LibLink: William Wallace: Tories will have to spend to build a better Britain

Lib Dem Peer William Wallace has been writing for the Yorkshire Post about how building a fairer society doesn’t come cheap.

Theresa May ended her statement to the Commons last Monday, postponing the intended Brexit vote, ‘on a personal note.’   She spoke of her commitment to improve public services, to tackle social injustices, ‘to make this a country that truly works for everyone, a country where nowhere and nobody is left behind.’

She might have a problem with that, though, however right she might be:

But any serious attempt to address them is likely to be opposed as vigorously by her right-wing as her plans for a soft Brexit.  A major effort to revive Britain’s poorer towns and regions, to redress the visible injustices in our society, and to restore the quality of our public services, means raising and spending public money on a large scale.  And the Conservative Party is committed to shrinking state spending further.

Although it’s an ideological thing for the Conservatives, all parties have to understand that better public services need higher taxes.

The Conservative Party is as deeply divided over taxation and public spending as over the EU. Moderate Conservatives recognise that the role of the state includes investment in education and welfare, research and development, roads, railways and other key public goods. But the Conservative Right has been much influenced (and financially supported) by American Republicans, ‘Libertarians’ who believe that governments should intervene and spend as little as possible.They believe as passionately in lower taxes as in hard Brexit.

This is not just a Conservative failure, however. Successive governments over the past 40 years have ducked the question of how to reconcile the need to invest in education, provide welfare and health care for an ageing population, and provide public support for economic growth with popular resistance to paying higher taxes. Mrs. Thatcher used North Sea oil revenues and sales of state assets to subsidise public spending, in contrast to the long-term investment funds which the Norwegians built up from the financial windfalls of oil. Tony Blair increased public spending far more than taxation, with the result that when the 2008 financial crisis hit the government deficit was already 5% of national income, which mushroomed to 12% in 2009-10.

Last year the UK raised a third of its national income in tax – more than the USA, but less than any other European country.   Yet public spending is still 4% of GDP higher. The Chancellor will have to cut much deeper to balance the books if he rules out tax increases.

You can read the whole article here.

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  • Kevin Hawkins 21st Dec '18 - 11:03am

    When I was a councillor I got sick of hearing Conservatives telling me “you don’t solve problems by throwing money at them”. My response was always the same – In some cases that may be true, but if the root cause of the problem is lack of funding then throwing money at the problem is precisely what you should do. Congratulations to William for making it clear that you can have excellent public services or you can have low taxes – you can’t have both.

  • Peter Martin 21st Dec '18 - 11:51am

    But the Conservative Right has been much influenced (and financially supported) by American Republicans, ‘Libertarians’ who believe that governments should intervene and spend as little as possible.They believe as passionately in lower taxes as in hard Brexit.

    The American republicans only believe in spending as little as possible when its on anything useful like Medicare for all. Reagan increased his spending enormously on ‘defence’, ‘star wars’ etc, and essentially ran a ‘Military Keynesian’ wartime style economy for several years. The economy boomed and the deficit increased enormously. As Dick Cheney famously put it “Reagan proved that deficits don’t matter.”

    Are Reagan or Cheney ever referred to as ‘deficit deniers’?

    So these guys aren’t so dumb. They do know how the economy really works and I would expect the Tory right are prepared go spend if the circumstances are right. They know the Government doesn’t get its spending money from the taxpayer.

    They may not spend on what we would like it spent on though. But that’s another story.

  • Peter Martin 21st Dec '18 - 12:04pm

    @ Kevin Hawkins,

    “Congratulations to William for making it clear that you can have excellent public services or you can have low taxes – you can’t have both.”

    Lib Dems are far too wedded to this idea which is neoliberal in origin. The underlying idea is that Government gets its spending money from the taxpayer. So we constantly see suggestions to “put a penny on income tax” to “pay” for this that or the other. If you add them all up the standard rate would be at least double what its is!

    That’s just going to depress the economy and solve nothing. The way things work is that the Govt creates its own spending money out of ‘thin air’. That’s where money comes from. It’s not been created by God who has left strict instructions that we should never create any extra!

    So Govt then imposes taxes to create a demand and hence a value for the currency. So, do taxes need to rise if spending is increased? Possibly. If there is an inflation problem. But don’t increase them until you know that otherwise you’ll depress the economy unnecessarily.

  • “The Chancellor will have to cut much deeper to balance the books if he rules out tax increases.”

    I wonder if William Wallace has read the 2018 Budget book! It states that:

    Government income is “expected to be about £810 billion in 2019-2020”;
    Economic growth in 2020 is forecast to be 1.4% rising back to 1.6% in 2023;
    Total government expenditure for 2019-2020 is forecast to be £841.6 billion, of which £93.5 billion is “Capital expenditure”.

    This means that for 2019-20 if capital expenditure is ignored (which is party policy) there is a budget surplus of £61.9 billion.

    The 2018 Budget book states that in 2019-2020 £841.6 billion is 38.1% of GDP. This makes GDP £2,275.85 billion for 2019-2020.

    £810 billion is 35.6% of £2,275.85 billion. Therefore if the economy does grow by 1.4% government income should increase by £11.3 billion in 2019-2020 and even more each year after that.

    If we allocated £6 billion of this increased government income to the NHS and social care we could use the remaining £5.3 billion to increase other government expenditure. We could even use up to £53 billion of the non-capital budget surplus to increase benefits to the relative poverty level – which in April 2018 are at least £151.49 a week for a single person and £260.90 a week for a couple.

    The idea that there is a lack of money for the UK government to spend is a fallacy.

  • Sue Sutherland 21st Dec '18 - 3:54pm

    Peter Martin. It sounds as if you’ve found the magic money tree! I’m not an economist so I don’t know what you are referring to. Can you explain this please?

  • Peter Martin 21st Dec '18 - 4:53pm

    @ Sue Sutherland,

    The phrase “magic money tree” is often used to shut down the debate when it comes to how much money Govt can spend. The neoliberal right want to make the point that ‘money doesn’t grow on trees’ but, at the same time, they don’t want to explain what it is and where it does come from. They want to keep us in the dark, so we can’t question them when they tell us we are burdening future generations with debt and the usual other nonsense they come out with.

    I would say that everyone who is interested in politics should make a little effort to understand some economics. It’s not the exclusive preserve of boring old greybeards like JoeB and myself. It’s really not that difficult if you look at the right way. It just needs a little lateral thinking. One of my favourite economists is Stephanie Kelton who wouldn’t at all look out of place in the Lib Dems. Except she’s American.

    Government creates money from nothing. It spends it into the economy at the same time as levying taxes in its unit of account to create a demand for the currency and thereby give it a value. There’s no guarantee of gold or silver any longer. It can never get back more than it has created in the first place. So to to be in deficit and debt is a natural state of affairs for a currency issuer.

    This is Stephanie doing a better job than I can to explain all this.

  • Katharine Pindar 22nd Dec '18 - 12:25am

    Lib Dems do not ‘constantly make suggestions to put a penny on income tax for this, that, or the other’, Peter Martin. I remember two such suggestions, one formerly to do with education, the current one for health and social care which seems to have been widely accepted by the public. It is surely unfair to ignore the thoroughly worked-out party policies on taxation reform, such as the proposal to tax wealth, applauded by for example the Labour-leaning Guardian journalist Polly Toynbee. And it is surely true that, as William has suggested, that there will have to be heavier taxation to pay for much-needed services, central and local, as well as other public goods.

    One would certainly hope, Michael BG, that extra government income would be used to enable those drawing benefits to have an increase to bring their income up to the relative poverty level, as you suggest. As a non-economist, however, I struggled a bit with your figures, and did wonder, what might we find are essential committed needs for further public expenditure which would tend to use up much or most of the extra billions. Not continuing to be wasted as current funds are on preparing for a hard Brexit, indeed, but on rising costs of the NHS, education reforms and police enhancement, examples that spring to mind.

  • @ Peter Martin

    Stephanie Kelton states that the government deficit should be larger than the balance of trade deficit and a government surplus should only happen when there is trade surplus. She even implies that if there is a government surplus when there is a trade deficit this would cause a depression.

    There is often talk about the total size of private debt but are there any figures for the annual size of the “UK private deficit”?

    How much UK government deficit is the correct amount of deficit for 2019-2020?

    @ Katharine Pindar

    We have stated in our 2017 manifesto costings that 1p on Income Tax will raise only £6.345 billion. This is a one off increase. Therefore spending can only be increased by the same amount. However the £11.3 billion increase in 2019-20 is due to economic growth and if the economy grows by the same percentage the following year the increase will increase (it has to include the increase on the increase like compound interest). It would be £11.5 billion and this new income can be spent on new things. (It is likely that if government spending increased, then the economy would grow and government income would increase by 35.6% of this further increase.)

    It then becomes a matter of priorities.

    My number one priority is removing everyone in the UK out of relative priority. Employing more police would have to wait. However, we could use the 1p increase in Income Tax to fund your extra police and having more teaching assistants (I would add more prison officers) as we don’t need the £6.3 billion for the NHS and social care (I am suggesting £30 billion over 5 years). If the new workers were all paid £30,000 a year that works out as 211,500 new workers. (There are only about 126,000 police officers in England and Wales.)

  • Peter Martin 22nd Dec '18 - 8:48am

    @ Katharine Pindar,

    “And it is surely true that, as William has suggested, that there will have to be heavier taxation to pay for much-needed services, central and local, as well as other public goods.”

    Well no it isn’t because, at National level, taxes don’t ‘pay’ for ‘much needed’ services in the same way they do at local level. The Government issues money when it spends (that’s where money comes from) and destroys money when it taxes. The pound is effectively an IOU of government. No-one can own a number of their own IOUs . I can write out one to myself and it’s meaningless but if I give it someone else its my liability. Therefore the Govt can neither have nor not have any money (unless it’s in a foreign currency) in the same way that you or I can.

    Extra spending will create extra revenue. If Govt spends more money into the economy it will get more back in taxes. However that’s not really the right way to look at the problem. It could create extra inflation by doing that. So that’s the time, and not before, to put up income and possibly other tax rates. Not because the Govt needs the money but because it has to control inflation.

    So statements like “1p on Income Tax will raise only £6.345 billion” are quite wrong. You don’t know if the 1p will ‘raise’ anything at all if the economy is depressed as a result of extra taxation. Not that it matters in any case!

    @ Michael BG,

    I’m not sure I fully understand your question, but the extent of private debt isn’t the same as the extent of gross private debt in the economy in a sectoral balance sense. If I borrow, say, £1000 from you the overall indebtedness of the UK private domestic sector is unchanged. But that borrowing still has an economic effect because the borrower nearly always wants to spend the borrowed money whereas the lender is only lending it out because he has no immediate desire to do that.

  • Katharine Pindar 22nd Dec '18 - 9:07am

    Your number one priority to end relative poverty in the UK I would agree with, Michael, and why should we two powerless Lib Dems not give our opinions on desirable spending of government surpluses as freely as George Osborne might, who gave up all his power to do so? (He was interviewed on the Today Programme this morning: how frustrated he and David Cameron must feel with the state of British politics and their party’s failures today!). But of course I am not myself competent to discuss what public surpluses there may be and what they should be spent on, and don’t understand why ‘we don’t need the £6.3 billion for the NHS and social care’ any more, in your grand scheme of things.

  • William wallace 22nd Dec '18 - 9:27am

    Treasury figures on revenue and spending do not match OECD figures, which I Have relied on because they offer a basis for international,comparison. The idea that it ‘s “neoliberal” to pay attention to the size of government deficits over the balance of growth and recession periods seems to me absurd. The UK finances its balance of payments deficit by selling off assets to foreign investors. Siuccessive governments have also sold off public assets to help finance current spending. That ‘s not the way to run a sustainable economy.

  • To be fair to Peter has a sort of point. You can continue to magic up money and pay for things as long as people believe the money has value. The USA are currently doing that as the government deficit explodes, but people believe the dollar has value, so that is OK. Zimbabwe tried the same trick, but people didn’t believe the Zimbabwean dollar had any value and hyper inflation ensued. So to be able to conjour up money you need crediblity, alas our crediblity is declining now what was the major driver of that Peter? The thing to remember about economics is it isn’t a science, it is humanity trying to get a grip on human nature, and we are a pretty irrational species. While the laws of physics don’t change, the laws of economics change at a dizzying speed, if you understand that, I feel you have a full understanding about economics, it’s a confidence thing.

  • Peter Martin 22nd Dec '18 - 12:43pm

    @ William Wallace,

    “The UK finances its balance of payments deficit by selling off assets to foreign investors.”

    You’re actually saying that BOP deficit comes first, or the current account deficit comes first, and there has to an inflow of money into the country , via the capital account to ‘pay for it’.

    I’m sorry but this is, again, more neoliberally inspired thinking!

    The sum of the capital account surplus (+) and current accounts deficits (-) has of course to be zero. The one balances out the other

    It is a truism that the two have to sum to zero, so what would happen if we didn’t “sell off foreign assets” or sell gilts on the international markets. Say we forced the capital account surplus to be zero. Hey presto, the current account deficit would have to be zero too.

    This wouldn’t be pain free. The capital account surplus keeps the pound higher than it would be otherwise. Our exports and imports would have to balance and the pound would naturally find its own level to do that.

  • Peter Martin 22nd Dec '18 - 12:50pm

    @ frankie,

    The dollar doesn’t have a value simply because of “belief.” The US government has a relatively well managed tax system. US taxes are payable in US$ and the need to acquire US$ to pay taxes and other fees imposed by the US government creates the demand for the dollar that gives it a value. For the UK just substitute the £.

    Unlike Zimbabwe, and post WW1 Weimar republic Germany, the US economy hasn’t been devastated by war so there is something to buy with US$. But say the Yellowstone volcano erupted and made large parts of the USA uninhabitable and devasted US agriculture. You’d have a hyperinflation in the USA too even if the US Govt didn’t print a single dollar bill.

  • @ William Wallace

    Thank you for posting and I think responding to my comments. Firstly I thought I was using OBR rather than Treasury figures. Secondly, I don’t think we should expect any two economic forecast figures to match. I wonder if you spent 1 hour and 22 minutes watching the video of Stephanie Kelton (it is a shame an edited version is not available which cuts out the time wasting in the video)?

    Do you believe there will be no economic growth in future years? Do you accept that if there is economic growth of 1.4% and the government takes 35.6% of GDP in income and the GDP is £2,275.85 billion, then government income would increase by £11.3 billion? What level of growth do you think there will be for 2019-2020? What size will the economy be? What percentage of GDP does the OECD say the UK government will take in income? So how much extra income do you think that the government will have in 2019-20 due to economic growth?

    I think it is a fact that governments don’t over the long term reduce the national debt. The UK is a good example. It is therefore possible for the UK government to always run a deficit. I do not think it is true that an organisation called the UK sells off its assets. What happens is that when we have a trade deficit foreigners have Pounds Sterling and they need to put them in a UK bank or invest in UK business or assets or lend the money to the government. (The alternative would be for them just to sell them and so reduce the value of the pound, which I think might be an even worse thing if it is dramatic.) If you dislike foreigners owning UK property then the solution is to pass a law to stop foreigners from owing UK property unless they live in the UK say for 300 days a year. As a liberal I think it would be difficult to justify why foreigners and foreign companies should not own shares in UK businesses.

    The selling of public assets to finance current spending, we both can agree is not a good thing, but it really is not part of a debate on if tax increases are need to finance all new public spending.

  • I believe party policy is that we are not bothered by the size of the actual deficit, we are only bothered about the size of the deficit once capital expenditure has been removed. Does the OECD have a different figure for the £93.5 billion of “Capital expenditure”? Does it have a different figure for the forecast deficit for 2019-20? Is their forecast deficit larger than their “capital expenditure” figure?

    @ Peter Martin

    The size of our trade deficit and the government budget deficit for each year are published. I was asking for what size is the third of these three sectors deficits or surpluses? If we accept that government spending should be set in relation to the decline in the size of the private sector surplus then we need to know what it was last year and what it is forecast to be for this year.

    While Stephanie Kelton states that governments can issue as much money as they wish, she did mention doing so could cause problems. Is the only problem inflation? If the economy is at full capacity then the increase in money will devalue the money. However, the external value of the money may also fall.

    Therefore how much can the government increase the deficit by for 2019-20? With growth forecast to be 1.4% is the figure close to 0.8% of the economy (which is about £18.2 billion) to allow of any multiplier effect? (The 2.5% increase in VAT which generated about £13 billion of revenue helped nearly create a recession.)

    Katharine, why would we need to spend an extra £6.3 on the NHS and social care if we are planning to increase spending on them by £30 billion over five years? I believe that expects say that the NHS needs an extra £20 billion by 2022-23, about £4 billion a year. My plan provides all the needed money with £10 billion left for social care, while our current policy only finances one year.

  • Peter Martin 22nd Dec '18 - 3:17pm

    @ Michael BG,

    Neil Wilson used to do a good job of collating the sectoral balance figures on his website but it all came to a grinding halt earlier this year. His posts are still available on the wayback machine though.

    It’s something that one of the official Govt bodies, like the OBR , should be doing themselves. But I don’t suppose they want us to look at it this way!

    I think this is what you’re asking about?

  • Peter Martin 22nd Dec '18 - 3:25pm

    While Stephanie Kelton states that governments can issue as much money as they wish, she did mention doing so could cause problems. Is the only problem inflation?

    Yes. This is exactly what she is saying.

    The real limitation is the amount of resources we have in the economy. If we try to call on resources which aren’t there something will have to give as rationing mechanism. This includes people in the workforce. So we shouldn’t waste anyone’s potential efforts by tolerating high levels of unemployment and underemployment.

    If the economy is at full capacity then the increase in money will devalue the money

    No. Because production will be higher too. Inflation is often said to be caused by too much money chasing too few goods. So if both the amount of money and goods (and services) increases there need not be any inflation.

  • Peter Martin 22nd Dec '18 - 3:34pm

    @ JoeB,

    According to the Economist article, there are three ways to get out of this situation. Britain could consume and thus import less.

    Well yes. I don’t think we need the Economist to give us statements of the obvious. But the only way to do this without wrecking the economy is to force down the value of the currency, ie the pound, and impose capital controls to prevent an influx of overseas capital. It’s not something that we see anyone advocating.

    However every large net exporter does exactly this in one way or another. So should Britain do it too? I’d say no. Because we can’t all be net exporters. But the net exporters should realise that they are creating net importers on a penny for penny basis, which has to be paid for by someone in the importing country assuming the debt, and stop lecturing us on our fiscal irresponsibility!

  • Peter,
    It is all about confidence. The era of hyperinflation in Germany was ended by the Rentenmark, backed by the perceived value of German land, it might as well have been based on the value of cabbages, just as long as people believed in cabbages. All currencies are faith based, lose the faith and all your laws and explinations mean nothing.

  • John Marriott 22nd Dec '18 - 5:14pm

    Am I the only one whose eyes start to glaze over when Messrs Martin, Bourke, and all those individuals unwilling to reveal their true identity get going on reciprocal points scoring?

    We have a problem. Most of us want better services. They have to be paid for. So, who pays? Well, most of us in my humble opinion. You can, of course, argue that those with the broadest shoulders should step up to the plate first; but that’s letting a lot of people off the hook. You can produce more, spend less, close the tax holes etc; but, in the end, you Nearly always come back to Income Tax.

    We got into this mess back in 2008 because many of us were living beyond our means, and not just in this country. The Germans have a saying; “Die Briten leben auf Pump” (trans. “The Brits live on tick”). It’s payback time for us at least. As Elvis famously advised, we need “a little less conversation, a little more action”.

  • Nonconformistradical 22nd Dec '18 - 5:35pm

    @John Marriott
    “Am I the only one whose eyes start to glaze over when Messrs Martin, Bourke, and all those individuals unwilling to reveal their true identity get going on reciprocal points scoring?”

    No you are not!!! Makes us no different from the voting public of which we are part – I’m guessing most peoples’ eyes glaze over in this situation

  • Peter, looking at that chart you provided the link to, the period from 2002 to 2008 looks quite nice. There was no private balance deficit, which I think was according to Vince Cable to have been the problem at that time! However, it does not provide an answer to my first question. And I note you haven’t answered my second. Do you think increasing the deficit by £18.2 billion in 2019-20 would have a beneficial effect and not increase inflation or the devaluation of the pound?

    Your response to my If the economy is at full capacity then the increase in money will devalue the money is incorrect because being at full capacity implies that production can not increase.

    Joe, I don’t think there is an evidence that government deficit spending on consumption is a problem in principle which you imply. In the past our national debt GDP ratio has been as high as 260.43% in 1821 so the maximum must be higher than that. Currently it is about 86.8%, so it is not really a limiting factor (

    Therefore the only issues with increasing the government deficit are inflation or the devaluation of the pound.

    According to the ONS there are 1.881 million people in the UK who are economic inactive but want a job – This is 5.8% of the number of people employed or 5.5% of the combined figure. Therefore in October 2018 there was space employment capacity of 5.5%. So increasing the government deficit by 0.8% should cause no problems.

    John Marriott, it is important to understand how the economy works and what the government can spend. It is important that we understand that increasing the deficit is not necessary a bad thing and there is a huge amount of money which government could spend to make the UK a more liberal place. And I think it is important for our members to know this as it is them who make our policy.

  • Peter Martin 22nd Dec '18 - 6:44pm

    @ frankie,

    What they said isn’t always what they mean. This is how currencies work:

    @ Nonconformistradical,

    The choice is simple enough. You can listen to the economic mainstream, which includes William Wallace and JoeB, for all his quicky thoughts about a LVT being a magic bullet, and which has led us to where we are now.

    Or you can start to listen to people like Stephanie Kelton who tell it like it is. You don’t have to listen to me! Others who have it mainly right would be people like Joe Stiglitz, Bill Mitchell (the Aussie one), Randall Wray, Warren Mosler.

    I’m not quite sure how the economics profession can have got it so wrong since the 80s, haven’t been on the right track before that, but they have.


    Maybe Vince was speaking about the USA? Or maybe he just got it wrong. There was no private deficit in the run up to the 2008 GFC. Maybe just a an insufficient surplus?
    Do I think “increasing the deficit by £18.2 billion in 2019-20 would have a beneficial effect” ? This isn’t an answerable question. Say the Govt increased its spending by £18.2 billion. Its taxation revenue would increase too. So the deficit wouldn’t increase by this much. Maybe it wouldn’t increase at all. Maybe it would even decrease!

    Say the extra spending by the Govt generated extra inflation. People who had money in the bank might be more inclined to spend it rather than see it lose its value. So the extra spending would further add to the inflation problem and at the same time reduce the Governments deficit.

    An increased deficit doesn’t necessarily mean higher inflation and an increased deficit doesn’t necessarily mean lower inflation. It’s inflation wot matters!

  • John Marriott 22nd Dec '18 - 7:57pm

    @Joseph Bourke
    So, it would appear that it’s all about land or, as the late Kenneth Williams’ character, ‘Arthur Fallowfield’, used to say every week in ‘Beyond our Ken’ in his impeccable West Country accent; “The answer lies in the soil”. Really?

  • Peter, what is the point in trying to convince people that deficits are not necessary a bad thing if you will not take the next step and look at how much they could be increased by to achieve your economic goals?

    Of course we would expect government income to increase if the deficit was increased by £18.2 billion. Should we assume it is by the same ratio as current government income – 35.6%? I don’t know of any economist who thinks that increasing the deficit would generate the same or greater government income. Do you?

    The point of the question was is £18.2 billion low enough for it not to generate increased inflation. You say inflation is the main issue, therefore I think you should have thought about how much the deficit can be increased by in a year without causing inflation.

    Perhaps you have misunderstood the question. The question isn’t can the government increase the deficit by £18.2 billion every year. It is, with growth forecast to be 1.4% can the deficit be increased by 0.8% of GDP without causing inflation or the devaluation of the pound?

    Can you even agree that with growth forecast to be 1.4% if the deficit was increased by 3% of GDP (£68.3 billion) there would be increased inflation because the UK economy can’t cope with a growth rate of 4.4%?

  • Michael BG,

    I don’t think you can be that precise. The Debt management office has a gilt auction almost every week and includes mix of maturities from short-term treasury bills of 3 month to long-dated gills of 30 years. Actual borrowing is based on debt rollover and deficit financing.

    Philip Hammond was able to commit 20 billion for the NHS because actual tax receipts had been much better than forecast in Spring of this year and hence the forecast deficits/borrowing requirement had left room for unfunded spending commitments. It can of course go in the opposite direction in the next fiscal period and the projected deficits/borrowing requirements will increase again. This is particularly the case if higher interest rates have to be offered to ensure successful gilt auctions (with approximately 30% of gilts being held by overseas investors).

    It is equally the case that you cannot be so precise about inflation effects as Monetary Policy Committee efforts to meet the target rate set by the government demonstrates. Cost pressures begin to build in the economy when high rates of capacity utilisation are approached. There are currently labour shortages in several sectors of the economy including hospitality, construction, military personnel, teaching posts, agriculture, NHS and social care sector among others and we have seen wages increasing above the level of CPI in recent months.

    Total vacancies are recorded at 848,000 against a JSA claimant count of 992,000

    Economic growth comes from either population growth/increased labour force participation or increases in output from productivity enhancements. Most economic growth in the past 15 years has come from the former. With the long-term unemployment rate at 1% there is limited scope for increasing labour force participation and we will probably continue to rely on population growth from inward migration to keep the economy on an upward trajectory.

  • Peter Martin 23rd Dec '18 - 8:33am


    I’m sorry you think I’m being evasive but the point is that Government’s can’t directly control their revenue so can’t easily control their deficits. The Government’s deficit is the difference between what it spends, which it can control, and its revenue which it can’t. I’m sure all economists agree on this.

    The more everyone else spends the smaller their deficit. If I go off an buy £100 worth of premium bonds then I’m increasing Government debt. If use that money to buy 4 or 5 bottles of whisky then I’m ‘helping’ the Government reduce its deficit with the excise duty payable. That’s my choice and not the Govt’s.

    The Govt can try to influence everyone else to spend more by reducing interest rates – which is what they’ve done since the 2008 GFC. So as people borrow to spend on houses and cars etc the level of spending increases and so does the Government’s tax revenue. So their deficit reduces. But that’s about it.

    The Govt can’t easily cut its deficit by cutting spending because it will cut its own revenue too. It will possibly succeed in the end but only by driving down the economy into such a depressed state that a large section of the population have no spare cash to save and buy those Premium bonds, or National Savings certificates, or whatever there is in their country.

    This is why it is such a stupid idea for the EU to insist that Govts using the euro should stick to very low arbitrary limits on their deficits. What is it for Italy? 0.8% of GDP? As I have just explained, it simply is not possible for the Italian Govt to meet this target without severely depressing its economy.

  • Peter Martin 23rd Dec '18 - 9:15am

    @ Michael BG,

    A slight addition to the above about lower interest rates producing lower deficits. The real interest rate is the difference between what savers receive and the level of inflation. At the moment its slightly negative for savers. They are having trouble not losing out. It’s probably still slightly positive for borrowers.

    But suppose the Government engineered higher inflation?

    It would create an incentive for borrowers to borrow and a reduced incentive for savers to save. Spending would increase and the Govt’s deficit would fall.

    And how would the Govt engineer higher inflation? Well, of course, by spending more itself. So we have a paradoxical situation that a more buoyant inflation prone economy would mean a lower Govt deficit. It’s a dangerous game to play though and I’m not saying we should do this but it is theoretically possible.

    I think nearly all economists would follow the logic of the argument but wouldn’t necessarily want to endorse it. Except the ones I advocate of course!

  • Peter,

    high levels of inflation have a poor historical record. The idea that taxes are what gives money its value comes from the medieval system of coinage. The Normans adopted the stable system that had already been in existence in Anglo-Saxon England for several centuries and William the Conqueror commissioned the doomsday book to assess how much to levy on individual landholders. In the time of Henry II the currency was the silver penny made from sterling silver (92.5% silver). Coins were produced by authorised minters (about 150 Anglo-Saxon noblemen) . Coins had to be procured from them King’s agents to pay taxes. When it was found that minters had been replacing silver with cheaper tin in the coins the result was high inflation with a pound only buying a pennyworth’s of goods at market. Henry II had 93 noblemen arrested, their hands cut-off and castrated. Barbaric as the punishment there was no great outcry from the Anglo-Saxon subjects such was the disdain at the debasement of the currency.
    Henry VIII needed a great deal of money. Having depleted the vast fortune inherited from his father and funds raised from dissolution of the monasteries, selling off of Crown lands and raising taxes he turned to debasement of the currency. However, with increasing trade abroad, the purity of the coins was a major factor and led to English money becoming short-changed and in many cases, unacceptable in overseas markets. For any debasement to be successful and to prevent it destroying the economy, the market and capital outflows need to be severely controlled by the Government after the issue of debased coins.

    During the Napoleonic wars Britain’s substantial export trade allowed it suspend the gold standard and raise very substantial loan finance. Inflation was a problem long after the war. The Corn Laws were introduced in 1815 and food riots and social unrest ensued for five years. There was stock market collapse in 1825.

    WW1 and WW2 saw high levels of inflation with depressed economic conditions for much of the inter-war period and a decade of austerity after WW2. As the global economy began recovery in the 1950s the British economy improved but inflation began to reappear in the 1960s and the 1970s saw the phenomenon of stagflation – high inflation coupled with high unemployment.

    This is the reason why maintaining relatively stable economic conditions and as Frankie has commented confidence in the currency is an important function of government.

  • Peter, you are still not addressing my questions. It seems to me you are finding excuses for not addressing them. It does not matter how much of the £18.2 billion comes back in revenue. The question is do you think that a £18.2 billion increase in spending (0.8% of GDP), not covered by any planned increase in tax rates, would be likely to increase inflation assuming no other government action. You advocate Modern Monetary Theory and you say the economy is not all full capacity (and I agree with your view there), therefore according to MM Theory the correct government action is to try to increase the deficit. I didn’t pick 0.8% out of a hat.

    My other question (re-worded) which I thought would be easier for you to answer was – Can you agree that with growth forecast to be 1.4% if government spending was increased by 3% of GDP (£68.3 billion), not covered by any planned increase in tax rates, there would be increased inflation because the UK economy can’t cope with a growth rate of 4.4%?

    Governments can and do forecast the effects of their actions. It seems the government produces each year a document setting out the illustrative effects of tax changes – Like all economic forecasts it is a guide and can’t be relied upon to be 100% accurate.

    If a government cuts its spending (which it could do) then there would be an effect on its revenues. There would be direct and indirect effects. As I pointed out the 2.5% increase in VAT which generated about £13 billion of revenue nearly created a recession. This was because it had deflationary effects on the economy.

    I can’t believe that you, as a supporter of MMT, do not understand that the theory calls for increasing the deficit as the way to boost the economy. I know you accept that tax increases (to reduce the deficit) are a way to reduce demand in the economy which you advocate doing when inflation is high.

    (I think the Euro rules are still maximum of 3% of GDP deficit and National Debt 60% of GDP or lower.) In 2017-18 the UK government deficit was only 1.9% of GDP and it is predicted to be 1.2 for this year.

    As I wrote earlier, “Stephanie Kelton states that the government deficit should be larger than the balance of trade deficit”. In 2017 our trade deficit was 3.7%. Looking at the last four quarters I would expect this it to be 3.4% for 2018.

  • Peter Martin 23rd Dec '18 - 6:17pm

    Michael BG,

    Your original question was

    ” Do you think increasing the deficit by £18.2 billion in 2019-20 would have a beneficial effect and not increase inflation or the devaluation of the pound?”

    Now you say

    It does not matter how much of the £18.2 billion comes back in revenue. The question is do you think that a £18.2 billion increase in spending (0.8% of GDP), not covered by any planned increase in tax rates, would be likely to increase inflation assuming no other government action.

    Well it does matter because whatever does come back will also reduce size the Govts deficit relative to what it would have been if none came back.

    So an extra $18.2 billion of spending is a different matter and a different question. JoeB often makes the point that he believes that the economy is at full capacity. He tells us tales of castration and how HenryVIII debased the currency. The gold bugs and many neolibs like himself have never quite got over the idea that money should be linked to a quantity of precious metal otherwise we’ll have runaway inflation. The reality of all modern currencies are just tokens and there is really nothing left to ‘debase’. We don’t have runaway inflation.

    I don’t know where JoeB lives but I would say it likely in an area to be doing relatively well. So, yes, if too much of your £18 billion, or whatever, was added to spending there it could lead to extra inflation.

    So I would heavily weight the extra spending to the less wealthy areas and I doubt it would cause an inflation problem. I wouldn’t spend it all in one lump. I’d share it out evenly and monitor the effects of the extra spending, and be prepared to back off if we saw a problem.

  • Peter Martin,

    I live in London and as I have mentioned on a number of occasions there are more people living in poverty in London then the total populations of Manchester, Liverpool, Leeds and Newcastle combined. 19 of the boroughs with the worst homelessness problem are in London. London also has the highest regional rate of unemployment

    We don’t have an inflation problem or an unemployment problem in the UK and we don’t need to create one.

    What we have is a problem with underfunding of public services and housing shortages. The answers are clear enough – taxes to reallocate resources from the private sector to public service provision and borrowing to invest in public housing provision.

    Taxes of themselves don’t depress output they move output from the private sector to the public sector. If there are high taxes on Pizza’s there may be less Pizza’s eaten (and less staff required to make) but more labour resources available to fill vacancies in the NHS and elsewhere. The deadweight loss arising from taxation occurs at the margins where it disincentives people engaging in extra work or businesses in expanding. through Laffer curve effects

    The OECD chart on page 58 of the APPG on Land Value Capture report ranks taxes by relative effect on per capita GDP growth. The taxes with the most damaging effects on growth are personal and corporate income taxes. The taxes with the least or no effect are consumption taxes and taxes on immoveable property (with Land Value Taxes having no deadweight loss).

    Consequently, evidence based policy will focus on restoring funding of public services with a mix of consumption and land value taxes and funding increased capital spending including investment in public housing with significant increases in borrowing levels. Borrowing for housing development can be effected via the housing revenue account as the council rents provide the revenue stream to service the borrowing.

  • Peter, I am sorry my first question was not as clear as it was when I reworded it. To me the question was the same one, but I thought you might not see it in the same way as I did. The way it was worded was very much in the mode of Modern Monetary Theory who don’t seem bothered about whether the increase in deficit is because of a tax cut or increased spending (watch the video of Stephanie Kelton you posted and she was calling for an income tax holiday!)

    Your answer implies you are not as committed to MMT as you declare. In fact you might worry more about increasing inflation than I do. The ONS publishes regional unemployment rates – The latest is up until October 2018, the lowest is 3% for the south west and the east and the highest is 5.2% for the west midlands. What I found a little surprising was the figure for London – 4.7%. It also publishes average hours worked in each region – divided by sex – the highest is Northern Ireland 38.7 hours, the lowest is the north east at 35.7 (London at 37.5 and the south east at 36.4) [these figures are for men, the figures for women are about 10 hours less). I think these figures show there is spare capacity in all of our regions.

    Joe, can you remind me what mainstream economists were saying that the government should do in 1929-33?

    I think you will find that Philip Hammond is planning on increasing the deficit for 2019-20 from £25.5 billion to £31.8 billion (table 1.2 of the budget book).

    I think it is a good thing that wages are increasing. Just because wages increase it doesn’t mean prices will. Lots of the areas where you say there are labour shortages are ones funded by government such as teachers, the military, NHS and social care workers. The only area that you mention which would concern me is agriculture. The solution is greater investment in machinery so less seasonal workers are needed.

    It would be interesting to know how many vacancies there were in 1965 compared to the number of people unemployed as a comparison to your figures.

    According to the ONS there are 4.1% unemployed – 1.38 million. Therefore the 1% who are long-term unemployed number 336,585 people!

  • Michael,

    The Centreforum report Delivering growth while reducing deficits – lessons from the 1930s highlights the major part that house building played in the economic recovery.
    The report says:
    The ‘cheap money’ policy put in place in 1932 provided an important offset to the deflationary impact of fiscal consolidation that had led to the double-dip recession of that year. A major way in which this stimulated the economy was through its favourable impact on housebuilding in an economy without strict planning rules; the private sector built 293000 houses in the year to March 1935.

    In the 1930s, the industrial economy of the UK did not entirely consist of deeply depressed heavy industries: it was a nation of shipyards and coal mines. Cunard built the Queen Elizabeth luxury liner at Clydebank in 1935. South of the Humber, there were flourishing new industries engaged in vehicle construction, aircraft-building, electrical (and even electronic) engineering, furniture making. There was a huge increase in service industries. It was in the south-east, the west midlands and elsewhere that there was a great demand for owner-occupation. Even in Hull, shipping, aviation and milling supplied this demand.
    Builders, both large and small, responded to the demand – and many carefully managed ‘mutual’ building societies and savings banks provided mortgages at low interest rates.
    In addition, there was much local authority building. Between the wars, several major housing bills, of varying significance, were enacted. Christopher Addison, John Wheatley, Neville Chamberlain and Arthur Greenwood all introduced major bills, of importance to both private and public home-building.

    As described in this report after the financial crisis of 1931, healthy economic growth averaged 4% a year in real terms between 1934 and 1939,stimulated primarily not by rearmament but by the successful tax and economic policies of the National Government.

    I would agree that long-term unemployment needs to be addressed and this is best done via a tailored job guarantee scheme administered by local authorities.

  • Peter Martin 23rd Dec '18 - 11:32pm

    @ Michael BG,

    If I’ve got any doubts on MMT it is with how the JG might or might not work out in practice.

    On the question of deficits I’m what Stephanie Kelton would call an ‘Owl’. They are what they are and they don’t tell us anything that’s useful about the workings of the economy. So, yes, the Government’s deficit is everyone else’s surplus. And equally, everyone else’s surplus is the Government’s deficit.

    So yes, the Government can act to try to increase its deficit which increases everyone else’s surplus. But equally everyone else can act to try to reduce their surplus, by spending more, which reduces the Government’s deficit. I’m not saying anything contrary to MMT theory here.

    So who wins? I don’t think we can predict that.

  • Peter Martin 24th Dec '18 - 8:43am

    @ Joe Bourke,

    UK unemployment was never below 10% between 1920 and 1940. The National Debt was typically around 150% of GDP only falling to about 120% of GDP as spending for the approaching war increased in the late 30’s. The recovery from WW1 was much slower than we saw after WW2.

    The economic policies of the time were what we would now call neoliberal and austerian. They failed even on an austerian primary criterion of achieving low public debt.

    On the other hand some 25 years after WW2 and after a period of Keynesian expansion, with unemployment rates a typical 2-3%, the UK National Debt fell to less than 50% of GDP. Not that’s necessarily a good thing but it should have been according to supposedly “modern day” neoliberal thinking. A low level of public debt is equated with lower deficits and lower levels of inflation. The historical record shows otherwise. The problem in the 70’s was higher than desirable levels of inflation.

    But rather than learn the lessons of what had gone awry and modifying policies accordingly, the right wing seized their chance and threw out what had worked, in the main, very well in the postwar period. They didn’t like the idea of having full employment. They wanted it to be higher to stifle working class aspirations and act as a disciplinary measure against working people. We saw all that start in the Thatcher years.

  • Peter, I think you are a dovish owl rather than a true owl. A true owl would say as Stephanie Kelton does that the budget deficit should be higher than the trade deficit. As I stated it is likely that the UK trade deficit will be 3.4% for 2018 and the budget deficit is forecast to be 1.2% therefore the private sector would be in deficit to the tune of 2.2%. 2.2% of GDP is about £46.75 billion. Therefore a MMT owl should be saying that the deficit should be raised by £46.75 billion!

    I think that £24.2 billion could fund a job guarantee scheme for 2.7 million people.

    Joe, for me the economy was run terribly during the Thatcher years with unemployment rising to 14% in 1982 and the annual average not reducing to below 10% until 1988 and I am not convinced that the annual average of 5.8% in 1990 was good enough. In every year from 1921 to 1927 the annual average was above 10%, in 1931 it was 21.3%, 1932 it was 22.1% (with a high of 22.4%), 1933 it was 19.9%, 1934 it was 16.7%, 1935 it was 15.5%, 1936 it was 13.1%, 1937 it was 10.8% and 1938 it was 12.9% (with a high of 13.2%). (Figures from the government statistical service c 1996.) Is that your idea of a successful economy?

  • Peter Martin 24th Dec '18 - 6:30pm

    Michael BG,

    I think Owls think that the deficit should be left to float rather like the value of the currency rather than be fretted about as the neoliberals do. The responsibility of Govt should be to keep the economy working to as close to its full potential as possible without causing high inflation. This may not be enough to create full employment which is where the JG comes in.

    Stephanie is making the point that the Government’s deficit should be greater than the trade deficit or current account deficit. The idea is that an amount of money is leaving economy to pay our net import bill and therefore the Govt needs to deficit spend to replenish that loss. If the two were exactly equal then the private domestic sector will be in balance. But Stephanie is saying that there needs to be a little bit more money going in to the economy to allow it to grow without the private sector debt levels increasing.

    And I would say she’s likely to be right 99% of the time. The Government should be adjusting its monetary policies to discourage the build up of too much private debt. These just create asset bubbles in the property and stock market which eventually burst causing all sorts of problems.

    That’s the situation we’re in now and it’s not looking good. Bubbles will burst and the economy will be looking very flat in the next year or so. It will all be blamed on Brexit of course!

  • Larry Elliott wrote a piece in 2016 asking what Keynes would do that pretty much mirrors the Libdem policy approach is

    “central banks slashed official interest rates to levels never seen before. In the UK, borrowing costs were reduced to 0.5%. Central banks also bought bonds from private institutions, with the aim of increasing the supply of money and reducing market – or so-called long-term – interest rates. Both initiatives meet with Keynes’s approval. His works advised the use of aggressive monetary policy because lower interest rates should help to stimulate higher private sector investment, because in most cases this is what lifts economies out of recession.
    …In certain circumstances, it doesn’t really matter how low interest rates go – private companies feel so uncertain about the future they are reluctant to invest. People hoard cash rather than spend it.
    …the desire of the private sector to invest is affected by “animal spirits”. When animal spirits are low, governments should step in with public investment. They should do this even at the cost of a higher budget deficit, because the higher growth that will result will mean the investment more than pays for itself.
    …Ultra-low interest rates for the best part of a decade have led to asset-price bubbles. Measures of private indebtedness are rising again.
    … Keynes outlines three alternatives to the status quo. The tax-cutting and infrastructure spending plan proposed by Trump will lead to stronger growth in the short term, but Keynes says he is not especially impressed. He fears that there will be little extra investment in the public infrastructure that the US actually needs and that the stimulus will be poorly focused.
    The second option would be to exploit exceptionally low interest rates by borrowing for long-term investment projects. Governments could do this without alarming the markets, Keynes says, if they followed his teachings and borrowed solely to invest.
    Option number three would involve being more creative with quantitative easing, Keynes says. Instead of the newly created money being used for speculative plays, why shouldn’t governments use it to finance infrastructure? Building homes with QE makes sense; inflating house prices with QE does not.”

  • Peter Martin 24th Dec '18 - 10:11pm


    I agree with Larry Elliott most of the time but he’s quite wrong with “Keynes discovers that governments deviate from his ideas. Instead of running budget surpluses in the good times and deficits in the bad times, they run deficits all the time”

    When Keynes was most influential in the British Treasury, Britain ran budget deficits nearly all the time too. The USA nearly always runs budget deficits. The UK nearly always runs budget deficits. And as net importers so they should. Keynes would understand the reasons very well. The Govt needs to replenish the money (most of the time) lost to the economy as Michael BG correctly points out and also correctly references Stephanie Kelton in support of that. We can’t all be net exporters.

    Michael BG and I may have a few disagreements from time to time but I don’t get the same feeling that we’re talking past each other, in the same way as I do with you. We do engage with what each other says.

    With you, I just get a long winded reply, ignoring the points previously made, which I suspect is just a slightly modified version of what you’ve copied and pasted from somewhere else.

  • Peter Martin,

    the comments I make endeavour to engage with the subject of the article written by Lord Wallace. Like Lord Wallace my principal interest is in policy that addresses current issues. Where I make a reply to a comment you have posted I will direct the comment specifically to you. I’ll leave the discussion about Owls to you and Michael.

  • Joe, it seems clear that you believe full employment is not a good thing and it should not be the primary objective of government. I think full employment should be the top priority of all governments and a job guarantee is a tool in achieving it. When it is not possible to achieve full employment that is when the job guarantee is activated for those who wish to take it up. There should be times of the economic cycle when no one needs to take up a job guarantee.

    Peter, owls do not believe that deficits should float, they ‘see government spending that leads to deficits as integral to economic growth, even in good times’. As you recognise that there is “too much private debt” you should recognise that the budget deficit of 1.4% needs to be larger than the trade deficit of 3.4%. Therefore you should be advocating that government spending should be increased by about £46.75 billion in the long term, depending on how much of it comes back as government income and the effect of the economic stimulus on the trade deficit.

  • Joe, Larry Elliott points out the failure of UK governments since 2010. From the same article, Keynes is “aghast to hear that apart from a period of collective stimulus in 2009, … Governments … cut public investment”. This is what the coalition government did, because the leadership of the party ditched the economic policy we fought the 2010 general election on.

    You quote the three suggested policies none of which are party policy. Do you think party policy should be to create money for the government to invest in such things as building homes?

  • Merry Christmas ,Michael.

    I think unemployment has come down from 8% to 4% during and since the coalition years and we should try to keep it at or below that level.

    I agree with the premise of Lord Wallace’s article that taxes need to go up to fund public services. I also concur with Vince Cable’s oft stated position that we should be taking advantage of the low interest rate climate to invest in public infrastructure and especially public housing.

    QE could be employed to acquire land as a public asset. That is a simple asset swap. Borrowing should be used for construction costs with the debt service costs met from council rents.

    Sectoral balances are the outcome of policy decisions around the regulation of credit and level of public and private investment vs savings ratio. There are an indicator of imbalances developing not causation. Government accounting treats capital investment as an expense rather than depreciation of public assets.
    If government surpluses arise they should be recycled into infrastructure investment as Larry Elliot notes in his article. There is no need to fund increases in the stock of public assets with current taxes. They can justifiably be funded by borrowing and amortised over the average life of public assets.

    The pressing problems that need to be addressed in the current climate are underfunding of public services across the board and critical housing shortages. Unemployment is at its lowest level since 1975 notwithstanding the very high levels if inward migration in recent years. Jobs are being created all the time.

    This is basic public financial management. Borrowing to invest generates the economic growth needed to service increases in debt service costs.

    Borrowing to meet current public expenditures (exclusive of investment) does not address the structural issues of a low growth or an uncompetitive economy with a large trading deficit. Ultimately it perpetuates the asset bubble in the bond, share and property markets fuelled by large current account deficits and money creation in the private banking sector for speculative financial investments.

    Increases in the stock of money should come about naturally as a consequence of economic growth and investment in productive capacity. That is how living standards are improved.

  • Malcolm Todd 25th Dec '18 - 10:02am

    Michael BG 24th Dec ’18 – 4:41pm

    “As I stated it is likely that the UK trade deficit will be 3.4% for 2018 and the budget deficit is forecast to be 1.2% therefore the private sector would be in deficit to the tune of 2.2%.”

    I think you may be confusing different percentages. That 3.4% probably relates to the total amount of trade, rather than the GDP.
    At any rate, a quick bit of Googling suggests the UK’s trade deficit in 2017-18 was in the region of £30bn. Its government deficit in the same period was £41bn.

  • Peter Martin 25th Dec '18 - 11:20am

    Matthew Todd,

    I think Michael BG has got it right. Neil Wilson used to keep a good record of the sectoral balances, but unfortunately it all stopped abruptly earlier this year. I’m not sure why. The Wayback machine is the only reference. See the post about UK sectoral balances about half way down on this page.

    It does show that the UK private domestic sector was starting to go into deficit a couple of years or so ago. In other words the economy is being supported by too much private credit creation which in turn has created an asset bubble. These inevitably burst and lead to recessions as we’ve see happen before. The recession causes Govt revenues to drop and there is a swift reversal of the picture as the Govt has no choice to run a bigger deficit which it should, as Michael BG argues, be doing already.

    Micheal BG,

    There are times that MMT would say that the Govt should run a surplus. MMT doesn’t say that Govts should always run deficits. If the foreign sector is in deficit , and the domestic sector too, then the Government has to be in surplus. So I think the concept of a floating Govt deficit can be a useful one. It means, like the exchange rate, we keep our eye on it but we don’t have a predetermined view on what it should be.

    Bill Mitchell sets some interesting quizzes and he’s fond of sectoral balance questions:

    I try to avoid too many figures and too much arithmetic.It puts people off. Better to let them work them out for themselves. But you could well be right about the desirable size of the deficit. It will jump to more than that once the crisis hits anyway. The Govt won’t have a choice.

  • Peter Martin 25th Dec '18 - 11:46am

    On the subject of Bill’s quizzes the first one this week is relevant to the OP.

    “Higher levels of taxation permit the government to spend more? ”
    Yes or No?

    I was wanting to answer. ‘Maybe. It depends.’ But that wasn’t an option!

  • Joseph Bourke 25th Dec '18 - 1:35pm

    The government needs to provide public services at an adeqate level. The mechanism for doing so is taxes that reallocate resources from the private sector to the public sector. Taxes levied for these purposes have to be both efficient and equitable so as to ensure that increased output in the public sector makes up for or surpasses any loss of output resulting from the transfer of resources from the public sector.

    There is no problem of mass unemployment today. Total vacancies are close to the claimant count – Beveridge’s definition of full employment. There are areas where policy intervantions are justified such as persistent levels of long-term youth unemployment in London and elsewhere, but these need to be addressed with targeted tax funded programs not poorly directed national fiscal stimulus.

    There is a more pressing problem of labour shortages in key sectors such as construction where much more resource is required to address the shortage of housing. This will likely require transfer of labour from the services sector like taxi and delivery drivers, car washing etc. to address

    Recessions are generated by insufficient demand to buy up domestically produced output. A key driver of insufficient demand is the accumulation of wealth at the top of the income decile that is recycled into mortgage lending driving up land prices. When there is too much capital chasing a restricted supply of land, house prices are driven to unsustainable multiples of average earnings. An increasing proprtion of disposable income is required to meet mortgage payments and or rents depressing demand in other sectors of the economy. High levels of household borrowings for both housing and to make up insufficient income for consumption purposes accumulaye to a point where the bubble bursts as it did in Japan 30 years ago.
    If governments adopt a policy of targeting deficits or surpluses on the basis of trade balances, then counties like Japan and China would be running large government surplus. They do the opposite as their household sectors have high savings rates.
    The UK has a low savings rate and a large trade deficit. That is a structural economic problem that needs to be addessed by tacking inequality in the distribution of income. The answer – a shift in the incidence of taxation towards accumulated wealth principally in land and consumption and away from earnings at the lower and middle income deciles.

  • Malcolm Todd, you should look at the official figures. The 2018 budget book forecast a budget deficit of £25.5 billion for this financial year, which they say is 1.2% of GDP. The budget book talks of the trade deficit being 3.7% of GDP in 2017 down from 5.2% in 2016 ( The last four quarters trade deficits according to the ONS are: -15.723, -17755, -19954, -26522 (downloadable from making -£79.954 billion which is 3.4% of £2351.6 billion which is my rather high estimate of the UK’s GDP.

    Joe, at the time of the 1974-79 Labour government unemployment rates of over 4% were seen as very high and were unacceptable. If the unemployment rate was the lowest it had been since November 1974 (2.8%) then the government would have achieved something.

    I think you might have answered my question about creating money to build houses with a yes.

    Keynes suggested that it was not a vital question what the government spent the extra deficit on, so long as aggregate demand is increased. The money could just be given to the unemployed. Conservatives and Republicans give it away via tax cuts. It really doesn’t have to be used for investment. To end up with a government asset at the end of the exercise is a plus and therefore building things is a good idea, but it is not a vital part of the process.

    I don’t think MMT states that there has to be a government budget surplus if there is a trade surplus, it is just a prerequisite.

    Peter, Stephanie Kelton does not say that there should be budget surpluses at any time when there is a trade deficit. On the video you posted she stated that budget deficits should only happen when there are trade surpluses.

  • Peter Martin 26th Dec '18 - 9:56am

    @ Michael BG,

    As I’ve said, Stephanie is going to be right about this – most of the time. So when wouldn’t she be? I think you mean that she’s said that govt budget surpluses should only happen when there are trade surpluses.

    This is what we see in Germany at the moment. There’s something like a 7% trade surplus. The PDS are big savers at 6% of GDP, the Government runs a surplus of 1% of GDP. So 6 + 1 =7

    Maybe, in some future time, elderly Germans start to spend their savings. Say the German private sector are 2% in deficit. Say the Bundesbank start to spend some of their savings too and Germany runs a trade deficit of 1%

    So just by simple arithmetic we can see that the Government would still be in surplus by 1%.

    You may think this is an unlikely scenario, but it is theoretically possible, and is totally consistent with MMT theory, So therefore I wouldn’t quite agree that there should be a 100% hard and fast rule about no Govt surpluses unless there is an export surplus.

    The key issue is to understand why we do occasionally need them. Export surplus or no export surplus. They aren’t needed to ‘repay debts’

  • Peter, you are correct I should have written, “On the video you posted she stated that budget surpluses should only happen when there are trade surpluses”.

    I think your example has a German trade deficit of 1, a budget surplus of 1 and a private sector deficit of 2. You are correct that they balance, but Stephanie would see this as a problem with a depression looming so she would advise the government to run a deficit of 2 so the private sector moves to a surplus of 1.

  • Peter Martin 26th Dec '18 - 3:46pm

    @ Michael BG,

    “……. but Stephanie would see this as a problem with a depression looming so she would advise the government to run a deficit of 2 so the private sector moves to a surplus of 1.”

    It’s possible that she might see it that way. It depends on circumstances at the time. If there has been a consistent pattern of excess savings, over many years, in the private sector, and the Germans are prodigious savers, then it is also possible that they might be considered a potential inflation risk. It might be better to run them down in a controlled manner rather than risking that happening by allowing a too lax fiscal policy to add inflationary pressure to the economy and so triggering a loss of confidence in those savings.

    As always it is all about striking the correct balance in the economy.

  • Peter, you should have watched the video you posted, at about 57 minutes and 30 seconds in Stephanie talks about how bad a private sector deficit is and such a deficit being followed by a depression. She talks of a government deficit pushing the private sector back into surplus. At about 1 hour and 50 seconds she said, “I am making the argument that the private sector needs to be in surplus”. That sounds like a rule to me.

    Joe, I am sure you are aware of the following from ‘The General Theory of Employment, Interest and Money’ – “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it private enterprise on well tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is”. The point being that it doesn’t matter what the work is.

    I expect you are correct the consensus is that 4% is the non-accelerating inflation rate of unemployment (NAIRU). As a student I was never taught that the consensus answer is the correct answer; I was taught to weigh up the views and then decide what I think is the correct answer and if I could come up with an unique answer then all the better. Were you not taught the same things?

    There are two regions with unemployment rates of 3% – the east and the south west. Therefore there is no obstacle to all regions having a 3% level of unemployment. As I pointed out above there is underemployment, no other region has as high an average of hours worked in a week than Northern Ireland which has an average 38.7 hours week for men. And women have an average of about 10 hours less a week.

    When there was full employment people didn’t feel left behind. Full employment as a policy aim as well as a job guarantee for everyone who wants to take one up are both part of dealing with the left behind.

    I agree that government money should be targeted to those with a high marginal propensity to consume, such as those receiving benefits (as current benefit levels are well below the poverty level).

  • Peter Martin 28th Dec '18 - 10:17am

    @ Michael BG.

    There’s quite a lot of political disagreement, as you might expect, in MMT circles. There will always be those who favour more expansionary policies and those who are more concerned about possible inflationary effects. That’s inevitable and as it should be. The ultra minor disagreement that you and I might have, (possibly Stephanie Kelton too? ) is an indication of that.

    But let’s not let any minor disagreements detract from the bigger picture. The more pressing problem is thinking that taxes will always have to be increased “to pay for” better services and that the Government is constrained to only spend what it receives in taxes.

    Increased taxes, whatever the size of any Govt deficit, slow down an overheating economy and should only be applied to cool it down as an anti inflationary measure.

  • Peter, I wonder if MMT has a presentation problem. Perhaps the size of the budget deficit does matter. It should be higher than the trade deficit so that the economy does not go into recession. Perhaps more stress should be put on how much growth an economy can actually achieve as a restriction on the amount any government should increase the deficit by. Not only full employment but trying to grow the economy too fast can cause inflation. Perhaps the replacement of NAIRU with NAIBER (Non-Accelerating Buffer Employment Ratio) should be discussed more.

    Even with MMT the government does not in reality have total freedom to increase the deficit hugely every year, there are constraints and these constraints need to be mentioned.

    Increasing a tax does not always have a deflationary effect on the economy, it depends what the government does with the extra revenue. For example if the higher rate of National Insurance was increased to 12% and the money used to fund a Basic Citizens Income this would transfer lots of the money to people who would spend it and this could be a stimulus.

    If there is full employment and the government wishes to spend more money on something then raising the money from increasing taxes might be the correct way of doing it, to ensure that the economy does not over heat.

  • Peter Martin 28th Dec '18 - 2:14pm

    @ Michael BG,


    I don’t think most people are even aware of the link between the Govt budget deficit and the trade deficit. This simple fact alone causes most of the problems. According to current mainstream economic theory the trade deficit doesn’t matter any longer. It wasn’t always like this. Harold Wilson probably lost the 1970 election because the Tories made the most of a slightly worse than expected set of trade figures. They showed a deficit of about 0.3% of GDP which is really neither here nor there!

    This would possibly be workable if the mainstream didn’t also think that the Government budget deficit did matter a lot. So they try to close one at the same time they are ignoring the other and end up unnecessarily depressing the economy. To try to keep the economy moving they are far too keen on shifting the burden of debt to the private sector.

    They are trying to achieve the impossible of a balanced Government budget, a deficit in our trade and a stable economy free of asset bubbles.

    I think the neolibs know this as well as anyone but it suits their political purposes to carry on about Zimbabwe and the Weimar republic whenever they are challenged. So, I would say they are the ones with the real problem.

  • Peter Martin 29th Dec '18 - 11:06am

    @ JoeB,

    “Our income is what we produce.”

    No it isn’t. We can consider that everything we produce in our National economy, goes for sale in a giant supermarket. If there are more products than paying customers some will be left on the shelf and, like in a real supermarket, may well end up being thrown away. Even if we have the capacity to produce more of them we likely won’t bother in the future. So workers will either have to be redeployed to making something that will sell or they will lose their jobs. This can happen if there is insufficient aggregate demand.

    If we have more paying customers than items available then we’ll inevitably get inflation.

    So aggregate demand needs to be regulated and can only be regulated by Govt adjusting its spending and taxation levels to suit the changing needs of the economy. You and I won’t adjust our spending patterns for ‘the greater good’. Not that we have the ability to do that anyway.

  • Peter Martin 29th Dec '18 - 12:33pm

    @ JoeB,

    I’m slightly and plaeasntly surprised to see you referencing Pavlina R. Tcherneva. She’s one of those terrible MMT types who want to debase all our currencies to the extent they’ll end up on a par with the Zimbabwean dollar! 🙂

    She could perhaps added monetary policy to fiscal policy in her quote below. But she’s quite right. Many things in macroeconomics work the opposite way around from what we are continually being told by the mainstream.

    “The conventional approach of fiscal policy is to create jobs by boosting private investment and growth. This approach is backward, says Research Associate Pavlina R. Tcherneva. Policy must begin by fixing the unemployment situation because growth is a byproduct of strong employment—not the other way around. ”

  • Joe, from the article by Pavlina R. Tcherneva that you posted: “We cannot conclude from this that the goal of full employment is abandoned once we approach it, as it is done by mainstream economists who define full employment as the noninflationary level of unemployment (or the remaining frictional and structural unemployment). For Keynes, even in expansions, the goal of full employment is still important. The problem to wrestle with is structural unemployment, which should “be treated as something to be handled forcibly and not something to be defeatist about” (Keynes 1980: 357). To deal with structural unemployment, government can redirect its public works to those “special areas” with the highest remaining unemployment. Keynes and the government had agreed that they could take “the contract to the men, rather than the men to the contract” (Brown 1936)”.

    She emphasises the need for public works when the economy is at or near full employment. She writes, Keynes’ “solution to inflation, however, was not one that sacrificed employment, as is currently advocated by mainstream theory on the basis of the Philips Curve relationship. This scenario is important to study because it shows the asymmetric nature of demand-management policy”.

    She talks of measuring the output gap in terms measuring the number of people who are unemployed (I suppose we should add underemployed as well).

    She states that Keynes called potential output an impostor and misleading. She states that Keynes has a view of potential output which not only includes those unemployed, but those underemployed and those who were not counted as unemployed but will enter the work market.

  • Michael,

    Tcherneva in her abstract writes:
    “Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an “on the spot” approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle. ”

    Today we have record rates of workforce participation. Where high levels of youth unemployment persist in areas like London or the West Midlands, it is not because there is a lack demand or of job opportunities – there are labour shortages across the public and private sector alike.

    The issue is one of the right tools for the job or effectiveness of policy interventions. Direct job creation via job guarantee schemes to equip long-term unemployed with the work skills needed to allow them to participate in private sector employment is the tool needed in the current economic environment.

    A job guarantee scheme targeted at 300,000 long-term unemployed could be administered by local authorities and cost around 3 billion of funding to implement. That is a practical program that can be implemented overnight that would serve to aid local authorities in delivering services for which they do not currently have a budget.

  • Joe, we can agree that a job guarantee programme would be a good idea. However, there is spare capacity in the economy and so some increase in aggregate demand would have some effect on this. We have historically low growth rates and I think even if we had full employment we should be able to grow the economy closer to 3% than 1.5%.

    However, my point was that the government could give money to the unemployed rather than build something. I agree that a job guarantee programme for 300,000 people might cost around £3 billion, which would be an economic stimulus which via the multiplier would increase aggregate demand by even more.

  • Michael,

    the point I am making is Fiscal stimulus is counter-productive at or near full-employment. There are two measures of unemployment – the Labour force survey at 4% that includes students in full-time education seeking part-time jobs and the claimant count at around 3% which includes 1% long-term unemployed on benefits. The claimant count are the hard numbers.

    A tax funded job guarantee is not a fiscal stimulus per se although it may increase demand in the economy as workers spend any additional income they receive over and above the current benefits they receive.

    David Weill of Brown University has written a concise summary of the relative impact of Fiscal Policy at different stages of the business cycle here

    “Unfortunately, discretionary fiscal policy is rarely able to deliver on its promise. Fiscal policy is especially difficult to use for stabilization because of the “inside lag”—the gap between the time when the need for fiscal policy arises and when the president and Congress implement it. If economists forecast well, then the lag would not matter because they could tell Congress the appropriate fiscal policy in advance. But economists do not forecast well. Absent accurate forecasts, attempts to use discretionary fiscal policy to counteract business cycle fluctuations are as likely to do harm as good. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policy, is far more agile than fiscal policy.

    Whether for good or for ill, fiscal policy’s ability to affect the level of output via aggregate demand wears off over time. Higher aggregate demand due to a fiscal stimulus, for example, eventually shows up only in higher prices and does not increase output at all. That is because, over the long run, the level of output is determined not by demand but by the supply of factors of production (capital, labor, and technology). These factors of production determine a “natural rate” of output around which business cycles and macroeconomic policies can cause only temporary fluctuations. An attempt to keep output above its natural rate by means of aggregate demand policies will lead only to ever-accelerating inflation.

    The fact that output returns to its natural rate in the long run is not the end of the story, however. In addition to moving output in the short run, expansionary fiscal policy can change the natural rate, and, ironically, the long-run effects of fiscal expansion tend to be the opposite of the short-run effects. Expansionary fiscal policy will lead to higher output today, but will lower the natural rate of output below what it would have been in the future. Similarly, contractionary fiscal policy, though dampening the output level in the short run, will lead to higher output in the future.”

  • Joe, earlier in the article there is, “If the economy is in recession, with unused productive capacity and unemployed workers, then increases in demand will lead mostly to more output without changing the price level. If the economy is at full employment, by contrast, a fiscal expansion will have more effect on prices and less impact on total output.”

    Also David Weil seems unaware of the relationship between the trade balance, the government budget deficit and private sector savings or debt. The article contains no evidence for any of his claims and is therefore unconvincing.

  • Michael,

    Professor Weill does discuss the impact of fiscal policy on the trade balance and private sector savings/debt.

    “Fiscal policy also changes the composition of aggregate demand. When the government runs a deficit, it meets some of its expenses by issuing bonds. In doing so, it competes with private borrowers for money loaned by savers. Holding other things constant, a fiscal expansion will raise interest rates and “crowd out” some private investment, thus reducing the fraction of output composed of private investment.

    In an open economy, fiscal policy also affects the exchange rate and the trade balance. In the case of a fiscal expansion, the rise in interest rates due to government borrowing attracts foreign capital. In their attempt to get more dollars to invest, foreigners bid up the price of the dollar, causing an exchange-rate appreciation in the short run. This appreciation makes imported goods cheaper in the United States and exports more expensive abroad, leading to a decline of the merchandise trade balance. Foreigners sell more to the United States than they buy from it and, in return, acquire ownership of U.S. assets (including government debt). In the long run, however, the accumulation of external debt that results from persistent government deficits can lead foreigners to distrust U.S. assets and can cause a deprecation of the exchange rate.”

    “A fiscal expansion affects the output level in the long run because it affects the country’s saving rate. The country’s total saving is composed of two parts: private saving (by individuals and corporations) and government saving (which is the same as the budget surplus). A fiscal expansion entails a decrease in government saving. Lower saving means, in turn, that the country will either invest less in new plants and equipment or increase the amount that it borrows from abroad, both of which lead to unpleasant consequences in the long term. Lower investment will lead to a lower capital stock and to a reduction in a country’s ability to produce output in the future. Increased indebtedness to foreigners means that a higher fraction of a country’s output will have to be sent abroad in the future rather than being consumed at home.”

  • Peter Martin 1st Jan '19 - 2:17pm

    @ JoeB,

    “In doing so, it (the Govt) competes with private borrowers for money loaned by savers. Holding other things constant, a fiscal expansion will raise interest rates and “crowd out” some private investment”

    Sorry to have to be so blunt but this is just more neo-liberal claptrap.

    According to the ‘crowding out’ theory interest rates should have risen after the GFC but instead they fell to a historically low level. ‘Fell’ isn’t quite the right word. They were pushed down by the combined actions of the Treasury and the BoE. The Govt of a currency issuing country, can control the level of interest rates, both short and long term, to be whatever it likes.

  • Joe, I did read the whole article and what you have posted is the evidence that David Weil does not seem to understand that:

    S + T + M = I + G + X

    Therefore S – I = G – T + X – M

    Therefore if G –T = 1 and X – M = 0 then S – I is 1

    So having a budget deficit with a trade balance means that the private sector has to be saving.

    If G – T = 3 and X – M = – 1, then S – I is 2.

    This is why Stephanie Kelton talks of having the government deficit larger than the trade deficit to bring the private sector back into saving and so avoiding a recession.

  • Peter,

    yes, I think you right in saying the government can take countervailing action to hold down interest rates. I don’t think the neoliberal label adds anything to the conversation. The summary of fiscal policy by Professor Weill is fairly standard Keynesian fare and he does preface his comments with “Holding other things constant.” The extraordinary monetary policy intervention of recent years to hold down interest rates has not come without costs particularly for those on fixed incomes reliant on interest from savings and those trying to get on the housing market. The excessive use of monetary policy is in large part a consequence of under-investment particularly in areas such as public housing.

    “Ceteris Paribus” is useful for isolating individual impacts of changes but the economy is a dynamic system continually impacted by multiple changing variables. Ultimately, there is no free lunch, changes in one policy level are going to have costs for one or another sector of society.

    I think the best we can do is seek to maintain full employment as Beveridge envisioned and to do so both by maintaining public investment throughout the business cycle and endeavouring to ensure a fair distribution of national income between labour and capital. In so doing we should see productivity levels gradually recover and automatic stabilisers can act to adjust fiscal policy during the normal oscillations of the business cycle. Monetary policy will remain the primary tool for addressing recessions when interest rates are above the zero bound level.

  • Michael,

    I understand the point that Stephanie Kelton makes. However, I would argue that if sectoral balances are showing significant deviations from their long-term trend this is an indicator of underlying structural problems in the economy that need to be addressed.

    A large trade deficit can arise for a number of reasons. In recent decades a key driver (both in the UK and US) has been the outsourcing of manufacturing overseas and the jobs that go with. The jobs that replace manufacturing tend to be predominately in lower productivity and hence lower paying service jobs.

    The trade balance is not simply a measure of domestic demand but of overseas demand for export goods. The UK government can seek to support domestic exporters with trade finance and ad trade agreements but the biggest factor is demand in global export markets.

    Decisions to invest in government bonds are made in the same way as other decisions to invest in financial assets i.e. on the basis of real interest rates. The real interest rate is the return on capital after discounting for inflation. When yields are below the rate of inflation investors are losing capital on that part of their portfolio invested in sovereign bonds, something that can only continue as long as investors are prepared to balance loss making safe haven assets in a portfolio that includes riskier investments that generate real above inflation returns.

    That is not a good basis for government policy. Borrowing should be directed towards increasing the productive output of the economy that is what ultimately determines the sustainability of debt and generates the growth in output that reduces the deficit.

  • Peter Martin 1st Jan '19 - 5:38pm

    @ JoeB and @ Michael BG,

    The primary factor in determining the trade balance is the level of the exchange rate. NONE of the big manufacturing net exporters let their currencies freely float. Therefore the countries who do: Australia, the USA, Canada, NZ, the UK are going to run trade deficits most of the time.

    As Michael correctly understands this translates into having to run Govt budget deficits too.

  • Joe, you are correct that trying to generate economic growth via monetary policy is problematic and it seems to make those holding assets richer and those not poorer. This is why managing the economy via fiscal policy is better as the money can be targeted. However, monetary policy must not be allowed to run counter to the fiscal policy, which having an ‘independent’ Bank of England’ allows. Monetary policy should support the government’s fiscal policy. So when there is a large budget deficit monetary policy could support it with the creation of money to fund some of the deficit.

    I don’t have an issue with part of the government deficit being used to encourage investment in the poorer regions of the UK (I think this might not be allowable under EU rules) or to provide free training to those not in work to equip them to get jobs which are available in their area.

    As Peter Martin points out, the main way to reduce UK manufacturing costs in relation to other countries is via the exchange rate (as any investment to increase productivity could be done in any country).

    Having free trade with a country does not necessary help the UK’s balance of trade, it depends on which country gets the most extra exports out of the trade agreement. I don’t have an issue with the government providing support for companies to export. I do wonder how easy it is to access especially for small companies.

    At the end of the day it is the government’s responsibility to achieve full employment and ensure no one is left behind, because of things not under an individual’s control.

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