Todays Announcement: 3 March 2021

Budget betrays children, parents and teachers

Daisy Cooper MP, Liberal Democrat Spokesperson for Education, reacted to the Budget:

“It’s simply astonishing that the Budget has nothing to tackle child poverty, nothing for children or young people or their early years education or schools.

“Tens of thousands of childcare providers are at risk of closure, whilst school finances are at breaking point.

“The Chancellor’s Statement needed to give children and young people the opportunities to regain the learning time they have lost over the last year.

“He has failed to extend free school meals permanently to ensure no child living in poverty goes hungry, he’s failed to give nurseries and early years providers any certainty and he’s failed to deliver much-needed extra funding for schools to help meet the additional costs of being open safely during the pandemic.

“This is a huge betrayal of pupils, parents and teachers by a government whose handling of the pandemic has wreaked havoc on their lives for a year and is now failing to invest in their future.”

Ends

* Cllr. Tahir Maher is a member of the LDV editorial team

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41 Comments

  • Helen Dudden 3rd Mar '21 - 9:22pm

    It seems that the budget, is meant to right the many wrongs that this government has created.
    I would have thought the free school meals, should have carried on until after the furlough is behind us. This reminds me of those awful packed meals that were considered adequate.
    The many waiting for cancer treatment and the long lists for surgery and specialist appointments.
    I’ve just been writing on the subject of Housing for Power Wheelchair users. It seems a 5 year waiting list is another subject not considered important.
    Depression is going to cause problems, yet again there is still nothing in place to help the situation.
    Also, I’ve grown tired of the constant warnings on the virus, a young person explained to me yesterday, how many of his friends find life difficult.
    I think to sum up this life of this government, too little, too late.

  • Peter Martin 4th Mar '21 - 4:24am

    As expected LDV completely misses the point when it comes to discussing narratives surrounding the budget. If you were able to directly ask Rishi Sunak why he hadn’t done more to directly help children he wouldn’t have any difficulty with his reply. It would be along the lines that he was spending N billion on keeping the economy going and that means keeping families in jobs and businesses functioning.

    If you pressed him, he would perhaps say that of course he would like to do more but he was acutely aware of the needs to be “fiscally responsible” and that he was the guardian of the public purse etc. Sooner or later you’d be forced back on to your line of “let’s put a penny on income tax”. That’s never worked too well previously and it would be unlikely to do any better this time.

    The problem is that nearly everyone thinks like Andrew Marr who said on Sunday “at some point we’re going to have to pay this [pandemic spending] money back.” But Governments hardly ever do this. Even when politicians say they are – they really aren’t! When they claimed they had finished repaying WW1 debt they weren’t being truthful. They were simply cancelling bonds that paid 3.5% and replacing them with other bonds which paid much less.

    What Andrew Marr should have been saying to Rishi Sunak, and what LDV should be saying now, is that we all know the UK government is not a household so is not financially constrained like the rest of us. That said, there is a danger that if Rishi overdoes it we could overheat the economy and create an inflation problem. So is Rishi likely to be overdoing it or underdoing it?

    The numbers look large but they have to be compared with the overall size of a £2 trillion pa economy. Looked at this way it’s more likely than he’s underdoing it and so does have more spending power at his disposal than he is prepared to admit. This means more money for children without raising taxes. Of course, there is no way of knowing, right now, how quickly we’ll come out of the lockdown and how quickly the economy will recover.

    If it does come out faster than we might expect and does start to overheat then that is the time to put up taxes. It’s rather like driving a car. We respond to events by either putting on the brakes or pressing on the accelerator. We don’t decide what we might need to do until we need to do it.

    https://www.politics.co.uk/comment/2021/03/02/bullsht-and-the-budget

  • John Marriott 4th Mar '21 - 8:16am

    I have never been able to get excited about budgets, especially the ones delivered in the House of Commons out of that red box. In this particular year the ritual ripostes from the opposition parties are particularly annoying, given what we have had to face this past twelve months and what we are likely to face for the next few years.

    As for the government not being “financially constrained”, as Peter Martin puts it, in one way that might be true. After all, it can print its own money, can’t it? However, despite low interest rates at present where borrowing is concerned, the debts we are building up will need to be paid off eventually; but certainly not in my lifetime. I’m probably being rather naive when I say that most countries, except possibly the PRC, are more or less in the same boat and really so when wondering why they can’t all just write off the collective debt and start with a clean sheet.

    So, despite the gnashing of teeth from Starmer and Co, I quite frankly don’t think we have much choice than to go with the flow – yet another price the non Tories are paying for failing to get their act together in the Autumn of 2019.

  • Peter Martin 4th Mar '21 - 10:56am

    “I have never been able to get excited about budgets…”

    That comment looks like it applies to the entire Lib Dem Party too. Saying that Rishi should have done more for children should be just a part of any wider criticism. Have Lib Dems nothing to say about financing the NHS, local councils, helping out struggling businesses and families who have slipped through the cracks of previous Govt support?

    Have Lib Dems nothing to say on the question of public debt which seems to worry most people? Even though it shouldn’t!

    The time to say something more substantial was last night or early this morning. So get a move on! The topic will become stale soon enough.

  • Joseph Bourke 4th Mar '21 - 11:20am

    Labour have found it difficult to mount any sensible criticism of the budget measures as this is pretty close to what Labour has hithereto been arguing for. With the changes in the Conservative constituency since 2019 the Tories have had to keep a focus on the needs of the former labour Northern Industrial towns as well as the traditional shires. You have a Tory Chancellor continuing to deliver an enormous level of state support to the economy in the form of jobs and income support, infrastructure investment and tax incentives for private investment. The future tax rises come in after an economic recovery is expected to be well established. Marginal relief is being introduced for corporation tax so that 7 of 10 companies will continue paying a small company rate of 19%. Even after the rise, at 25% for larger companies the tax is still lower than that of the USA, Canada, Japan, Germany or France.
    With little to complain about in the proposed measures, focus has to turn to omissions from the budget and addressing the both long-standing problems and the longer term impacts of economic scarring from the pandemic and Brexit.
    That needs a coherent narrative supported by detailed policies that can deliver the vision set out. That vision has to be one of a future where the young enjoy the prospects of a bright future and the old can rely on the state to guarantee a secure retirement.
    There are three big issues to be addressed: financial and economic stability, inequality and climate change. To address these issues we need a suite of policies that combine to deliver the vision. Those policies are major tax reforms along the lines of the Mirrlees review that can be relied upon to fund public services at adequate levels; an integrated system of tax and benefits that incorporates a Universal basic income at its heart; integration of health and social care; and major long-term investment focused on a transition to renewable energy. The last of these may well require a return of utility services to local authority control.
    People need an environment of financial and economic stability to be able to secure employment, buy houses, raise families and manage retirement. That means avoiding wild swings in taxes and inflation and being prepared to deal with the next crisis in whatever form it may take – military, public health or environmental.

  • John Marriott 4th Mar '21 - 12:50pm

    @Peter Martin
    My comment has nothing to do with Liberal Democracy and all to do with John Marriott Esq., a member of the awkward squad and proud of it. Like you, I’m between parties and philosophies at the moment. My views are my own. They do not represent any particular political party’s, although I can’t help feeling that yours are what you wished the Labour Party might espouse. They say that the two things none of us can escape are “death and taxes”. As far as the latter are concerned, most of us could afford to pay a little more, if you ask me.

  • Steve Trevethan 4th Mar '21 - 1:19pm

    From whom have we “borrowed” to pay for the coronavirus crisis?
    In which currency/currencies have we “borrowed”?
    When do these “borrowings” have to be repaid?
    What are the terms and conditions?
    Why does H.M.G. go to the extra expense of “borrowing” when it does, has and should create money itself?
    Has anyone at L.D. H.Q. read the “Deficit Myth” by S. Kelton, “The Production of Money” by A. Pettifor and anything by S. Keen?
    Might it be the case that H.M.G. has not borrowed anything to cover the Covid costs?
    https://www.taxresearch.org.uk/Blog/2020/10/19/the-uk-government-has-not-borrowed-anything-to-pay-for-the-corona

  • Joseph Bourke 4th Mar '21 - 2:03pm

    Steve Trevethan,

    the BBC article answers your questions https://www.bbc.co.uk/news/business-50504151.
    A number of risks are taken into account when selecting possible debt management strategies. Five particularly important risks are:
    • interest rate risk – interest rate exposure arising when new debt is issued
    • refinancing risk – interest rate exposure arising when debt is rolled over, with an increase in refinancing risk if redemptions are concentrated in particular years
    • inflation risk – exposure to inflation from the indexation of coupons and principal of index-linked gilts
    • liquidity risk – the risk that the government may not be able to borrow from a particular part of the market in the required size at a particular time because that part of the market is insufficiently liquid
    • execution risk – the risk that the government is not able to sell the offered amount of debt at a particular time, or must sell it at a large discount to the market price
    These are the major risks that the government has taken into account in recent years and expects to take into account in future years. The weight placed on each risk can change over time. The average maturity of UK debt is circa 15 years currently which is better than many European counterparts.

    The large purchases of gilts by the Bank if England in the secondary bond markets as a consequence of its quantitative easing program has been conflated with money creation. In fact money is created when banks issue loans and the state spends money into the economy. Much of the QE is balancing out a reduction in money supply as a consequence of loan/credit reductions i.e. money previously created in the banking system that is now being destroyed with deleveraging.
    Money is a financial instrument that derives its value from an implied-in-fact contract: fiat money only has value (is an asset to its holder) because it is a liability of society. More specifically, fiat money is a long-duration, special-form equity instrument issued by society and represents a proportional claim on the future output of society. Confidence in fiat money is retained if such claims are in large part honoured. If the claims are seen to eroded away by excessive inflation then confidence in fiat money declines; the cost of living increases for all and people look to alternative stores of value – property, shares, gold, commodities and crypto currencies like bitcoin etc.

  • Peter Martin 4th Mar '21 - 2:32pm

    @ Joe,

    So that’s it then? Lib Dems have no other criticisms of the Govt’s budget other than the one raised about meals for poorer children?

    All these risks ‘boil’ down to one thing. A risk of inflation. If there is little or no inflation then who cares if no-one other than the BoE wants to buy Govt gilts? That’s what we have at the moment with 90% of Government lending being to itself. It’s just money moving from the left to the right trouser pocket. The last time I looked the pound was around $1.40 which is a lot higher than the doomsters were predicting not too long ago.

    PS The private banking sector doesn’t have the ability to create net credits. If they create money when they issue loans, the liabilities stay in the private sector. If this happens on a large enough scale, as it did prior to the 2008 GFC the banks can panic and start calling in loans or refuse reasonable requests to refinance. This brings about the collapse that they worried about in the first place.

    This can’t happen if the Govt is the issuer. Just a risk of inflation as previously discussed. I’m sure we’ve been through all this before.

  • @Peter Martin
    ” Looked at this way it’s more likely than he’s underdoing it and so does have more spending power at his disposal than he is prepared to admit. “
    I suspect he is being sensible as fundamentally the risk is that the economy doesn’t quickly “bounce back” and thus tax revenues remain ‘delicate’.

  • Joseph Bourke 4th Mar '21 - 4:11pm

    Peter Martin,

    I have commented above what I think the budget response should focus on.

    Libdem economic policy is not complicated. It is firmly Keynesian based. When private spending is declining government spending should be increasing both through social security and tax automatic stabilisers and discretionary investment spending in infrastructure and R&D. There is no arbitary limit on recovery/stimulus spending required to support post-recession economic recovery. Current spending on public services should be fully funded via taxation on the assumption of a tax base that prevails at the full employment level. Deficit spending arising from automatic stabilisers (including lower than projected tax yields) and accelerated investment spending can serve the dual purpose of fiscal stimulus and delivery of a rapid transition to renewable energy.
    Money is the medium of exchange required to facilitate spending on productive resources in the economy. Approximately 20% comes from government spending and 80% from private sector consumption. Redistribution in the form of pensions/social security accounts for around 20% spending in the economy and is faciltated by tax and benefits policy.
    Once you appreciate that money is debt in the form of a claim on future output and that money is created by government spending and bank lending the relationship between money creation and output is clear. When money creation in the banking sector causes overheating (as it always does eventually) then government curtails lending with interest rate rises and/or macro-prudential policy. When aggregate demand is deficient to generate full employment then bank lending is stimulated and increased deficit spending is introduced in the form of discretionary tax cuts and/or accelerated investment. In neither case should spending on core public services and redistribution be curtailed or expanded. They should always be fully funded on the assumption of full employment even when discretionary tax cuts are introduced and regardless of lower tax yields in a downturn. These policies don’t eliminate fluctuations in the business cycle but they do smooth out troughs and peaks and maintain relative economic stability.
    What should not be done is a return to the stop/go policies of the post-war era with continual cycles of retrenchment/reflation that lead to rising unemployment accompanied by double digit inflation.

  • Peter Martin 4th Mar '21 - 4:39pm

    @ Roland,

    You’re still stuck in the rut of household economics which suggests that when taxation revenue is high then Govts have more money to spend. As even Joe suggests ” When private spending is declining government spending should be increasing”. So it’s t’other way around!

    @ Joe,

    Yes, but you don’t half make hard work of it with your arbitrary fiscal rules like ” Current spending on public services should be fully funded via taxation on the assumption of a tax base that prevails at the full employment level ….” etc etc etc.

    Even Rishi seems to have a far less complicated approach. Just do what it takes to keep the economy going! I’d add, as always, that if overheating looks to be a problem then we put the brakes on!

    Fiscal rules are a rod for your own back. What might have looked sensible a couple of years ago doesn’t look to be at all sensible now.

    Also when claiming to be “firmly Keynesian” you need to specify your brand of Keynesianism.

    http://bilbo.economicoutlook.net/blog/?p=38776

  • Steve Trevethan 4th Mar '21 - 4:55pm

    Thanks to Joseph B. for his information and the B.B.C. website.
    The website seems to omit the point made by some economists that governmental spending needs to exceed income in order to create money for the private and domestic sectors.
    It also seems to omit the point that in paying to borrow money from those with savings, H.M.G. is paying money to the “wealthy” for the use of money which it could create and put into the economy directly.
    Might at least some of the money paid to wealthy lenders be obtained by making many citizens and their children poorer?
    Austerity?
    Peter M. is correct in stating that a/the crucial factor is inflation and that borrowing from oneself, which seems to be borrowing in your own currency, is no real problem at all.
    Might it be the case that the value of a currency, at least in part, depends upon confidence in that currency?
    Might confidence in a currency depend upon the efficiency of its socio-economic performance?
    Might that, in turn, depend upon strong infrastructures, lack of poverty and wise, assertive investment from H.M.G. and the domestic and private sectors?

  • @Peter – Yes it might seem that way, however, we should remember that Rishi Sunak has to present to both his own party and the country where many do believe in government economics = household economics. So appearing to be responsible is good PR.

    Personally, I think of money and thus government economics as being more akin to shares in a large company, although the analogy isn’t perfect, but it helps to get away from household economics thinking as shares do bring in the ‘goodwill’ factor that also applies to currencies.

  • Joseph Bourke 4th Mar '21 - 7:29pm

    Steve Trevethan,

    the largest buyers of government gilts are Insurance companies and pension funds who typically invest funds for workplace and personal pension funds. The average UK pension pot after a lifetime of saving stands at £61,897. With current annuity rates, this would buy you an income of only around £2,500 extra per year from 67 https://www.theguardian.com/money/2019/sep/28/uk-pensions-saving-retirement. So government bonds can hardly be said to be paying money to the “wealthy”. The reduction in interest rates have reduced annuity rates to an all time low and left many final salary pension schemes with very large unfunded deficits.
    The second largest investors are overseas investment funds and central banks buying them as part of their foreign currency reserves.
    The next biggest category holding UK government debt is banks on behalf of depositors, which includes the Bank of England that exchanges gilts for interest paying cash reserves with member banks. The BofE may have overtaken the overseas investors category by now.
    You are right that the value of a currency, at least in part, depends upon confidence in that currency and the economy that supports it. Low interest rates go with low growth prospects. As economic performance improves interest rates should begin to normalise in line with nominal GDP growth . And economic performance is indeed driven by strategic investments in productive skills development, innovation and new technologies such as that of the renewable energy industry.

  • Peter Martin 5th Mar '21 - 9:39am

    @ Roland,

    “Personally, I think of money and thus government economics as being more akin to shares in a large company, although the analogy isn’t perfect….”

    Yes many people view it along these lines too. But what is it a share of? If you double the number of company shares their value halves. The monetarists, led by Thatcher and Sir Keith Joseph in the early 80s, used to think along these lines but quickly came unstuck.

    Try thinking of ££ as tax vouchers. The government insists you pay your taxes so you need to get hold of the ££ to pay them. So, for example, if you wish to obtain a litre of petrol you’ll need to pay 80p or so in tax to the government. It doesn’t need your 80p because it can create as much money as it likes but it does need its money to be sought after and to therefore to be worth something.

    http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html

  • Steve Trevethan 5th Mar '21 - 11:15am

    Thanks to Joseph B. for his elegant presentation of positive aspects of government gilts.

    They are indeed a multi-use financial financial tool for H.M.G. Perhaps they also provide a secure place for “surplus”/investable money which does less socio-economic harm than increasing real estate prices etc.

    However, as they basically seem to be a vehicle through which H.M.G. puts money into its society, it seems necessary to connect them with other governmental financial inputs and extractions. Austerity reduced governmental financial inputs to the impoverished group so the net result seems to be a policy of wealth reduction for the impoverished and the maintenance of wealth for the not-impoverished or investor group.

    What are likely to be the longer term socio-economic consequences of such a policy?

    My use of the word “wealthy” was put in inverted commas as its intended meaning was a loose use of the word. The replacement phrase “investor groups” is intended to be more accurate and so more useful.

  • Joseph Bourke 5th Mar '21 - 11:16am

    Roland.
    Money and thus government economics can be thought of a being more akin to shares in a large company. The shares of a large company are its currency and can be used to acquire resources both human and capital increasing the value of the business and its shares. Many IT start-ups have used their shares as deferred remuneration to recruit executives and/or make acquisitions of other companies.
    A trend that has accelerated greatly with ultra-low interest rates and QE has been share buybacks. Large companies are effectively able to borrow at close to zero cost to buyback their own shares inflate the value of the company’s shares and the executive options. Easy money for big firms and their executive boards. Tough for anyone reliant on savings income in retirement or first-time buyers in the housing market.
    The behaviour of equities and fiat currencies is comparable. They are, in fact, very similar financial instruments. Fiat money, just like a share of common stock, represents a proportional claim on some future economic benefit. Equities represent a proportional claim on future residual cash flows: the value of an equity (share of common stock) varies according to expectations of future cash flow and expectations regarding the number of shares outstanding, i.e. the number of shares that will have a claim against that cash flow.
    Fiat money represents a variable claim on the future output: the value of fiat money varies according to expectations of future output and expectations regarding the size of the monetary base, i.e. the number of monetary units that will act as a claim against that future output.
    The value of a stock collapses when the outlook for cash flow plunges and expectations for share issuance soar. Similarly, the value of fiat currency collapses when the outlook for economic activity plunges and expectations for monetary base expansion soar.
    Fiat money shares another characteristic of equities: fiat money is a long-duration asset. The value of fiat money depends on long-term (30-40 year) expectations regarding the outlook for both economic output and the monetary base. As long as expectations for future economic growth remain optimistic the major fiat currencies will maintain their value. It is real resource productivity that gives money its value, not government promises; just as it is real cash flow that ultimately creates shareholder wealth, not any promises made by a company’s board of directors.

  • Peter Martin 5th Mar '21 - 11:55am

    @ Joe,

    “The shares of a large company are its currency ….”

    No they aren’t.

    They are what the name implies. ie shares of the total value of the company. The pound is not a share of the total value of the UK. Many of us will have worked for both large UK companies and the Government. We might have noticed that we get paid in ££ in both cases. We don’t normally get paid in company shares.

  • Steve Trevethan,

    new money creation comes principally from private sector activity via new bank lending. The stock of money required to facilitate the exchange of goods and services in the economy increases as nominal gdp grows and changes as the velocity of money changes. The velocity of money changes as their is a shift in saving/borrowing trends and hence spending and investment.
    Bond issuance by HMG is not a vehicle by which the government puts money into society. When the government issues a bond it transfers money from private accounts to the government accounts. II is an asset swap, The private sector holder of funds had a cash claim against future output in the form of a bank deposit that it has swapped for another claim – a government bond. Whether the claim is represented by money or a government bond the substance remains the same – it is a claim on the output of society.
    The opposite happens when the BofE buys back bonds. The government swaps one claim – bonds- for another claim – cash reserves. The money supply changes if you don’t include bonds in the monetary base but the equity position or level of claims against productive output does not change.
    To create new money claims the government has to spend the money on real resources.
    Government spending has not fallen since the financial crisis. What has happened is the rate of increase in spending has slowed and spending has shifted proportionally towards healthcare and away from other public services and working age benefits.
    Looking forward we have to be able to make decisions that provide good quality public services for the population as a whole as well as adequate social security in the form of pensions and working age benefits for an aging society. The funding required for healthcare, state pensions and other welfare provision is going to increase proportionally and that is going to have to be met by increased levels of taxation in the future. Debt costs are low and borrowing is serviceable and can remain so if used productively to enhance the productivity of a demographically smaller workforce.
    When we look around the world we can see the results of economic policy. The Nordic model has high rates of taxation and high levels of social provision. The US model has very high levels of inequality and deprivation. Japan has maintained high levels of employment, but at the cost of low growth and stagnant wages. In the UK, the policy of zero interest rates and QE has prevented deflation but in doing so has shut out a whole generation from the prospect of home ownership and created employment conditions and low growth conditions similar to that of japan; low unemployment but based on low skilled work, low wages and part-time work. If we are going to break out of that paradigm we need to be prepared to face the reality of what needs to be done.

  • Joseph Bourke 5th Mar '21 - 12:31pm

    Peter Martin,

    fiat currency derives its value from an implied social contract. Fiat currency is an asset to its holder because it represents a liability to society. Although government is the legal issuer of fiat currency, from an economic perspective, fiat currency is a liability of society and represents a claim against the future output of society.

    In general terms, a financial instrument represents either a fixed or proportional claim to some future economic benefit. For example, a corporate bond represents a fixed claim to the future cash flows of a business. In contrast, a share of common stock represents a proportional claim to the future residual cash flows of a business.

    There are two key drivers of the value of common stock. First, the expected cash flows that will be generated by the business: a share of common stock is a claim to those cash flows, so clearly the future level of those cash flows matters. Second, the expected number of shares outstanding in the future: if the market expects shares outstanding to skyrocket in the future, then each share will claim a smaller proportion of future cash flows and, all else remaining equal, will be worth less.

    The expected proportion of future output that fiat money will claim in any future period depends upon the expected future size of the monetary base at that time.

    There are two key drivers that influence the current value of fiat money.

    The first is obvious: the value of fiat currency is positively correlated to the outlook for future output growth. If fiat currency represents a proportional claim against future output, then its value must be tied to optimism regarding the ability of the economy to grow.

    The second is less obvious: the value of fiat currency is inversely related to expectations regarding the future size of the monetary base. If fiat currency represents a proportional claim against the future output of society, then its value will rise if people start to believe that long-term monetary base growth will be restrained and its value will fall if people suddenly believe that long-term monetary base growth will accelerate.

  • I wonder if the party should be making more of the Conservatives ditching our policy of increasing the Income Tax Personal Allowances to remove the low paid out of paying Income Tax? Ed Davey would find it difficult to criticise them over the public service pay freeze as we supported it when in government, unless he states austerity was the wrong policy in 2010 and will be wrong policy in 2023 and onwards because of the low level of economic growth forecast.

    Joseph Bourke,
    The future tax rises come in after an economic recovery is expected to be well established.” 4th Mar 11.20am

    The rate of unemployment in 2019 was 3.8% it is forecast this will be 5.1% in 2023, 4.5% in 2024 and 4.4% in 2025 with economic grow at 1.7% in 2023, 1.6% for 2024 and 1.7% for 2025. With unemployment between 4.4 and 5.1% there has been no economic recovery, it is still getting there. This means that not enough is being done to expand the economy in 2023, 2024 and 2025. If the OBR are correct and economic growth is going to be 4% this year and 7.3% next year then I don’t think total government expenditure should be more than planned. However, it does need to be more for 2023, 2024 and 2025 as I don’t think the economic recovery will be secure in 2023.

    Joseph have you read this Bill Mitchell post http://bilbo.economicoutlook.net/blog/?p=14153 where he explains how the economy works according to my type of Keynesians?

    If the economy always needs there to be a government deficit to maintain full employment then current spending on public services does not need be fully funded via taxation. It is rare for the UK government budget to be in surplus and we didn’t have full employment when this happened, but it might be argued it was necessary in 1998, 1999 and 2000 because economic growth was above 3% (3.6%, 3.4% and 3.4%).

    Steve Trevethan,

    Thank you for the link to the Richard Murphy web page where he points out that the government had borrowed £173.7bn while the Bank of England had spent £176bn on government gilts. Therefore the increased deficit has been financed by quantitative easing.

    Peter Martin,

    Bill Mitchell (in the posts he references from the link you provided) is stating that full employment can be achieved by fiscal policies by reducing the spending gap to zero.

  • Steve Trevethan 5th Mar '21 - 1:17pm

    Might the interest paid on relevant loans be a financial input into the investor part of society and so a financial input into society?

  • Joseph Bourke 5th Mar '21 - 2:01pm

    Michael BG,

    funding current spending with taxation does not create a surplus or eliminate the deficit. It does stabilise the debt as a % of GDP going forward. Net Investment spending funded by borrowing means that deficits of around 3% to 3.5% of GDP are maintained for the forseeable. This is in an environment where sustainable nominal GDP growth (real growth + inflation) is expected to be circa 3% to 3.5%.
    The increase in Corporation tax for larger companies from 2023 should be supported by LibDems as a means of moving towards funding current spending from taxation.
    Jane Dodds in her article today seems to express a grasp of what is required “We know our small businesses will be the engine of our recovery from Covid, and will be key to rebuilding a resilient, strong and sustainable economy, putting right the failures of decades of under-investment in Wales.”
    “We will press for a £500m fund to reinvigorate our Welsh towns, and make them more sustainable and more attractive to visit; and we want to abolish business rates, which are unfair and a tax on growth and innovation, while disproportionately hitting small businesses, and replace them with a new system of land value taxation.”
    Tax policy is far more than fiscal policy. The basic model for tax reform we should be looking at is the Mirrlees review. The overall tax burden may not change greatly but the incidence of taxation will, as will the efficiency and equity of the tax system.
    With respect to employment this should be directly supported by a job guarantee program https://www.nytimes.com/2021/02/18/business/economy/job-guarantee.html aimed at sustaining effective demand (not aggregate demand) as long argued by Pavlina Tcherneva.

  • Peter Martin 5th Mar '21 - 2:06pm

    @ Michael BG,

    By “spending gap” , you presumably mean the Govt’s deficit ie G-T in the sectoral balances?

    Yes, it is possible that G-T = 0 will produce a condition of full employment if the other sectors also sum to 0. One way would be to have balanced trade and the Private Sector neither net saving nor net desaving.

    @ Joe,

    “….the value of fiat currency is inversely related to expectations regarding the future size of the monetary base.”

    So we all should be worried that the Government is running a large deficit at the moment? Furthermore we should worry, not only for ourselves but future generations too, that future Governments will raise taxes to repay what they have borrowed and therefore we should start saving to cover those future bills?

    This sounds suspiciously like something I read on one of Steve Keen’s blogs not too long ago. This is a quote from one Robert Barro who teaches at Harvard and presumably is well paid for writing this kind of nonsense:

    “A net­work of inter­gen­er­a­tional trans­fers makes the typ­i­cal per­son a part of an extend­ed fam­i­ly that goes on indef­i­nite­ly. In this set­ting, house­holds cap­i­talise the entire array of expect­ed future tax­es, and there­by plan effec­tive­ly with an infi­nite hori­zon…”

    As my father used to say: I wouldn’t pay him in washers!

    https://www.debtdeflation.com/blogs/2014/05/05/should-governments-run-permanent-surpluses-2/

    PS you’ve still not specified which brand of Keynesianism you prefer.

  • Peter Martin 5th Mar '21 - 2:17pm

    “funding current spending with taxation does not create a surplus or eliminate the deficit. It does stabilise the debt as a % of GDP going forward.”

    No it doesn’t do that either.

    This kind of thinking was behind the EU’s fiscal rules as defined in the Stability and Growth Pact. The idea was that current spending was financed out of taxation which left another 3% to be used to deficit finance capital investment.

    As we have seen in the eurozone, countries which have attempted to follow the rules have seen their GDP’s stagnate or actually fall. So even though their debt might be no different in euro terms a falling GDP has meant their debt position has worsened.

  • Joseph Bourke 5th Mar '21 - 2:33pm

    Peter Martin,

    no, we should not be worried that the Government is running a large deficit at the moment. It is the right response to the dramatic fall in output that the Pandemic has brought about and a straightforward Keynesian response to a downturn. That does not mean however that we can maintain the same level of deficit indefinitely or increase the deficit further to stimulate economic growth, without impacting the purchasing power of the currency relative to other major currencies.
    Government will not need to raise taxes to repay borrowings. The debt level erodes over time as a % of GDP, if strategic investments are maintained to stimulate economic growth and as a consequence of a 2% inflation target embedded in monetary policy. Taxes do need to be raised to support increased health and social care costs, pensions and benefits arising as a consequence of an aging population and to restore funding to education, local authority and policing services.
    The most successful economies have been the Nordic countries where fiscal management and economic growth have combined to deliver high quality socio-economic outcomes.

  • Joseph Bourke 5th Mar '21 - 3:21pm

    Peter Martin,

    funding current spending with taxation does stabilise the debt as a % of GDP going forward. The policy does not require any rule. Automatic stabilisers set the level of deficit in any given year. If tax yields are lower than projected than the deficit is automatically higher i.e an automatic demand stabiliser. If private sector unemployment is growing than spending on job guarantees acts to stimulate demand i.e. another automatic stabiliser.

    Michael BG,

    QE does not directly finance the deficit but in buying up existing bonds does create the space for the issue of new bonds to finance the deficit. Open market operations have long been undertaken by the BofE as part of its management of monetary policy but not in quantities sufficient to impact on the level of bond holdings. The quantities now being purchased do raise the issue in the mind of the Investment community as to what extent QE is part of the banks yield management and how much of these very large scale purchases are actually support to finance the government deficit https://www.ft.com/content/f92b6c67-15ef-460f-8655-e458f2fe2487
    Maintaining the confidence of the Investment community is important for the reasons noted above: the value of fiat currency is inversely related to expectations regarding the future size of the monetary base. The value of sterling will fall if people start to believe that long-term monetary base growth will accelerate.

  • Peter Martin 5th Mar '21 - 5:34pm

    @ Joe,

    So you’re saying that ” If tax yields are lower than projected then the deficit is automatically higher” but that ” the debt as a % of GDP” is stabilised.

    The debt is the sum of all previous deficits so I don’t follow how deficits can be higher but debt stabilised. Even if deficits are constant the debt will accumulate and the ratio of debt to gdp will rise unless gdp rises too. But we don’t know what that will do.

  • Peter Martin 5th Mar '21 - 6:01pm

    “The most successful economies have been the Nordic countries where fiscal management and economic growth have combined to deliver high quality socio-economic outcomes.”

    Which Nordic countries? Norway is a special case because of its oil sales. It manipulates its currency downwards by exporting its surplus oil money via its Sovereign Wealth Fund.

    Denmark is highly mercantalistic too and pegs its exchange rate at a lower level that the free market would set purely to maintain an export surplus.

    Sweden is slightly less mercantalistic but they tend to say one thing publicly but do another in practice. This is from the Riksbank website. “The gold and foreign currency reserve makes up more than half of the Riksbank’s total assets. This allows the Riksbank to offer emergency liquidity assistance in foreign currency and to influence the krona exchange rate by buying and selling currency.”

    Isn’t “influence” just another term for currency manipulation? ie They hold down the krona to achieve an export surplus. And of course if there is net money coming into the country then there is much less need for governments to deficit spend to keep the economy going.

    So to keep the neoliberals happy we should all be like Germany, Denmark, and Sweden and run large export surpluses.

    https://www.riksbank.se/en-gb/statistics/riksbanks-balance-sheet/

    And then we have Finland. They were doing well until they joined the euro but then Nokia suddenly wasn’t the success it once was and neither is Finland at the moment.

  • @Peter Martin – re: “This kind of thinking was behind the EU’s fiscal rules as defined in the Stability and Growth Pact. The idea was that current spending was financed out of taxation which left another 3% to be used to deficit finance capital investment.”

    I always had a bit of a problem with this. I suspect part of the problem has been the separation of “the money supply” from “government spending”. So that effectively the right hand of a Government could only spend money that was already in circulation. With the left hand keeping a tight control on the money supply – turning the taps according to its own ideas, I wonder whether this is a hangover from the Gold Standard et al.

  • Joseph Bourke 5th Mar '21 - 7:03pm

    Peter Martin,

    I am saying automatic stabilisers have the same effect as fiscal stimulus when there is significant slack in the economy. Budgets should be set on the assumption of a tax base at the full employment level. In years when full employment is maintained the debt is stabilised; if the economy is sluggish tax yields will undershoot but budgeted expenditures remain the same. The deficit is temporarily greater but the automatic stimulus brings the budget back to target; if the economy is overheating tax yields will exceed budget and serve to dampen demand to prevent inflation overshooting.
    The purpose is to maintain a stable level of public service and benefit provision as a % of gdp over the course of a business cycle, that is consistent with a full employment level. Long-term sustainable economic growth then comes from investments in innovation, skills and technology improvements that can provide for greater levels of output from the available stock of land, labour and physical capital in the economy.
    Economic progress will be interrupted from time to time by external shocks and environmental disasters that require additional fiscal stimulus to bring aggregate demand/output levels back to a full employment, but that is an inescapable fact of life.
    I think we have had this discussion before but the public debt is actually repaid and refinanced. The low rates of interest that have been available since the 2008 financial crisis mean that almost all older debt has been retired. The current public debt relates principally to deficits accumulated since 2000.
    The government had to borrow a then record £154bn in 2009. By the time the coalition took over in 2010 that had fallen slightly to £144bn, equivalent to 9.9% of GDP. Deficits over the past 7 years since April 2012 have been:
    Financial year ending March
    2013 2014 2015 2016 2017 2018 2019 2020
    Deficit 127.0 103.9 94.6 83.7 56.3 56.4 41.0 60.3
    Th gross government debt outstanding immediately prior to the pandemic is represented by cumulative deficits since around 2000 and stood at 84.7% of gdp. having peaked at 85.4% in March 2015. The average maturity of the UK debt is said to be around 15 years.

  • Peter Martin 5th Mar '21 - 7:59pm

    @ Joe,

    Have you any real world examples of this happening? The “budget back to target” presumably, to your way of thinking, means that current expenditures match taxation revenues with some allowable deficits for capital spending.

    So what about the loss of money from the economy to pay our net import bill. How does that affect your assertion? Where does the money come from to top up the economy and keep it from falling into recession? Or do you simply ignore it. What if there is a net desire to save in the domestic sector? If they want to lend who should do the borrowing? Is that just something else to be ignored?

    @ Roland,

    It’s probably a good idea to forget the idea of money supply and just look at what is spent and who is spending it. The government creates money when it spends into the economy and it destroys it when it taxes. It can’t collect back more in taxes than it has created in the first place. The government can’t own its own IOUs any more than you or I can so the Govt neither has nor doesn’t have any money -unless its in a foreign currency.

  • Peter Martin 5th Mar '21 - 8:20pm

    @ Joe,

    “QE does not directly finance the deficit but in buying up existing bonds does create the space for the issue of new bonds to finance the deficit.”

    There is a taboo on the Treasury selling bonds directly to the central bank. That would be “direct finance of the deficit”. You are simply making the point that if you or I or any bond dealer buys bonds from the Treasury and then sells them to the central bank (BoE) that everything is OK and no taboos have been broken.

    This sounds like a workaround to me. Who cares about nonsensical taboos? Why not cut out the bond dealers from the chain and save on whatever cut they make on their deals? Presumably they aren’t buying and selling out of the kindness of their hearts!

  • Joseph Bourke 5th Mar '21 - 8:55pm

    Peter Martin,

    the current account deficit arising from overseas transactions is financed by the capital account i.e. through foreign investment in UK financial or physical assets and the balancing figure is the repricing of UK liabilities due to changes in the exchange rate and gains arising on UK assets held overseas. These increasing capital gains on past foreign investments have been used to fund the current account deficit.
    This article discusses how this works https://bankunderground.co.uk/2017/12/07/a-prince-not-a-pauper-the-truth-behind-the-uks-current-account-deficit/#:~:text=The%20UK%E2%80%99s%20trade%20balance%20has%20consistently%20been%20in,foreign%20investment%20in%20UK%20financial%20or%20physical%20assets.
    “The two most important components of a current account balance are the trade balance, or the difference between what the country exports and what it imports, and the primary income balance, which includes the difference between investment income earned abroad by residents, and that earned domestically by non-residents. The UK’s trade balance has consistently been in deficit since 1998; the primary income balance has deteriorated substantially since 2011, perhaps reflecting a decline in overseas income for multinational companies.”
    “… the UK has cashed in on some of its past investment abroad to fund its foreign spending: between 2012 and 2016, UK residents ran down their stock of foreign holdings by £526bn (an average of around 6% of GDP over those five years), more than funding the current account deficit”
    QE has been an unwelcome but necessary measure necessary to repair the deflationary effects of first the financial crisis created by overleveraging in the banking sector and now exacerbated by this second bigger Pandemic shock. The evidence of how it has contributed to increasing inequality is well known – inflating property and share prices while economies and wages stagnate. This Guardian article https://www.theguardian.com/business/economics-blog/2016/sep/28/quantitative-easing-qe-pernicious-effects-favour-wealthy-tax-middle-class writes “It is time to start calling QE what it is: a hidden tax on the wealth of middle-class savers and pensioners”
    The BofE is part of the institutional framework of government and serves in the role of’lender of last resort’. This together with the gilts market provides safe assets that comprise the foundation of the financial system. That role should not be compromised.

  • Joseph Bourke 5th Mar '21 - 11:50pm

    Peter Martin,

    the sectoral balance data is published by the ONS now. This is the release for the quarter to September 2020 the period of opening up after the 1st lockdown https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/quarterlysectoraccounts/julytoseptember2020
    It is a good indicatiion of the kind of wild swings in net saving from one quarter to the next following an economic shock and what we might expect as we exit this current lockdown.
    – The households saving ratio decreased to 16.9% in Quarter 3 (July to Sept) 2020, a decrease from the record of 27.4% in Quarter 2 (Apr to June) 2020.
    – Households consumption spending increased by £50.7 billion (19.6%) in Quarter 3 after the largest quarterly fall in nominal household spending ever recorded in the previous quarter; the increase in the latest quarter has been driven by a recovery in household spending in restaurants and hotels, and transport.
    – The households net lending position continued to increase to £46.5 billion, down from a record net lending position of £88.7 billion in Quarter 2; this equates to 8.6% of gross domestic product (GDP) in Quarter 3 compared with 18.6% in Quarter 2.
    – General government saw a decrease in its net borrowing position to £69.6 billion in Quarter 3 from £103.1 billion in the previous quarter, which equates to negative 12.9% of GDP in Quarter 3 compared with negative 21.6% in Quarter 2; the main drivers were the coronavirus (COVID-19) intervention job support schemes.
    – Non-financial corporations net lending increased to £7.4 billion in Quarter 3 following net lending of £4.9 billion in the previous quarter; this equates to 1.4% of GDP in Quarter 3 compared with 1.0% of GDP in Quarter 2.
    – In the financial account, general government, financial corporations and non-profit institutions serving households (NPISH) were net borrowers – all other sectors were net lenders.

  • Peter Martin 6th Mar '21 - 10:34am

    @ Joe,

    “the current account deficit arising from overseas transactions is financed by the capital account….”

    Yes. I’ve said the same thing myself. The two accounts sum to zero. A large part of the capital account is debt in the sense that there is an overseas demand for UK financial assets. It’s debt in an accounting sense just as it is when we put money in a bank. The bank doesn’t worry about its customers doing that and neither should the UK.

    But we do and that is a big problem.

    I’m not sure what point you are making about the sectoral balances at the moment. They are not at all typical. They are perhaps more easily understandable with the help of the graph below.

    The government seems to be making the rather optimistic assumption that businesses and households will shortly be doing the borrowing so they don’t have to. This, in neoliberal speak, will mean that the “black hole” at the centre of public finances won’t look quite so black, and that the ‘drunken sailor’ who has ‘maxed out the credit card’ will start to sober up and be more ‘fiscally responsible’.

    I can’t see it turning out quite like that!

    https://www.taxresearch.org.uk/Blog/wp-content/uploads/2020/07/Screen-Shot-2020-07-14-at-13.54.00-600×349.png

  • Joseph Bourke 6th Mar '21 - 11:49am

    Peter Martin,

    the balance of payments is an important element of long-term economic sustainability. I first went to live and work in the USA in 1981 as Paul Volker was hiking interest rates to bring US inflation under control. The following year the Mexican 1982 debt crisis erupted https://economics.rabobank.com/publications/2013/september/the-mexican-1982-debt-crisis/#:~:text=In%20August%201982,%20Mexico%20was%20the%20first%20of,of%20the%20debt%20restructuring%20and%20reforms%20are%20discussed. Something I had seen before in the UK in 1976.
    Mexico has its own currency and can borrow in Pesos but a large proportion of its public debt and private securities are held by overseas investors. It also has significant dollar denominated liabilities. This is also the case with the UK with over 50% of FTSE securities ad a large proportion of public debt held by overseas investors and large holdings of dollar denominated liabilities within UK financial institutions. This makes both countries vulnerable to capital flight or what the bank underground article refers to as a “sudden stop” in capital inflows. Mexico experienced this in 1994 during the Peso crisis https://www.investopedia.com/terms/t/tequilaeffect.asp.
    Sterling underwent a significant devaluation against other world currencies in the wake of the financial crisis and the Brexit referendum. The volatility of sterling have led some market participants to comment that it has more in common with an emerging market economy than a reserve currency https://www.exchangerates.org.uk/news/29890/2020-06-24-boa-pound-sterling-now-trading-like-an-emerging-market-currency.html
    The UK is not, however, in the same position as Mexico. As the bank underground article notes, inward investment in the UK has been negative with more overseas investors selling than buying. Inward investment in the UK is predominantly in real estate and financial securities and to a lesser extent than in years past in longer-term Foreign Direct Investment. However, UK investors have a large stock of foreign assets, of around 420% of GDP (excluding derivatives), so in theory at least, UK investors could realise overseas assets to fund current account deficits for decades.
    Additionally, exchange rates are relative prices, measured against the value of other major currencies like the dollar, euro, yen etc. If all currencies are weakening together than relative exchange rates can stabilise.

  • Peter Martin,

    the sectoral balances can and do swing about quite wildly from quarter to quarter and year to year. Management of the economy and public finances is undertaken over a period of years. You cannot increase taxes one qurter and reduce them next quarter in response to changes in sectoral balances or spikes in inflation and hope to retain any semblance of financial stability.
    Usually a Spending Review covering a period of three or four years will give government departments enough certainty to make long-term plans. As a consequence of the Coranavirus disruption that long-term planning was set aside and only one year of forward planning undertaken at the end of last year and updated in this weeks budget.
    Normally the amount of money a chancellor would allocate in a Spending Review would be determined by tax levels and how much the government is prepared to borrow.
    The OBR forecasts this week suggest that the economy will go through around 18 months of rapid recovery this year and next until growth levels off at around 1.5% per year from 2023. These rolling forecasts are the basis for the longer-term spending review.
    Tax and borrowing needs to be set on the basis of the OBR forecasts with retraining and job guarantee schemes introduced to address structural unemployment; welfare reforms centered on a guaranteed minimum income; and large scale investment plans developed based on enabling a rapid transition to renewable energy as part of the measures required to get to zero carbon in the coming years.

  • Joseph Bourke,

    I assume you didn’t read the Bill Mitchell blog that I provided the link to, which explains how the economy works according to my type of Keynesian economics. If you understood my type of Keynesian economics you would know that the economy can be at near equilibrium with large numbers of people unemployed and for there to be spare capacity in the economy. This is why when the economy can only reach full employment with a government budget deficit it does not matter what the government spends the money on. A point made by Keynes himself.

    Full employment should be achieved by a mixture of my type of Keynesian economics and regional aid. The economic stimulus can be partly provided by having Job Guarantees and/or increasing benefit levels, which targets the stimulus into the regions with the highest number of unemployed people.

    I assume you didn’t read the Richard Murphy web page. Neither he nor I said the government was directly funding the deficit with quantitative easing. I think to fund some of it directly would be a good idea and might reduce the increase in inequality caused by QE.

    Increasing the money supply with QE surprisingly has not caused large increases in inflation as might have been expected, but it has caused house prices to rise and I think also share prices, which I expect the investment community likes.

    The so called “automatic economic stabilisers” do not counter all of the effects of a recession. This is because the amount of benefits a person receives when unemployed is a lot less than they were earning when employed and so aggregate demand in the economy keeps falling as long as more people are made unemployed. This is why the government has to provide an economic stimulus on top of the “automatic economic stabilisers”. Of course increasing taxes, freezing public sector workers pay and cutting investment as the Coalition did in 2010-12 is madness as all Keynesian economists should know.

    We haven’t had full employment in the UK since 1974!

  • Peter Martin,

    I assume that you also didn’t read the article by Bill Mitchell that I provided the link for. Here it is again – http://bilbo.economicoutlook.net/blog/?p=14153. Bill writes, “A spending gap is defined as the spending required to create demand sufficient to elicit output levels which at current productivity levels will provide enough jobs (measured in working hours) for all the workers who desire to work.

    “A zero spending gap occurs when there is full employment. From a functional finance perspective (outlined in the blog above) the role of government fiscal policy is obvious – to ensure there is no spending gap.”

    This is what I call Keynesian economics. For the sectoral balances to balance does not guarantee full employment. As Bill writes, having a zero spending gap does. It can be said this is where aggregate demand in the economy equals the capacity of the economy.

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