Well, there you go. Another Conservative budget served with more invective directed against the Lib Dems than you might expect. You would be forgiven for thinking that they were frightened of us in the Blue Wall. Tim Farron was quick to jump in on Twitter:
The Chancellor wouldn’t waste his breath slagging off the Lib Dems if he wasn’t terrified of losing to us.
A speech carefully crafted into soundbytes for social media. Lots of impressive sounding numbers, but being a big number doesn’t mean it’s an adequate number. It’s so annoying when politicians of all flavours do this. Here’s £xoo million to build y million houses. Why don’t they express themselves in terms that actually reflect the human impact and the scale of the problem? Because their solution is simply not good enough.
Anyway, what do our leaders make of the electioneering effort put in by Jeremy Hunt today? Ed says that it’s time to just get on with the Election:
This is a bottom-of-the-barrel Budget from a Conservative government that has given up on governing. Rishi’s recession is being followed by Hunt’s hangover, with years of unfair tax hikes while local health services are stretched to breaking point.
This Budget had nothing to offer for people seeing their mortgage soar due to Conservative chaos or being left waiting for months in pain for NHS treatment.
The public will see this for what is: a desperate last throw of the dice by a Conservative government that has neglected the NHS, trashed the economy and overseen a record fall in living standards. It couldn’t be clearer that we need a general election now so voters can finally kick this tired and out-of-touch government out of office.
The thing is, people still feel under a lot of economic pressure. They blame the Government for it and that is bound to affect their vote.
By-election winner Helen Morgan echoed Ed’s message:
Don’t be fooled by the Chancellor’s efforts to pull the wool over people’s eyes. This budget won’t touch the sides for people facing soaring mortgage bills, paying more at the fuel pump, and seeing the cost of going to the shops rise every week. We need a General Election now.
Helen also mentioned a crucial omission:
The Chancellor spent a lot of time listing parts of the country today (notable exception of Shropshire). Yet the Budget itself includes NO mention of rural areas and NO mention of farming. Further proof the Conservatives don’t care about the countryside.
Alistair Carmichael says that voters are past listening to the Conservatives;
The Chancellor has tried to paper over a Tory recession and Tory tax hikes which have hit families across the country. Ministers have searched for election gimmicks but voters are past listening. Few would take this government at its word after years of falling living standards.
Wera Hobhouse was right to point out that the extension of the Household Support Fund for 6 months was far from enough to tackle poverty when the safety net has so many holes in it that it is barely there any more:
I am glad that the Chancellor has heeded my calls to extend the Household Support Fund in today’s Spring Budget. But for the thousands in Bath who rely on its support to put food on their plates and heat their homes – a sixth month extension simply doesn’t cut it.
Wendy Chamberlain did highlight one Lib Dem win, though:
Very pleased to see that the Chancellor has listened to a Lib Dem suggestion. He has just announced that the threshold will be increased to £60k and the top of the taper, when child benefit is withdrawn, will be raised to £80k.
There is also a consultation on ending the inequity of losing Child Benefit if one earner is on a high income, while a couple who each earn just under the threshold keep it.
Only yesterday, Wendy presented a Bill to Parliament to address this very problem.
Responding on behalf of the Scottish Liberal Democrats, Christine Jardine:
This really is a budget with little to offer families struggling with Rishi’s recession. It felt like a few scraps from a government which knows it’s out of time.
“The national insurance cut is meaningless because of stealth taxes elsewhere.
“Scottish Liberal Democrats are on the side of hardworking Scots who want to see their bills and NHS waits cut. Where was the help for people with soaring mortgages or spending months in pain waiting for NHS treatment?
“The sooner voters get the chance to deliver their verdict the better.”
On the windfall tax she added:
“This is a budget which will not make anyone happy, least of all the Scottish Conservatives who are clearly completely out of the loop. On the same day they lead a Scottish Parliament debate on oil and gas, the Chancellor stood up to announce that he was extending the same windfall tax they were arguing against.
“That leaves the SNP as now the last party standing on the side of the super profits of the oil and gas giants.
Lib Dem London Mayoral candidate Rob Blackie said:
There is nothing in here for London. Our housing crisis remains unaddressed, growth prospects gloomy and our public services remain under strain.
Talk of improving public sector productivity is meaningless without proper investment to make it happen.
There are over 3,000 police officers that are stuck in the back-office instead of serving on the frontline because the Government refuses to fund Met Police staff.
This was a yet another missed opportunity to fix London’s broken public services.
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
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52 Comments
The budget does make some sense from a right wing POV. I don’t mean that the supposed “giveaway” will increase the Tory vote in the next election although I’m quite sure this is the motivation behind it.
The objection to cutting taxes is usually that it will increase the government’s budget deficit with the result that it will need to borrow more. However the money flow doesn’t work like we are told it does. Money is issued by government when it spends and destroyed when it is collected in taxation. Any rate of positive taxation will see all created money returned to government. Any deficits result from some of us hanging on to it in the form of savings.
A reduction in tax will stimulate the economy and speed up the rate at which money flows back to Government. So the govt’s deficit won’t be affected unless we decide to save more.
Inflation could be a problem if tax rates are cut but as recession is more likely than a booming economy this is a risk we should take.
I’d prefer us to take the same risk by Govt spending more on the NHS and other social projects rather than cutting taxes, but this is a political rather than an economic POV.
The same argument applies. The deficit probably wouldn’t change.
Every cloud has a silver lining: at least the Chancellor has recognised that the withdrawal of Child Benefit should be linked to family income rather than merely the income of the highest earner in a family. That will be a fairer way forward…I just hope the next Labour government does not ditch this change.
Sadly neither Labour nor the Lib Dems subscribe to MMT so expect to hear nonsensical orthodox economics from both Rachel Reeves and Sarah Olney. When will our party have the courage to challenge the economics status quo?
The Tory’s are clearly toast, but why is the Lib Dem poll rating not reflecting this? Another 20 or so MP’s will, no doubt, be hailed as a success, thin gruel, very thin gruel.
@Mick Taylor.
What’s MMT? Magic Moneytree Theory?
@ Mick Taylor “When will our party have the courage to challenge the economics status quo ?”
Because, Mick, as they demonstrated between 2010-15, and as they continue to do so under the Leadership of a participant in that government, they happen to believe in it.
MMT
https://www.investopedia.com/modern-monetary-theory-mmt-4588060#:~:text=Put%20simply%2C%20modern%20monetary%20theory,monopoly%20issuers%20of%20the%20currency.
To me this budget is more about stitching up the next government, which they clearly expect to be Labour. Basically, they have taken a forecasted surplus and spent it on tax cuts, whereas Labour would have spent it on public services… it will be interesting to see whether 26-March passes without a May GE being announced….
The BBC pundits were unanimous that this was not a budget aimed at a May election. The bad stuff is not kicked on a few months it’s kicked into next year.
MMT is modern monetary theory, which looks at the whole spending cycle differently, recognising that governments must spend BEFORE they tax not after, because so many people’s income comes from government spending and they have no income to tax unless the government spends money on goods and services. This basically kicks into touch the nonsense about government accounts being like household spending.
Expect to hear the same old talk about living beyond our means and leaving vast debts to our children and grandchildren. MMT shows clearly that if a government issues its own currency AND takes steps to control inflation, then it can afford to fund public services.
I don’t often agree with Peter Martin but his analysis is spot on in this case.
Alas, our party continues to spout nonsense about tax and spend and hasn’t the courage to say that actually there is another way. I accept that this files in the face of everything we have been told by politicians for years and that being different is difficult, but if you don’t try, then we will continue the same old same old and never get decent public services in this country.
“A reduction in tax will stimulate the economy and increase the rate at which money flows back to the government.”
This is a gross simplification.
After all, we could be radical and eliminate tax completely. This would stimulate the economy much much more and increase the rate at which money flows back to the government at a prodigious rate.
Zero taxation and vast quantities of money flowing back to the government.
Mmt is merely a theoretical partial description of an economy. It makes no specific recommendations as to tax levels, spending levels, borrowing and so on.
Regarding “Modern Monetary Theory.
I followed the link provided above (thank you!) and I fimd:
“Put simply, modern monetary theory decrees that such governments do not rely on taxes or borrowing for spending since they can print as much money as they need and are the monopoly issuers of the currency”
Now I don’t profess any expertise in economics (and I am willing to accept that government finances are not exactly the same as household finances, but MMT sounds too good to be true (all you have to do is print as much money as you like and you don’t have to worry about borrowing) and u do know that of something sounds too good to be true it probably is.
@Noah
Indeed the recent constituency poll in the chancellor’s seat actually shows that our vote share is unchanged from the last election and the loss in conservative support has gone entirely to labour and reform. Even if we were only polling well in seats we are positioned you would expect our national poll rating to put us at least couple of points ahead of where we were at the last election, instead we’re a couple of points down!
The reason for taking MMT with a large pinch of salt is that we are not operating in a hermetic economic regime.
The major reserve currency by far (accounting for about 60% of international exchange reserves) is the Dollar, so the USA can take greater liberties with its money supply, but this is likely to be at the expense of other smaller countries who risk being short changed in what they receive for their produce. In effect it helps keep poorer countries poor.
Caron Lindsay,
I was really pleased that the BBC News yesterday showed a clip of Ed Davey speaking in Parliament after the budget. Therefore I was surprised that what I heard on the News is different to what you have written Ed made of the budget.
I went to Hansard and what Ed said in Parliament was:
“What we heard from the Chancellor was a Budget that reeks of desperation and deceit from a Government who know that they have lost the trust of the British people. It is a bottom-of-the-barrel Budget, with nothing to make families truly better off after the catastrophic fall in living standards under the Conservatives, and no plan for long-term economic growth, no real extra support for the NHS and our public services, and no end in sight for the years of unfair tax hikes—just a last ditch attempt from the Conservative party to cling on to power.” https://hansard.parliament.uk/Commons/2024-03-06/debates/C2965AFB-8AC8-4B6C-8CC1-D63BD7F2F431/BudgetResolutions
Roland,
Thank you for providing a link to an article on MMT.
Modern Monetary Theory is often presented in a too simplistic way.
While governments can print the money they want to spend into the economy, this can be inflationary and needs to done very carefully, but the government does not receive all of this money back and does not destroy it. It needs to be made clearer that the government can’t print as much money as it wants, it is limited by the amount of spare capacity in the economy. If it prints too much money this will result in inflation or a decline in the value of the currency.
It is generally accepted that the money supply needs to increase every year, and that without this there can be no economic growth. Therefore the public needs to understand how this is done. If this is done just by increasing the amounts of money in the financial institutions then instead of doing this, it could be done instead by giving the money to the government to spend into the economy. We know that during Covid the Bank of England created money that was slightly larger than the extra money spent by the government. Therefore the money could have gone straight to the government to spend.
@Tristan You have, as many do, missed the other half of the MMT theories. The ability to create money has to be coupled with measures to prevent inflation. So, for example, government still has to tax, but after spending takes place, not before. MMT changes the way we look at tax and spend and shows how foolish policies of austerity really are. Don’t expect either Labour or the LibDems to adopt it because they fear being called feckless by the Tory media.
@Michael BG – on your comment to Caron Lindsay. Ed Davey expressed himself in a press release in different words from those he used on the floor of the House. So what’s your point?
MMT is being misunderstood and misused on here as a get-out-of-jail-free card to avoid economic dilemmas.
There is no serious economist who thinks a government’s finances work like a household budget. That is not an original “insight” of MMT theorists.
However, the fact that sovereign currency issuers are not obliged to default, doesn’t mean that “printing” money is costless. There are many potential negatives of printing too much money (or indeed not enough.)
MMT is a theoretical (and pretty flawed) description of the economy. It has nothing concrete to say about spending levels, tax levels and so on.
@ Chris Moore,
“A reduction in tax will stimulate the economy and increase the rate at which money flows back to the government. …..This is a gross simplification.”
No. The oversimplification is to think that we can change one thing, like the tax rate, and everything else remains the same. So, for example, if we cut govt spending and raise taxes the dangerous, and false, conclusion is that the deficit will reduce. Both will slow the economy and the tax take will decrease.
“After all, we could be radical and eliminate tax completely.” </em
No. The imposition of the tax gives value to the currency. See link below. Another way of looking at it is to say that it creates the fiscal space for Govts to spend without causing excessive inflation. So although the theory is different from the mainstream it isn't quite as different as some make out.
@ Tristan,
“…… but MMT sounds too good to be true (all you have to do is print as much money as you like.)..
This sort of thing is often said by those who have some ideological objection to the theory. Unfortunately, some MMT proponents who don’t quite get it can give a false impression too. But I always suggest we think in terms of available resources and how to make the best use of them rather than the amount of money anything costs. If the resources are there we can afford to use them. If they aren’t……..
https://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
“It is generally accepted that the money supply needs to increase every year, and that without this there can be no economic growth”
That’s just rubbish. You might get more money flowing round the economy, but nobody would be any better off. For growth in prosperity, which is actually what people want, you clearly need the economy to increase in capacity. The best way of doing that would be to discover an energy source that was high density and non- carbon emitting. Just possibly, without breaking the laws of physics, some use of nuclear that’s better than boiling water to raise steam might do it. Back in the Thatcher years, it was North Sea Oil, but sadly that’s over.
@ Martin
“USA can take greater liberties with its money supply, but this is likely to be at the expense of other smaller countries who risk being short changed in what they receive for their produce. In effect it helps keep poorer countries poor.”
There’s obviously an advantage in having a larger economy but it’s not as great as popularly supposed. Smaller countries might have a lower GDP but their GDP per capita can be much higher than the USA.
Iceland (Pop 300k) is about as small as countries go. They had a huge economic crash as a result of the 2008 Global Financial crisis. The value of their krona slumped. But, they did most of the things that MMT economists would have recommended and recovered very quickly. This included not panicking about a falling currency and not bailing out their banks to the extent we saw elsewhere.
Perhaps surprisingly, there are still those who think Iceland is too small to have a floating currency. Bill Mitchell makes the case for keeping it as it is.
https://billmitchell.org/blog/?p=35691
SHAME. The further 2% cut in National Insurance will cost the Government £10.4b with 50% of it going to the fifth richest households. The lowest paid and people on pensions will be worse off because the Government has failed to increase the personal tax free allowance or raise the income tax thresholds in line with inflation.
The Chancellor has simply fuelled widening income inequality and increasing poverty which will increase the pressure on the NHS given the correlation between income and demand upon health services.
“No, the oversimplification is to believe we can change one thing, like the tax rate, and everything else remains the same.”
Who do you actually believe you are arguing with, Peter? Who is it you believe believes this “oversimplification”?
The reality is MMT is merely a fairly flawed theoretical description/model of the economy.
It is being misused on here continually to suggest we can have our cake and eat it.
One thing I did spot about MMT is that an economic entity practicing it needs to control the printing/withdrawing of its own currency. On the face of it, that is inconsistent with our aim to Jon the EU since accepting the Euro would be a condition of joining.
Amid the economic arguments appearing here, it was good to read Chris Perry’s point about the budget ‘widening inequality and increasing poverty’ because of the Government’s failure to increase the personal tax-free allowance and its freezing of the income tax thresholds despite inflation. I am also concerned that the small amounts of increase of finance for some departmental budgets will most likely not be available also to relieve local government services, which are having to make cuts in non-statutory but valued services such as provision of leisure centres and libraries, even despite the projected steep rise in Council Tax which will further hurt the poorest.
While it won’t be enough to save this dreadful govt, extending the windfall tax and abolishing the non dom regime are good moves albeit for political motives. Cutting NI rather than income tax may have been influenced by fiscal rules but by ignoring the largely Conservative voting pensioners it is brave. As is correcting the child benefit cliff edge and the aim of simplifying the tax system by eliminating NI. The fact that gilt yields reacted favourably shows the market is OK with the budget. It could have been a lot worse.
>MMT
As the article I linked to notes, it’s a supposition ie. A belief. Thus from my STEM background, I treat it more of a viewpoint/way of seeing things which thus influences the way you think about things and their interrelations. Because as others have noted governments with currency making capabilities are different to households who rely on what is effectively someone else’s currency. Which is the problem being alluded to with respect to the US dollar, in the global economy the UK is more akin to the householder having to use the dollar for various essential transactions. Thus one of the things we in the UK need to do is to maximise our dollar earning potential…
>economic growth
At the global level there has effectively been zero economic growth. The growth of the global economy has basically tracked the growth in population… So I question the belief that an ever increasing money supply really is as essential to economic growth as some believe.
>child benefit cliff
This was manufactured once the decision was made to remove its universal benefit status, something I didn’t see the real benefit of, particularly given the relatively small amounts involved.
@Russell I agree with your take, it’s just a shame the government decided to spend the extra revenues on tax cuts rather than towards the multi-decade backlog of capital investments this country has been in need of…
@ Roland,
“Thus from my STEM background”
This sounds very much like a “Listen to what I say because I’ve done some science” argument. OK If you want to play that game, can I say I’ve got an honours degree (2-1) in Physics and an MSc in electronics? So as part of my working life I had to be able to understand electromagnetic theory to be able to figure out how such things as computers, microwave communications and their components, circuits on printed boards etc worked. Sometimes it was quite tricky.
After the 2008 GFC I was intrigued that an assembly of highly qualified professors looked stumped when the Queen asked why no-one had foreseen the looming crash. So I resolved to take a look at how the economy worked. I must admit at the time that my ideas were vaguely Keynesian but I really had no idea of where money came from in he first place or just what the National Debt meant in practice.
None of the conventional theories could answer these questions. I thought this is like trying to understand Chemistry but having no idea what atoms and molecules are. It was only MMT which made any sense at all.
So, look, I’m happy to discuss the theory with anyone with an open mind. But dismissing something out of hand as a “belief” would indicate that this might be difficult. Just like any other scientific theory it needs to be tested by observation and reasoned argument.
@ Chris Moore,
“Who do you actually believe you are arguing with, Peter? Who is it you believe believes this “oversimplification”?”
Unfortunately most people. Including many who should know better. For example, during the period of the Coalition government, the big question was how to reduce the government’s deficit. The answer, at least as most were concerned, was to cut spending and raise taxation. VAT went up to 20% for example.
There was little or no recognition that a cut in spending also translated into a cut in revenue. No recognition that if taxes rose the economy would slow and revenue would again fall.
The theory, both in the UK and perhaps even more in the EU, didn’t seem to go any further than saying that if we cut spending by N billon and impose a tax rise which should on the basis of a very simple calculation bring in another M billion then the deficit will fall by (N+M) billion.
I was saying “No it won’t “
Mary Reid,
My point is that it should have been made clear that Caron was quoting from a press release and not what Ed had said in Parliament. I don’t understand why the press released didn’t quote Ed’s words as said in Parliament, maybe the person who wrote the press release felt his words needed to be changed to try to catch a journalist’s eye.
Mick Taylor,
The first step in a political party advocating MMT would be to explain why the money supply has to be increased and how it is done at present according to MMT by just giving the money to the banks.
Jenny Barnes,
You may not like the way the economy works, but “It is generally accepted that the money supply needs to increase every year, and that without this there can be no economic growth.” However, I could have added that just because the money supply is increased; this does not lead to economic growth, if no more is produced then it leads to inflation.
Tristan Ward,
Indeed, giving up our own currency and using the Euro would mean the UK couldn’t use MMT to run the economy and is a very good argument for us only re-joining the EU if we don’t have to commit to giving-up the pound.
Chris Moore and Katharine,
Yesterday I heard it said that someone earning between £27,001 and £52,268 would be better off and someone earning between £15,570 and £27,000 would be worse off.
@Peter Martin “ This sounds very much like a “Listen to what I say because I’ve done some science” argument.”
It was simply to give a reason as to why I treat “beliefs” and specifically economic beliefs, which economists tend to aggrandise by calling theories, in the way I do. It was the article I linked that labelled MMT a supposition aka belief.
I agree MMT does make sense, although it a harder concept for people to grasp compared to household budgets. However, like all things economic, there is the textbook concept and there is the real world. To me a notable omission from the writings about MMT is confidence and trust in the currency and thus in the government.
As for chemistry, an understanding of the medieval world view, allows a better insight into alchemy and an appreciation of the effort that gave us modern chemistry. To me much of Economics has parallels with alchemy, but then much of what currently goes for AI is sleight of hand confidence tricks, so that shouldn’t be taken to be as damning as may seem.
@Mick Taylor “ MMT changes the way we look at tax and spend and shows how foolish policies of austerity really are.”
I suggest looking back over the last 45 years of mostly conservative and traditional economic thinking shows how foolish our governments have been in not spending and insisting on tax cuts, PFI, etc.
Also comparing the Financial crash and Furlough, nicely illustrates how the traditional way of giving money to the banks delivers a poorer outcome (from larger amounts of money) than approaches which gets money directly into circulation and people’s pockets.
I notice that Christine Jardine welcomes the changes to child benefit. Whilst it is welcome the taper has been eased, and is a win, we definitely should be shouting further that it should return to being a universal benefit and make it taxable on the recipient (whilst shifting some of the income tax&NIC thresholds around) as Judith Freedman made a point of yesterday following the budget. Would be interested in whether the parliamentary party has an opinion on the review to move child benefit assessment to household income and whether they know how much more burdensome that assessment would be – opportunity to clearly condemn it after the historic fight to ensure individual taxation.
Discussions on MMT here are pointless, it’s fringe and doesn’t tell us anything useful for making policy, and just misinterprets how expenditure and tax function. No one serious should be suggesting the party embrace it.
Accidentally said Christine Jardine, i meant Wendy Chamberlain, that’ll teach me to write my comment whilst scrolling through the post. Apologies!
@ Brandon,
“Discussions on MMT here are pointless, it’s fringe and doesn’t tell us anything useful ….” ???
Many mistakes could have been avoided with a correct understanding of MMT. These include:
1) The implementation of Private Finance Initiatives to saddle the public sector with excessive interest costs. Why do this when Government can borrow at a fraction of the cost? It was simple a slight of hand by politicians to get the debt of the public books and at the same time provide corporate welfare to the city. The debt was, incidentally, higher when interest charges were factored in than it would have been otherwise. Keeping the figures off the balance sheet doesn’t mean they don’t exist.
2) The overemphasis on monetary policy to control inflation. We’re just transferring money from hard pressed borrowers to the banks in the hope that the bankers won’t spend it whereas the borrowers would. This possibly is happening but it puts the onus on the young who end up paying higher than necessary mortgage costs. This is just a transfer and doesn’t reduce the so-called ‘money supply’. If demand has to be reduced to fight inflation, a fairer method is to use the taxation system.
3) The faulty economics of the 2010-2015 Government. The austerity program was a huge mistake. Fom a Lib Dem POV, Vince Cable has acknowledged that it boosted the Leave vote.
4) The 2008 GFC itself. This was caused by too much private sector borrowing. When the debts went sour…..
“The 2008 GFC itself. This was caused by too much private sector borrowing. When the debts went sour…..”
So why was everyone happy to fund that debt? And why did it all go sour? Oil was around $100 /bbl at the time, and looked to be heading for $150 – $200. At those prices, very marginal oil fields and fracking plays would have been viable. However, the global economy could not support oil prices that high, so went into decline. Why would oil prices that high have been necessary? Well, the new discoveries tend to be small and difficult, so the fact that the oil is there doesn’t mean you can get it for cheap. Back in the day, you could stick a pipe in the ground in the Middle East and have abundant oil flow. Now, you might have to build a floating drilling platform to withstand Atlantic storms to get oil…
@ Michael BG: I don’t know where you get the idea that I don’t like how the economy works. I just pointed out that creating “money” does not create growth.
@ Jenny Barnes,
“So why was everyone happy to fund that {private sector} debt?”
The private sector lending into the economy and the government spending into the economy are both potentially both growth inducing and inflationary. The difficult trick is to maximise the former and minimise the latter. The simplistic argument is that both increase the so-called “money supply”. But, there is a difference between lending and spending. Bank lending doesn’t make anyone better off in the longer term unless the value of the money repaid, including interest, is substantially less than the value of the money borrowed.
So, the monetarists idea of an economic stimulant by increasing private lending can only really work in a continually growing economy with a relatively high degree of inflation. This inflation is best measured by asset values, such as land, house and share prices, rather than the normal CPI. So long as these rise all seems well. But if a bubble develops in the market which then bursts, causing prices to fall, we see a high level of private debt turn into a high level of bad private debt. The conditions for an economic crash are then created.
When these crashes happen it all seems so obvious that something was wrong after the event. The difficulty is predicting them beforehand.
It was a rhetorical question. They thought the debt could be repaid because they thought the economy would grow enough to support $200 bbl oil. And they were wrong. The world economy fairly obviously can’t support oil at over $100bbl for long.
@ Jenny,
A rhetorical question, providing it is sensible, deserves rhetorical answer 🙂
The price of oil is a symptom of a credit boom rather than the cause of it.
The price of oil is dependent on the difficulty of obtaining it. As it becomes more difficult to obtain, the minimum price needed to obtain it gets higher. If the economy could support oil at those high prices/ real life energy costs to obtain all would be well. But it can’t. Since 2005, you may have noticed the global economy pretty much flatlining…and the price of oil bubbling up to$100 bbl and then subsiding again.
Rachel Reeves seems to say that Labour only plan to spend about £8bn more than the Tories based on “closing tax loopholes”. This seems overly cautious, there is surely scope to inject £20-30 bn immediately (and more with a closer relationship to the single market). So let’s call for that.
Jenny Barnes,
You wrote that it is rubbish that “It is generally accepted that the money supply needs to increase every year, and that without this there can be no economic growth”. Which is just not so, as it is generally accepted. I didn’t say that increasing the money supply would cause the economy to grow. In my last comment to you I wrote, ‘that just because the money supply is increased; this does not lead to economic growth, if no more is produced then it leads to inflation’.
At no point did you point out ‘that creating “money” does not create growth’. And at no point did I say that it did.
The price of oil seems to be linked to the supply of oil rather than the difficulty in getting it. When the price of oil is high economic growth is likely to fall, but I am not convinced there is any strong relationship between the price of crude oil https://www.macrotrends.net/1369/crude-oil-price-history-chart and the growth of world GDP https://www.macrotrends.net/global-metrics/countries/WLD/world/gdp-growth-rate?q=
The lowest economic growth years were in 1974-75, 1982, 2009 and 2020. The highest spikes in the price of crude oil were in 1980, 1990, 2008 and 2022. I don’t see the link the way you do.
“Since 2005, you may have noticed the global economy pretty much flatlining”
The world GDP grew by over 2% a year between 2010 and 2019 and by 4% or more a year from 2004 to 2007.
Marco,
The UK’s GDP was about £2,274 billion in 2023. One percent is £22.74 billion. If £8bn was spent more than the Tories for four years this would only be £32bn. We have policies to spend £250bn more than the Tories over the next five years. It will be interesting to see if these make it into our manifesto.
Much of our extra spend is not tax and spend but tax and give back. If a household gets an extra pound in benefits and pays an extra pound in tax it makes no macro-economic difference. If ten poorer people get an extra pound and one richer person pays an extra ten pounds this only affects money supply because poor people tend to circulate money faster.
Government accounts should have figures for net revenue raised (after benefits) and a measure of redistributive effect e.g. average percentage change in deviation from the mean of household income (weighted per person) for their household configuration as a result of taxes and benefits. Our manifestos and shadow budgets should state how they would affect those two figures.
To illustrate the idiocy of fixating on gross revenue, look at two schemes:
1: Negative Income tax. Anyone not using up their tax allowance could claim a refund equal to 20% of the unused amount.
2: Universal Benefit. All adults would receive an annual benefit equal to 20% of the tax allowance which would be abolished.
They are identical in effect on both personal and government finances but one produces a significant reduction in tax revenue while the other massively increases it.
Peter Davies,
As Marco was talking about extra spending financed from borrowing, so was I. I hadn’t included the approximate £50bn for fixing the social security safety net and our guaranteed basic income which is funded from taxation increases.
I suppose we are also funding our NHS and social care and other policies from new taxation, none of which are included in the £250bn of investment spending.
@ Jenny
“……. creating “money” does not create growth.” ???
If it didn’t exist we’d be reduced to having a barter economy. It’s difficult to see how that could function effectively enough to produce any significant growth!
So the Govt has to create some money. More than that it needs to spend it into the economy and create a value for it by the imposition of taxes in the absence of any metallic standard.
So it is about creating, spending and taxing at just the right levels. As Goldilocks would say about her porridge, the economy should neither be too hot nor too cold. It should be just right.
I would say roughly £12bn on health and social care, £8bn on education, £8bn on social security and £2bn on policing, courts and prisons is needed. That is spending plus £20-30bn of capital investment in improving infrastructure and creating green manufacturing jobs.
Macro,
In our Policy Paper 150 Towards A Fairer Society it is stated the our old policies to scrap the two-child limit, the benefit cap, and the bedroom tax, reversing the cuts to the work allowance and the cuts to the Employment and Support Allowance for those in the Work-Related Activity Group, introducing a second-earner work allowance and restoring the link permanently for the Local Housing Allowance to average rents (in our 2019 manifesto) would cost about £8bn and restoring the £20 a week increase to Universal Credit and the legacy benefits would cost about £7bn. In our 2019 manifesto we had about £7.7bn for the NHS and social care, nearly £14bn for early years and childcare. £4bn is needed for local government over the next two years. I agree that it is likely that £2bn is required for policing, courts and prisons.
@ Jenny,
“The price of oil is dependent on the difficulty of obtaining it.”
This is one of several factors. It’s being somewhat naive to think that there is a perfect market at work. The Saudis don’t have a monopoly but they have enough market share to be classed as a price setter. So the influence and policies of the major producers has to be another factor.
A third factor is the extent to which the developed world is determined to wean itself off fossil fuels. A fourth would be the buoyancy of the world economy. A fifth would be the the state of the world’s geopolitical situation.
I’m sure we’d both be able to think of a few more!
My contention is that the buoyancy of the world’s economy depends on the price of oil being low, while the real resource cost of obtaining it is gradually increasing, forcing the price up.
One might argue that the energy requirements could be met with renewables, but this ignores the upfront energy cost of building windmills and solar panels, and so far renewables have not made a significant dent in world demand for fossil fuel. Currently, solar and wind combined produce just under 3% of world energy demand.
@ Jenny,
Of course, there is a relationship between the price of oil and the buoyancy of the world economy but it’s not a simple case of cause and effect in one direction. A lower price helps create a more active economy, as you suggest, but equally a more active economy increases the demand for oil, and just about everything else too, which forces up the price.
In the longer term, if we are going to eliminate the burning of fossil fuels we’ll have to find a way of having a successful economy but by using much less oil. In which case the price will be largely irrelevant.