Following the announcement of the new (so-called) £22bn ‘Black Hole’ in the Government’s finances, Chancellor of the Exchequer Rachel Reeves has announced over £3bn in departmental spending cuts, making the winter fuel allowance mean-tested, and scrapping the previous government’s social care reforms (which set a maximum of £86,000 on a person’s personal care costs) meant to be implemented eventually in October 2025.
During the General Election it was generally recognised that there would need to be cuts to the non-protected departmental budgets, which the Resolution Foundation said could be as much as £33bn and the IMF said could be about £30bn. During the General Election the Labour Party talked of less than £10bn in extra government spending.
In our Manifesto we suggested how £19bn more could be raised from increased and new taxes. These included buy-backs, increased taxes on social media firms and tech giants and reforming capital gains tax, as well as including one copied by the Labour Party, higher taxes on the energy giants (but raising £900 million less than ours).
There is a way forward, which our pre-Manifesto passed in the Autumn Conference of 2023 proposed. We stated that we would “safeguard the UK’s economic prosperity while making the investments our country needs. We will make sure that day-to-day spending does not exceed the amount of money raised in taxes over the medium term…”
However, in our Manifesto those words were replaced with, “Foster stability, certainty and confidence in managing the public finances responsibly to get the national debt falling as a share of the economy and ensure that day-to-day spending does not exceed the amount raised in taxes, while making the investments our country needs.”
Why make that change? It would leave us on the same horns of a dilemma as the new Chancellor has. You can’t simultaneously pledge to reduce the national debt AND pledge to make the investment the country needs, in one parliamentary term.
It is investment that is needed for the national growth in the economy that we all want to see – to have spare money to fund the NHS and social care, and help the standard of living increase for everyone, pensioners and those not in work as well as the workers.
Economists have already recognised this. One, quoted by columnist William Keegan in the Observer of July 21st, is the former chief economist of the Bank of England, Andy Haldane. Keegan writes,” Haldane takes a more refreshing view than Reeves on the so-called fiscal restraints. In an article in the Financial Times in May he said of the fiscal rules: ‘By constraining investment and stunting growth, these are self-defeating… they need to be replaced with rules that promote growth and seek to maximise national net worth, not minimise gross debt’”
Exactly so. It’s time, surely, for us to throw off our needless blanket of caution, and ask our Financial Spokesperson Sarah Olney and all our MPs to tell the new government, “Enough of cuts. We need growth through investment, and the national debt will reduce in its own good time when the country is again productive.”
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. Katharine Pindar is a long-standing member of the Cumberland Lib Dems.
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130 Comments
A good fiscal rule would be to avoid using silly terms like “black hole” ! The UK deficit and debt is nothing remarkable either by historical or international norms.
The nearest real black hole is 1600 light years away! They aren’t anything to worry about at all! There’s no such thing as a black hole in the Economy.
The economy is much more about resources than it is money. Money is a creation of government. If it isn’t in debt it means it hasn’t created anything. Even Japan has a National Debt which is twice the size of ours. Rachel Reeves knows this so why doesn’t she say so?
The question that Rachel Reeves should be asking is if there are sufficient resources in the economy to complete these projects. If there aren’t there could be an inflation problem. Then, cuts and tax rises could be in order.
But if there are…….
“Enough of cuts. We need growth through investment, and the national debt will reduce in its own good time when the country is again productive.”
Maybe it will and maybe it won’t. The National Debt is a measure of how much everyone else wants to save rather than how much the Government wants to borrow. It’s probably a good thing if they do want to save more because that means there is confidence in the UK economy as a whole.
The aversion to the the ND leads to some fairly bad policy choices. Like getting ripped off with PFI schemes.
We do indeed need to look again at the fiscal rules. We need to recognise that as a currency issuer the government can raise the money it needs with the very important proviso that it must control inflation. The ND is money the government owes the Bank of England (ie itself). The ND has been used as a talisman to stop governments spending what is necessary by pretending it’s a debt for future generations. The ND has existed ever since governments needed to borrow to fund expenditure, many hundreds of years and it has never been fully repaid, just risen and fallen in bad and good times
Time to change the tune and find the money for the public services we all need and want.
Fiscal rules are constraints on growth. After WW2 the country spent on the things we needed/wanted The NHS house building etc. Debt was there through our war purchases. It did not stop the country investing in rebuilding, moving towards the future. National Debt did not stop us moving forward into a positive future.
Today can be the same. The trap that the Conservatives installed on Labour re Fiscal controls should be ignored and money etc used to develop the country. The debt will still be there but can be controlled.The country must move forward.
I recommend Richard Murphy’s analysis of the National Debt, see for instance his evidence to the recent Lords’ Inquiry:
https://committees.parliament.uk/writtenevidence/128206/pdf/
One key point he makes is that 700bn of the 2300bn National Debt is actually owed by the government to itself, so it is in reality well below the much-quoted `100% of GDP’ that is claimed.
He also has excellent ideas on how to tax wealth – see https://taxingwealth.uk/
[And also much interesting anaylsis of other day-to-day economic news on https://www.taxresearch.org.uk/Blog/ ]
PS Correction: the official National Debt is currently about 2700bn not 2300.
Thank you for your several early useful comments. I was pleased with Nigel Hunter’s reminder that the country invested a great deal after WW2 without being stopped by National Debt considerations! Sorry no time to respond to everyone yet (this piece was sent very early for yesterday’s edition, but got mislaid in the system), but we will follow up as soon as we can, and hope our leaders will also be noting this discussion.
What we need to do first as a Party is to reframe how we talk about taxation; we are not arguing for higher taxes but instead for fairer taxes. If someone’s income is £20,000, or £100,000, or £1,000,000 a year they should be paying the same progressive rates of tax on it regardless of whether it is in form of wages, or rents, or share dividends, or capital gains or any combination of these. That is basic equity and we should be saying so loud and clear.
The second aspect of taxation is the taxation of wealth. Trusts are the elephant in the room here; the taxation of them is pitiful (6% of the value of the Trust every 10 years). The Party must commit to the reform of the law on Trusts and limit their use to minors and others who cannot look after their own financial affairs. The Duke of Westminster’s family trust alone must be worth over £10 billion by now.
For most, the principal source of wealth is their house and this argues for the reintroduction of the old Schedule A income tax, where being a owner-occupier was regarded as having an income equal to the rental value of the house; it would also require the reintroduction of mortgage income tax relief, so that someone buying a house with a 100% mortgage would pay no additional tax but this would increase to the full rental value of the property as the mortgage was paid off.
Taxes are virtually certain to be increased in the autumn budget What taxes can UK finance minister Rachel Reeves raise in her first budget?
The Post-war Attlee government did not need to raise taxes they were already at war-time levels. High rates of taxes were maintained as defence spending was rapidly cut and funds reallocated to reconstruction and nationalised industries. Several local authorities, Unions and friendly socities had ratepayer or insurance financed health services. The NHS nationalised health services (making them universal) and collecting premiums via national insurance instead. The Attlee government also maintained import restrictions and rationing in the 1945-51 period while running budget surpluses to pay-down high levels of wartime debt. The financial viability of the post-war welfare state relied on two key economic factors – restoring UK export markets and the maintenance of wartime levels of full-employment .
Why did UK debt to GDP fall in the post-war period? UK post-war economic boom and reduction in debt
– Economic growth was averaging 2.5% +. Total real debt increased in this period, but GDP increased at a faster rate: Positive inflation:- Patience. After the early 1950s, debt to GDP fell over the next four decades. It took a long time to reduce debt to GDP:Relatively low budget deficits (though the UK very rarely had a budget surplus).
The UK was a major manufacturing nation in 1945 and innovation produced high levels of post-war productivity growth. That kind of GDP per capita growth appears to be a lot more difficult to achieve in a service based economy. However, the same basic factors for financial viability apply today as they did in 1945 – growing UK export markets Post-Brexit and the maintenance of full-employment .
Michael,
you ask why in our maniesto were the wording of fiscal rules changed to “Foster stability, certainty and confidence in managing the public finances responsibly to get the national debt falling as a share of the economy and ensure that day-to-day spending does not exceed the amount raised in taxes, while making the investments our country needs.”
There is no reference to one parliamentary term in that sentence. The emphasis is on confidence and the trajectory of national debt as a share of the economy. If the proprtion of taxes raised increases to more closely match day to day expenditures as a proportion of GDP that should not restrict increases in net borrowing for productive investment at least in line with expected nominal GDP growth.
William Keegan in his article writes “One of our new crop of Labour ministers’ distinguished predecessors was Harold Lever, who served as financial brain to the Wilson/Callaghan governments of 1974-79”. This national archive cabinet document gives a good idea of the thinking at the time PUBLIC EXPENDITURE 1977-78 – TH E ECONOMIC BACKGROUND
@ Denis,
“One key point he makes is that 700bn of the 2300bn National Debt is actually owed by the government to itself, so it is in reality well below the much-quoted `100% of GDP’ that is claimed.”
I don’t believe this is correct though the argument is often expressed in this way.
The debt is, or should be, calculated as the currency is issued and spent. This corresponds to the often stated concept of money being an IOU. It’s an IOU of the issuer. So you can’t issue IOUs without accumulating debt. So the debt held by the BoE still counts.
However, for historical reasons connected to the now defunct gold standard, the debt is still calculated from the time that cash IOUs are exchanged for bond IOUs.
Having said this, it doesn’t really change anything.100% of GDP is nothing to be concerned about.
@ Peter Martin. As I read you, Peter, Rachel Reeves should be concentrating on building up resources in the economy rather than fixating on reducing the National Debt. Hear hear! I suppose the government should be able to do that if their Great British Energy plans are carried through? Meanwhile, as you say, it’s nonsense to talk of a Black Hole in the economy, and we should remember that Japan’s National Debt is twice as big as ours. Thanks, Peter.
@ Mick Taylor. Totally agree, Mick, thanks. I seem to have been told all my life about the National Debt, and not found anything to worry about in it. of that. Finding money for the public services is as you say is what we all need and want, especially for the Health Services and social care straight away.
@ Denis Mollison. Hi, Denis, thank you for the references to Richard Murphy, who is an economist we both have recommended to our party more than once. I remember for instance his suggestions on relatively painless ways of extra tax collection, which the Chancellor might like to pick up on rather than bring painful cuts to the public services.
@ Joe Bourke. Thanks for the historical review, Joe, explaining how GDP rose post WW2 faster than debt, and the differences now that we are no longer a major manufacturing nation and export markets have been damaged by Brexit. As you say, the same challenges appear – the need to increase exports albeit from this service-based economy, and to maintain full employment. (I’ll ask Michael to reply to you on your second contribution, when he is available later this evening. )
Peter Martin,
total debt/IOUs doesn’t tell you much regarding financial position unless it is related to total assets/net equity or negative equity.
The whole of government accounts combine the treasury and bank of england accounts in a consolidated balance sheet Whole of government accounts 2020-21
See pages 110 to 113. The deficiency on the balance sheet has increased from £1.986 trillion in 2016 to £3.326 trillion in 2021. These net liabilities are described as Total liabilities to be funded by future revenues. The note on government borrowings is on page 186.
In the same period, the increase in the unfunded public sector pension liability has increased by over £900 billion, accounting for just under 70% of the increase in the deficiency on the balance sheet.
For the last two years to 2021, public sector staff costs were approximately £488 billion of which about 70% related to central government – say £339 billion. The increase in the unfunded public sector pension liabilities (largely central government) in the same period was £437 billion.
Joe Bourke,
You have an interesting way of reading the wording in our recent manifesto on our fiscal rules. You seem to be trying to say that the manifesto wording is not much different from the pre-manifesto wording. While I didn’t completely agree with the earlier version in the pre-manifesto, it emphasised the need to make the necessary investments and then talked about only day-to-day spending needing to balance with government revenue OVER the medium term. The new wording while not being identical to the government’s makes getting the national debt falling as a share of the economy the priority not making the investments our country needs. If that is the priority then the future forecasts will be important, so the policy aim can be seen to be met. As forecasts are normally for five years then it will still be the fifth year of the forecast where our new fiscal rule will have to be seen to be being met, just like the government’s. If we meant what you think we meant then we would need to state we would extend the forecast period as long as necessary so we can show our aim being met.
It should not be the government’s economic aim to manage the government’s finances to get the national debt falling as a share of the economy, but it should be a consequence of a successful economic policy.
None of the leaders, including Ed, told the public clearly that we are NOT a high tax country. The OBR and IFS last year said we are average and the BBC Reith Lecturer (in answer to a question) said if we want public services like some of the other developed countries, we need to pay more tax. The latter is a general statement of course, because we need a fairer tax system and the need to find ways of helping people who struggle because of housing costs.
This message still needs to be heard and I am sure our party can say it while assuring people on low incomes (and others who are struggling) far from being taxed more can be helped more. We should remind people we were better than Labour in making this clear in our manifesto. The mantra of ‘tough decisions’ looks like being used to excuse this new government from (i) investing enough for our future (in people not just the economy), (ii) spending enough to help pull up those who are struggling and (iii) changing the system radically to a fairer one.
I wish to add that this government should learn from the situation post 2010, when with hindsight we did not invest enough for the future. Thus in 2015 Nick Clegg commented that from 2010 we should have invested more in our infrastructure; we stuck by the rule imposed by George Osborne about debt and borrowing who made bringing these down as an absolute priority that we should not have signed up to.
@ Laurence Cox and Nigel Jones; you both, I am sure rightly, call for a fairer tax system, and that is in keeping with our party’s continuing emphasis on seeking ‘A fairer society’. As you say, Laurence, there should surely be equal taxation of rents, dividends and capital gains; I wonder if offshore accounts need attention too. The taxation of wealth does seem to require much further discussion, with trusts indeed seeming to need law reform. But as to the taxation of housing, I hope we will demand first reform of council tax bands, and ending the inequity of big houses in London paying so little more than average family homes.
Nigel, you are quite right to emphasis that we are not a high tax country and should pay more for better services, while protecting those on low income. I want to see us promote simultaneously our policy to help the poorest, Guaranteed Basic Income, which would begin by increasing Universal Credit from its present insufficient amount.
Dennis Mollison,
I enjoyed reading Richard Murphy’s submission to a recent House of Lords Inquiry. I particularly liked the idea that £1,000 billion should be removed from the size of the National Debt (points 12 and 13), and that it should be renamed National Savings. In point 17 he suggests that money invested in ISA’s each year, and that 25% of money invested in pension schemes should both be used to fund national infrastructure, which he estimates would raise £100 billion a year (point 18). I also liked the idea of a state bank which offers the same products as retail banks which he believes would dramatically increase the amount members of the public invest with the government (point 16). Currently over £200 billion is invested with the National Savings and Investments {NS&I} (point 4).
Thank you also for pointing out that the National Debt is about £2700bn, which means the economy is over £2713bn.
Nigel Jones,
Indeed we are not a high tax country. Also the Tories were correct when they said that average earners are facing lower levels of direct taxation than they have in 50 years.
It is concerning that Rachel Reeves seems to be looking at reducing government investment (hospitals and transport schemes have been scrapped).
@ Joe,
Your figures see designed to scare rather than educate. The UK isn’t the only country to have similar figures buried in its accounts. So the problem isn’t peculiar to the UK. Neither is it peculiar to Govts. We all have our own “unfunded liabilities”. If we are paying rent this month we’ll have to pay it again next month and the month after and again….
If we’ve just bought £100 of groceries this week, we’ll have to do the same next week and the week after that….
So how do you account for these future liabilities? Living is an “unfunded liability”. That’s just the way it is.
You do have a point about assets though. These do need to be better taken into account. So, for example, if we buy a house on a £250k mortgage we are, according to most, £250 k in debt. But what about the value of the house we’ve just bought? This is usually a better option than renting in the long run. Unfortunately Labour look like they are going down the PFI route which means they’d rather rent than buy to avoid appearing to be in debt.
It’s false economy.
@ Katharine,
As I was saying, or implying, to Joe above we have to move away from our present view of debt always being a bad thing. Those of us who are lucky enough to own our own homes probably do so on the basis that at some point in our lives we chose to go into debt rather than continue to pay rent. But it’s not net debt if assets are taken into account.
You mention Great British Energy. No-one really knows the details of how it’s supposed to operate. I believe it will turn out to be a scam. It will essentially be a way of channelling public money into the private sector without getting any assets in return as Prof Gabor explains in the link below.
GB Rail is slightly better. However the big money is made by the rolling stock leasing companies: the ROSCOS. Again this is a rent to avoid debt scam which is false economy.The Labour government isn’t planning to do anything about them.
https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
I agree with Katherine Pindar and would counsel against Richard Murphy. As we know from Liz Truss, governments which are financially imprudent get punished by the markets.
Several contributors here seem to talk about the National Debt as if it’s not “real” and we shouldn’t fixate on it. A BBC report last October stated that in the previous year the country had spent £111bn servicing the ND. That’s money we should have spent on ….. well choose your own priorities !
But perhaps someone can tell me this: a company borrows because the rate of return on that extra capital exceeds the interest rate paid. Can government make the same commitment ? If they borrow to invest, will future growth justify the cost of investment ? I am not convinced.
We can speculate all we want here, but the truth is that Rachel Reeves is one of the most orthodox economists ever to have been CotC. She doesn’t even support Keynesian economics! She believes implicitly in the existing financial rules and so we cannot expect any radical thinking from her.
That means cuts in investment, the likely abandonment of the triple lock, no help for cash starved councils. Of course she will deny it, but it’s austerity by any other name. It’s all so unnecessary.
Scrutiny of the current governments economic policy has to be based on our policy as set out in the Libdem mamiesto that MichaelBG has quoted above i.e. “Foster stability, certainty and confidence in managing the public finances responsibly to get the national debt falling as a share of the economy and ensure that day-to-day spending does not exceed the amount raised in taxes, while making the investments our country needs.”
That effectively means increases in taxation to cover day to day spending and increased borrowing for needed investment in housing and infrastructure. The Lib-Lab pact of 1977-78 may be a precedent for coperation on economic polivy https://liberalhistory.org.uk/wp-content/uploads/2014/10/60_Report_Lib-Lab_Pact_July_08.pdf
Peter, the report you reference on the huge dependence of the government on private finance (thank you) is alarming. I suppose it will be up to our parliamentarians to keep a close eye on the arrangements, and be prepared to question how much these firms should be used and the costs of doing so.
Joe, you are correct to say effectively we must expect to follow the Manifesto statement and not the pre-Manifesto document. However, what we are saying is that constant vigilance not to overly increase the National Debt is not needed, and can be counter-productive. As the effective opposition in Parliament, we surely should not be simply applauding government policy, but pointing out its shortcomings.
Thank you Joseph for your simple summary of our manifesto on fiscal rules. You understand more of this than I do, but it is worth repeating what you say with added detail, i.e. increases in taxation (on excess profits, wealth and ‘unearned’ income) to cover day to day spending and increased borrowing for needed investment in housing and infrastructure (and training of people).
You would think reading some of the misunderstandings of MMT commonly peddled on this site that issuing government debt is costless, except for insofar as it cotributes to inflation.
Plenty of academic evidence that high levels of national debt are linked to low growth in GDP or GNP per head.
Japan’s very high national debt level has been cited in this conversation a couple of times as giving a free pass for the UK to rack up more debt: Japan has had anaemic growth for decades. Further increasing national debt is not the solution in Japan.
@ Mick Taylor. As I was just writing to Joe Bourke, Mick, we should surely be an effective opposition to the new government, and that may well mean modifying our positions. I think you are right to point out the dangers of Rachel Reeves’s orthodoxy, which is already resulting in harmful effects, as several commenters above have noted. We should not accept the failure to improve public services, nor as Ruth Bright has pointed out, the abandonment yet again of the Dilnot recommendations which he repeated on one of the TV channels again this week.
@ Chris Moore,
“You would think reading some of the misunderstandings of MMT……”
It can be costless if the Government borrows from the BoE. This is where the £350bn to finance the Covid lockdown came from. If Government is creating money it is creating a debt.
So usually the Government sells bonds, which is just an asset swap. It sets the interest rate to suit what it considers to be suitable at the time, with the co-operation of the BoE as a player in the market.
What effect does ND have on the economy? It doesn’t have any effect at all. For example the Government could give us all £1000 of Premium Bonds but with a requirement that they can’t be cashed until some distant future date. The ND would increase by £1000 x 70 million which is £70 billion but nothing would change.
However when the time was up the money would start to be spent, the National Debt would fall and there could be an inflationary pressure. So we can see that a falling ND is a sign of possible inflation and a rising National Debt, assuming that it isn’t artificially created as above, is a sign of possible deflation.
Just something for Economists to keep their eyes on.
“Plenty of academic evidence that high levels of national debt are linked to low growth …..”
If you used such a statement on Wikipedia you’d get a note saying “Reference Required! “
I find it astonishing the way people here are condemning Rachel Reeves because she – as someone with an MSc in economics – follows established mainstream economics. Remember Michael Gove and the ‘had enough of experts’… doesn’t the same principle apply in economics?
Yes I realise economics is a bit more controversial and open to more disagreement even amongst experts than – say – physics or environmental science. But it’s still an established academic discipline, backed by decades of research as well as extensive data on the economies of numerous countries. When people not trained in economics start calling for the Chancellor to abandon all that learning, then alarm bells ought to be ringing. Especially when the basis for those calls is some strange assumption that the Government can somehow just spend however much it wants, irrespective of how much income it’s getting or what resources are actually available.
@ Mark,
“I agree with Katherine Pindar and would counsel against Richard Murphy”
Did Katharine (note the spelling, Mark!) disagree with RM? I can’t see she did.
The problem with Richard is that he’s a Maverick. He’s decided that MMT isn’t quite right and so we need RMMT. Richard Murphy Economic Theory!
So, he’s sometimes OK but often he’s not!
He’s wrong on not counting the debt owed to the BoE. This is because he’s still partially stuck in the mainstream which considers the debt to be created when bonds are sold rather than when money is first created.
https://www.taxresearch.org.uk/Blog/2023/04/29/mmt-the-differences/
@ Simon R,
“I find it astonishing the way people here are condemning Rachel Reeves because she – as someone with an MSc in economics – follows established mainstream economics.”
It’s not just those on this thread.
Professor Bill Mitchell who has a PhD, has done extensive Post Doctoral Research, and a stream of academic papers to his name is also saying she has got it all wrong.
Do his qualifications trump Rachel’s MSc and PPE degree from Oxford?
https://billmitchell.org/blog/?p=61904
I am amazed that it is all being done wrong can be such a final answer so soon. The Telegraph thinks so and that makes me sure that it’s too early to say. The true test is some way off and the next budget will be key.
Simon R., it is the choices the new Chancellor is making that we are not happy with. David Garlick, we are already seeing choices made that we as a party dislike, and as the virtual real Opposition to the new Government, I don’t think we should simply sit back and wait. The Chancellor will be planning her October statement. We have a Conference in mid-September when we can hopefully reach some agreement on all our responses, some of which will undoubtedly be affirmative.
Economics like any field of study has to adapt to real world experience. Old theories get modified or discarded as new insights are gained building on knowledge developed over time.
The former USSR was an experiment in Marxian economics. Lenin tried to abolish money altogether with ration vouchers, but after chaos and starvation ensued he ended up settling for a single state bank for Soviet Union.
When the Soviet Union collapsed, Yeltsin went for privitisation and anarchic capitalism aided by well intentioned Westen economists like Jeffrey Sachs with disastrous results for the Russian population.
Today, Putin’s Russia is running a war economy with much the same results as Britain in WW2. High inflation and an unstable currency, a tight squeeze on consumption as resources are transferred from private sector production to munitions and armanents and shortages appearing across the economy.
Richard Murphy in his blog makes much of the differenvce between Rachael Reeves statement “we can only do what we can afford” and Lord Keynes wartime statement “we can afford anything we can do” Reeves trolled the left, Labour of old, and Keynes as she set out her desire to create a dismal economic nightmare
Ultimately, both statements make a similar point – what we can do is only constrained by domestic productive capacity. Once we approach the limit of manpower, factories and equipment no amount of fiscal or monetary expansion will produce more munitions. We have to instead increase productivity. If we want to have lend lease we have to be prepared to borrow in dollars when exports are insufficient to pay for imports or accept that a free floating currenct will gradually lose its purchasing power relative to other currencies.
That’s not economic theory that is real world experience.
@Mark Frankel – `I would counsel against Richard Murphy’
Play the ball, not. the man.
For instance, if you disagree with RM’s analysis of the National Debt, or his suggestions
of how best to tax the wealthy, explain why.
Thanks for the insights and quotes from Richard Murphy above. No economist myself, I still feel heartened by the quote from Lord Keynes in 1942 – ” We can afford anything we can do.” There appear to be historic arguments why that, much the opposite of what Rachel Reeves has said so far, did work. And in any case the Labour party did I understand promise they would not impose austerity. Where is their historic instinct gone to seek to relieve poverty and inequality? We Liberal Democrats must it would seem lead the way still to fight poverty, as our Constitution demands.
There is a strong case for targeting net debt rather than gross debt (as is currently the case). It matters what you are borrowing for. If you borrow to build council houses then you will generate both a financial return to cover the cost of the debt and growth in GDP thus helping a debt to GDP ratio while being affordable.
Labour are making house building a central part of their growth strategy but ignoring the fact that previous high numbers of new houses per year were only achieved when a substantial proportion were directly financed by the state – council houses. It was a Liberal minister, Addison, who led on council housing in the 1920s. We should reclaim our heritage and champion it again.
@ Joe,
“Once we approach the limit of manpower, factories and equipment no amount of fiscal or monetary expansion will produce more munitions.”
Yes this is absolutely right.
In peacetime we can replace “munitions” with “to support the elderly”, or “to provide a better NHS service” or “to give a better education to our children”. I’m sure we can all think of additional examples.
When Keynes said ““we can afford anything we can do” he meant within the limits of what is physically possible.
When has Rachel Reeves said the same thing? I don’t this she has. She isn’t saying that we can’t build the tunnel under Stonehenge, or restore some of the many railway lines that were closed in the 60s, or provide the electricity and gas to help old people keep warm this winter, because we don’t have the physical resources to do these things.
She’s saying we can’t do them because ‘There’s not a huge amount of money.’
If she were thinking in terms of resources rather than money why would she be saying ” We need to unlock private-sector investment”. What difference does this make? Either the resources are there or they aren’t.
https://www.bbc.co.uk/news/articles/cldyeykzp33o
@Simon R. The problem with economics is that there are always more ways to skin a cat. Heterodox economists like me think that there is never a simple single solution to any particular economic problem. Orthodox economists like Rachel Reeves think there is only one solution and as we can see this means applying the same fiscal rules as the Tories. I don’t know why you think this is all about MMT. The straitjacket of orthodox economics leads to cuts in services and investment, when in fact providing services and investing in new infrastructure would make much more sense.
The problem is that Chancellors (and their shadows) cannot bring themselves to fight back against a rigid orthodoxy that denies solutions to many problems by refusing the money to do them.
As I said before, time for new thinking before our public services are destroyed by orthodox economic solutions, austerity by any other name.
The majority of the limited resources necessary for the production and distribution of goods and services are employed in the private sector with about 19% of the workforce employed in the public sector.
If the government determines to permanently utilise a greater share of available resources to create public goods and services it will generally need to do so by proportionally reducing the overall level of spending on private consumption i.e. by increasing the current tax take as a % of GDP. Tax increases can be spread over a number of years by deferring increases through increased levels of borrowing to reallocate resources from the private sector to the public sector until the desired level of state spending as % of GDP is achieved. Robust economic growth also makes such an incremental transition much easier.
Fiscal or monetary expansion can be an intermadiate step to prortionally higher levels of state provision that ultimately are maintained by a permanenly higher proportion of tax take in the economy.
Commentaors have long complained that Britain has pretended that we can have Scandinavian levels of public services and American levels of tax for far too long.
The LibDem manifesto implicity recognises this in calling for day to day spending to be covered by taxes while borrowing to make the investments our country needs.
I think Rachel Reeves is making a mistake in cutting back planned investment spending, but she is not wrong that taxes need to be increaed (if that is labours intention) – most likely as noted in the link above What taxes can UK finance minister Rachel Reeves raise in her first budget?
Mick Taylor,
Indeed Rachel Reeves is one of the most orthodox economists ever to have been CotC. I think anyone who has worked for the Bank of England should not be CotC.
Chris Cory,
You can see a graph from the OBR here – https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html. It shows National Debt as a percentage of GDP. The National Debt has existed since 1694 and was the foundation of our economic success. The government has always paid interest on the debt.
This OBR article sets out how the National Debt was reduced in relation to GDP. So, yes government investment can increase economic growth and if economic growth is at a higher rate than the rate of growth in the National Debt there is no problem. Since 2010 governments have not invested enough and so economic growth has been at historical lows. The government needs to increase its investment and this will encourage business to invest and these investments will lead to economic growth and with higher economic growth the National Debt as a percentage of GDP will decrease as it did from 1820 to 1914 and 1947 to 2000.
Simon R and David Garlick
I assume that those people who think Rachel Reeves economic policies are not right base this on their consideration of alternative economic policies as set out by other economists. I think everyone should have a view on what economic policy they would like the government to follow.
Joe Bourke,
Scrutiny of the current government’s economic policy has to be based on our policy as set out in the Lib Dem manifesto
You then go on to interpret it to mean, ‘increased borrowing for needed investment in housing and infrastructure’ and ‘increases in taxation to cover day to day spending’. I disagree – they do not correctly represent our policy as set out in the manifesto. As this policy does not exclude investment spending from the need to get the national debt falling as a share of the economy. This is a major change from our existing policy passed at Federal Conference and our established policy since at least 2017.
Our scrutiny should be based on ‘increased borrowing for needed investment in housing and infrastructure’ and increased day-to-day spending which should be covered by government revenue over the medium term except during recessions.
I agree with you when you wrote, ’ what we can do is only constrained by domestic productive capacity. Once we approach the limit of manpower, factories and equipment no amount of fiscal or monetary expansion will produce more … We have to instead increase productivity.’
Paul Fox,
Thank you for bring to my attention that it was Christopher Addison, a Liberal MP at that time, who introduced the idea of council houses. I think in 1919. He resigned from the Cabinet in 1921 when it was decided to halt the building of council houses (https://en.wikipedia.org/wiki/Christopher_Addison,_1st_Viscount_Addison).
@ Joe,
You appear to have misunderstood what Rachel Reeves means when she says ” We need to unlock private-sector investment”.
She’s not suggesting that the Government ask for tenders from building firms in the normal way from private sector when it wants to build a school or a hospital. No-one has any objection to this.
She’s asking for the private sector to put up the money for the building works. The Government then will either rent it back from them, maybe under some kind of hire purchase agreement or pay excessive rates of interest on the money borrowed. It’s clearly false economy and no more than a device to hide debt by keeping it off the books.
RR is clearly looking to go down the PFI route.
None of us would want to buy a house on this basis when it is far cheaper to simply borrow the money from the bank. It’s even cheaper for the Government to borrow by issuing bonds. It can even borrow for free from the BoE if it chooses to.
Neither is anyone denying that the necessary Government spending might turn out to be inflationary and require some increase in taxation. On the other hand there is a widespread misapprehension that a similar amount of spending by the private sector won’t be. It really makes no difference in the short term.
In the longer terms we’ll all end up paying far more than is necessary.
https://www.thenational.scot/news/24492305.labour-being-advised-finance-giants-wholl-benefit-pfis/
@Peter Martin
Well said
Peter,
increased investment, both public and private, is a key element in delivering economic growth. One of the major infrastructure projects initiated by Labour is GBEnergy https://moneyweek.com/economy/uk-economy/government-launches-great-british-energy “The government is going to invest £8.3 billion of public money over the course of this parliament. It hopes this will be matched by £60 billion of private company investment – although there are no guarantees this will happen.”
The private company investment to finance the construction and installation of wind farms on a large scale comes from pension and investment funds buying share or corporate bond issues that generate the returns to meet pension committments. The costs of capital and risks are borne by investors and consumers via regulated energy prices.
The service costs of Central government financing of such projects comes from taxpayers. The net costs of capital and risks are borne by taxpayers.
The physical and human resources needed to construct and maintain wind farms is the same in either case. The cost difference between public and private sector finance is determined by whether pension and other savings are invested directly in government bonds with the financial risks assumed by taxpayers or are invested in private sector funds that can potentially earn a greater return by assuming the risks associated with private capital investments.
LibDem policy is based on fostering stability, certainty and confidence in managing the public finances responsibly. That includes managing public capital spending committments broadly in line with the expected trajectory of nominal gdp growth. That growth trajectory and hence the capital financing required is limited by the availability and productivity of physical and human resources.
@ Joe,
There’s no objection to the private sector making an investment if that is what it wants to do. However when we see such schemes as Great British Energy set up we do have to be suspicious. It doesn’t create any Energy. It doesn’t distribute any Energy. It doesn’t buy or sell any energy but it’s described as an Energy company.
Prof Gabor explains how it will likely work in the Guardian link I posted earlier.
“BlackRock wants the state to ‘derisk’ investments. This financial jargon was included in the 2024 Labour manifesto, and it in essence involves the state stepping in to improve the returns on infrastructure assets.”
So it seems that GBE is simply a way to socialise any losses that the Energy companies might make but allow them to still privatise their “improved” profits. The Government is not going to be an equal partner in GBE.
Starmer, Reeves and co are taking the public for mugs. Just as Blair and Brown did with the original PFIs of twenty years ago .
Why are they doing this? What is in it for them?
I meant to add this link to my comment above. The last Labour Government was allowed to get away with what the Independent terms a “heist” because not enough of us were aware of what a scam the so-called PFI was going to turn out to be.
Now we do. Don’t let them get away with this “fraud on the people” again.
https://www.independent.co.uk/news/long_reads/pfi-banks-barclays-hsbc-rbs-tony-blair-gordon-brown-carillion-capita-financial-crash-a8202661.html
@ joe bourke
“The UK was a major manufacturing nation in 1945 and {the switch form coal to oil } produced high levels of post-war productivity growth. That kind of GDP per capita growth appears to be a lot more difficult to achieve{when the obtaining of oil becomes considerably more expensive – as the easy to access fields are extracted first}
We surely need to pressure the new Government for priority spending on the Health Service. The holiday season doesn’t stop people needing doctors’ and NHS dentists’ appointments soon and hospital appointments hastened, and the possibility of still more delay in seeing one’s GP because of industrial action is alarming. I hope our parliamentarians will harry Wes Streeting and Keir Starmer in pursuit of our policies. And as more money will be needed, surely we can recommend some of Richard Murphy’s ideas for extra taxes, and work out at our September Conference further plans for taxation reform to press on Rachel Reeves. Increasing the health of the nation should surely be a first aim of and main contribution to full employment and economic growth. And it’s up to us, now virtually the real Opposition party with the heft that none of the small parties can match and the divided Conservatives certainly can’t, to influence this Government to work towards it.
Peter Martin,
I think it is too early to say Starmer, Reeves and co are taking the public for mugs. I would be astonished if they allowed a repeat of the mistakes made with PFI contracts. There is nothing instrinsically wrong with public-private partnerships if they are concluded on mutually benefical terms. That was clearly not the case with many PFI contracts contracted in the Blair/Brown era.
The IFS described the main party election manifestos as a “conspiracy of silence that leave voters guessing over policy on tax and spending, and on future size and shape of state…Regardless of who takes office following the general election, they will – unless they get lucky – soon face a stark choice. Raise taxes by more than they have told us in their manifesto. Or implement cuts to some areas of spending. Or borrow more and be content for debt to rise for longer. That is the trilemma.” There does appear to have been some element of surprise for the new Chancellor when she had full access to the books and treasury officisla Who is to blame for the UK government’s overspending?
To be fair to Starmer and Reeeves an objective observer could equally welcome the fact that the new government is finally coming clean with the British public of the nature and extent of the problems facing the public sector.
Mervyn King in an interview with former Australian polician, John Anderson does a decent job of laying out what those problems are Our Economic Delusions
Joe Bourke,
‘Tax increases can be spread over a number of years by deferring increases through increased levels of borrowing’.
Indeed, but this is not what we said in our manifesto or what is implied in what you wrote on 1st Aug 10.47am.
In your comment of yesterday 12.03am you seem to be saying that the government should have a desired target for the ‘level of state spending as % of GDP’. I don’t agree. The government should decide what it needs to spend to provide the level of services the public require and they either raise the revenue or borrow the money required while ensuring that over the economic cycle day-to-day spending is covered by government revenue. My Local Party has submitted a motion on our economic policy. I hope it will be selected for debate and the party can have a discussion on what our fiscal rules should be.
We should also have clear policies on what we would do to get those with health issues well enough to return to work and what incentives we will provide for businesses to employ these people and those who have been out of work for some time.
Peter Martin and Joe Bourke,
It is a shame that Rachel Reeves is not encouraging pension funds to lend more to the government specially to be invested in buildings and infrastructure.
@ Michael BG @ Joe
“It is a shame that Rachel Reeves is not encouraging pension funds to lend more to the government”
The Government does already encourage Pension funds and others with cash to spare to lend money to it. It sells bonds or gilts on the open market. If it wants to encourage them more, or less, it can raise, or lower, their yield by with the co-operation of the BoE as a buyer and seller in the market.
This is nothing new and it is a very low cost way to borrow. The ‘problem’ , if this is the right word, is that it appears on the books as, er, borrowing. Governments make promises not to increase their debt but at the same time they do want to increase it.
So they’ll look for ways to do this without it appearing on the books. PFI schemes are one way. There a fair bit of smoke and mirrors involved but often it comes down to leasing assets rather than buying them outright.
/cont
So it’s rather like renting a house on a long term basis. Sure, it appears that you don’t have the debt to the bank or building society that you would if you bought it.
However, you’re still paying rent. As most of us know, this may be OK in the short term but it’s not a better long term option.
The solution to the problem is for Government to include the asset value of any spending on its balance sheet in the same way that the rest of us do, and usually without thinking in accountancy terms. We might prefer to not be in debt to the bank but at the same time we know that the alternative is to pay “dead money” to a landlord in rent for years on end.
The point is that we don’t actually need the money of the rich. If everyone with more than £10 million were to somehow lose it, the rest of us would be no worse off at all. We’d still have the same real resources in the economy to carry on as normally. I’m not saying they should lose all their money but they shouldn’t be looking for any special deals when it comes to lending to the government.
@PeterMartin. I thought the fiscal rules now show PFI as part of government debt. Certainly it has happened a lot less in recent years.
Michael BG,
The foundation of economics is the economizing problem: society’s material wants are unlimited while resources are limited or scarce, so wants have to be prioritised.
Vince Cable in a recent interview was asked If you were Chancellor what would you do https://www.thisismoney.co.uk/money/meandmymoney/article-13204495/Sir-Vince-Cable-admits-MONEY-early-financial-decisions-left-lot-desired.html? In reply he commented “I’d be honest about the fact that there’s no way of sustaining quality public services without a substantial increase in taxation, but nobody’s willing to say that.
The idea that we’re an over-taxed nation is nonsense – it’s about 38 per cent of GDP, whereas in Denmark it’s more than 50 per cent. Secondly, taxation should be tweaked so that it bears more heavily on the older generation, who have benefited from appreciating property prices, and does more for the young and particularly those with families.
@ Joe,
What you have just said is all true. Except I have Denmark as 46.0% The UK is 33%
Having said that, Vince could have chosen France as an example which is taxed at 46.2% of GDP but given the state of French politics maybe he is better sticking with Denmark!
Denmark does make matters worse for itself by insisting that it run a significantly large current account surplus of over 13% of GDP. This means that it has to impose taxes at the rate of 13% just to dampen down domestic demand enough to be able to divert the production to its export markets. If it tried to do this without keeping its currency pegged at an artificially low rate against the euro it would certainly create massive unemployment for itself.
The UK has a trade deficit of 4%. So this is a 17% point difference between the UK and Denmark.
The difference in tax revenue is only 13% points. So removing the effects of the trading imbalances means Denmark is actually taxing slightly less than the UK.
https://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance
Peter,
Michael and Katherine’s article quotes Andy Haldane ‘By constraining investment and stunting growth, these are self-defeating… they need to be replaced with rules that promote growth and seek to maximise national net worth, not minimise gross debt’”
Government does include the asset value of any spending on its balance sheet in the same way that the rest of us do in the Whole of governmwent accounts
The most important element for improved living standards in the form of per capita GDP is productivity i.e. the rate of technological innovation. This tends to come from the private sector and it is hard for the government to influence this beyond Investment in infrastructure, e.g. new roads, railways lines and broadband internet to increase productive capacity and reduce congestion.
We may not need the money of the rich but we do need invrestment to develop. The UK has a very low investment/saving rate compared with other developed economies. That has been a long-standing issue going back to what Keynes referred to as the MacMillan gap
Joe, just to pick up one of the points of your latest comment (thank you, though you misspell my name) you suggest that “we may not need the money of the rich” though (unarguably) “we do need investment to develop”. I suggest we, or rather the Chancellor, does need money from the rich – very much so, to help pay for the needed extra doctors and dentists and (better paid) care workers and the local government services and all the rest of the goods that she says she can’t afford yet awhile, of which I would personally put first the needs of the poorest.
I have read of but not yet accessed a Resolution Foundation study which says the Chancellor could access £9.5 bn through taxes on capital gains and inheritance, eg by raising CGT rates on shares to match the rate of tax of dividends (Observer report on July 28, headlined ‘Reeves could raise £10 bn in wealth taxes to plug fiscal hole’). While it does seem likely the Chancellor will be thinking of that for her autumn budget, it is what she may prioritise next to spend it on which will most concern our party. Meanwhile, she could of course borrow more to pay for grave necessitates.
Katharine,
We can hope that either some members have submitted a motion to Conference on further plans for taxation reform or that the Federal Policy Committee has submitted a motion on the plans for taxation reform in the manifesto which we haven’t passed as policy, such as:
Increasing the Digital Services Tax by 4%; and
Introducing a 4% tax on share buybacks,
which can be added to with amendments.
Joe Bourke,
Please could you make it clearer when you are quoting? Today you quoted Vince Cable but didn’t have any quotation marks round the paragraph starting with “The idea”. You did the same with a quotation of Keynes earlier in this thread.
That is an interesting article in the FT by Stephen Welton you posted a link to. (I was surprised I could read it.) He calls for the ‘creation of a UK National Renewal Fund, with £15bn of equity capital, to channel … capital to’ the ’21,000’ “growth economy companies”. These companies are ‘highly profitable and fast-growing – on average increasing revenues at twice the pace of economic growth’ but ‘they are generally too small to be funded by public markets’. He also calls for a large pension fund component to this fund. And he calls for regulatory change to enable this.
@ Joe @ Katharine,
When I said ‘we’ don’t need the money of the rich I meant government. Having said this it doesn’t mean they shouldn’t be taxed. However, the reason for all taxes isn’t so much that central government (its different for local government) needs the money. It’s because it wants to prevent us from spending it ourselves. The spending by the wealthy has recently had a highly inflationary effect on asset prices such as property and land. This needs to be curbed.
If the wealthy want to make a sensible investment to develop useful products then I don’t think many will object. However what we see recently is a demand that Government intervene to derisk their involvement. This is what Great British Energy is about, IMO. This is not how capitalism is meant to work!
If Government is putting money into a project it should be as an equal partner. If there are no willing partners then it has to make a decision on whether to go it alone.
@ Joe,
So what fiscal rules does Andy Haldane have in mind? I’d suggest just one. Loosen fiscal policy if govt wants the economy to move faster. Tighten it if govt wants to slow it down when inflation might become a problem. It like putting your foot on either the brake or the accelerator when driving a car. This is not saying anything about the direction in which we steer the car.
I’m sure there are people in the Treasury and BoE who do know how the economy works. They aren’t the ones interfacing with and seeking votes from the public though. As Matthew Green (one of your own) says on his blog:
“Public debate encourages us to think of the state’s finances in terms of a household budget: public spending must be covered by taxes, or else the national debt gets out of control, which in due course could mean throwing the country to the mercy of foreign creditors, or burden future generations. This narrative has the merit of being easy to communicate and sounding like common sense. Try telling voters that this is not how things work, and they will immediately become suspicious.”
And we can’t have that, can we?
So it doesn’t really matter what might be in the “whole of government accounts” if hardly anyone reads them.
https://thinkingliberal.co.uk/national-finances-dont-work-like-household-budgets-that-doesnt-help-labour/
@Michael BG. Sorry if I gave the impression that I thought all government debt was bad. I was trying to make my point concisely ! I was simply suggesting that were ND to increase now, the need to service that debt would restrict the budgets available for wider government spending. But then again, I was schooled in traditional economics many years ago, so I would say that.
My fears are that extra investment now will fail to achieve that GDP growth this government is banking on, because there are supply side issues that are still holding us back.
Peter Martin,
I don’t know who Matthew Green is and he doesn’t say on his website.
He wrote, “My personal scepticism of MMT is that its advocates don’t tend to think enough about the difficulties of managing a small open economy, which has to manage its economic relations with other economies (and exchange rate policy in particular) – a situation that fits the British economy more than the American one.”
Chris Cory,
My point was that we have had a National Debt since 1694 and it was not a real concern during this time. However, there were periods when the amount paid in interest were seen as problematic, but we coped.
I don’t know what you mean by ‘I was schooled in traditional economics many years ago’ unless you mean the economics of the 1920s and 30s. The economics of the 1940s to the 1970s were the days of Keynesian economics which brought us full employment, decreasing inequality, and a declining National Debt to GDP ratio. The 1980s brought us Thatcher and Monetarism and the current economic orthodoxy of neo-liberal economics, with increasing inequalities, and lack of economic growth.
@ Michael BG,
There is a Matthew Green who was a Lib Dem Candidate in last month’s election but I don’t think the same MG.
I agree that it’s the advocates and devotees, or some of them, who can be the problem with MMT. Many don’t ever get beyond saying that a currency issuing government can never run out of money and taxes don’t fund government spending. These statements are true enough but they have to be understood in the right way. If they aren’t then misleading impressions are created which can give MMT a bad name.
Joe
You claim that productivity=technological innovation which drives increased GDP per capita. Evidence?
Many people say so, but that’s not proof
@ Jenny,
Are you asking for proof or evidence? Not quite the same thing.
I would point to the growth of the internet in recent decades which has clearly contributed to the growth of all our economies. Joe would probably place more emphasis on the contribution of the private sector: Apple, Microsoft and others.
Whereas I would point out that the internet itself is a creation of government.
On a more fundamental level we humans are innovative by nature. Give us a task and we’ll probably do it somehow. Ask to do it again and we’ll find a way of doing it better and quicker. We’ll always find a way to continually improve the production process and better technology is just another tool for doing that.
This is fine if the benefits are shared out equitably. However, in a capitalist society we are worried that they won’t be. If we use technology to replace human workers we are concerned that the workers will lose their jobs and it will be the capitalists who benefit from increased profits.
Jenny,
the simple answer to evidence that productivity drives Per capita GDP economic growth is the impact of the industrial revolution on living standards. For data on more recent trends and their impact see this 2018 speech/paper The fall in productivity growth: causes and implications
“The UK productivity level is below that of other advanced economies. The silver lining is that there is scope to catch up with the frontier…By adopting technologies and processes that enhance productivity and are already tested and in place in other countries. ”
The Blair-Brown government enjoyed a productivity generated boom in financial services and lower manufacturing input costs as a consequence of outsourcing of components manufactire to China. This allowed for sready increases in heath and welfare spending while maintaining debt to GDP levels below 40% until the financial crisis
After the Truss budget, this labour government is not going to risk another meltdown in UK bond markets and steep devaluation of Sterling precipitating another financial crisis, or listen to anyone advocating such policies. I think the focus will be on structural reforms, particularly in the planning system to generate growth and public spending increases more or less in line with ecoomic growth.
@ Joe,
“…..the simple answer to evidence that productivity drives Per capita GDP economic growth is the impact of the industrial revolution on living standards.”
The simple answer isn’t always the correct answer. There is no dispute that there’s a link between increased productivity and rising living standards which in turn means higher wages . But is it correct to say “drives”?
From the POV of a capitalist faced with the choice of spending more to hire extra workers or more to invest in modern machinery the level of wages is obviously a key factor. If wages are higher the decision will probably be directed towards more mechanisation. So once we are in a situation where wages are rising we’re in a virtuous circle. Higher wages lead to increased productivity which in creates rising living standards.
However if wages are flat or even falling this won’t necessarily happen and some experts may even be “puzzled” by it all – as they seem to be in the link you provide. They talk about a “productivity puzzle”.
Up until about 20 or 30 years ago the number of agricultural workers as a percentage of the workforce fell steadily. However once cheap labour started to become available from the EU the fields were once again full of manual workers! Why buy a machine to pick strawberries if it’s cheaper to use non-union labour?
@joe “the ~ evidence that productivity drives Per capita GDP economic growth is the impact of the industrial revolution on living standards.”
I didn’t ask about productivity, I asked about technological innovation, which you claim is the same thing.
The increase in GDP per capita following the industrial revolution was surely due to the impact of the use of coal energy replacing human, wind, water and horse power. Steam ships, railways, traction engines… none of that works without coal.
And while you could claim that the increase in efficiency from a Newcomen to a Watt steam engine is a technological improvement, and I’d agree, it improves efficiency of the same tech, in the same way that Mallard was faster that a Trevithick engine – but neither are still in use today
Joe, thank you for the reference to the Bank of England speech on the causes and implications of our country’s fall of productivity. After the lengthy analysis of the fall in manufacturing and financial productivity, the author says finally she is optimistic, because (as you quote) our productivity can catch up “By adopting technologies and processes that enhance productivity and are already tested and in place”, and she says firms in the UK have “the right factors”, spelt out, to catch up. However, this speech was delivered in 2018. The author says an investment boom in Europe was not followed here, stating “Investment has suffered because of the uncertainty regarding future EU trading relationships.” Since the UK’s trading relationship with the EU does not seem to have improved in the six years since this speech was uttered, do you think the author’s optimism can still be echoed? The ‘right factors’ she cited included ‘institutional and legal framework, geographical location, top-rate research and innovation centres and the human capital to harness resources to foster growth’. Well, are they all restricted by the continuing consequences of Brexit?
Joe Bourke,
Silvana Tenreyro in her speech, that you gave a link to, seems to be saying that the UK’s lack of productivity was due to a few things, that the UK’s flexible labour market produced a fall in real wages, that there was uncertainty regarding trading relations with the EU (which I think should by now be over) and so firms opted for increasing labour rather than capital because employment decisions could be more easily reversed.
Katharine,
Where is the evidence that the EU countries are doing any better than us in increasing their productivity?
To answer my own question I would say that some of the former Eastern European Communist countries have done better but this doesn’t really apply to the UK.
The country in the EU which is the closest to us, both in a geographical and economic sense would have to be France. They don’t look to be doing any better than we are overall although they are doing better in some things like a better health service for example.
On the other hand their tax take is over 46% of GDP whereas ours in 33%. I’m sure we would both support some increase in taxation but I doubt that we’d be able to win any elections if we announced such an increase in advance!
Well said. We need to borrow more to increase investment.
We should have fiscal rules requiring a minimum of capital spending.
As for day-to-day spending, borrowing should be kept low (2% of GDP) so as not to cause too much inflation whilst leaving some excess capacity for recessions. Further day-to-day spending should be financed by taxes (an LVT is ideal, that may take a while to set up: we need higher taxes on high incomes, pensioners, and on wealth via CGT and higher dividend taxes).
The OBR writes ” …the UK’s tax burden is set to rise to a post-war high of 37.7 per cent of GDP in 2027-28 (on a UK ONS National Accounts basis)… many economies face growing fiscal pressures associated with ageing populations, higher stocks of debt, higher interest rates, energy insecurity and climate change, and growing geopolitical threats. Meeting these pressures… may require further increases in tax burdens…over the remainder of this decade”
Money is debt and debt is a claim on existing assets and the additional output produced by investment in newly developed assets . Borrowing for investment is justified by maintainig or generating greater levels of future economic output in the form of public or private services sufficient to meet the costs of servicing those claims.
The tax burden is ultimately a political choice between the level of public goods and services made available and the level of private consumption.
A successful economy requires a healthy and educated workforce, good communucations, transport, utilities and ports infrastructure coupled with political stability, rule of law, secure property rights and sensible planning laws to compete internationally. That requires consistent long-term investment that is maintained regardless of short-term fluctuations in the economic cycle and a predictable environment in which business can operate. Deficits will increase during slowdowns and reduce in expansions, but debt as a share of GDP (i.e. private claims on existing public assets and the additional output produced by investment in newly developed public assets) will gradually reduce over-time as a consequence of inflation/growth until the next crisis has to be met.
@ Joe,
I’m not sure what the point of your last comment was. It seems like a collection of statements of the obvious. Was it all a quote from the ONS or just part of it? I can’t see any closing quotation marks.
@ William Francis,
“We should have fiscal rules requiring a minimum of capital spending.”
This is essentially a “Capital Spending is Good, Current Spending is Bad” argument.
It can lead to some obviously bad policy choices. For example we build Schools (Good Capital Spending) but fail to staff them properly. (Bad Current Spending). Or we build hospitals…….
Peter Martin,
it should be obvious that taxes as a share of GDP will have to rise to meet existing social security, health spending and interest payments and that these ongoing committments cannot be met by ever greater deficit spending. It should also be obvious that borrowing has to be justified in terms of the additional output of public and/or private services that any Investment spending will generate.
To increase housebuilding to the levels required needs land around cities made available for development (i.e. green belt) and large numbers of additional trained construction workers that are not currently available.
There are more UK trained doctors and nurses going to Australia, Canada and the US to work then are coming in to work in the NHS.
Junior Barristers have been deserting the criminal bar in droves as a consequence of legal aid cuts and the prison service is collapsing.
It should be obviious that taxes as a share of GDP will need to increase signficantly to meet higher public service wages and that borrowing for longer-term investment in housebuilding and infrastructure likewise will need to increase significanly.
Simply increasing day to day government spending across the board without increasing taxes would see inflation reignited and the BofE react with ever higher interest rates to try to stabiise the price level.
The choice is between higher levels of tax or increasing levels of inflation to reduce private consumption and shift resources to the public sector. Higher asset Inflation is not a realistic choice as it simply exacerbates wealth and income inequality as we have seen througout the period of near zero interest rates.
William Francis,
Thank you for your support.
There are occasions when the economy can’t support increased government investment funded from borrowing and for the government to spend that money would cause inflation.
During recessions and economic crises the government could need to borrow more than 2% of GDP for day-to-day spending to ensure they don’t make the recession or economic crisis worse.
Joe Bourke,
That OBR article that you provided the link to states, ‘In 2021, the most recent year for which there are internationally comparable outturn data, the UK’s tax-to-GDP ratio was 33.5 per cent of GDP on the OECD’s measure (which is slightly lower than the ONS definitions on which our forecast is based)’, which is close to the 33% stated by Peter.
I wonder if the second paragraph of your post of 1.49pm is a quotation with its, ‘Deficits will increase during slowdowns and reduce in expansions,’ which doesn’t sound like your position, but is mine.
In your post of 3.06pm I don’t understand why you think Peter has said the opposite of what you have written.
@ Joe,
Who is suggesting that that every expenditure can be met by ever greater deficit spending? Not me. I’m sure I’ve posted the article in the link before before.
Incidentally an increasing deficit means that everyone else (domestic + foreign sectors) is saving more and is therefore potentially deflationary. Whereas a falling deficit means that everyone else is spending more and is potentially inflationary. So it’s important to not get this the wrong way around.
A looser/tighter fiscal policy may or may not result in an increasing/decreasing deficit.
The economy is about resources rather than money. What Rachel Reeves should be saying is that “If we don’t have the resources, we cannot do it.” This is the Keynesian position. However she’s fixated on the money aspect. She didn’t use the word ‘resource’ once in her recent speech to the HoC. She used the word ‘money’ 12 times. ‘Finances’ 8 times. ‘Afford’ or ‘affordability’ 8 times. This is clearly just bad economics.
https://billmitchell.org/blog/?p=60987
Katharine,
UK productivity growth stalled in the aftermath of the 2008 banking crisis. The productivity growth in the decade prior to the banking crisis was ephemeral being largely based on unsustainable increases in bank lending to both the housing and financial markets. Economic growth was finally restored in 2013 to2015 and investment began to recover. That growth was derailed by the Brexit referendum in 2016. Investment and productivity has flatlined since. Real wages today are no higher than they were in 2007.
Europe will always be the main trading partner for the UK. Lessening the barriers to trade with Europe is essential to the prospects for UK economic growth and ideally at least rejoining the customs union.
@ Joe,
You’ve got a couple of things right in your last comment. Yes, something did go wrong in 2008 and, yes, real wages are no higher that they were in 2007.
I can’t see much else though. Where’s the evidence that “Economic growth was finally restored in 2013 to2015 ” for example?
If you Google {GDP UK} you’ll see a graph of GDP going back to 1960. Can you see any evidence at all of a 2013 recovery? You’ll also see on the same graph the French GDP record. There’s no major long term difference.
If you’re saying Brexit has slowed the UK economy, it’s actually also slowed the French economy slightly more!
Peter Martin,
this is the ONS graph for GDP growth – 2013 1.8%, 2014, 3.2%, 2015 2.2%, an average of 2.4% annually over the 3 years GDP year on year growth. These are just historic facts not myths promulgated by Labour activists.. Researchers at the Bank of England and elsewhere, using a large survey of business in the UK, also made an estimate of the impact of Brexit on business investment. Based on responses from businesses, they estimate that business investment was 23% lower than it would have been in 2020/21 due to Brexit How has Brexit affected business investment in the UK?
“In the years after the referendum on membership of the European Union (EU) in mid-2016, business investment in the UK was essentially flat. It then took a sharp hit during the Covid-19 pandemic, and has recovered slowly, only just regaining its pre-pandemic level at the end of 2022. A range of analytical approaches suggest that business investment has been subdued partly due to the effects of Brexit, and this will have reduced the size of the economy and future growth.”
Peter Martin,
Thank you for posting the link to Bill Mitchell where he quotes James Callaghan in September 1976 and writes, ‘British Prime Minister James Callaghan, aided and abetted by the untruthful Chancellor Dennis Healey (who lied about needing IMF funding), told the gathering that governments can no longer spend their “way out of a recession” and that the Keynesian approach was an option that “no longer exists”.
‘The Conference followed a period of clandestine activity between the US and British bureaucracies which was aimed to bring Britain to heel, one way or another and to overcome its ‘immorality’ – yes, the US thought the fiscal deficits the Brits were running were immoral.’
Later he writes, ‘The methodology that they (the OBR) use biases the output gaps downwards, meaning they estimate full capacity is reached well before it has actually occurred, meaning their ‘full employment’ unemployment rate is biased upwards.’
The graph showing GDP, you suggested Googling for, of the UK, France and Germany is very interesting. As you say that of Britain and France are close together. Also the shape of Germany’s and France’s are very similar since 2008.
@ Michael BG,
“The Keynesian option no longer exists” line was always nonsense. Oil prices were rising sharply in the 70s. Under such circumstances there are always going to be prices rises no matter what type of Economics is considered mainstream. The cuts demanded by the IMF were designed to depress the economy and increase unemployment as a counter inflationary measure. There was naturally an upsurge in class conflict as workers tried to both protect their jobs and maintain the value of their wages.
In addition the pound had only recently started to float and the Callaghan govt started to panic as it fell below $2. They should have just let it do that. It fell to $1.08 shortly after Mrs Thatcher took over and hardly anyone remembers that. They do still remember the IMF debacle.
@ Michael BG “British Prime Minister James Callaghan, aided and abetted by the untruthful Chancellor Dennis (sp) Healey”.
Sorry, Michael, but this portrayal of Denis Healey is simplistic and unfair. Healey had to do what he had to do…………….. and, if my memory is correct, the then Liberal Party under David Steel and John Pardoe gave them parliamentary support.
MichaelBG,
I posted earlier a link to cabinet minutes discussing the economic background for the 1977-78 budget Public Expenditure 1977-78 – The Economic Background.. Callaghan and Healey were two accomplished politicians with a wealth of experience from the post-war Attlee administration through the Barber boom and subsequent inflationary spiral of the 1970s. We would not be in the poor state we are in today, if we still had statesmen of this quality and experence running the country’s affairs over the past few years.
Peter Martin,
‘Where is the evidence that the EU countries are doing any better than us in increasing their productivity?’
Katharine was referring to a 2018 speech by Silvana Tenreyro where she showed in a graph that the UK had lower annual growth in productivity 2007-16 than France and Germany as well as the USA, Canada and Japan.
Joe Bourke,
I don’t know what point you are making. Denis Healey seems to have been writing that because the economy was coming out of recession the government should cut its expenditure because an increase in VAT would cause inflation and an increase in income tax would create pressure for pay increases.
@ Michael BG,
We were actually in the EU in the period 2007 – 2016 and hadn’t even voted to leave until Jun 2016.
However, I’ll take a look. Any chance of a link to this said graph?
MichaaelBG,
Healey set out his reasoning for expenditure cuts as against further tax rises in 77-78 in the Cabinet memo and the global economic backkground. The domestic economy was growing strongly and the Chancellors objective was to reduce the annual deficit from 10% to 4%. That was his (and Callaghan’s) judgement of what was required at the time. They were not lying to the British public as Bill Mitchell characterises their assessments. As David Raw notes in his comment – Healey had to do what he had to do…………….. and, the then Liberal Party under David Steel and John Pardoe gave them parliamentary support.
Rachel Reeves has made clear her rationale for tight control of public spending. The budget this year is likely to be along the lines of Gordon Brown’s 1998 Prudence with a purpose budget and include tax rises raher tha spending cuts or significant increases in borrowing.
Libdem parliamentary scrutiny of that budget will almost certainlty be on the basis of our manifesto position. Neither the Chancellor nor Ed Davey/Sarah Olney are lying or have a misunderstanding of economics. Rather they clearly understand the weaknesses and constaints that currently exist within the UK public finances and the conseqences for inflation., nterest rates and living standards in general of the kind of recklessness displayed by Liz Truss/Kwasi Kwarteng that rightly put the Conservatives out of office.
Just to get the discussion back on track, can I ask what the basis might be in economics for any set of fiscal rules that might be advocated? For instance we could follow the EU and say that the Government budget deficit should never exceed 3% of GDP.
But what’s special about 3%? As far as I can make out it was decided upon as some sort of compromise figure in the early 90s. It was estimated that, based on past experience, the big guns of the EU shouldn’t have any problem with this. Of course future events couldn’t be foreseen. First there was the 2008 GFC then there was the 2020 Covid pandemic.
The 3% limit had to be suspended. So why bother having it in the first place? Isn’t it better to just let every Government decide what is appropriate for the circumstances of the time? That’s what will inevitably happen in any case.
@ Joe
” They (Callaghan and Healey) were not lying to the British public as Bill Mitchell characterises their assessments.”
Bill was saying they lied about the need to call in the IMF not about any assessment on fiscal policy.
The alternative explanation is that they didn’t understand that the only reason to call in the IMF was to prop up the value of the pound. That’s all that an influx of any foreign currency provided by the IMF can do. There is now widespread agreement that this is hardly ever a good idea. Govt is simply lining the pockets of of the currency speculators by telling them that they’re happy to see an overvalued currency. The sharks know it won’t be able to sustain this position for long. They’ll circle their prey and move in for the kill shortly after.
I can never work out whether politicians are lying or whether they simply don’t understand. When Rachel Reeves tells us there’s no money, does she really believe that? The BoE can make as much as it likes and hand it to government by the QE process.
She probably shouldn’t do this but she could if she wanted to. Why doesn’t she say she could find the money if she wanted to but she has decided that it wouldn’t be right for the economy at the moment?
Peter Martin,
the QE process is simply a swap of longer-term government debt in the form of government bonds for short-term debt in the form of commercial bank reserves. The object is to lower longer-term interest rates and encourage investors to buy shares or lend money to businesses to help to support the economy. QE also helps the government to borrow money in the capital markets.
However, as well as increasing the price of bonds through lower interest rates, it also increases the prices of things such as shares and property. This tends to benefit wealthier members of society who already own these things, as the Bank itself concluded in 2012 The Distributional Effects of Asset Purchases Bank of England, 12 July 2012
Younger people found it harder to buy their first homes and build up savings.Another important side effect of QE is the hit to pension funds. Government bond prices are used to estimate how much it will cost to provide pensions in the future. If those bond prices go up, the cost of providing future pensions rises. As a result many firms were obliged to make bigger payments into their pension schemes, reducing money available to invest elsewhere. And in many cases, QE will have contributed to the decision to close pension schemes altogether.
Governments can temporarily increase public or private spending to stimulate economic activity in deflationary periods through accelarated capital expenditures or lowering taxes or interest rates Conversely, they must decrease spending in the economy during inflationary periods either through taxation, reduced government spending or more commonly increased interest rates to curb private sector spending. The latter course of action is best avoided by maintaining financial and economic stability that allows government, business and families to plan their finances with a high degree of confidence,
QE does not provide any more funding for the state. It simply replaces one form pf debt with another. The governments recurring spending has to be financed by moving resources from the private sector to the public sector i.e. via taxation or borrowing from the 85% of the money supply in the hands of the private sector.
Economic and productivity growth will return when government can instill confidence in businesses that they can safely invest for the future.
@ Joe,
“QE does not provide any more funding for the state”
It depends on whether you take a narrow or broader view of what is happening. On the narrow view it is just a swap of one form of Govt IOU for another. The BoE creates ££ to swap for mainly Government securities in the open market which forces up their price and which lowers long term interest rates as you suggest.
However, that’s not the end of it. At the same time as the BoE is buying up gilts in the secondary market the Treasury is selling new ones into the primary market at a much higher price than if the BoE wasn’t intervening in the market.
It’s just a work around to avoid the stigma of the BoE buying up bonds directly from the Treasury.
When the Covid crisis hit and the Govt announced they were going to spend big time to support the economy there was more than one senior Lib Dem, including I think Sarah Olney, who was asking where the money was going to come from!
It was the same story after the GFC of 2008 and the banks had to be bailed out. The BoE has since clocked up some £850 bn worth of QE. So where has the cash used to buy them gone? It’s been spent by Govt into the economy to keep the wheels turning.
Peter Martin,
but QE was not spent into the economy. The deficit spending into the economy and rollover of debt was financed by new bond issues. QE simply changes the composition of government liabilities from longer-term bonds held by the private sector to short-term bank deposits held in reserve accounts with the Bank of England. That increased liability position doesn’t change if you skip the issue of bonds and the government borrows directly from the commercial banking system. It also does not change the overall liability position if you bypass the commercial banks and borrow the savings of the private sector directly from pension funds or individual savers through national savings accounts.
It is deficit spending (and increased commercial bank lending) that increases the supply of money circulating in the economy. The increase in the supply of money offset deleveraging and prevented a severe asset deflation and economic contraction in the aftermath of the financial crisis. When deleveraging ends and savings accumulate, continung to increase the value of assets and supply of money in excess of nominal gdp growth will eventually generate inflation as savings are reduced by increased consumer spending, as it did in the wake of the Covid pandemic.
This is not economic theory, simply an observation of what we have seen in the real world.
Joe Bourke,
The papers you provided a link for are from the later part of 1976 discussing policy for the future. It was earlier in the year that Healey went to the IMF and as Peter has pointed out that is the time when Bill Mitchell is referring to, where Healey told the public the UK needed to go to the IMF.
David Raw,
If my memory serves me correctly, Denis Healey in his memoirs wrote that the Treasury had pressurised him to go to the IMF. He never used the funds from the IMF and Healey has said that was as he had expected.
Peter Martin,
This is the where Silvana Tenreyro’s 2018 speech can be found – https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/the-fall-in-productivity-growth-causes-and-implications including the graph I referred to.
@ Michael BG. Michael, it would be helpful, and usual practice, if you could cite the page/s you refer to in Healey’s memoirs.
I must confess to a certain affection and respect for Lord Healey, given that, like him (and my late old friend and contemporary Greaves A.R.) , we all attended Bradford Grammar School.
I certainly don’t regard him as an untruthful man……. Far from it, he often hit the nail on the head directly and with forcefulness, which could be delightfully humorous. I subscribe to the view that he was one of the best Prime Ministers we never had regardless of party. A man with a hinterland.
Michael BG,
Healey discusses the IMF stand-by facility (which had not been fully drawn) on page 2 of his memorandum noting the great improvement in industrial relations and that global growth had recovered more strongly than anticipated earlier in the year. The IMF loan was partly drawn and helped in restoring confidence in the public finances and a subsequent economic recovery at the time (until the winter of discontent).
On page 3 at para 6 he writes”Now that the economy is recovering we must aim steadily to reduce our PBSR. Business must be in a position to borrow more for investment, stockbuilding and increased working capital as recovery proceeds; and private saving is likely to fall as inflation and unemployment fall. It will therefore be difficult to finance a large PSBR except by driving interest rates to levels at which indusatry cannot afford tp borrow, thus choking off the investment on which sustained growth will depend and without which there is no hope of reducing employment to acceptable levels.”
The Chancellor had full control of fiscal and monetary policy without any monetary policy commitee in 1977 and was not forced by the IMF to make spending cuts. His reasoning for doing so was as above. Bill Mitchaell may not agree with his reasoning but there is no reason to suggest that he was lying (Cont).
(cont)Taxes as a share of GDP remained at a steady 33% throughout the 2010’s and public spending was higher than 2007-08 all the way through until 2019-20 when spending returned to the 2007-08 level as a % of GDP.
Spending increased dramatically during the pandemic and has remained at higher levels than 2007-08 and 2019-20 ever since.
Interest costs have increased dramatically , health and pensions spending will continue to see real terms increases far in excess of projected economic growth without any offsetting decreases in defence spending.
Tax increases (including corporation tax, the freezing of allowances and many more people paying higher rate taxes) already in the pipeline are expected to take taxes as a share of GDP to circa 38% by 2027-28 based on the last OBR review of fiscal projections. The OBR described Jeremy Hunt’s funding plans and unspecified spending cuts as “not even fiction” . Rachel Reeves now asserts there is a further £22bn of unfunded spending.
The spending review and budget is scheduled for 30th October. I think it unlikely that Labour would ditch manifesto promises at this early stage and will focus on their growth agenda as the means by which public services can be improved. The credibility of that agenda and the need for wide ranging tax reform will be a key area of scrutiny for Libdem Parliamentrians British tax system is in need of reform
@ Joe
There s often a lot of jargon employed to try to obscure what is happening when governments indulge in unorthodox fiscal and monetary practises. The right wing called QE ” money printing”
Which is easily understandable if you mentally combine the treasury and the BoE. The created bonds then drop out of the picture. The govt is clearly just creating it’s own spending money.
You say QE doesn’t provide more funding for the state but what do governments do when an emergency such as the 2008 GFE or the 2020 covid emergency arises and they need extra cash quickly?
They start up the QE process.
This alone should be enough to inform us what is going on.
I’m not arguing we shouldn’t do it when necessary but we should be honest about what’s going on. It causes s large increase in the debt and is potentially inflationary.
Peter,
QE faciltates borrowing by reducing the amount of bonds avalable in capital markets, but it does not increase the overall level of debt. It just replaces existing bonds with shorter-term borrowing. To finance deficit spending the government must increase the overall level of government debt i.e. bonds and bank reserve liabilities combined.
There is no need for QE if the government is confident that its bond issues will be fully subscribed at an acceptable level of interest. If there is too much government debt circulating in the market the government can create demand for its newly issued bonds by reducing the level of existing bonds in the market and replacing it with interest bearing bank reserves. In the last couple of years there has been quantitative tightening i.e. reducing the governments liabilities to commercial banks and increasing its borrowing via bond markets as global interest rates have normalised.
The government can use its overdraft (ways and means facility) whenever it needs cash quickly in an emergency. But this is ultimately a taxpayer debt too (when the funds are spent and transferred to the private sector via bank reserves) just as all government liabilities are.
Joe Bourke,
‘the QE process is simply a swap of longer-term government debt in the form of government bonds for short-term debt in the form of commercial bank reserves.’
According to a House of Lords briefing (https://lordslibrary.parliament.uk/quantitative-easing/) ‘QE takes the form of the bank buying government bonds, and to a lesser extent corporate bonds, from other financial institutions such as banks and pension funds.’
And, ‘The Bank states that rather than holding on to cash, the beneficiaries will usually invest in other assets, such as shares. This increases the prices of those assets, making households and businesses wealthier and therefore promoting spending. Alternatively, the institutions might increase their lending to households and businesses, again boosting the economy.’
‘if the Bank buys a bond from a pension fund, the pension fund might be paid by receiving a deposit at a high street bank. The high street bank would, in turn, receive an additional asset in its central bank reserves.’
So QE is not simply a swap of government bonds for commercial bank reserves, it also entails banks and pension funds ending up with cash that they need to spend/invest. I don’t see why those institutions who received cash for their government bonds can’t buy new government bonds and you seem to agree with me ‘the government can create demand for its newly issued bonds by reducing the level of existing bonds in the market’.
David Raw,
I couldn’t give a reference to where Healey says in his memoirs that the Treasury pressurised him as I was relying on my memory as you were earlier. It seems my memory was not quite right – ‘Healey later claimed that the Treasury had grossly overestimated the public sector borrowing requirement, the key figure used during the IMF crisis, and that if he had been given accurate figures, he would not have had to ask for the loan’. https://www.ft.com/content/11484844-b565-11df-9af8-00144feabdc0 (They don’t give a reference for this, but I have read on the internet something similar before now, but I can’t remember where.)
I also have lots of respect for Healey and Bill Mitchell is wrong. It seems that Healey did not knowingly lie about needing the IMF funding, he was relying on overestimated figures from the Treasury and so ask for the loan which was not needed according to him later.
@ Joe,
The discussion we’ve just been having is really about the difference, if any, between what is sometime called Overt or Direct Monetary Financing and Quantitative Easing. The former is simply the process of the Treasury selling bonds to the the Central Bank and is considered highly taboo. QE looks to be many, including myself, to be so close as to be indistinguishable.
It’s rather like a shopkeeper who isn’t allowed to sell cigarettes to children. So he sells them to a third party who then sells them to children. The end result in both cases is that children end up with cigarettes and the shopkeeper gets his money. The only slight difference is that the middleman gets his cut out of the proceeds.
Naturally the establishment do what they can to make the case that QE is somehow far more respectable than OMF. As Bill Mitchell puts it:
“They claim the difference is that QE carries the expectation that the central bank will sell the debt back to the non-government investors, which is another imaginary piece of reasoning. Ask yourself, how much debt has the ECB, the Bank of Japan, the Federal Reserve, the Bank of England, etc sold back rather than allowed to mature while still on their books?
The answer is not much!”
So there can’t be much difference then!
https://billmitchell.org/blog/?p=49327
@ Michael BG,
I’m sure Denis Healey was smart enough to make the best possible case in his memoirs. However I’m also sure he knew at the time of the 1976 crisis there would have been no need for the involvement of the IMF if only the pound had been allowed to float.
That was a relatively new concept at the time and a falling pound carried political risks.
He would have calculated that it was politically less disadvantageous to prop up the pound and blame the IMF for the unpopular economic consequences of taking the loan.
Whether or not he was right is a matter of opinion.
So was he lying? I’d put it that he was just being a politician. They hardly ever give us the full story. Especially when it’s about economics. They tell us what they think will give them the best chance of being re-elected.
Peter Martin,
Callaghan and Healey were consumate politicians, but there was a lot of opposition within the Labour party at the time to spending cuts of any kind. The cabinet papers linked above were secret documents put under wraps for 30 years and only made public in 2006. So, I think they were reflecting what they belived was the necessary economic approach at the time. The prospect of a steep fall in sterling and its impact on inflation and unemployment was clearly of real concern to Healey When Britain went bust
At Para 7 on page 3 of his cabinet memo he writes “The only alternative would be to print money as the Conservative government did in 1972 and 1973, with consequences for inflation from which we are still suffering. Indeeed, the present prospect is that the growth of the money supply, which has been fairly stable over the past two years will be accelarating later this year. In 1977, with unchanged policies, it may be growing at a rate faster than the national income. If no action were taken to rein back the rate of growth of money we would create an excess of liquidity which would add to our difficulties. Our efforts to bring down the rate of inflation and maintain the expansion of the economy would be at risk. Moreover, the excessive rate of growth of money supply could rapidly spill over into external capital flows and seriously increase our difficulties in managing the sterling exchange rate.”
Management of the exchange rate and terms of trade to control inflation (particularly oil prices) rather than interest rates (which at 15% were already at historically high levels) was the priorirty for policy makers in the late 1970s.
I don’t think Healey can blame Treasury forecasts for his decisions. As Chancellor, he has effectice control of the Tresury.
Michael BG,
QE operations are not risk free for the governmemt. As Interest rates have increaed the volune of interest payments on bank reserves have more tha doubled and capital losses on bonds sold back to investors have incurred substantial losses Bank of England losses cost Government £45bn as interest rates rise
“The government has been compelled to cover nearly £45 billion in losses incurred by the Bank of England over the past year, raising concerns about the sustainability of current monetary policies.”
“Over the past two years, the Bank of England has faced unprecedented losses due to rising interest rates and the devaluation of gilts on its balance sheet, which are being sold back to investors as part of the quantitative easing wind-down. Increased borrowing costs have also led to escalating interest payments to commercial banks holding reserves at the central bank.”
“The Bank estimates that the lifetime losses from its quantitative easing programme could total £85 billion over the next decade.”
@ Joe,
Does it really matter if the BoE makes paper losses of what are, in effect its own IOUs? Bill Mitchell explains in the link below why he thinks it doesn’t. He quotes Mme Lagarde of the ECB who would seem to agree with him. What do you make of their arguments?
The Government has made a decision to allow interest rates to rise as part of its contractionary or anti-inflationary monetary policy. Why would it do this if it leads to increased Government spending to ‘bail out’ its own central bank?
If rising interest rates cause losses, them it must follow that falling interest rates must cause profits. So over time don’t these cancel in the accounts of the central bank?
https://billmitchell.org/blog/?p=49228
Joe Bourke,
I am not aware of Healey having any formal education in economics. We now talk about government investment unlocking business investment rather than forcing it out as happened in the past and Healey also suggests it in paragraph 6 (and 8) as a reason for reducing the PSBR. He also suggests that savings would decrease with decreases in inflation and unemployment which seems counter to economic theory. This is why he writes in paragraph 7 what you quoted. It therefore seems that he was wrong about the need to reduce the PSBR for internal economic reasons.
Peter Martin,
Thank you for the link to Bill Mitchell where he quotes Christine Lagarde stating that the ECB as a central bank ‘by definition, it will neither go bankrupt nor run out of money’ and financial losses don’t effect it.
Peter Martin,
when the BofE bought the bonds, it would receive the interest coupon from the treasury and payback to the treasury any surplus earned from the coupons over and above the interest being paid out on reserves and its own operating costs.
Now that interest rates have increased the market value of the bonds has fallen. The bank has the option of holding to maturity but all the while paying bank rate on the commercial bank reserves created when the bond was purchased making an annual loss on the differential between interest received and interest paid. If the bank wants to reduce its holdings as part of its monetary policy operations it has to sell the bonds at a loss and the treasury has to cover those losses in its budget. Wheras in years past there was a net transfer of income to the treasury budget now there will be net losses to be accounted for in the budgets.
In the case of the ECB, if its capital is completely eroded as a consequence of losses on bonds it can, if required, call on its member states to inject new capital. It does not have a liquidity problem, as it can always create more Euros (as Christine Lagarde comments) but ultimately member states are the guarantors of its capital solvency and on the hook to cover losses if deemed necessary.
So too with the BofE, there is never an issue with liquidity and UK tax base is the guarantor of its solvency.
When debt money is created there is always an asset and a liability. When the central bank creates a deposit asset for the government to spend as the agent of taxpayers the other side of the ledger is the taxpayer as the ultimate creditor. That applies to both commercial bank and/or central bank equity bailouts.
@ Joe,
We need to separate out the question of the bonds/gilts and the interest the bank pays out on reserves.
It’s true that the Treasury is repaid what might be considered a surplus from the coupons on the bonds. But it can’t then claim any payments the other way have to come out of the “taxpayers’ pockets”! Despite what is claimed, the BoE is effectively a part of Government. We are essentially discussing about the to and fro of money flows between one government department and another. It’s left trouser pocket vs right trouser pocket economics.
On interest paid on reserves: There didn’t used to be any interest paid. Now there is. This is a banking decision. Banks do often decide to either pay interest on certain accounts. It doesn’t force them to call in the receivers! Neither does a decision to pay interest on reserves create a solvency risk for the BoE.
Presumably those who took this decision to pay would have been of the same opinion – otherwise they wouldn’t have made it.
Peter Martin,
surplus that are credited to government budgets in years past reduce the need for additional taxation at that time. As that goes into reverse then additional taxation or borrowing is needed to cover servicing costs. The fact that there were surpluses being earned in the 2010s doesn’t help much with current budget and tax requirements.
All money creation by banks is based on the ability to service lending. When a commercial bank makes a loan and creates money the limit of the amount it can create is based on the future income of the borrower.
When money is created by a central bank via lending to government the limit of the amount it can create is based on the collective ability of the current and future taxpayer base to comfortably service that lending.
In normal conditions commercial banks will hold only a minimal amount of non-interest paying reserves with the central bank for the purposes of clearing inter-bank transactions.
The BofE could decide to stop paying interest on excess reserves, but that would be an effective tax on the banking system probably borne ultimately by borrowers and/or savers.
The bulk of commercial bank assets will be earning interest on loans and other investments. If the commercial banking system has excess depoits at the central bank not earning interest, it will strive to swap those reserves for interest-bearing gilts pushing bond yields below where the central bank wants to keep them to meet its 2% inflation target.
@ Joe,
“The fact that there were surpluses being earned in the 2010s doesn’t help much with current budget and tax requirements.”
I doubt that many of us would be happy to be told that we couldn’t have a refund on past overpaid tax on the basis of ‘that was then and this now’!
The mainstream can’t seem to decide if the BoE should be independent or not. They seem to want it both ways. It’s independent when it suits them and a part of government when it doesn’t.
If it were truly independent Govt would say that the BoE can offer interest on reserve accounts, if it chooses to, but that it shouldn’t come crying for a hand out if the costs are too high. The same with the purchase of bonds.
On the other hand if the BoE is a part of government than there would be a general understanding that BoE should do whatever is deemed necessary to support the currency, including the wider National economy, and the question of any profits or losses is quite irrelevant.
I’d support the latter option.
The Bank of England operates monetary policy in accordance with the mandate set for it by the Chancellor. “It is independent of government but works closely with the Treasury. It describes its key job as ensuring the UK has secure banknotes, stable prices, a safe banking sector and a resilient financial system”What is the Bank of England and why does it change interest rates?
The BofE is wholly owned by the state and returns any profits it makes to the Treasury.
“All of the profits we make from printing banknotes are passed back to HM Treasury. Over the past five years that has averaged over £250 million each year. Over the past five years, the profit from our activities other than printing banknotes has averaged a little under £100 million each year. So combined with the profit we make from printing banknotes each year we give around £350 million back to the public through HM Treasury.”Who pays for the Bank of England?
That was then this is now. The income earned is a pittance against the losses incurred on bonds bought in the secondary market https://www.economist.com/britain/2024/08/08/how-should-britain-handle-200bn-in-quantitative-easing-losses. I expect we will see some fudging of the accounting rules, so Rachel Reeves can defer these capital losses over the very long-term.
““It…… works closely with the Treasury. ”
It’s rather more than that! The BoE only bought the bonds because it was instructed to by Treasury. The only question would have been “how many?”
This does mean that it’s not at all independent of government.
So having been given its orders the BoE can’t be expected to accept any responsibility for any losses or gains. In any case, and as both Bill Mitchell and Christine Lagarde explain they don’t actually mean for a central bank what they might mean for a commercial bank.
We can understand any losses the Government might make in terms of what someone else might gain. So for example, if I pay someone in cash to mow my lawn, the Government loses out in its tax revenue but the the two of us will benefit from an untaxed transaction.
So, if the BoE is making a loss who, would you say, is making the gain?
Peter Martin,
it is operational independence. The Bank of Engliand Act 1998 does have a provision that allows the Chancellor to override the decisions of the bank in exceptional circumstances. The Chancellor decides what are exceptional circumstances. Even without this provision the Bank follows the steer of the Treasury.
The British Public are supposed to be protected from poor minesterial decision making by at least four seperate institutions; the civil service, the Treasury, the press and Parliament.
Liz Truss blames the Office for Budget Responsibility (OBR) and the Bank of England for undermining her authority Liz Truss: an economist explains what she got wrong (and what she’s actually right about)
“Independent institutions, as well as the markets and public finance (fiscal) targets, put the brakes on “Trussonomics”.”
The Bank of England routinely carries out open market opeations in pursuit of its monetary policy mandate. Any gains or losses are simply the costs of carrying out government policy. When these operations are conducted on a large scale they are called !quantitative easing’ and the gains or losses are amplified at scale. These costs (like the £89 billion of interest expected in 2024-25) are the direct costs of servicing debt and managing the currency and price level that have to be accomodated within goverment budgets. Who gains? – the British public in having lower inflation, solvent pension funds and a more stable currency (unlike the Japanese Yen) albeit at the cost of higher taxes.
@ Joe,
If the British public is enjoying lower inflation due to the activities of the BoE then we should, on a correct understanding of economics, be paying lower taxes.
Peter Martin,
The BofE increases interest rates to cutb spending in the economy and put downward pressure in inflation How do higher interest rates help to lower inflation?
Higher taxes are a consequence of a number of factors not least demographic pressures that see health and pension costs costs increasing in real terms at 3% above the rate of economic growth, much higher debt servicing costs as interest rates normalise in the US and elsewhere and many other areas of public services and welfare provision.
You write above “I doubt that many of us would be happy to be told that we couldn’t have a refund on past overpaid tax on the basis of ‘that was then and this now’!
Keynes in his pamphlet “How to pay for the war” advocated compulsory savings in the form of increased levels of taxation on wages to prevent the kind of inflation seen during WW1. The idea was that the excess tax would be refunded after the war to support consumer spending. The Attlee administration imposed severe austerity on personal consumption after the war maintaing high levels of tax, price and wage contols and rationing to deliver the welfare state Clement Attlee. The refunds were never made and any idea of tax refunds were abandoned by the 1970s. So, economic theory is all well and good but you still have to deal with the here and now as Attlee had to and Callaghan/Healey in 1976.
If interest rates were reduced to near zero now, then it seems likely that taxes would have to increase to a point where the government was running a budget surplus to constrain inflationay pressures and prevent a collapse of the pound along the lines of what is being seen in Japan.
@Joe “The BofE increases interest rates to cutb spending in the economy and put downward pressure in inflation”
That explanation totally ignores the real causes of the most recent increase in inflation, namely in the increase in world prices beyond the control of the BoE (remember at one point the BoE actually admitted that 80% of the inflation being seen was beyond its control), all the BoE achieved by increasing interest rates was to fuel domestic inflation. As we saw all that happened when the BoE increased rates, the banks got richer and businesses such as the mobile operators increased their prices by inflation plus 3.9 percentage points, because they could. The biggest cause of inflation in our economy today is the business/investor viewpoint that customers are there to be exploited, with many large companies increasing prices, because they can and it allows them to declare better profits on a largely unchanged market share and cost base.
@Peter “…be paying lower taxes.”
Much hinges upon what you actually mean by “lower taxes”… Remember the IFS thinks UK taxes are too high and the unwritten subtext to their pitch is a return to the 1960’s where tax rates were significantly higher than today, but fewer paid tax…
@ Joe, @ Roland
The effect of increasing interest rates to curb spending is nowhere near as straightforward as Joe suggests. Anyone who is in debt and is paying interest has less to spend but on the other hand anyone who is actually receiving interest payments will have more to spend. The banks like higher interest rates !
On a macro level, the government is actually putting more money into the economy than it otherwise would in paying higher interest on reserves. That’s sounds to be inflationary.
There are various factors behind the recent inflationary surge. One of them has to be the increased spending by the Govt during the Covid pandemic. So if the main cause of the inflation was loose fiscal policy it doesn’t make much sense to place all the emphasis on monetary policy as a counter inflation policy.
It would have been fairer to raise taxes on everyone to share the burden more equally.
There is the social aspect having very low interest rates when inflation is high so on this basis there is a case not having them at zero but this is quite different from using monetary policy as the prime counter inflationary measure.
Compulsory wartime savings were just a deferred “temporary” tax. My father said he didn’t think, at the time, he’d ever get it back but as everything was rationed there wasn’t much to spend money on anyway. Direct rationing was probably the main counter inflationary measure.
Roland,
the BofE link above gives the following explanation:
“The causes of today’s inflation are different. One of the main causes was the sharp rise in the cost of energy and some food products that was caused by Russia’s invasion of Ukraine.”
“And just before that, there was also a surge in demand for products after the Covid lockdowns came to an end. Businesses had problems meeting that sudden demand.”
“Higher interest rates can’t stop the impact of these kinds of things. But they can slow down new causes of inflation that follow on from these shocks. ”
“These new causes include things like businesses putting up their prices because they face higher costs themselves.”
“But if their customers have to cut back on spending, then businesses have to start offering more competitive prices to keep their customers.”
“The cost of food, heating and other bills have gone up more quickly over the last year than for many years. These things are essentials. People in the UK didn’t cause inflation because they spent too much on them.”
“But the way we get inflation down is just the same as if the economy was booming. Higher interest rates will reduce overall spending in the UK.”
My view on this is the BofE reacts to market forces rather than setting rates. If rates go up in the USA, the BofE is forced to follow to prevent imported inflation spiraling out of control How the U.S. ‘Exports Inflation’ Through a Strong Dollar
Roland,
I think it would be a good idea to remove those on lower incomes from paying income tax and increase the rates to compensate. I can’t imagine a Conservative government ever doing this as they are fixated on the rates of income tax.
You are correct as lots of the inflation of the cost of living crisis was caused by the effects of Russia’s invasion of Ukraine the BofE couldn’t do anything about that inflation. However, as Peter Martin stated some of the inflation was the result of government action during the Covid pandemic and as the BofE states some was the result of the problems businesses had meeting the increased demand following Covid. This can be seen from the increase in UK inflation from 2% in July 2021 to 5.5% in January 2022.
@ Joe,
“My view on this is the BofE reacts to market forces rather than setting rates”
If it wants to do this why doesn’t it set up a market system for those who want to borrow and those who want to lend? It could work like the share market. If there were more potential borrowers than lender then rates would rise. They’d fall if it were the other way around.
The reality is that there are always more lenders than borrowers so the Monetary Committee of the BoE has to intervene in the ‘market’ to ensure they don’t fall to zero. The BoE can only put a lower floor on interest rates. If the natural rate were say 6% there’d be no point the BoE saying they should be 5%. Why would anyone take less than the market rate?
https://www.jstor.org/stable/4228167
Peter,
there is a market for lenders and borrowers and it is International.. No one knows what the natural rate of interest is. There is a risk free rate and that is detemined by the rate that the market traders settle on at any point in time by trading in the bond market. That risk free rate in turn is determined by inflation expectations and the economic outlook. In a financial crisis (such as that of 2007-08) we saw a flight to safety particularly in US treasuries. In calmer periods bond traders are more amenable to risk taking and will look to where returns relative to currency risk are greatest.
The Japanese carry trade has been in the news recently. During the past few years, the Bank of Japan has let the Yen exchange rate fall rather than increase interest rates to tackle inflation. Traders borrow in Japanese Yen at near zero rates of interest and invest in typically US Tech stocks often on a highly leverage position. Japan has just increased its interest rate from 0.10 to 0,25% and announced a plan to unwind its massive bond buying programme as it eases back from a decade of stimulus measures, despite an economic contractionof 2.9% annualised in the 1st quarter of this year Japan hikes interest rates for second time since 2007. That is more than double the rate of interest.
For the Japanese government and taxpayer the interest payable on its debt of 260% of GDP is on the way up as inflation has returned to the Japanese economy. Japanese public debt is invested in oversas financial instruments (with net debt lower than the UK) and infrastructure assets, so its debt service costs should be manageable in the short-term.
In the article we quoted William Keegan quoting Andy Haldane, ‘By constraining investment and stunting growth, these are self-defeating… they need to be replaced with rules that promote growth and seek to maximise national net worth, not minimise gross debt’. We also pointed out that our fiscal rules were changed from the pre-manifesto to the manifesto. There were two main changes:
There is a new aim to get the national debt falling as a share of the economy, which means that government investment which we had not put a limit on we now do put a limit on;
We removed the time scale of the medium term for our aim to make sure that day-to-day spending does not exceed the amount of money raised in taxes, implying we want it done over the short term.
We argued that our fiscal rules should return to the pre-manifesto rules. And then we should put pressure on the government to change their rules to our rules.
The majority of people who posted a comment were supportive. Thank you.
@ Joe,
I still don’t understand your point. If there were a free market to decide on interest rates why would be need a Monetary Committee at the BoE to decide what they should be? There isn’t a committee to decide on what the value for the pound should be against the euro or dollar which I agree is decided by market forces.
@ Michael BG,
Who decided to change what weren’t a particularly good set of fiscal rules before the election to an even worse set of fiscal rules for the election manifesto?
What’s the point of spending so much time at conferences debating these, and other polices, if the PTB in the party just do what they like at election time?
Peter martin,
the impossible trilemma states that it is impossible to have all three of the following at the same time:
– a fixed foreign exchange rate
– free capital movement (absence of capital controls)
– an independent monetary policy
The BofE is set the task of ensuring the UK has stable prices, a safe banking sector and a resilient financial system.
An independent monetary policy means Interest rate changes are not made in accordance with government interest rate targets (or even domestic pressures), they are made in reaction to external inflationary pressures that are reflected in bond yields. When bond yields begin to increase internationally the BofE is forced to follow to deliver the mandate the government has given it.
The low interest rates and QE of the past 15 years has seen an explosion of private debt in the housing market and a massive transfer of wealth from income earners paying for mortgages and student loans to those with financial assets.
We do need taxes on wealth (as MichaeBG and Katharine have written) and particularly land value taxes where much of the wealth is extracted via excessive mortgage and rent payments. We also need much higher levels of both public infrastruture and private business investment in productivity enhancing technologies.
Fiscal rules focus borrowing on growth enancing investments and are there to foster confidence in financial markets that inflation will not be allowed to runaway and interest rates hiked to very high levels causing instability in domestic bond and share markets alike and widespread lending losses in the property market.
Hm. This thread (and some others) rapidly become the Peter and Joseph show. Arguing the toss about monetary and fiscal policy is boring!
@ Mick Taylor 12th Aug ’24 – 5:03pm
Seconded wholeheartedly
Peter Martin,
It would seem that the Manifesto Writing Group supported by the Federal Policy Committee wrote the fiscal rules that were in our 2024 manifesto. It is annoying that the people on these bodies felt they could make changes to the fiscal rules we passed at Conference. Our Constitution does not give them that power. The Manifesto Writing Group I think has the power to not include policies in the manifesto and to set out the timing of when the policies included would be implemented.
I agree with Joe, the BoE reacts to market forces in the sense that to keep the value of the pound it sometimes follows what other central banks do with their interest rates and in particular follows what the Fed does with their interest rates.
Joseph Bourke,
The Monetary Policy Committee of the BoE in its monthly reports sets out what it thinks is happening to UK inflation and so UK inflation rates do effect what they do with the Bank Rate, they do not just follow what other central banks are doing.
There seems to be wide agreement that the government’s fiscal rules need changing and doing so would not spook the financial markets. Our party’s fiscal rules for a long time excluded government investment and should do so again.
There are now numerous suggestions in the Media on how the Chancellor can find the funds she thinks she needs to fill what she regards as the ‘black hole’ of nearly £22 bn. I should think she will take some of them, since even a non-economist like myself can understand those regarding reforms to capital gains tax, inheritance and pensions taxes. I think our challenge as a party will be to demand that her Budget spending plans include the needed funds which our policies on public services and the costs of living require.