As trailed here, the team who gave us the Green Book some 10 years ago is launching a new podcast series, starting with an episode on the economy.
This is hugely important as concerns about the economy, be they low paid jobs, insecurity or our apparent inability to fund decent public services and infrastructure, are at the top of most people’s concerns.
We’re all well aware of the lack of investment in this country, both public and private which has led to this situation. However, the standard answer from most of our politicians has been ‘but there is no money’ – the excuse for the austerity of the last 13 years – which has only made things worse. Meanwhile our debts, both personal and public, have just got bigger.
What’s needed is a different approach and a new way of thinking about political economy. So in this episode of Green Book Pod, we look at what has been done differently elsewhere, in particular in the USA where Biden is turning the economic approach of the last 20-30 years upside down, and we ask where the money might come from.
Joining us are three great guests:
Vicky Pryce who is a very well-known economics commentator, regularly on TV, radio and in the media. She is the Chief Economic Adviser at the Centre for Economics and Business Research and was joint head of the Government’s Economic Service.
Max von Thun was economic advisor to the party when Vince Cable was leader and is now the European director for the US based Open Markets Institute. He brings good insights into what is happening in the US with Bidenomics, which is a real challenge to the economic assumptions of the last 20-30 years.
Richard Murphy who was one of the creators of the original Green New Deal and also the tax justice movement. He is a very active blogger on political economy, and has thought long and hard about government funding and where the money could come from.
Chairing the session is me, Robin Stafford. I have been supporting the party on economic matters over the last 5-6 years.
Green Book Pod is hosted on LibDem Podcast, and this first episode is now live all the major platforms. You can also find the podcast on YouTube here
Next month we return to discuss what’s the right way forward to achieve net zero.
For more on the original Green Book, see here.
* Robin Stafford is a member of Waverley Liberal Democrats and advises the party on economics and business.
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44 Comments
Robin, this is a brilliantly helpful podcast – thank you! It really hits home for me on how we would be able to raise the capital needed for public services and infrastructure investment, ending deep poverty and building the houses required. We already have the policy of taxing income from capital gains, not the wealth itself. We should surely demand reorientation of economic thinking in that direction, so that we are not requiring extra taxes on income. Max von Thun is suggesting that the pension funds be required to invest 25% of NEW pension income in the economy, and that the huge amount, 27 bn, lying dormant in ISAs could be used for a capital wealth fund though keeping security for withdrawals. He calculates that taxing income from wealth and changing the tax rate on relief from pensions could each raise 12 bn, with ending VAT exemption on financial services 8 bn more. Dizzying sums! And the Labour Party is being too timid and too small in just trying neither to tax nor borrow more. This is surely offering a way ahead for our own economic policy to develop: the money needed for growth IS available, but tax-and-spend can be forgotten.
Naomi Klein argues in her book This Changes Everything
“You have been told the market will save us, when in fact the addiction to profit and growth is digging us in deeper every day. You have been told it’s impossible to get off fossil fuels when in fact we know exactly how to do it – it just requires breaking every rule in the “free-market” playbook: reining in corporate power, rebuilding local economies and reclaiming our democracies.
You have also been told that humanity is too greedy and selfish to rise to this challenge. In fact, all around the world, the fight back for the next economy is already succeeding in ways both surprising and inspiring.
Climate change, Klein argues, is a civilizational wake-up call, a powerful message delivered in the language of fires, floods, storms, and droughts. Confronting it is no longer about changing the light bulbs. It’s about changing the world – before the world changes so drastically that no one is safe.”
One key issue, however, is that while the Western consumers must do all they can, achieving planetary net zero will not be decided by the decisions of European or even western governments outside the USA. It will be decided by policies adopted by the big users of fossil fuels in China, USA, India, Russia and elsewhere i.e. by the countries emitting the greatest volumes of carbon into the atmosphere Top 10 CO 2 -emitting countries in the world
@ Katharine,
The problem with the argumnents in the Youtube link is in the idea that all you need to do is raise the money by taxing the wealthy and hey presto the Govt has what you term the “dizzying sums” it needs to address the poverty issue. Yet, we don’t need “dizzying sums”. We do need to effectively utilise the available resources in the economy.
This is not to say we shouldn’t tax the wealthy. We certainly should to reduce inequality but not because we need their money per se. The purpose of taxation is to prevent too much spending in the economy. However if the rich aren’t spending there’s no immediate advantage to giving them an increased tax bill. It doesn’t increase the government’s spending ability.
But, just to repeat, we should still give them the bill anyway! I’d say for socialist reasons but non-socialists may well disagree!
Mistake – it was Richard Murphy who made the striking suggestions for raising funds from private wealth – mentioning that there is £15.2 trillion there, a stunning total – not Max von Thun (apologies, Richard) – though all the participants contributed very well.
Peter: I am not sure that the ‘available resources’ will continue to be well up to the ever-growing needs of the Health Service and social care. But whether or not, I am with you in wanting redistribution of resources. I think there is a huge imbalance now in this country between the wealth of the capitalists, companies and people, and the income of the mass of the working population, even with state support, and this inequality, I believe striking in the Western world, ought to be addressed soon. Is the forthcoming government up to it? We should lean on them to take it up.
@ Katharine,
Richard Murphy doesn’t seem to be able to make up his mind whether or not he supports MMT. He seems to blow hot and cold on the subject.
If he’s blowing hot he’ll be saying that the limit of what we can do is defined by the resources available to us. This includes the extraction of real resources like oil and gas, plus the number of people who are willing and able to be doctors, teachers, nurses etc and also the number of other people who are needed to do all the other necessary jobs in the economy. There’s no getting around this fundamental point. These set the limits on what any government can do.
If he’s blowing cold he’ll be saying that we need to raise the money first, and one way of doing this is to tax the rich. Theoretically we could give every person on the UK rich list a £1 bn tax bill. If they paid it we’d see the governments debt fall by £1bn for each payment. It prevents them spending that money at some time in the future. Both are reasons for doing just that. The point that MMT economists would make, though, is that it doesn’t create any more real resources in the short term. Therefore, spending money raised from wealth taxes is potentially just as inflationary as what some would say was “printing the money” even though it’s nearly all done in a computer these days.
I think in reality BOTH limits apply. If the Government is to spend money, then it has to think about where the money is going to come from (tax or borrowing/’printing’) and what the economic consequences of that will be; but also you need to consider whether the economy has the ‘real’ resources available to provide whatever the money is going to be spent on – if those resources don’t exist, then inflation and bad things are inevitable. That latter point is a particular issue today when the economy seems to be working at capacity: Notably, we largely have full employment amongst people who are able and want to work, which begs the question, how can we produce more stuff? Who will produce it? (I think part of the answer is that if we want better standards of living/to deal with poverty/etc. then we HAVE to start asking why so many people of working age are either choosing not to work or are apparently unable to work, and what can be done to reduce that number).
@ SimonR,
I’m in agreement with you when you say:
“but also you need to consider whether the economy has the ‘real’ resources available to provide whatever the money is going to be spent on – if those resources don’t exist, then inflation and bad things are inevitable.”
This can still be true even if the money is somehow raised in taxation. Especially if we are in state of near full employment. The type of taxation then does matter. If someone is going to get more it means someone else is then going to have to make do with less. What you say about people not working is also a valid point. If we want our elderly people to be better cared for we need the carers to do that. Money is only a means to an end. £’s don’t in themselves change any bandages or empty any any bedpans!
Where we might disagree is in what happens when the economy isn’t in a state of full employment and there is unused spare capacity.
Domestic resources set the limit on what can be produced in the UK, but needed resources including food and energy are global. The sequence of government spending is firstly impose a tax liability on taxpayers, secondly spend into the economy and thirdly collect tax liabilities in the current year or future years. The budgeting is not dissimilar to the operation of a credit card – first set a credit limit, second spend as needed and then collect repayments with the outstanding balance that can be serviced determined in large part by the level of interest costs. Government spending is enabled by tax collections in much the same way as current credit card spending is enabled by subsequent repayments. All government spending is a taxpayer liability, now or in the future.
Economics focuses on economic growth and the efficient allocation of scare resources but pays insufficient attention to the distribution of wealth, which is a key aspect of political economy. Taxes (as well as being necessary to contain inflation) serve to enable transfer payments that redistribute income to satisfy basic needs in the form of state pensions and other social security payments and hence play a critical role in the management of distribution and alleviation of poverty.
The orderly management of the economy requires that the bulk of day to day spending be financed by tax collections and that future consumption in the form of capital spending be financed by future taxation i.e. deferred by borrowing.
Goods and services for consumption today should be mainly financed by current taxes. Goods for consumption in the future like new housing, hospitals, schools etc should be financed by borrowing. That provides a basis for a sustainable economy at full employment and inter-generational equity that is not over-consuming natural resources today at the expense of future consumption.
I think the Green book revival and focus in net zero is to be welcomed. In terms of the political debate on taxation, Rishi Sunak recently commented “The best tax cut, though, that I can deliver right now for the country is to halve inflation.” This prompted Baroness Jenny Jones to tweet “Sunak is economically illiterate. That’s really worrying in a PM.” Twitter
Some Conservative ministers still seem to be pushing for a pre-election tax cuts despite all the warnings against such a policy Tories have no room for tax cuts despite £52bn a year stealth rise, says IFS
I don’t suppose Joe and I will ever agree on how the economy works. The Government might have what just possibly could be described as a “credit card” with the BoE but it isn’t anything like the Visa or Mastercards that we’re familiar with in our own finances!
Thanks to all the podcast contributions. We need more of this kind of thing. Two practical problems…
Firstly, any proposals for more equitable tax, however merited (which they are) will be difficult to sell politically because, as a frontal attack on everything the Tories hold dear, the resistance will be fierce.
Secondly, promises to ‘pump-prime’ (or that other favourite ‘kick-start’) the economy are routinely made but it never happens. Conclusion: the pump (motorcycle) is broken and needs repairing
Trouble is that’s not really within the spere of economics. If it were, it would have been done long ago.
This is something I think voters instinctively understand so, if done, it could be an end-run around the political logjam.
A useful starting point is to consider where VALUE is being created and destroyed in the economy.
What, for example was the added value of the HS2 project at the point it was given the go-ahead? ££££ we were told. In reality it was massively negative and that was fairly obvious at the time. Value (money value) in this case was destroyed, the country is poorer (but a few are richer).
Then there the lack of quality apprenticeship schemes and consequential skills shortages. That too has a money value but also a huge human cost in unrealised potential, poor mental health etc.
The thing is that the public ‘gets’ this. It speaks to their direct experience in multiple ways.
And, it would be impossible for the Tories to argue against.
Katharine,
Richard Murphy estimated that the 25% of new pension income is in the region of £100 billion. However, Vicky Pryce pointed out that last year pension funds were badly hit by the effects of Kwasi Kwarteng September ‘mini-budget’. Therefore if pension funds were required to invest 25% of new pension income in the economy the government would need to provide guarantees that they wouldn’t lose on their investments when the time came to redeem them. I am not sure that Richard Murphy’s assertion that the £27 billion in ISAs is lying dormant is correct. He said there were no net withdrawals from ISAs, then why wouldn’t those institutions holding these funds not lend them out? He criticised that £20,000 can be put into ISAs each year and most of the funds in ISAs are held by millionaires. He also mentioned his Taxing Wealth Report (https://taxingwealth.uk/2023/09/13/the-taxing-wealth-report-2024-recommendations-to-date-and-their-suggested-value/) where more of his suggestions can be found. The tax which you refer to as taxing wealth is not a wealth tax as Richard Murphy believes it is too complicated to implement and would result in lots of disputes about the value of assets (such as horses and businesses). It is aligning the tax rates on Capital Gains with Income Tax rates, which is party policy, but in our 2019 manifesto costing document we said it would raise nearly £5.7 billion, while Richard estimates it as about £12 billion. It is therefore possible that his other estimates are over estimates.
Richard Murphy suggested abolishing the entrepreneur capital gains tax relief which applies when someone sells their business which he estimated would raise £2 billion. He also suggested applying National Insurance to all incomes. Later he suggested restoring the investment income surcharge that was abolished in 1984 at 15% because he said income from work is taxed at 25% more than income from investments. He estimated that this would raise £18 billion.
Peter,
Richard Murphy did mention re-distribution and saying that it would be a good thing to transfer money from the wealthy to people who would spend it. However, in the current economic circumstances it is necessary to state how we would pay for our increases in day-to-day government spending. I hadn’t thought about the inflationary effects of transferring money from the wealthy who don’t spend it to those who do spend it.
Simon R,
I agree we should be coming up with policies to encourage those of working-age who either choose not to work or are apparently unable to work, to return to work. Unemployment is increasing but even when it 3.5% I considered it too high.
Gordon,
The public are not as pessimist as you suggest, they still believe that government action can make things better and they are correct. Biden has injected $1.9 billion into the USA economy and this did reduce unemployment, but it has also led to increased inflation. Vicky Pryce states that HS2 was not good value for money. She also said that new towns were not good value for money either.
@ Katharine,
“…there is a huge imbalance now in this country between the wealth of the capitalists, companies and people, and the income of the mass of the working population…”
Yes.
The Tory line, outwardly, is that they want the government to give way to the free market. However the criticism of the Truss wing is that it hasn’t actually done that. I would agree with her to some extent. Instead Govt has become an agent of capital. The development can be summed up in the slogan of “Privatise the profits. Socialise the Losses”. They have used the considerable power of a currency issuing government tilt the table in their favour.
The task of those who disagree with what we have now is to tilt the table back so that it does favour working people. I do feel that Lib Dems don’t sufficiently appreciate the power that does lie with the Westminster government. No amount of devolution is going to change that. The SNP, on the other hand, have come to appreciate the point. Their power is always going to be limited unless they are in control of their own currency which does mean they will need total independence.
Reducing inequality resonates more with me than taxing the wealthy. Fairness could run through our manifesto and the country certainly needs more of it. Intergenerational fairness is an important subset.
Peter Hirst: but how to reduce inequality, Peter? Peter Martin says we Lib Dems don’t sufficiently appreciate the power that lies with the Westminster government, and again I am asking, what should they be doing? No economist I, as my comments show, but it does seem to me that while ordinary tax-payers are powerless to prevent being made to pay more (such as when the standard allowance was frozen), wealth seems to grow easily. Why is that? I suppose most of us haven’t the spare cash to invest in lucrative new investments (even the Skipton building society is just offering a good rate of return – if you can leave £1000 minimum in there); and I suppose that tax concessions and extra dividends and bonuses contribute to my impression that wealth grows more wealth. But we are not suggesting ‘taxing the wealthy’ as such. I just feel that income and capital should be equated in fair taxation.
The expression the government “spends into the economy” gives a completely misleading impression of government as deus ex machina. It’s no such thing. Economy encompasses all actors.
MMR did not invent the idea that extra spending when no physical resources available will be inflationary. All economists agree on that.
Katharine,
Apologies; I misread what you wrote, you didn’t refer to Richard Murphy talking about taxing wealth, you wrote, “taxing income from wealth” and it is this that I am pointing out is him talking about the aligning of the tax rates on Capital Gains with Income Tax rates, which is one of the two reforms he estimates would raise £12 billion.
Peter Martin,
The podcast mentions the increase in monopolist power in the UK and Bideconomics in the US and Biden’s tightening of, and enforcing anti-trust law. We need this in the UK so the UK government in not the agent of capital and in particular monopolist capital.
Peter Hirst,
I expect fairness will run through our next manifesto, but fairness means different things to liberals and conservatives. We could talk about a fairer UK with reduced economic inequalities and increase tax on wealth to re-distribute it to those living in poverty.
@ Chris Moore,
Yes the economy does encompass all actors. However actors aren’t directors! This is a better term than “deus”.
The Westminster government is the executive of government which is of course chosen by Parliament. It sets the laws and issues the currency by spending it into the economy. That’s where the money comes from in the first place.
Joe will probably say that the banks create money too. They actually create IOUs which are usually denominated in the government’s currency of issue. They could issue them in bitcoins if they wanted to but they wouldn’t be issuing bitcoins. They’ll be pounds in the UK, dollars in the USA etc
The currency issuing government does call the shots in any economy.
Ann Pettifor is the author of The case for a New Green deal. In a Guardian article she writes “There are fundamentally only two sources of financing. The first is borrowing (credit). This is achieved by applying for a loan, or issuing a bond. The second is existing savings.
To raise the money for a green deal, governments would have to draw on their equivalent of a giant credit card, but would also be able to take advantage of investment by savers. Thankfully, the creation of millions of jobs will generate the income and tax revenues needed to repay any borrowing.
First, the borrowing: credit issued by a commercial bank, as we all know from spending on our credit cards, does not draw on our existing deposits or savings. Instead it is a promise to pay in the future. OECD governments (backed by millions of taxpayers) are the most trusted borrowers, which is why their promises (bonds) are in such demand. Savings, by contrast, already exist – in bank deposits and savings accounts.
When a government borrows, as it has for financing HS2, that leads to investment and the creation of paid jobs in public and private sectors, and to private sector profits. Both employment income and profits generate tax revenues. Tax revenues are, therefore, a consequence of spending or investment – and can be used to pay back the borrowing. They need not be used directly to finance that investment” The beauty of a Green New Deal is that it would pay for itself
The fact that taxes need not be used directly for financing public investment for consumption over many years in the future does not mean that taxes are not needed. As Pettifor notes the bonds issued by OECD governments are trusted because they are backed by future tax collections.
Peter Martin,
currency as a unit of account is a fungible public utility. Private banks can and do create credit denominated in the national currency i.e. credit accepted as money and in general use for settlement of exchanges of goods and services.
The banks provide a payment system “Payment systems are a set of common rules and procedures that support the transfer of funds between people, businesses and financial institutions. Most payment systems are managed by operators, and supported by one or more infrastructure providers of hardware, software, and communication networks. Some financial institutions have direct access to each payment system and provide payment services to their customers” Payment and settlement
The Bank of England has been acting as a settlement agent for payment systems since the nineteenth century. “Not all accounts are held at the same payment service provider, so when a customer makes a payment to a business that has an account with a different provider, the customer’s provider owes the business’s provider the value of the payment. This creates a level of risk, so a payment system needs to use an intermediary, known as a settlement agent, for the final settlement of funds between providers.”
“Banks and other institutions can hold accounts with us, which are used to settle money moved between them. We provide these accounts to support our mission of maintaining monetary and financial stability. There is a financial stability advantage for a settlement agent being a central bank like the Bank of England. As we are financially supported by the Government, this removes the risk of account holders losing money held in, or moved between, accounts held with us.”
In the UK settlement is done via reserve accounts at the BofE in real-time through the faster payments and Chaps systems.
Joe Bourke,
Ann Pettifor sounds like Peter Martin, when she says that the taxes from the employment income and profits generated by green investment will return to the government to pay for the investment. If we assume that 35% of the investment returns to the government in the first year, the second would be (35% of 65) 22.75%, the third (35% of 42.25) 14.79%, the fourth (35% of 27.46) 9.61%, and the fifth (35% of 17.85) 6.25%. As can be seen the amount returning the government reduces each year until it is close to zero. Governments have never been able to pay for investments in this way. I expect this is because of the interest the government pays on its debt. In the above example at the end of year 5 the debt is 11.6% of the original amount borrowed. If 5% interest a year is added to the outstanding debt the debt would be 24.23% of the original amount borrowed.
What is more interesting is that she writes, “To appeal to savers, the government could issue bonds to be repaid over different time periods – short, medium or long-term. These would attract pension funds and insurance companies, but also different kinds of individual savers.” This links into what Richard Murphy said in the podcast about getting the money invested in ISAs into special bonds similar to the Green Bond issued by NS&I. He suggested examples of one for the NHS, one for schools, and others for each nation of the UK.
Joe Bourke and Peter Martin,
A long time ago when I was doing my ‘O’ levels I was taught about how banks work (I expect it was a simplified view). When a country was on the gold standard a bank would allow people etc. to deposit coins into them and then would provide their own paper currency. There would be a ratio of paper currency to the amount a bank held in coins. In 1833 an act was passed which stated that when a provincial bank opened an office in London that they couldn’t issue bank notes anymore (https://www.natwestgroup.com/heritage/history-100/objects-by-theme/turning-points/banknotes-bill-1844.html).
After this banks would lend to a ratio of the amount of currency that was deposited with them. I was also taught that under the Heath government this changed and resulted in a large increase in the money supply. Wikipedia seem to be saying this requirement no longer exists, instead each bank sets its own voluntary reserve target (https://en.wikipedia.org/wiki/Reserve_requirement).
@ Michael BG,
Ann Pettifor is correct to say that all govt spending on Green investment, as with any other type of govt spending, whether or not this is termed ‘investment’ is immaterial, will return to government. She isn’t correct to say “to pay for it”. Any kind of spending, good or bad, could be justified in this way. So, this is missing the point.
There are a couple of questions to be asked. 1) Is this a worthwhile use of resources? If it is then they should be used. 2) Are those resources available at the moment? If not then tax rises may be necessary to create the fiscal space.
Sorry to be a killjoy but MMT isn’t just about the Government never running out of money!
@ Michael BG,
There have been lots of rule changes on how banks operate over the the last couple of hundred or so years. When gold was the standard the ultimate requirement was that the banks make good their obligations in gold. The support they had from the BoE would, in the 19th century, have been far less than they have now. The US Federal Reserve didn’t even exist before 1913. Therefore the important consideration from their POV was to maintain confidence and prevent a bank run. This could have been terminal even if their balance sheets looked to be healthy. Assets may not have been able to be realised quickly enough.
So they would voluntarily set up their own rules some of which may have been backed up in law. Nevertheless the late 19th century was a period of high bank volatility both here and in the USA.
I’m not sure how a ban on English banks printing notes would have had much effect. It wasn’t banned in Scotland. They do this now, that is create their own IOUs, albeit electronically. What really matters is that the bank stays solvent and can look to the support of the central bank if it is needed.
The fact that government spending returns to it in tax collections is just another way of saying that all government spending is ultimately financed by taxpayers whether those taxes come in the form of tax levies, inflation or debt seigniorage. . The more government spends as a % of GDP the higher those liabilities will need to be.
If spending is ramped up on investment in energy security that will bring future benefits and increase future tax liabilities to the extent the investment is not offset by increased domestic productivity and reduction in the import of fossil based fuels. It is only where there are productivity gains (whether in the delivery of public services or energy usage) that lead in turn to higher tax collections on higher levels of national income (but not an increased tax burden as a % of GDP) that public investment can be said to pay for itself.
On the question of whether green investment and state investment in housing is a worthwhile use of resources – the answer is yes. As to the question of whether sufficient idle resources are currently available -the answer is no. But it does not necessitate tax rises to shift investment spending from the fossil fuel and consumer services sector to the renewable energy and house building sectors. It requires the redeployment of resources from fossil fuel and consumer industries to these more important areas of economic activity. State taxation and regulatory policies (including the allocation of credit) can both seed and redirect private sector investment to correct market failures of the kind we see in the energy and housing sectors.
Michael BG,
economic textbooks still do teach the fractional reserve theory of money creation that assumes a money multiplier based on a requirement to hold a proportion of deposits in reserve. It is an abstract model rather than a reflection of operational reality.
The Heath government was the first in power after the USA suspended dollar convertibility to gold and the pound became a free floating currency in 1972. The then Chancellor deregulated bank credit creation leading to the housing boom of the early seventies. That signalled a move away from restrictions on the quantity of credit made available to a reliance on changes in the cost of credit to regulate the level of bank lending.
The successive housing booms and crashes in the UK stem from this time period.
@Joe Bourke: You say, “Thankfully, the creation of millions of jobs will generate the income and tax revenues needed to repay any borrowing.“. But who is going to do those jobs when we already have virtually full employment amongst people who wish to and are able to work? The UIK’s problem isn’t lack of jobs: I’d say it’s more, lack of infrastructure, plus for some reason the cost of the Government building or doing anything seems to have become astronomical.
I’m also very suspicious of any claim that spending will pay for itself entirely. It’s clear that some of what the Government spends will come back in increased tax revenues, but not all of it. As far as I’m aware, that doesn’t really match decades of history, where Government spending has generally caused the debt to increase.
Simon R,
you are right about the Green new deal claims. With near full employment in the UK, the new jobs will have to replace existing jobs in the fossil fuel industries and some other discretionary spending sectors and be created in the private sector rather than public sector. Some other OECD countries with higher levels of unemployment may have more spare capacity for new net jobs creation.
I think you can say that government spending does get recovered eventually one way or the other i.e. directly by taxes or by inflating away the real value of savings and debt over time (so called Financial repression). Investment led productivity growth is a preferable alternative to financial repression and can raise living standards unlike financial repression which erodes real incomes. The current UK debt of circa £2.5 trillion is the equivalent of around 20 years of accumulated deficits since 2000 and actually falls as a % of GDP when there is a high level of inflation. Government debt has fallen from 105.6% in Q3 2021 to 101.2 in Q3 2023 despite running historically high levels of deficits UK government debt and deficit: June 2023
“But it does not necessitate tax rises to shift investment spending from the fossil fuel and consumer services sector to the renewable energy and house building sectors.”
So you’ll just ask everyone nicely to think about redirecting their investment spending?
If renewable energy was more profitable there’d be no need to redirect anything. Maybe in the longer term it will be but we aren’t quite there yet. As you say yourself, and which somewhat contradicts your earlier comment:
“State taxation and regulatory policies (including the allocation of credit) can both seed and redirect private sector investment to correct market failures of the kind we see in the energy and housing sectors.”
Peter Martin and Joe Bourke,
I pointed out that the amount returned to the government via taxation never equals the amount invested or spent by the government. It can get close but it will never get there. This is a mathematical fact. (With my original example with no interest after 18 years the debt is still nearly 4.3% of the original amount borrowed and so not all of it has returned to the government by then.)
Peter Martin,
Indeed the removal of the power of English banks to print their own bank notes would have little effect because of their power to lend more money than they have in deposits.
Joe Bourke,
Unemployment rate was 3.5% July-Sept 2022 and currently it is 4.3%, so there are some “idle resources”. If the government could get those of working-age who are not well enough to work, well enough to work there would be more human resources. It would take a lot to get people working in the “consumer services” sector to work in the building sector. The capacity of the building sector can be increased over time and more quickly by importing people with the correct skills. Indeed the government can have taxation and regulatory policies to encourage investment in particular areas.
The national debt increases in pounds over time. The money which comes back via taxation does not seems to reduce the total debt in pounds over time. Inflation does decrease the value of the debt and economic growth can reduce the ratio of national debt to GDP.
@ Michael BG,
” the amount returned to the government via taxation never equals the amount invested or spent by the government….”
True. This applies to any government spending. The government spends money into the economy and it get a percentage back in taxation revenue. We shouldn’t want it to be 100% otherwise we wouldn’t have those £10 notes in our wallets!
@ Joe,
“The fact that government spending returns to it in tax collections is just another way of saying that all government spending is ultimately financed by taxpayers whether those taxes come in the form of tax levies, inflation or debt seigniorage.”
I don’t want to get into a discussion about “debt seignorage”. It’s probably not high on most voters’ list of economic priorities. However, if I’d just ask that if we do accept that “ultimately” all government spending does come back, why are we so concerned about the speed at which it does so? Why are we so impatient that we want it to come back straightaway?
From a Marxist POV all government spending is made useful by the labour power of workers. It’s labour power rather than money which makes the world go round! Money is just a way of directing labour power. So taxpayers may do the financing but it’s the teachers, doctors, nurses, builders, etc that make everything happen!
Peter Martin,
The cost of providing renewable energy has been falling relative to fossil fuels but is likely to be a long term transition and require a major shift in the allocation of investment by the big multi-national energy companies. It is not something that can be achieved by government alone or even should be in many cases. It requires close cooperation between government and energy producers. Thurrock council is a case in point. Thurrock had borrowed more than £1bn and invested hundreds of millions of pounds largely in high risk solar wind farms. Losses on these investments have led to the council cutting services to the bare essentials and declaring bankruptcy. Thurrock Council reveals ‘grave’ £469m hole in its budget. There are several councils around the country in similar dire financial straits.
Peter Martin,
spending for current consumption, public or private, is best done from current income/production. Borrowing provides a means of deferring payment for a product or service to a future point in time.
In Economics, the “standard of deferred payment” is a function of money that indicates a widely accepted way to value a debt such that you can acquire goods at present and pay for them in the future. The Standard of deferred payment is considered to be a direct result of two other functions of money namely “store of value” and “unit of account”. However, for money to function as a deferred payment standard, it must retain value, it must also store value. Money facilitates the acts of borrowing and lending. Since money enables current transactions to be discharged in the future, it has become a standard of deferred payments.
For money to retain value it has to be backed by real resources i.e. economic output. Deferring of payment to match future consumption of capital goods matches consumption with payment. The excessive use of debt for current consumption (rather than investment for future consumption) depletes the ability of money to function as a store of value. Inflating away the value of the currency and the real value of wages while driving up asset prices has been a principal driver of the falling share of national income going to labour and widening equality in recent decades.
Peter Martin – I think you need to understand that MMT and tax are the flip side of each other – and are intimately linked. I try to make that clear. Those who are not keen on MMT – and it is sometimes missold by those who think they are – do not hear that message.
Michael BG (comment 28th @ 2:39am),
Apologies for not responding earlier – I’ve been away for a while with poor comms.
I think you mistake my meaning. I think people very much DO believe government can make things better. The trouble is they’re not hearing any political party advancing a credible plan to do so. Hence, they deride “experts” who claim to know the answers, but patently don’t as they can’t deliver. In desperation, some fall for snake oil salesmen selling fake solutions like Brexit.
Of course, that means that the field is wide open for a minor party to come from nowhere if it can devise a credible approach – and that is surprisingly simple provided you ask the right questions.
The perennial problem of British industry, construction, etc is that its high cost compared with overseas competitors. The traditional solution is to cut wages – by stealth where possible, by force where necessary. That used to be aimed at the working classes but now includes doctors.
To plug the gap, governments for the last 40 years have relied first on oil money, then increasingly on asset sales (land, companies) and running up debt. Running up debt works now just as it did for imprudent aristocrats of old who mortgaged or sold off their estates to keep the money coming in. It’s a plan that works until it doesn’t. My sense is that we are near that moment.
The debt is largely privatised as mortgages and student loans, but it will still bring down the economy when it becomes unsupportable. It looks to me remarkably like a Ponzi scheme.
However, as Adam Smith understood, government policy should aim to decrease all costs EXCEPT wages which should increase.
The Tories won’t to go there because a hugely influential part of their base, financiers in particular, but also many others, do very well out of the ‘rentier’ economy. That is one where unnecessary costs are loaded on businesses – but are someone’s income in a modern equivalent of the corn laws.
For instance, house prices rise because of too easy credit combined with (partly) immigration-driven demand. Landlords win, but everyone else loses and wages don’t go as far as they used to once the rent or mortgage is paid.
Another big driver of high cost in teh economy is government dysfunction. Many things need managing or at least coordinating at a level that’s above even the largest firm, for example, training – recognised by Adam Smith as a classic market fail – if firm A expensively trains someone, firm B can poach them once trained so firm A is incentivised NOT to train.
Then there’s whether the qualification achieved is worth something or is just a meaningless ‘job done’ tick in a bureaucrat’s box. Too often the answer is the latter meaning that training is insufficient and of poor quality. And that’s no way to run a modern economy.
@ Gordon,
“The debt is largely privatised as mortgages and student loans…..”
Which debt are you meaning? The government doesn’t usually lend into the housing market. Applying higher interest rates to control inflation would make at least some sense as a policy if that were the case. These could be considered as a sort of extra tax. As it is, the money stays in the economy as a transfer from mortgagees to the banks who seem do be doing very nicely for themselves at the moment.
But Government is responsible for student loans.
It won’t be Government debt that brings down the economy – although it could present an inflation problem if Government overdoes it. It will be the extent of private debt which needs a collateral base of high house prices. If house prices fall we’ll see a high level of bad private debt which could bring down the economy as it nearly did in the 2008 GFC.
Gordon,
Sorry to read you have had comms problems. You haven’t set out a credible plan how to ‘pump-prime’ the economy. You have just listed more problem without the solutions.
The large amount of private debt is a problem, especially with high interest rates. The government could ensure interest rate are low, but this might cause problems. There is little the government can do about private debt. It could make lenders write off some of the debt of the poorest, but this could be problematic. What it could do is write off the debts to the government of those on benefits who had to take them out because of the five week wait for Universal Credit or who took them out to buy household essential items, but this is a very small amount of the total private debt.
Peter Martin,
I think you’re saying something close to but not exactly what I meant.
When the government takes on new debt and spends it into the economy it cascades through many hands. That keeps economic activity high as recipients eat out, holiday, get loft conversions etc. The statistics look good, but the underlying activity isn’t when largely funded by debt with a growing share of spending on critical imports – food, energy and more.
So, far so good-ish – but what happens when government won’t/can’t take on more debt? If there were no alternative, the economy would tank as the public cut all non-essential spending. Many would become unemployed potentially causing a domino collapse.
For the Tories the alternative is obvious – privatise it. At a stroke this (a) fits with their preference for ‘free market’ solutions, (b) keeps headline government debt down, and (c) aids an important constituency – the banks and others who do the lending.
Neither debt nor trees can grow to the sky so at some point the party must end. We are already there for most lower paid and younger people. The first result is that Tory support among young people has collapsed.
https://www.thelondoneconomic.com/politics/poll-finds-just-1-of-18-24-year-olds-support-tories-359804/
Government can create domestic debt, but those critical imports are an Achilles heel. If/when foreign lenders lose confidence we are in deep trouble. If house prices fall then, as you say, banks will fail. If government saves the banks (it will) the resultant money printing would be immediately inflationary.
Michael BG,
My point was that the much promised ‘pump-priming’ never happens but that’s not what’s needed. However, it suits the Tories to keep things as they are, and the opposition parties don’t have the chops to challenge them. We need a wholly new approach.
However, I did mention several items that should be addressed in a ‘new economy’ platform in my comments of yesterday:
1. Government dysfunction: Precedes all other failures. A huge subject but perfectly addressable given the desire so to do.
2. Training (apprenticeships): as noted this is a market fail understood by Adam Smith but not by any current party. The first essential is to agree that it’s a top priority; the second is to fix the market failure (hint: there is a good low-cost solution, but no-one appears interested).
3. Business cost base: way too high to be competitive. This is a direct consequence of all the above and more including the priority given to ‘rentier’ and finance interests over the productive economy.
The corollary of these (and others I didn’t mention) is that most have a precarious existence of low pay, bad housing and little agency. That in turn means unnecessarily high welfare costs and, I strongly suspect, excessive mental health problems.
After >40 years of Tory thinking (also adopted by Labour/LibDems) it’s a failed approach to managing the economy and a disaster for all but a tiny handful. Tinkering round the edges won’t cut it – we need new thinking.
@ Gordon,
You may disagree but I think the way it works is that Government spends money into the economy, then it gets some of it back in tax, some of it back as loans as some people want to save it, and there’ll be some that just goes missing entirely.
Maybe the boys in the Bullingden club have burn it in front of a homeless person?
This includes our overseas trading partners who seem happy enough, on average, to supply us with more goods and services that they buy from us. So they have spare money they lend to the Government. What else can they do with it?
This is effectively a temporary and voluntary tax so the Government may as well make use of it to keep the economy going. They can create as much money as they like as we saw in the Covid crisis so their ability or inability to borrow isn’t an issue insofar as they don’t overdo it and create too much inflation.
@ Richard Murphy,
You claim, somewhat patronisingly:
“I think you need to understand that MMT and tax are the flip side of each other – and are intimately linked.”
There’s no disagreement from me on the importance of taxation.
I’d recommend anyone, even your good self, to read L Randall Wray on the question of “Do we need taxes”? The answer has to be ‘yes’ but not quite for the reason that many assume .
https://neweconomicperspectives.org/2014/05/need-taxes-mmt-perspective.html