s nothing in the BoE articles and the Randall Wray articles that contradicts the other. Providing we understand that the term ‘money’ is used the way it is. It isn’t necessarily an IOU of the govt/BoE.
Bank X is under no obligation to accept IOUs (money) created by Bank Y and vice versa. Of course they will, up to a point, but only if they are sure that the other is viable. Most of these IOUs will be cancelled out in the clearing process, and any that aren’t can be settled by govt/BoE created IOUs. They’ll both accept these.
It has to be like this when you think about it. If banks could “create money” in the normal meaning of the term, then why would they bother doing anything else? Like opening their doors to you and I. This is the only way they make real money ie Money at the apex of the pyramid and created by the central bank. They do have to work for it like everyone else.
This article may also be helpful.
http://neweconomicperspectives.org/2011/09/mmp-blog-14-ious-denominated-in.html
Peter Martin,
creating money does not create wealth i,e. net worth. This applies whether it is the central bank or private bank that creates money. When a company issues shares or bonds it creates no wealth. It merely exchanges one financial instrument (shares or bonds) for another financial instrument – cash. To create real wealth (as opposed to financial wealth) funds raised through the creation of new shares or bonds have to be invested in productive activity i.e. real resources that combine to add economic value. The bank bailouts created no new wealth. They simply underpinned debt that had been previously created by private banks to finance speculation in the property and stock markets or consumer credit. This money creation was not new spending in the economy. The spending on speculative assets and consumer credit had already occurred in the years leading up to the financial crisis.
The government conducts its business in much the same way as a firm. It manages its current spending, tax receipts, investment spending and borrowing on the basis of budgeting for a full-employment economy using automatic fiscal stabilisers to cover peaks and troughs in the economic cycle. The Phillips curve has long been abandoned as a policy guide.
The unit of account (money) is held stable by the central bank targeting a mandated inflation rate (or preferably a projected nominal GDP growth rate) such that the required volume of money required for economic activity is always available at the price determined by the interest rate. This is the purpose of the central bank.
A healthy economy will have an interest rate that allows for savers and their pension funds to retain the value of their savings (i.e. interest on savings above inflation); for firms and households to be able to borrow in financial markets at affordable rates of interest and invest to expand production or acquire housing; wage rates commensurate with the country’s level of technological development and International competitiveness; a sustainable balance of payments and stable exchange rate; and low levels of inflation.
It is the functioning of the real economy, the distribution of the wealth created and the availability of credit to productive enterprises that determines standards of living, not (important as it is) the ability of central banks to create the money and credit that enables everyday exchanges of goods and services to take place.
@ Joe B,
“….creating money does not create wealth”
You’ve made this point before. What would you say about destroying money? Would that destroy wealth? According to your logic it wouldn’t make any difference. If you think this you’re ignoring your own observations. We’ve all seen what happens when Governments put the squeeze on. The economy contracts. Incomes and wealth levels fall.
So can creating money, either by the Govt spending more or taxing less, or by the banks lending more, cause the economy to expand? Well yes. I think nearly everyone is agreed that it can. Everyone also agrees that there is potential inflation risk. The tricky bit is to avoid that.
” The unit of account (money) is held stable by the central bank targeting a mandated inflation rate. …….This is the purpose of the central bank.”
No. This is a late 20th century neoliberal fad. We’ve had central banks long before anyone came up with this idea.
“The government conducts its business in much the same way as a firm”
No it doesn’t. A business is a household in economic terms. The Govt is not a household. A surplus isn’t the same thing as profit. A deficit isn’t the same thing as a loss. The Govt’s role is to regulate and fine tune the economy. Not to create a profit or a surplus.
“A healthy economy will have an interest rate that allows for savers and their pension funds to retain the value of their savings ”
Perhaps surprisngly you are more in step with MMT than you are with the neoliberals on this point. MMT uses the JG to ensure 0% inflation. Most MMT proponents would set interest rates to zero. So yes there would retention of value for savings. But not an opportunity to collect money for nothing, as there would be if real interest rates were positive. On the other hand the present day thinking of neolibs like Rogoff is that interest rates should be negative and inflation should be 2%.
Peter Martin,
money is destroyed everyday – when banknotes are burned, when loans are repaid, when taxes are paid. It makes not an iota of difference to net worth. It is simply a change in asset/liability composition or settlement of existing liabilities. It neither increases or decreases wealth
What you are referring to is debt deflation that occurs when a debt bubble bursts and that acts as a catalyst for a decrease in general price levels throughout the economy. Banks create money automatically in response to demand. As Minsky pointed out this always go too far and ends in a slump. Governments belatedly put the squeeze on credit creation when the economy is overheating (often far too late in the housing market). This is part of the process of keeping the money supply consistent with supply and demand for real goods and services in the economy.
Inflation targeting by Central banks grew from the experience of stagflation in the 1970s and superseded the Bretton Woods system with currencies pegged to a US dollar backed by gold until 1971.
@ Joe Bourke,
No I’m not just referring to debt deflation. We saw that happen immediately after the 2008 crash. The Labour Govt must accept some responsibility for that but nevertheless they did the right thing by reducing VAT and pursuing an expansionary policy afterwards.
That all came to an end when the coalition took over and they put the squeeze on. They destroyed money and reduced the spending power in the economy. It was generally know as a time of austerity economics.
So did this: a) Have no difference b) Increase Incomes and Wealth c) Decrease Incomes and wealth ?