Economics » Tax Research UK

We don’t need to cut government spending because we’re not borrowing right now

Feb 012012

Last week a wrote a blog explaining why all the data being published about government borrowing is wrong. We haven’t right now got government borrowing in total of about £1 trillion; we have instead, I argued, because of the Bank of England’s quantitative easing programme got government borrowing of about £725 billion.

In December the UK money supply fell by 1.4%. (Table A2.1.1 here). In other words, more was being repaid to banks as loan repayment than they were lending. The consequences are painful: business has less to spend, consumers have less to spend, demand falls, and we all head for recession. That’s hardly surprising given that we have relied on commercial banks to create our money supply through their lending and we know that they’re failing on all their lending commitments. So, the banks would drive us into recession if we left them to the job of creating money right now, and since this fall in money supply would also lead very quickly to deflation which has the effect of reinforcing recession because people defer sending as they think things will be cheaper in the future the outcome is really pretty bleak.

Which is why, of course, more quantitative easing is inevitable. Larry Elliott reckons it will be £75 billion and very soon and I tend to agree.

Today the IFS said the government will borrow £124 billion this year. Let’s assume they’re right and plug that number into my forecast, also allowing for the £75 billion of QE announced in October and the £75 billion now anticipated and we get this overall borrowing data:

Year	Net borrowing	QE	Net
	£bn	£bn	£bn
2005	35,736	-	35,736
2006	35,543	-	35,543
2007	37,182	-	37,182
2008	66,368	-	66,368
2009	147,878	200,000	-52,122
2010	147,686	-	147,686
2011	124,000	150,000	-26,000
Average	7 years		34,913

Remember the basis for this calculation: since the Bank of England is buying government debt which has no chance whatsoever of being resold to the market and the Bank of England is wholly owned by the government that debt is effectively cancelled once bough by the Bank of England. The only proper accounting for this debt is to recognise the government can’t and does not owe itself this money and as such it should be cancelled out even if it technically still exists.

The net impact is that this year the government will not borrow at all: it will repay £26 billion of debt. And it can do that because the only effective economic activity keeping the economy going is government spending and that spending needs to be financed by the creation of new money made out of nothing by lending – as all money is made (remember that fact – if you doubt it, read this).

Now we happily live with banks creating money to fund private sector growth if it happens and don’t panic about it. We should be just as relaxed if the government is doing that if inflation is unlikely as a result. And there is no chance of inflation as a result of this activity right now. That’s because there is so much slack in the economy we have real wage deflation – so there is no chance of this extra money reversing that. Of course green quantitative easing would eliminate that risk entirely, but it’s practically zero anyway.

So what does this mean? Well, actually government debt is falling right now: yes, I mean that.

And it also means we can afford to run a deficit. Indeed, we can’t not afford to run a deficit.

And it means that because that’s true the only spending that could possibly need cutting is that which we can’t afford to fund net of QE, but since over the last seven years borrowing net of QE will have been less than £35 billion on average a year or less than 2.5% of current GDP and not a person thinks we can’t afford to fund that we actually have no need for a programme of cuts right now. And nor will we do so until such time as employment rises and the prospect of real wage growth returns, which seems a distant prospect at present.

In that case the whole Tory economic narrative is wrong: we can afford the current deficit and must spend at current levels to ensure unemployment falls, wages rise and tax revenues increase to clear it unless we want to keep printing money for good. Since I’d rather people worked than print money I’d go for that stimulus option now. And to do that I would, I admit, have to borrow more. But when net borrowing is negative right now of course we can and should borrow more when the cost of doing so is near enough nothing: net real interest rates are about zero or even negative for the government at present.

This is the only sane economic policy option we have. All that’s stopping us taking it is the completely false story that a) we’re borrowing more than £100 billion a year when we’re not and b) that debt is rising when this year it will not.

And yes, I’m aware how bizarre this will sound to many people. But just remember that Schopenhauer absolutely right when he said that truth goes through three stages. In the first stage, it is ridiculed. In the second stage, it is violently opposed. And in the third stage it is accepted as self-evident. We’ll be at stage 1 with this idea right now. I give it a couple of years to reach stage 3.

The IFS verdict: Osborne has no chance of clearing the debt and we’re in for a torrid time

Economics 2 Responses »

Feb 012012

I admit I have not read all the IFS Green Budget, published this morning.

This is the core of the fiscal forecast:

You can ignore pretty much everything more than three years hence – no one has a clue in any economic forecasting model what will be happening by then. So just look at the three years up to the next election and you’ll see Osborne will still be piling on the debt using his definition of debt, as I’ve always predicted. To put it another way, the IFS think his whole economic strategy will have failed, completely. So by 2015 George Osborne will have no story to tell the electorate.

But it will be worse than that. We’re already suffering in the UK and that is before, as the Guardian notes:

The IFS warned, however, that work on repairing the £114bn “black hole” in the government’s finances had only just begun. It said that 75% of the deficit reduction programme was still to come, including 88% of the benefit cuts and 94% of the reductions in departmental spending.

SAo there is misery upon misery to be poured on the UK and all to no avail: the only reason for that misery is that supposedly it repays the deficit. But it isn’t. And it won’t. So it’s pointless. It’s a tale of wanton destruction of lives and well being all for no purpose. And none of it is necessary. Why? Because we’re not suffering that level of debt at all.

That’s the next blog.

The UK’s debt is falling, again – it will be about £650 billion by next week

Economics 11 Responses »

Feb 012012

As Larry Elliott has noted this morning in the Guardian another round of quantitative easing is now almost inevitable as money supply has fallen in the UK, again. Expect £75 billion next week. That will be £350 billion in all.

The outcome is simple: another £75 billion of government debt will be purchased by the Bank of England. And as I explained last week, this debt will never be resold. There is no chance of that. And this means that for all practical purposes the debt repurchased is cancelled. So far from having about £1 trillion in debt as was so loudly trumpeted by the government only a week or so ago the actual debt will pnly be about £650 billion after this issue, and the average government borrowing will, after tis repurchase, have fallen to less than £40 billion a year over the last seven years – the average rate (near enough, and lower after allowing for inflation) that was being incurred before the crash.

In that case shall we stop saying we have a debt crisis? It’s very clear we have not.

And shall we stop saying that we have to stop spending to ensure our children can repay the debt when it is only growing very modestly at most?

And shall we stop talking about the growing debt interest payments when at least one third of them will now be paid straight back to the government?

And shall we then talk about what we can afford to do when it so clear that we do not have a debt crisis at all?

And shall we call the Tories bluff for lying about a problem that did not exist?

Because that way we have a new political narrative which right now we have not got.

Unemployment to increase to over 3.5 million

Economics 1 Response »

Feb 012012

The Guardian is reporting this morning that the number of long term unemployed is now forecast to increase by 750,000 to more than 3.3 million over the next four years.

In 2009 I forecast unemployment of 4 million in this recession. At the time I did not anticipate the rise in the number of self employed we have seen, or the drop in productivity that has also occurred over the last couple of years as employers keep people in work at lower effective rates of pay rather than sack them. But if the number of long term unemployed (not all claiming benefit of course) reaches 3.3 million I think it’s a safe bet that actual unemployment will also rise by more than 700,000 to in excess of 3.5 million, and depressingly, my forecast of 4 million unemployed now looks within the range of reasonable plausibility.

I take no comfort from the fact I may have been right all along.

Wilful amnesia

Economics 8 Responses »

Jan 312012

From Paul Krugman, yesterday:

The infuriating thing about this tragedy [of a recession] is that it is completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their wilful amnesia.

Never doubt that this recession is not necessary: it is a deliberate act that was imposed by the will of right wing politicians and their advisers.

Yesterday those right wing politicians succeeded in imposing yet more austerity on Europe. Things will be getting worse soon.

Who’s benefitted most from the recession in the USA?

Economics 3 Responses »

Jan 302012

This data from the New York Times makes clear who has benefited most and least from the US recession:

So companies have won and paid less tax too.

Workers lost, badly.

And you wonder why people are annoyed?

A fully-formed and fully-argued manifesto for a more stable and more equitable world

Courageous State, Economics Comments Off

Jan 302012

Matt Sissons has reviewed my book The Courageous State on the Why Politics? blog. I won’t reproduce the whole review, and it’s fair to note he does offer some minor criticisms, which he has absolute right to do, before concluding:

What is most evident is that this is a book rammed full of good ideas. Not pie-in-the-sky but pragmatic, realistic solutions; not just to the economic crisis or the inherent unfairness in our society, but to the whole ideology which has led to the current class of wobbly politicians, whose lack of vision and conviction has allowed the dangerous status-quo to continue far longer than it should. It is these ideas, concentrated towards the end of the book, which elevate The Courageous State well above the yet-another-book-about-neoliberalism class of commentary. Murphy presents his solutions with great clarity, as well as clarity of purpose, which enables the reader to see the logical connections between them and for them all to sit together as a cohesive whole.

As a result, the most striking thing about Murphy’s vision, especially amongst the doom and gloom of the austerity agenda, is that it is one of hope; the best kind of hope based on specific, realistic objectives. You won’t find here any suggestions for revolution, simply a change of mind-set which will allow for the many small changes needed to alter the course of our troubled political and economic institutions; to enable them to be forces for the good of the majority rather than a wealthy few. With the current absence amongst national politicians of both hope and a cohesive vision, anyone looking to take up the leadership challenge on the left could do worse than read The Courageous State. If they were to pick it up they would find not just a book, but a fully-formed and fully-argued manifesto for a more stable and more equitable world.

The Courageous State is available here.

We seem to have forgotten Fordism

Economics, Uncategorized 6 Responses »

Jan 302012

Will Hutton made an interesting point in the Observer yesterday:

Fewer than 150,000 jobs are directly involved in the making of [1.4 million cars and more than 3 million engines in the UK each year] and the numbers have been gently falling for years as modern production techniques transform productivity. Tata is building a new engine plant in Wolverhampton that will be a world leader in low-carbon engines; it might create 750 jobs.

I discussed this phenomena in detail in a recent article on the new economics of social democracy, here but the way Hutton presents the argument makes it easy to draw the conclusions in a different way.

When Henry Ford built his car plant he realised that unless the product he made was cheap enough for the workers to buy then there was no point in building it: there was no market to supply. This was the basis of Fordism.

Now we can build cars with fewer and fewer people. Indeed we can build anything with fewer people, and although we might make more ‘stuff’ the number of people involved is still falling steadily. As a result even though those remaining people engaged on such work are well paid their share of the total reward from manufacturing is falling and profits are rising as a share of GDP. That’s what happens when productivity reaches such extraordinary peaks.

The consequences of such productivity are only now becoming apparent though. The pressure and ability to consume despite stagnant or falling real wage shares was, of course, fuelled by the finance sector that promoted debt to fill the gap in demand as overall wages fell and profits grew as a result of this obvious fact. But that has proved unsustainable: the model of consumption based on personal debt growth is dying.

But with the close of that model of consumer capitalism two other things are happening. The consumer is no longer spending: growth has disappeared; the growth that has underpinned our current model of capitalism has gone. And there is no prospect of that consumer returning when the universal reaction to debt management issues in the public and private sectors alike is to cut spending. The inevitable result is that jobs in services are being decimated: 50% yout unemployment in Spain is the obvious result. It is more than 20% in the UK.

We’ve forgotten the lesson of Ford. Being able to make something is not enough. Unless someone wants to but the product then the technical ability to produce it is in very many cases pointless. And to make sure people want what can be produced they must have jobs, and jobs that pay well enough for them to afford what the market wants to offer them to buy. Those jobs either come from the production process itself or by redistributing the surplus – usually arising in the form of rent – from that production process. Those rents, on skills, on the use of resources, on the compartmentalisation of risk and so much more, belong to society but they’re not being shared now. Instead they’re being captured by the few who aren’t paying tax and whose wealth is not trickling down.

So right now we’re demanding production at the same time as we’re demanding a cut in the number of producers and a cut in the number with the resources to buy what is being produced. The consequence is inevitable: this model will fail. We’ve forgotten Ford and the need to create markets. Instead we’re now intent on destroying them.

I’m not saying Ford’s idea of production was entirely right: there are limits to growth. But we’ll discover those limits a lot sooner if we do not ensure that people have the capacity to buy what business has to offer, and our current model of capitalism matched with the political thinking of those who are the supposed strongest supporters of that model guarantees a dearth of consumers. In combination it’s a giant suicide note for our current economic model. No wonder we need alternatives waiting in the wings.

The tax reforms needed if globalisation is to work

Economics, Task Force on Financial Integrity and Economic Developm, Tax avoidance, Uncategorized Comments Off

Jan 302012

IPPR produced a report on globalisation last week. With a forward by Lord Mandelson the report was written by Will Straw and Alex Glennie.

I admit I don’t agree with either Mandelson or Straw; they have a political perspective I don’t always share but this report has merit to it, as others have also noted since its publication. It represents a clear change of heart on Peter Mandelson’s part, and that I welcome.

The report is especially strong on the need for corporate tax reform. Having noted that profits are rising as a trend t also notes that there is a steady fall in corporate tax receipts as a proportion of profits and realises this is an issue that has to be addressed. It dismisses the alternative to corporate tax proposed by Oxford University and Mirrlees, which is a form of Value Added Tax. As the report rightly notes there is no doubt this would be regressive and so unacceptable. Instead it suggests five reforms, as follows:

First, the European Union should implement the Common Consolidated Corporate Tax Base (CCCTB). Under the current tax regime, multinationals file separate accounts for each country in which they operate; under the CCCTB, each company would compute only its EU-wide consolidated profit, on a common definition of the tax base. This profit would be allocated to member states on the basis of an apportionment formula containing factors such as shares in employment, payroll, assets and sales. Each member state would retain autonomy to tax its allocated share of profits at its own tax rate. This approach would allow countries to retain their own tax rate and pursue healthy tax competition. But within the EU, companies would have to actually move their staff and physical capital to the lower-tax regimes, rather than relying on the accounting mechanisms outlined above. In time, other jurisdictions could be encouraged to join, paving the way for an eventual global consolidated tax base.

Second, the EU and its member states should begin discussions with the International Accounting Standards Board to introduce a requirement that all multinational corporations report sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns in what is known as country-by-country reporting. Country-by-country reporting discloses the profits that companies record in each jurisdiction in which they operate and the taxes that they pay on them. This means that they can be held accountable for what they do and do not pay. The requirement would complement the CCCTB by providing simple transparency on the activities of multinational companies in jurisdictions outside the EU.

Third, other jurisdictions should be encouraged to adopt the EU Savings Taxation Directive as a means of creating an automatic exchange of taxation information. Since 2005, the directive has ensured that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. In Cannes, Indian prime minister Manmohan Singh called for the G20 to take a lead on the issue ‘in the spirit of our [2009] London Summit that [said] “the era of bank secrecy is over”’ . But the communiqué only committed to ‘consider exchanging information automatically on a voluntary basis as appropriate’. The EU should also adopt an amendment to the savings directive which would close existing loopholes and prevent tax evasion by stopping taxpayers from channelling interest payments through trusts and intermediate tax-exempted structures.

Fourth, as the Financial Action Task Force has already recommended, the beneficial ownership of companies, trusts and foundations should be on the public record. This would prevent multinational corporations from using networks of international subsidiaries to transfer profits and reduce their tax liability. This reform would also have the added benefit of making money laundering and the handling of illicit funds more difficult.

Fifth, bilateral and multilateral donors should support developing countries in building their tax collection and enforcement agencies.

Taken together, these measures will act to reduce the power of tax competition and lower the incentives on companies to execute tax arbitrage strategies.

There is much in here that is based on my work, that of the Tax Justice Network and colleagues in the Task Force on Financial Integrity and Economic Development. I welcome that.

I welcome Peter Mandelson and Will Straw seeing the merit of these ideas over those that were technically presented to them by economists as superior, but which ignored the political realities of taxation.

The tide is turning: the merit of international cooperation on tax is becoming apparent. It will help get us out of the mess we’re in: that’s now indisputable by all those except the governments of those states that promote tax evasion and those who benefit from it.