It is deeply depressing to see so much economically illiterate comment in the mainstream media. It's even more depressing when it comes from those who should have some basic economic understanding but whose knowledge appears to be about as poor as that of the average minister or MP.
Take Andrew Rawnsley in the Guardian yesterday, who said:
One of the more sensible things that the Tories did during their otherwise terrible general election campaign last summer was not to make too many promises about tax. Though they never explicitly acknowledged that taxes might have to go up during this parliament, Theresa May and Philip Hammond signalled this could be so when they dropped many of the pledges inherited from David Thingy and George Whatnot. Anyone with a basic diploma in political semaphore could intuit that this meant that there was a strong possibility that taxes would rise.
Possibility has turned into racing certainty. That is one conclusion we can draw from Mrs May's announcement that there will be £20bn extra per yearfor the NHS by 2023. Even the magic money tree can't produce that kind of cash without some watering by the taxman.
It's that second paragraph that irritates me. Ignore the sexist assumption that there is a 'taxman'. And ignore the trite references to the magic money tree. They indicate ignorance and prejudice in both cases, but they're not the issue. It's the tax angle that annoys me.
Of course spending £20 billion more on the NHS has a tax dimension. And of course tax revenues will rise. But that's not because rates will have to increase or allowances will have to be reduced. That is because there will be £20 billion more economic activity in the UK economy. And if there is £20 billion more economic activity in the UK economy then the very least that could be acknowledged is that tax will be paid upon it. And given that the average tax take in the UK economy is around 35% of GDP, then that's the minimum additional tax that will be due. So, Rawnsley could at least acknowledge that about £7bn of the 20bn cost of this spend will be settled by the tax due by those it will be spent on.
And, of course, we know that the tax yield can be higher than that. This is because of the multiplier effect. There is a simple explanation here. The essence is that the spend on the NHS is not all that will happen as a result of that spend. The £13 billion of so left in people's pockets as a result of that spend will be spent. And that will give rise to additional tax paid. And so on. But more than that; this new demand will stimulate additional new economic activity in itself quite outside the original NHS environment. And that new demand will result in more tax paid, especially if it results in new investment.
I am not going to argue whether as a result all, more or less of the £20 billion will be recovered as tax in the end. But few doubt that at least most (and I suspect rather more) will be.
So, whether or not Rawnsley believes in magic money trees the simple fact is that most of the extra spend on the NHS is paid for out of the £20 billion spent on the NHS. In other words, the additional spend pays for itself, at the very least at least in large part. And it is unforgivable that senior political correspondents do not have even this most basic of economic knowledge.
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You know I thought exactly the same when I read it and I didn’t even bother to finish the article.
Which begs the questions: what is Rawnsley’s understanding of economics? Is he aware of the multuipier effect? Or is he stuck in some sort of weird “all our yesterdays tax n spend world”? Or perhaps he is like the Bourbons: learnt nothing, forgotten nothing. One thing for sure, the Guardian/Observer need better educated commentors than the current crop.
Richard, it would be helpful if at some point you could apply this multiplier effect to tax cuts. Surely tax cuts, targeted at those with a marginal propensity to spend, will pay for themselves in the same way?
Not is associated with government spending cuts: they just shrink the economy
And most tax cuts have gone to the wealthy, who have high propensities to save
“Surely tax cuts, targeted at those with a marginal propensity to spend, will pay for themselves”
Exactly, best policy would be to cut regressive taxes like VAT and council tax and tax wealth instead, that will get the economy moving again!
What happens to the money that is saved? How is it saved?
That reduces the multiplier effect
Are you saying that all government spending increases always and everywhere increase real GDP/head, or are there exceptions and if so which are the major ones?
The limit is physical capacity
If spending tries to increase demand above capacity then we get inflation. Until then we get real income growth.
Tax cuts and government spending are fiscally identical in that they have the same effect on the budget. But the big difference is that government spending also pays for something that we want done. Remember the budget is fundamentally a costed plan of action. If you simply cut taxes you lose that action. Government spending achieves that primary purpose and in addition has the effect of increasing the money circulating and boosting the economy. Cutting taxes doesn’t do that.
Re Jeremy Corbyn article Bloomberg
Are you pro or con .?
https://www.bloomberg.com/view/articles/2018-06-25/jeremy-corbyn-has-a-terrible-economics-idea.
I have already made clear I think this a poor idea
Howard Micawber says:
“Re Jeremy Corbyn article Bloomberg”
Thanks for the link, Howard. Missed that one.
Some opposition policy eh? Instead of the government doing what the bankers say McDonnell proposes to cut out the middleman and hand it all over to the bankers to do as they wish.
So good to see the Labour party doing new thinking: Not so much a suicide note, this time, as a letter of resignation.
The final capitulation. One could despair if one hadn’t already done so many years ago.
What a mess the UK is currently in with such low calibre politicians in Westminster. The UK is most definitely lost at sea drifting randomly somewhere in the middle of an enormous sea fog!
Hi Richard,
As much as you blame others for not understanding this concept, you dont really clearly explain it yourself. You seem to for example keep entertaining to the assumption that tax money is needed to run the NHS by talking about how much tax will be collected eventually and therefore no one should be worried. What you should instead be saying or implying is that the money will be directly spent into the NHS in the first place so there’s no need to worry about whether enough tax will be collected or not because that’s not the source of NHS funding being talked about here. We need to worry for other reasons about tax such as fairness.Moreover, you need to clearly differentiate here, in more explanatory and simple language, what is a stock and what is a flow. You havent dont that and presume the guardian writer will understand when he clearly doesnt.
I am addressing the writer on his terms
I deliberately restrict the discussion to the multiplier
I note this is your first comment. Before dismissing me quite so readily maybe you need to read 15,000 blog posts andThe Joy of Tax, amongst other things I have written
I have read your book The Joy of Tax, and blog post here seemed inconsistent with your views in the book. That’s why I mentioned it. If the guardian writer does end up reading this article, I highly doubt he will go through much of your work but instead will likely go back thinking that he is right.
I was solely making a point about the multiplier and nothing else
I am not sure what point you are trying to make: no post can cover all ground
May I take the opportunity to point out that LVT would augment the multiplier effect as all good public expenditure feeds into local land values which produces a virtuous circle:o)
Another issue. Its about your recent post “The new funding structure for the Bank of England suggests that the Treasury thinks the proverbial is going to hit the fan” where comments I closed, so I am posting it here.
In that post you say that – “Second, no bank should be running a £500 billion loan book with any risk within on a capital base of £1.2 billion, meaning that the chance that this money is going to be released into the productive seems very low indeed. I think the intention is instead to bolster the balance sheets of commercial banks if they suffer significant risk post-Brexit. No other interpretation appears possible to me.” .
Isnt the assumption here that the Bank of England here is like any other bank when it clearly isnt? Why does a central bank need to worry about its capital base when it can comfortably run even with negative equity?
I thought I was making the point that the BoE is a central bank, and not like any other bank as a consequence, but is being treated as if any other bank, which is deeply troubling
Aren’t you agreeing with me as a result?
Didnt come across in the paragraph that you aren’t treating it like a normal bank.
Or maybe they know perfectly well that it is not the complete story?
Politics has spread to the furthest reaches of even the ersatz journalism that is the new norm.
I wonder if Andrew did PPE?
History. According to his Wikipedia biog.
Any body who gets their information from the Corporate Main Stream Media has no idea what is going on.
Jeffna says:
“Any body who gets their information from the Corporate Main Stream Media has no idea what is going on.”
Basically I’d agree with that, but one can become quite adept at reading between the lines.
Richard,
This is ‘off-topic’, I know; but last week on the Stephanie Kelton thread Liz Fox asked a very good question; effectively about all the ‘T-accounts’ (and with what institutions) required by the BofE through QE.
I think Wray recommends Scott Fulwiller as providing the full exposition. I confess I have not read Fulfiller (and anyway, that is the US Fed). This is a very good question, but not one I could actually attempt (if I understood, that was the essence of the question). May I respectfully suggest it is not forgotten in the ‘hurly-burly’. The thread is closed, and nobody took up your request to answer Liz Fox.
https://ftalphaville.ft.com/2013/12/12/1721592/guest-post-the-helicopter-can-drop-money-gather-bonds-or-just-fly-away-3/
Does this help?
Thanks Richard; not yet registered with Alphaville (ft), but will have a look.
Schofield,
Thanks for that; I shall look it up. I have a list of Fullwiler papers from Wray’s bibliography (Wray refers readers to Fullwiler for the detail).
John.
Eric Tymoigne and Scott Fullwiler are the detail experts on the inner workings of modern monetary systems albeit based on the United States system but the Americans largely copied the British system:-
http://neweconomicperspectives.org/money-banking
https://www.researchgate.net/profile/Scott_Fullwiler
Although I would normally avoid household analogies, any additional tax falling due to the Exchequer as a result of an extra £20bn pa spent on the NHS is no more of a retributional burden than the extra tax that would become due upon someone receiving a very considerable pay-rise – and should be seen as equally welcome.
I am at a slight loss to understand the problem here. I am delighted Rawnsley is writing in this way. It focuses a public’s attention, which is already conventionally conditioned to Neoliberalism, to focus on the Conservative policy exclusively within the terms of the conventional ideology. The NHS therefore can only be offered increases by raising tax or further borrowing; two options that are anathema to both Government and the conditioned public. The Government is obliged to square the circle by raising taxes or further borrowing; or admitting the ideology is fallacious.
I do not see this as a problem; rather let it unfold and reveal the internal tensions, and competing pressures within even their core support; be helpful, let them flounder. Expose the dilemma they are in to scrutiny, and whether such a dilemma actually represents reality. The attack should be directed toward the inconsistencies of Government policy that are exposed, and the consequences of the inconsistency.
My point is that Rawnsley does not understand the multiplier
That was it
Richard, what you say is true, providing very little of the extra £20b gives rise to rent extraction. With the downgrading of Industrial Capitalism and the consequential capture of all the organs of state by Financial Capitalism, that is a big ask. The rent extraction will simply end up in secrecy jurisdictions (Tax Havens), and not be available to act as a multiplier.
Accepted
A minor point, the extra £20 billion pa for the NHS is not going to be until 2023. How much extra will probably not get into the economic system until next financial year/budget. Agreed whatever increased spending will be will have a good multiplier effect because the biggest proportion of health spending is on labour which as NHS pay has been either frozen or only a 1% increase with inflation still around the 2.5% level will soon be spent by health workers giving a boost to the general economy
It will be interesting whether Theresa May will also “give in” to the demands from the Ministry of defence for an extra £20 billion for them!
Hmm. https://fullfact.org/health/what-is-the-nhs-budget/
“About 99% of the Department of Health’s budget comes from taxes. The rest of the money comes from charges for things like prescriptions for medicine, dentists, and opticians services.”
https://www.kingsfund.org.uk/projects/nhs-in-a-nutshell/how-nhs-funded
“The NHS is funded mainly from general taxation and National Insurance contributions. In 2001, an increase in National Insurance rates intended to boost NHS funding increased the proportion paid for by National Insurance, although general taxation still accounts for around 80 per cent of NHS funding.”
I suspect you might disagree with the characterization that NHS spending “comes from taxes”, on the MMT basis that it puts the tax cart before the spending horse. Perhaps you should have a word with FullFact and the King’s Fund? Because what Andrew Rawnsley says in the Guardian just reflects the general terms of the debate.
£20 billion by 2020 sounds a lot, even compared to the budget (for England in 2017/18 of around £122 billion) but inflation will eat quite a lot of that. And of course the press and the Opposition immediately retorted with the lazy question, “how are you going to fund that?”
Noted
I’m doing my bit….
Except that it doesn’t Andrew. You don’t need to study what MMT says . Just think about it simply as reality : tax can’t possibly ‘ pay ‘ for anything because you’ve got to have money before any tax can be paid, who or whatever you are . All this ‘ tax and spend ‘ is just conventional wisdom and just like a lot of conventional wisdom is completely wrong. Is there an agenda here ? It’s a question I ask myself frequently , but as most of history is cock-up rather than conspiracy my tentative conclusion, at best, is it’s just ignorance by the comfortably off ‘ opinion formers ‘ whose minds are closed because they ‘ know ‘ and cannot be persuaded of any other idea.
“how are you going to fund that?”
The answer would seem to be that it is self-funding expenditure.
It is
Too many, journalists and politicians cannot even do basic maths!
If government increases spending then total tax revenue rises WITHOUT any change in tax RATES, all else being equal.
As the multiplier for health spending is currently estimated at around 4 and certainly greater than 1, you can increase spending on health and reduce tax rates.
Agree
Have you a ref for that multiplier of 4?
Hi Richard,
I was interested by a multiplier as high as 4 and found the following link: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3849102/
This is a US study and obviously may not be the source that Charles got his number from.
A multiplier as high as this would imply (together with the 35% tax take quoted in the blog post) that this spending in the UK would be more than recouped in additional taxes.
Quite so
@Neil: Yes, that’s the reference I use. There are some caveats, the multiplier depends on where you start from and as you increase investment the multiplier falls. From where the UK is now, it is hard to imagine that the multiplier is less than 1, similarly for investments in schools, sustainable energy, transport and research. Consequently, we are missing out an enormous opportunities to improve peoples lives.
Agreed
That paper is interesting. It may be a US study, but it is looking at data from 25 EU member states. Given the news in recent days, the markedly negative multiplier for defence spending is also interesting.
The conclusion is that austerity (that is, reduced public spending) exacerbates an economic crisis, and that spending on education and health not only creates long term economic growth, but also has positive growth effects in the short term. Or to put it another way, Keynes was right.
The Kings Fund: “Across countries, the average multiplier effect of public health care spending has been about 3.6 — larger than almost all other categories of spending,85 studies of Obama’s fiscal stimulus in the United States suggest that the fiscal multiplier on Medicaid spending has been around 2.1.86 Unfortunately, there are no national NHS specific estimates that we have been able to identify — but from these studies it is likely that the economic multiplier effect of NHS spending is somewhere in the range of two to four.”
https://www.kingsfund.org.uk/sites/default/files/field/field_publication_file/tackling-poverty-research-paper-jrf-kingsfund-nov14.pdf
In other words, spending on the NHS pays for itself
Not sure if this is too simplistic, but as well as government debt being the same as private sector savings, can’t it be viewed as money that the government has not yet received through taxes?
Tha5 is what it is
‘tax-payer equity’
I am struggling to think of the relevance of your comment
It has become apparent to me as I advance in years and attempt to keep up to date, learn something new every day and challenge my accepted ways of thinking that most people consider that they have been taught what they need to know at a relatively young age and then turn off their learning muscle.
These then become the people who ‘know’ what they need to; politicians, political commentators, producers in the media fall into this category which is why the majority of the population just suck up their hard-of-thinking output as being true.
Until the public/electorate/man(and woman)-in-the-street starts to think for themselves and embrace lifelong learning we will continue to be assaulted by the lack of intelligence displayed by Rawnsley and suffer as a result of it.
Yes. But this is the nature of ALL our Main Stream Media. It would be significant if Mr. Rawnsley were egregious, but he is not. This is why the level of political ignorance in this country is so much higher than, for example ANY African state. (I was brought up there.) We do not talk politics, and those who do talk politics to us are unintelligent, uncurious, hugely privileged but very poorly educated and of course wholly uninformed.
This is the main reason why this country has descended into this slough of shit, since 1979.
And social media and the rise of independent sources of knowledge, such as this excellent blog amongst very many others, will lead to our new Reformation. I really believe that it is not too strong to say that.
It is as though journalists in general have never heard of MMT or of Keynes; and yet surely this cannot be the case. How can you write anything without being sure of your sources and alternative theories?
On the wider point of additional NHS funding my NHS Trust has borrowing of around £40 million which carries substantive public dividend (interest) payments. Additional funding would simply reduce this debt.
I would imagine that many trusts are in the same position and yet I have not seen any reference to the collective debt total across the sector. A key fifure I would have thought.
@Keith
There is a problem with too many journalists coming from generic humanities backgrounds (from favored institutions) and news organizations seeming not to value specialist knowledge at all.
One example of the above is the shower of nonsense that the mainstream media put out every time the inflation figures are published. When the rate of inflation falls it is ridiculously common to hear it said that “prices are falling”!
The problem is particularly acute with science/maths with topics such as risk/probability routinely being completely misrepresented.
KeithP says:
“….my NHS Trust has borrowing of around £40 million which carries substantive public dividend (interest) payments. ”
Public dividend ? Erm…explain please.
I would have thought it much more likely this is more money going for free to the banking industry; straight from government coffers to private sector.
This is what is generally the reality of ‘trickle down economics’.
Richard, your post inspired me to write a brief piece on multipliers.
http://www.progressivepulse.org/uncategorized/the-magic-multiplier-effect
May be even mathematically challenged journalists can follow a story about nurses and widgets, but then again?
Thanks Charles
And that is purely in cold economy price terms, not counting the social and personal benefit from improved healthcare increasing wellbeing.
It would be very interesting if someone were to redo the IFS analysis taking account of additional taxes raised by increased spending and money multiplier?? It might help to challenge their approach in a visible and direct way
If only there was time….
If most government pays for itself, how come we have a huge national debt and a huge budgetary deficit?
Because:
A) Governments have chosen to run deficits.
B) That is because without them there would be no money in our economy. The so-called national debt is in fact our money supply, and it’s the government’s job to create and deliver that money for our use.
C) The national debt provides a government backed secure place for savings that people demand.
It really is rather easy to explain. We want and need deficits and the national debt is just a giant savings account system that provides our economy with the money supply without which it could not function.
Next question?