I’ve never liked the term “progressive parties”, lumping us together with Labour and the Greens despite some significant differences in policies and priorities. It often serves as lazy shorthand for “not Tory”, but it’s accurate in one respect – the Conservatives have spent the last few years slowly strangling any expectation of progress. Their legacy is a cost of living crisis, exponential growth in hospital waiting lists, unaffordable housing, falling living standards and the virtual abandonment of attempts to tackle the climate crisis and protect the environment.
You will have seen that the new Labour Government has recently awarded “inflation busting” pay rises to public sector workers, triggering howls of anguish from the right-wing press. In reality, these pay rises simply go some way towards restoring real terms pay and living standards to a segment of the workforce that has been squeezed by austerity and hammered by inflation, yet even the sensible financial press has framed 5.5% as a problem because it is “inflationary”. It seems the burden of tackling inflation must mostly be borne by the lower paid and the middle classes, while the new boss of Thames Water (a company on the verge of bankruptcy) is given a £2.3m pay package and bankers have seen their bonus caps abolished (which Labour has no plans to restore).
While poverty and inequality have always been with us, this is indicative of the breakdown of the ‘social contract’ that broadly lasted from the end of WW2 until the financial crisis of 2008 – that is if you went to school and passed some exams, you could expect to get a steady job that would gradually pay more over time, allowing you to buy a house with a mortgage that would be paid off before a relatively comfortable retirement, enjoying prompt and free NHS treatment that contributed to increasing life expectancy. And better still – there was comfort in the expectation that your children, and then grandchildren, would have it even better.
Not any more – that hope has died for many. Unless from an already wealthy family, the short-term prospects for young people today are insecure employment, stagnant salaries and eye-watering rents that make saving for a mortgage and buying a house completely unrealistic, while middle earners pay a historically high tax burden that in-part funds the pensions and care of older generations that have spent their entire lives enjoying more disposal income than the working young. For the luckier ones, this is party offset by the ‘bank of mum and dad’, free childcare by grandparents, and eventually by inheriting some of the accumulated wealth that is a by-product of ever-rising house prices, all of which are highly imperfect and unfair ways of tackling intergenerational inequality.
Many others will not be so lucky, and will regard their own futures as bleak. Should we be surprised at the recent rise in support for far-right parties amongst ‘Gen Z’ across Europe and beyond? I imagine that the simplistic solutions and scapegoating offered by populists must be very seductive when mainstream parties are so uninspiring.
Our Conference in September includes a consultation session on Sunday called “Leading the Way – Liberal Democrat policy direction in the years ahead”, and I plan to be there. And what needs to emerge from that process is one thing – hope.
Hope that progress can be restored, that education and employment will be available to all and that engaging in them will inevitably lead to rising living standards. Hope that housing will be affordable, that our environment will be cared for, and if you fall ill you will seen and treated quickly. Hope that society will treat everyone with dignity and respect, regardless of your background, circumstances or abilities. And finally hope that our children and grandchildren will live to enjoy progress of their own.
This matters, because if we and other believers in liberal democracy fail to offer a compelling vision of progress, there are extremists that will happily fill that void with division and hate. Meanwhile there are worrying signs that the love-bombing of Starmer’s Labour Party by various vested interests has had the desired effect, and our 72 MPs must be ruthless in holding them to account.
I urge all members to follow and participate in the consultation process, even if you can’t attend Conference, and seize the opportunity that a record number of MPs must bring. If you are attending Conference – I look forward to seeing you there.
* Nick Baird is a Lib Dem activist and Chair of the Liberal Democrats in Cheltenham.
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58 Comments
This is an important article. The erosion of wage incomes has been going on since the 1970s. In the 1950s/60s a median wage earner could support a family, buy a home and a car and maintain a financially secure lifesyle on a single wage income.
By the 1970s/80s the maintenace of family life typically took two people working. By the 1990s/2000s, two wage earners were no longer enough and personal and mortgage debt began to grow exponentially. Debt as a proportion of household income rose from 85% in 1996 to 156% at its peak in 2008 Household debt: statistics and impact on economy. Since the financial crisis real wages have been stagnant while house prices, rents and share prices continue to inflate even while the economy struggles to grow cont.
Cont…The value of money depreciates year on year. This reduces the purchasing power of consumers and the government while inflating the value of assets. Everything we buy includes an element of rent, profits and interest i.e. return on assets. The more that assests are inflated by the faliling value of money, the greater the share of earned income that accrues to the owners of assets i.e. the wealthiest in society.
That process of asset transfer needs to be quickly reversed. It requires taxation in the form of Land Value tax and taxes on other economic rents – excess monopoly profits and mortgage interest earned on land.
Both ordinary families and the government are being indebted while assets accumulate in the hands of a wealthy few. That will continue until we are back to where society was in the peoples budget of 1909. Lloyd George failed to intoduce Land Value Tax then. We should pick up the mantle of wealth taxes again and endeavour to see it through this time. In the meantime Patrotic millionaires offers some advice Ten tax reforms to raise £60 billion for public services and a fairer economy
Nick Baird,
You set out well what the post WW2 social contract gave people. However, the social contract was not broken in 2008, it started in 1979 with the election of the Thatcher government. Since then full employment has not been the major aim of UK governments, the main focus is controlling inflation. This has increased inequalities. During the 1980s people lost the opportunity to get a steady job. Even by 1990 it was difficult to afford to buy a home and more and more people had to turn to the bank of Mum and Dad for help. However, it was after the 2008 financial crisis that the increase in inequalities grew even faster with quantitative easing and then austerity.
However, our 72 MP’s did not stand on a manifesto of hope, they stood on one which embraced neo-liberal economics that has led us here, with a fiscal rule of getting the national debt falling as a share of the economy. This puts an artificial limit on what the government can spend on investments to grow the economy and provide full employment.
Joe Bourke,
I thought David Lloyd George did propose a Land Value Tax in his 1909 budget, but the land valuation was postponed and then when in coalition with the Conservatives he allowed it to be abolished. I expect David Raw can tell us what did happen.
@Michael: Are you saying that you want to see debt increase, not just in absolute terms, but as a share of GDP too?
@ Michael BG I’m sorry to correct you, Michael, but the idea for the Social Contract had nothing to do with Thatcher.
It was originally drawn up in January 1973 by two Yorkshire lads, Harold Wilson (from Huddersfield) and Vic Feather (Bradford) Gen Sec of the TUC, in a document entitled Economic Policy and the Cost of Living. They had help from Barbara Castle (Bradford) and Denis Healey (Keighley/Bradford Grammar School). It was implemented after the 1974 elections by the Wilson/Callaghan governments – with a bit of a shove from Roy Hattersley (Sheffield).
As you say, the aim was to reduce inflation (after the Middle East Oil price hike), and to a certain extent it worked. I remember it very clearly (one of the better things of my advancing years).
Thatcher wasn’t up for negotiating agreements with the TUC or anybody else for that matter. She was more interested in planning confrontation – especially with the miners (such as the Battle of Orgreave, S. Yorks).
Michael BG,
I don’t think unemployment is going to be a major issue, rather it will be continuig labour shortages as more people retire than enter the workforce UK Labour Market Statistics
Nick Baird writes “hope that our children and grandchildren will live to enjoy progress of their own.”
The bank of mum and dad is only available to a relative few. For more and more people the family home will go to pay for end of life care in a nursing home owned by a private equity firm.
Rising debt and wealth inequality is at the heart of the problem . The avarage UK house price is £285,000. You will need to pay 2.5 to 3 times that amount from your earnings on a 30 year morgage at 7%/8% and get a 15% deposit first…cont.
Cont…Goverment debt has risen from 36.5% of GDP in 2007-08 to 100% today and close on £2 trillion in nominal terms with very little in the way of new infrastrucure, schools or hospitals to show for it. For every debtor there is a creditor on the other side of this debt,. As this massive increase in government spending has not been taxed back, the question arises who has ultimately ended up with all the new money injected into the economy and what are they doing with?
The answer is those with sufficient incomes to buy assets driving up asset prices in the process – Commercial and residential properties, water and utility companies, high street chains and factories, Urban land and famland, shares in UK commercial companies and most of all securitised mortgages.
The failure to tax back this increase in government deficit spending at any point has led to the situation since 2008, that despite a 16 year period of low growth and a 2 year shutdown in the economy during the pandemic, property prices and rents have risen well above the rate of CPI inflation or wage growth https://www.bbc.co.uk/news/business-66244990 while public services and living standards deterioate.
Simon R,
I am not saying that it should be an aim of government for debt to increase as a share of GDP. I am saying it should not be a government aim to manage their finances to get the national debt falling as a share of GDP. However, if the government does manage the economy to provide economic growth then the national debt should fall as a share of GDP.
Joe Bourke,
Indeed, the unemployment rate at 4.2%, in the House of Commons Briefing Paper you provided the link to, is not at depression levels as it was in 2011/12 of over 8%. The forecast they give is for it to rise to 4.5% at the end of the year. What I found strange was that the number unemployed was given as 1.44 million, and then later in the paper it is stated that 1.8 million people are claiming unemployment related benefits. This takes the rate to 5.25%. It states that the claimant count is above its pre-pandemic level.
Then there is the issue of the over 9 million people who are economically inactive, an increase of 350,000 over the last year according to the briefing paper. There is also a graph showing inactivity due to long term sickness increasing since 2020.
As we have a sovereign currency and so can and do create money, why does H M G borrow/« borrow » money?
What proportion of th (so called) National Debt) is, in reality, an essential macro savings scheme?
Why are banks etc, which lend money, not referred to as being in debt?
How much of the (alleged) National Debt is owed to ourselves?
If fears about the (alleged) National Debt result in making our society less equitable and so with less efficient infrastructures, how is it possible to avoid being less productive financially and socially?
In 1945 the major economies began switching to the newly widely available energy source of oil. By 1970 conventional oil reserves were becoming more expensive to access (1st oil shock) and by 2008 unconventional oil(fracked oil shales , Albertan tar sands, NGLs etc) ditto. As energy becomes more expensive to obtain, we get less benefit from our fossil energy slaves . I hope we can degrow equitably. One positive is that world birth rates are well below replacement, so if we can survive a couple of generations the population might be sustainable.
I can’t understand what is meant by the UK having a ‘sovereign currency’ and how we can ‘create’ money. The UK government cannot ‘print money’; it has to borrow it in dematerialised form from the markets and if it did so willy nilly, what would that do to the GBP exchange rate and the interest rate at which the UK government could borrow? We saw what financial imprudence did to Liz Truss.
On the wider question I agree that the glut of liquidity has increased wealth inequality by inflating asset prices. On the other hand, wealth generally has been increased by technological growth. All but the very poorest now have a smartphone, a miracle of technology inconceivable a few decades ago.
@MarlFrankel. I suggest you read about Modern Monetary Theory. (Stephanie Kalton is recommended). A sovereign currency is one that is controlled exclusively by one country’s government. So the pound is a sovereign currency and the Euro is not. The MMT view is that if you control inflation – a very important qualification – then a sovereign currency can be issued as necessary. Government borrowing is seen as effectively a transfer from the central bank to the government. i.e. a debt the government owes itself. There are lots of other parts to MMT and these are best looked at in detail.
@ Mark Frankel,
A couple of hopefully not too difficult questions for you to answer to help you answer your own question:
1) Where do ££ and $$ etc come from in the first place before they are available to be borrowed back by Govt or collected in taxation?
2) Now that they don’t have any link to anything substantial, like Gold, what makes them worth something? Is needing them to pay our taxes a reasonable explanation?
@ Mick,
A couple of points:
1) I’d say the euro is a sovereign currency in the sense that the sovereignty is held by a quasi-EU government in the form of the European Central Bank. A somewhat more charitable way of putting it is that sovereignty is shared by the eurozone nations.
The MMT view is that the euro is never going to work as a currency should until the Eurozone gets itself a single government which is totally and indisputably in charge of it.
2) Any supposedly loan or borrowing related transactions, involving the currency of issue, between the Government, the central bank and anyone else isn’t considered to be “borrowing or lending”. They are just swaps of one type of government issued IOU for another. Bonds/Gilts for cash usually.
Money is still considered to be a debt though. The debt arises when the currency is created and spent. Although the official accountancy method doesn’t count the monetary base – but it should. There isn’t any gold to back it up now.
@Mark Frankel
“All but the very poorest now have a smartphone”
Not quite. I am not poor but I choose to use a simple mobile phone and do not hand over my personal data to the greedy people who want to collect it.
A mobile phone has become something of a necessity as public phones in boxes have disappeared from our streets (the boxes might still be there but contain defibrillators, book exchanges etc.). But one does not need a smartphone to dial 999.
@Michael BG: investment by government will only increase overall wealth if
rate of return higher than cost of capital.
Take a look at Japan: sovereign currency, massive public investment and subsequent massive public debt. No significant growth for decades. Rate of return below cost of capital.
MMT enthusiasts on here living in la-la land where government borrowing is costless. Wrong!!
Even under their own MMT schema, inflation must be controlled using taxation (or cutting public spending).
So government investment projects with negative rates of return will destroy wealth.
Goverment investment with rates of return below that of private investment suppressed by high taxes will destroy wealth.
We need to get away from fantasy economics on here:
1.Government borrowing is not costless, even though the currency is sovereign.
2. Public investment projects do NOT necessarily increase overall wealth.
And it should be clear to everyone that government borrowing or “creation of money” is not immune to diminishing marginal utility.
Nick Baird’s article speaks of offer a compelling vision of progress. I view that as an ordinary couple being able to buy a home in their twenties, raise a family on a single income or without having to incur chiildcare costs that are more than you can earn, pay off a mortgage in their fifties, retire with a pension that will allow them to live confortably from their late sixties without having to rely on their housing equity to cover their living costs or end of life care.
Government can and does resource itself in three ways. Taxation, borrowing (deferred taxation) and money creation (inflation tax). Ultimately, it is all taxation. The question is how should the burden of these forms of taxation be distributed.
Government debt should be used increase the net worth of the public realm. This article on the patriotic millionairs site writes “Wealth of the 200 richest families has grown from £42 billion to £711 billion since the Rich List started in 1989, while public wealth of the country has fallen from £337 billion to minus £1 trillion. ”
“While the Chancellor aims to cut taxes, 3 in 5 British millionaires think economic growth cannot happen without raising further tax revenue for national investment. A 2 percent tax on the 350 Rich Listers could raise nearly £16 billion – enough to recruit 10,000 new teachers and cover the cost of repairing Britain’s crumbling schools.”
Governmet debt will as a proportion of GDP will continue to rise as long as nominal gdp growth is below the the level of interest being paid on debt The Fiscal and Financial Risks of a High-Debt, Slow-Growth World
@Steve. Government’s don’t just create money willy nilly because if you do that, it just means you have more money chasing the same amount of goods. The usual result is that the value of each £ decreases in direct proportion to the amount of money you’ve created, so you haven’t achieved anything except causing inflation – and there are a number of dreadful historical episodes of hyper-inflation in various countries, generally caused by Governments thinking they could just create more money. There are specific situations in which creating more money to a limited extent might work (roughly speaking, if there’s lots of spare capacity in the economy and you have unemployment caused by people not having the confidence to spend money, then Government printing and spending money may be beneficial) but there’s no reason to believe the UK is in such a situation at the moment.
Hence why Governments usually opt to borrow money instead, but as @Chris Moore rightly says, that is not cost-free. Totally agree with Chris that there is too much fantasy economics being proposed in this discussion.
Mick Taylor,
This article is an academic critique of the MMT approach to money and monetary policy, and discusses its recommendations regarding fiscal policy and aggregate demand management, the structural policies it advocates as well as the international aspects of MMT.
The consolidated government canot have net debt it owes itself. For every debtor there is always a creditor. That creditor in MMT is referred to as the non-government sector. It actually means those in society with adequate wealth to accumulate surplus savings outside of housing equity. That excludes at least half of the population who likely owe more in personal debt than any meagre pension or other savings they may have. The government is an agent of the public. Any government liability is ultimately a taxpayer liability. As the population ages and the working population declines those liabilities tend to increasingly fall on fewer shoulders to service.
Governments with sovereign currencies have, do and so can create money. Skilled/well advised governments do so with care and with concern for the whole community to which and for which they are responsible and so benefit the economy without causing internal inflation.
It is hoped that the attached articles and comments from Richard Murphy’s blog “Funding the Future” may help. Indeed, his blog is well worth following.
There is data which indicates that H. M. G.’s putting careful amounts of “extra” money into the economy reduces inflation.
https://www.taxresearch.org.uk/Blog/2024/08/20/the-government-can-never-run-out-of-money/
https://www.taxresearch.org.uk/Blog/2024/08/23/interest-paid-on-government-debt-increases-private-wealth/
https://www.taxresearch.org.uk/Blog/2024/08/21/the-so-called-national-debt-is-overstated-after-all/
@ Chris Moore,
“MMT enthusiasts on here living in la-la land where government borrowing is costless. Wrong!!”
I agree that some MMT enthusiasts are “living in la-la land”. That’s because they don’t understand it properly. They never quite get past saying that the Govt can never run out of money. Whilst true it has to be understood in the right context.
It is correct though to say that the Government can choose to set its own interest rates to be whatever it likes when it “borrows”. If you or I had that choice I dare say we’d both choose 0%. Govt has wider considerations though which extend well beyond even questions of “marginal utility” and levels of “public debt”.
PS I’d include Richard Murphy in my description of enthusiasts who don’t understand MMT properly. So whether, as Steve recommends, his blog is worth following is questionable.
Some of what he says is OK but a lot isn’t. By his own admission he doesn’t agree with MMT in any case! He’s come up with his own version!
https://www.taxresearch.org.uk/Blog/2023/04/29/mmt-the-differences/
Steve Trevethan,
governments do indeed need to create money. For that money to have any purchasing power they need to take it back via taxation. They can delay the recovery of the money they created by borrowing back money they spent into the economy that has been saved by the public. They can also reduce the real value of repayments of that borrowing by devaluing the currency through inflation. However, the more the currency is devalued, the higher the interest costs will be and the more new money will need to be created to pay those costs.
Interest paid on government debts does increase private wealth, but only the wealth of those wealthy enough to accumulate savings. That is the problem. The higher the government deficits, the greater the increase in the wealth of the top tier of the population and the more the pressure on wage earners to meet the costs of these wealth transfers to the richest. That is why deficits need to be focused on investments that grow the economy and generate the taxes to service the debt.
The last article you linked above is a statistical correction to the measurement of government debt.
I see that Richard Murphy has produced The Taxing Wealth Report 2024. This is how we can start to address debt and inequality that are at the heart of the problems the UK econony faces.
“The Taxing Wealth Report 2024 shows that there is the potential to raise around £90 billion of additional tax revenue each year from fairly straightforward reforms to the UK’s existing tax system.”
And then there’s the climate catastrophe
Joe,
“For that money to have any purchasing power they need to take it back via taxation.”
Yes. Or maybe most of it back, or sometimes even more than most of it back. This is where many MMT enthusiasts get it all wrong. The mainstream gets it wrong by thinking it ideally has to be equal.
“Interest paid on government debts does increase private wealth, but only the wealth of those wealthy enough to accumulate savings. That is the problem.”
MMT says exactly the same thing. Warren Mosler goes slightly further than most by describing these payments as potentially inflationary. This is contrary to monetarist thinking.
You surprised me earlier with your advocacy of a substantial tax raid on the wealthy to reduce the National Debt!
Maybe we don’t disagree as much as we used to? 🙂
Peter Martin,
Land value tax has always been directed mostly at the wealthiest in society that live off passive income while seeking to relieve the impact of taxes on labour. I see that Warren Mosler advocates just two taxes – a property tax and a tax on luxuries WARREN MOSLER | Modern Monetary Theory
“Eliminate income taxes and use a national real estate tax to anchor the currency
I estimate compliance costs at up to 15% of GDP.
Compliance issues reward, encourage, and promote a culture of cheating that extends to all law.
The infrastructure is already in place at the local level for a national real estate tax:
Compliance and legal costs are minimal.
The tax rates can be progressive based on values, efficiency, and other standards that advance public purpose.
Use luxury taxes to moderate consumption that is outside of public purpose:
These taxes function to reduce consumption.
The success of these taxes is judged by how little they collect and thereby serve to reduce the targeted consumption.
Eliminate sales taxes and other remaining transactions taxes as these function as internal tariffs:
Transactions taxes work against internal comparative advantage.
Transactions taxes work against specialization of labor.”
Interest probably does have somwe inflationary impact with debt to gdp ratios at 100% making it harder to use interest rates to dampen inflation. Depends on the propensity to spend versus saving the interest received.
@ Joe,
I think we could move in this direction. The devil will, as always, be in the detail.How do you define a luxury? What will be the tax rate on a bottle of whisky or a packet of cigarettes? If you make the level of tax too high then we simply encourage smuggling to evade the tax.
It might be possible in the USA, in theory at least. Whether this model would be applicable in Europe with its higher than average public sectors is more doubtful.
Have you considered how your well heeled voters in Twickenham, Kingston and Wimbledon will respond?
If you make house ownership too expensive they might just buy campervans and live in them! I might join them 🙂
Add me to the list of people who don’t regard Richard Murphy and his taxresearch blog as a reputable source of information (other than possibly on strictly accounting matters, which I get the impression is more his actual area of expertise). Over the years, when it comes to politics/economics, I’ve simply seen too many cherry-picked statistics, jumping to unwarranted conclusions or faulty analysis etc. on his articles. 🙁
Well commented, Mr Garlick!
It may well be the case that Neoliberal/Austerity Economics contributes to the climate crisis.
The economist and historian, Michael Hudson points out that there are three basic groups in societies:
1) The government
2) The small but so powerful rich and influential group
3) Thr regular citizens and their children
Might global warming, like current anti-social economics, be a consequence of groups 1 and 2 colluding to the disadvantage of 3 and our natural environment, using their powers and influences and the lack of relevant knowledge and information of group 3?
Peter Martin,
“If you make house ownership too expensive they might just buy campervans and live in them! I might join them”.
Allowing house prices to contune inflating, as we have done, is impoverishing the children and grandchidren of well heeled voters in Twickenham, Kingston and Wimbledon as well as everywhere else.
You might feel more wealthy or have access to equity to fund your lifesyle in retirement as inflation eats away at fixed pension incomes or meet end of life care costs, but your are shutting out your descendants from home ownership. On the present trajectory, over time all physical assets including housing will be owned by the wealthiest top decile of the population via private equity firms like Blackrock.
People generally want to help out their children and grandchildren. The best way we can do that is to make housing affordable for the current generation. The only realistic path to that destination is addressing wealth inequality and Land Value Tax is the most effective and fair means of achieving that by shifting the tax burden significantly onto asset ownership.
“Goverment investment with rates of return below that of private investment suppressed by high taxes will destroy wealth.” That is not quite true.
If the Government raises a billion in taxes and invests it with 5% return, that might suppress 500m of private investment with an 8% return and 500m of consumption (0% return). That would still be positive. The ratio of investment to consumption would vary according to the type of tax but it would always be less than 100%.
@ Joe,
I agree.
The expansion of private equity companies like Blackrock into all aspects of the economy needs to be resisted by all. I don’t believe everyone has yet woken up to the scale of the problem.
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
David Raw,
I remember the Social Contract between the Labour Government and the trade unions. Nick Baird in the article was talking about the social contract which existed after WW2 between the government and the people. And I was commenting on the post WW2 consensus breaking down and a new monetarist consensus replacing it starting in 1979.
I believe that the Social Contract of 1973 broke down in the ‘Winter of Discontent’ 1978-79 and led to the Thatcher government. While it was a mechanism to control inflation the Labour Government was still trying to reduce unemployment below 1 million. The Conservatives allowed unemployment to reach over 3 million in the mid-1980s.
I was hoping you would comment on my comment about Lloyd George proposing a land tax and then scraping it when he was Prime Minister.
@Peter Martin: you are the Pied Piper of the band of MMT enthusiasts on here….. I hold you personally partially responsible for their output…..
I’m joking, honestly.
But diminishing marginal utility is a fundamental which applies to all goods, including “printed” money at 0% interest rates, government investment, public spending and so on.
Massive new government “investment” may well produce returns below the real cost of capital. And lead to further impoverishment of the nation.
As poster children, think about massive government transport projects or shiny new IT projects in the NHS or postal service. Negative returns. And of course there are numerous other less dramatic examples.
“Massive new government “investment” may well produce returns below the real cost of capital. And lead to further impoverishment of the nation.”
I’m not quite sure what you mean by the “cost of capital”. It might apply to you and I but it doesn’t apply to government. Having said this, there is no reason why Government should pay more than is necessary for anything. However, Rachel Reeves looks to be dead set on doing just that. The big private equity companies want our infrastructure and they want our housing. They naturally want the best deal possible for themselves so they’ve come up with the idea that Government should “de-risk” their investments.
GB Energy, GB Railways, and the National Wealth Fund are being passed off as some kind of socialist initiative to appeal to Labour Voters. In reality they are a cover for PFI scams. Essentially the Private Investment Companies want us to rent the infrastructure off them to help keep Govt debt of the books.
It’s a false economy. As every houseowner knows long term renting isn’t usually a better option than biting the bullet, taking out a loan and ending owning what is being paid for.
If LibDems want to stop the impoverishment of the country they should take up the campaign against this economic nonsense. The big Finance companies only want one thing. A high risk free return on their capital “investment”. The higher the better.
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
No cost of capital to Government!! Ha ha ha!
Btw Strongly agree with you about PFI. A total rip off.
You are away in la-la land regarding the cost of capital. If there was NO cost of capital for government, they should just issue infinite amounts of money and buy up all assets in existence.
Getting back to Nick Baird’s article, there seems to be some talking at cross purposes about the ‘social contract’. Nick is using the phrase to describe the post-1945 consensus in which it was assumed that the Government would ensure there were jobs for all and if you worked you could have a reasonable standard of living. Separately from that there was a more formal ‘social contract’ agreed between the 1974-9 Labour Government and the Trade Unions, which seems to be what Michael is referring to, in which unions agreed to restrict wage demands in return for Government subsidies etc.
It’s easy to look back on both social contracts with rose tinted glasses. In reality, to the extent that they worked, it was because the Government subsidised uneconomic industries, put up with very restrictive working practices, and taxed higher incomes at an extraordinary level that basically made it not worth earning more than a certain amount. All of those things were hugely damaging to our economy and our standard of living, and pretty much ended after 1979 when Mrs. Thatcher (quite correctly) recognised that we couldn’t carry on the way we were going.
I think Nick is quite correct about the need to give people more hope for the future. But that can only be achieved if we are realistic about needing to work within a market economy (because a market economy is the only known economic framework that actually works) and the constraint of what resources are available.
Currently, the UK ranks 24th on the numbeo quality of life index Quality of Life Index by Country 2024 Mid-Year
Not bad compared to places like Russia or China and on par with Lithuania and Saudi Arabia, but going in the wrong direction in comparison to a number of European counterparts. Donald Tusk, the Polish PM, thinks Poles will be richer than Britons in five years time because of Brexit Brexit means Poles will be richer than Britons in five years, says Tusk
@ Chris Moore,
“No cost of capital to Government!! Ha ha ha!”
You are easily amused! Maybe it’s the way I tell them?
” If there was NO cost of capital for government, they should just issue infinite amounts of money and buy up all assets in existence.”
Well no! The money wouldn’t have any value in the limit that the Government tried to spend infinite amounts. The main reason that a currency issuing Govt would have for not overdoing it would be the inflation caused. This would be a cost to those who lost out in the process but it wouldn’t be a cost to Government itself.
In an emergency, such as the need for raising money to cover the spending to keep the economy alive during the Covid crisis or in the aftermath of a crash such as we had in 2008, money/capital can be created interest free but it would not be normal practice.
If Govt wanted to own all the available assets, the way to do it would be to Nationalise without compensation. It could even declare the existing currency to be null and void and start up a new one. This would be an effective way of getting rid of the National Debt.
All very draconian and it’s unlikely any Government would ever do it but, theoretically, it could. Any costs would be to others. Not itself.
“….. But {hope} can only be achieved if we are realistic about needing to work within a market economy (because a market economy is the only known economic framework that actually works) …….”
A market economy isn’t necessarily synonymous with capitalism. A market economy can work quite well if wealth isn’t too much concentrated in just a few hands. Once it is we have capitalists whose main concern is to maintain its value. They’d like to increase its value but the risk of a loss with any potential investment is too great. This is why we have lots of capital lying idle and why the big financial asset companies are looking to Govt to de-risk their investments by covering any losses.
This must be quite embarrassing for them because they have had to abandon their previous arguments that Governments should get out of their way and let them get on with it. It turns out that they are too ‘frit’ to actually do that.
Marx had something to say about this with his arguments of constant (the value of goods and materials required to produce a commodity) and variable capital ( wages paid for the production of a commodity).
The lower the proportion of variable capital, the harder Marx said it will be to make any profits and so the riskier any investment will be.
It looks like he might have had a point after all!
Chris Moore,
Government investments do not often generate direct financial returns; examples are schools and hospitals (especially if they replace an old one). This has always been true.
Keynesian economics state that if the workers building these new items would have been unemployed then the government employing them creates extra demand in the economy and as there is still space capacity in the economy this extra demand can be met.
This is why I think our policy on government investment financed from borrowing should be limited so it does not exceed the spare resources in the economy.
What is important for government investment financed from borrowing is not the rate of return but the effect on the economy. If the government investment generates a greater increase in the size of the economy than the increase in the National Debt then that investment has improved the financial situation of the government.
Simon R,
To have full employment there does not need to be a government subsidising uneconomic industries, very restrictive working practices, and very high tax rates on very high incomes.
It should never be forgotten that the Thatcher government pursued economic policies which resulted in over 3 million unemployed for years in the mid-1980s.
@Peter Martin:
If government is paying interest on debt, there is a cost.
You’ve laid out once again your belief in a currency issuing sovereign standing outside society like a deus ex machina. I don’t accept the usefulness of that model. It’s too far from reality.
Here are some examples of sovereign issuers:
Uk current: base rate a few per cent. Nat debt/GDP about 100%. Inflation 2%.
Japan current: base rate 0.25. Nat debt/GDP: about 200%. Inflation close to zero.
Argentina: last decade: base rate tens of %, inflation above 100%.
The cost of capital for those governments is not the same.
Each will need to think carefully
@Michael: I accept it can be very difficult to judge the economic return on some government investment. However, the fact remains that projects that produce negative returns will reduce overall wealth (total net asset value).
@ Chris Moore,
There may be a cost whenever Government pays out interest but it’s not to government itself.
I don’t often quote Margaret Thatcher but she put it that there’s no such thing as Government money only taxpayers’ money. I’d put it the other way around but you’ll see what she was getting at. If someone benefits by £1 paid out by government then someone else has to effectively pay for it. It’s beyond dispute that it’s going to be you and I ultimately in one way or another. On the other hand there are benefits to us both if the government makes the right economic choices.
The yield on 10 year bonds is currently about 4%. If the Govt wanted to borrow directly, or indirectly from the BoE by the QE process, it could be 0%. If it wanted to.
There are good reasons for it not to want to. Inflation is 2.2% p.a. so that’s a real rate of return of 1.8% p.a. I’m fine with that. I really don’t know why anyone would have a problem paying 1.8% when the alternative is to get ripped off in some PFI scam by a asset management finance company.
MMT theorists could put it the other way round to Maggie: there’s no such thing as taxpayers’ money, only government money.
So we are in agreement then that there is a cost of capital to government. And of course it varies.
Regarding PFI scam: entirely agree.
@ Chris Moore,
If there is a cost it is in issuing its own IOUs. Anyone can write out as many as they like so what does ‘cost’ mean in these terms?
The argument of the mainstream so-called ‘New Keynesians’ is that interest rates have had to rise to slow down the economy and prevent inflation. But, you would argue that the increased cost of capital means that the Government has to put more money into the economy as a consequence. So is putting more money into the economy inflationary or deflationary?
If it’s inflationary why raise interest rates in the first place? If it’s deflationary why does Government have to match increased currency issuance with increased taxation?
Chris Moore,
If a hospital was built and it increased the size of the economy by its value how does this decrease overall wealth? Once built its value would increase how does this decrease overall wealth? If all of the costs were borrowed and became part of the National Debt and the government paid interest on these gilts who does this reduce overall wealth?
@ Chris Moore,
“However, the fact remains that projects that produce negative returns will reduce overall wealth (total net asset value)”
You can’t get much more negative than having a large scale war. Yet, the USA at the end of WW2 was a wealthier country than it was at the start of it. The UK and the European countries were more badly affected but within a decade the standard of living exceeded the levels of pre-war.
Harold Macmillan was able to famously boast in 1957 that “you’ve never had it so good”.
So there’s a bit more to it all than simply counting the beans.
I’m not anything more than an amateur economist, but what “Modern Monetary Theory” seems to promise is that government can print as much money as it likes and spend as much as it likes at no cost to itself or anyone else.
If it sounds too good to be true, it probably is.
@ Peter Martin
“I don’t often quote Margaret Thatcher but she put it that there’s no such thing as Government money only taxpayers’ money. I’d put it the other way around”
Do you really mean ” there is no such thing as tax payer’s money, only government money”?
If you really do mean that, that makes everyone just a unit made to generate resources for government to utilize.
@TristanWard. MMT is often mischaracterised in the way you describe. All MMT theory is heavily qualified by the imperative of controlling inflation, so the scenario you describe is at best fanciful. Perhaps you might read Stephanie Kalton’s book on MMT?
What MMT does do, and I think it stacks up, is to suggest that governments spend first and then tax afterwards. With direct government spending, quangos, local government and government contracts, pensions and social security, a large part of the income of UK citizens comes from government spending. It follows that those whose money comes from the government have no income to tax until the government spends the money. At the moment orthodox economics insists that taxation must precede spending.
MMT certainly doesn’t suggest that governments can print money willy nilly, but it does suggest that there is more flexibility in the way government provides services.
Mick, could you explain what you mean by, spend before tax. I don’t really get that because to my mind, it’s a fairly simultaneous thing: The Government spends at the same time as it gets money in tax. If it increases spending without anything else changing, then it’s likely that it’ll get more tax back as the money it spends works its way through the economy and vice versa, so the effect is fairly circular. But it really makes no sense to me to talk of either taxing before spending, or spending before taxing – because other than possibly a very temporary increase or decrease in the deficit, there’s no difference. The issue is whether, in the medium to long term, the Government is keeping total debt under control and to within a reasonable % of GDP.
Inflation and taxes are, in many ways, simply two sides of the same coin. If the deficit is keeps growing as a % of GDP, it inevitably leads to devaluation of the purchasing power of currency as real economic growth cannot keep pace with the monetary expansion. It is good for those with real assets and high levels of debt (including the government and the wealthy). Bad for those holding government debt as a store of value like pension funds, small savers and consumers relying on below inflation wage rises or fixed pension incomes.
MMT suggests that the deficit is just the residual of the spending and saving preferences of the non-government sector i.e. the sectoral balances or Keynes paradox of thrift (if we all save too much at the same time there will be a deficiency of demand that can be corrected by increased government spending).
The problem with the Keynesian framework as it was applied in the post-war period was that stagflation (the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices) was thought impossible, but we have seen it on many occasions in the real world.
With UK public debt at 100% of GDP (it was less than half that level in the 1970s) any further significant increases in interest rate will increase deficits and likely not have much impact on slowing inflation i.e. a stagflationary impact. Debt needs to be reduced by taxation of the wealthiest in society; productivity growth needs to be restored with a combination of judicious investment in housing and public infrastructure and tax driven redistribution to temper growing income and wealth inequality.
Mick Taylor,
I don’t think the most useful aspect of MMT is that governments spend first and then tax afterwards. It is that governments which issue their own currency and borrow in it will never run out of money because it can print money rather than borrow it. This leads on to the risk of high inflation and their currency devaluing if the government creates too much money.
Joe Bourke,
I think it is unlikely any UK government will tax wealth to directly reduce the National Debt, but it might be persuaded to tax wealth to finance government investment spending rather than borrowing the money which would have the same effect.
The Office for Budget Responsibility said that most benefits from higher investment (public and private) arrive long after the five-year period that’s captured by its forecasts and by the government’s self-imposed fiscal rules. Within that timeframe, an investment boost equal to 1% of gross domestic product could plausibly increase the level of potential output by just under ½ a percent after five years and around 2½ per cent in the long run (50 years) Public investment and potential output
“…public sector investment can have a significant impact on the supply potential of the economy. As with private investment, public investment affects economy-wide potential output principally via its impact on the stocks of assets that support economic activity. These assets include infrastructure assets (such as the transport, energy, and water networks), public service assets (such as schools, hospitals, and public housing), and intangible assets (such as those created by research and development). And the investment itself can take the form of either direct investment in publicly-owned assets (public sector gross fixed capital formation) or indirect investment in privately-owned assets (in the form of net lending or capital grants to the private sector).”