There is a ludicrous article in the Guardian tonight which makes no sense at all despite being written by Denis Campbell, who seems to be to be a good journalist. The story says:
Labour's key election pledge to rescue the ailing NHS with an extra £2.5bn a year has begun to unravel after the party admitted that the money would not be available until halfway through the next parliament.
The party has confirmed that none of the £2.5bn pledge, which formed the centrepiece of Ed Miliband's speech to its conference in Manchester, would be raised in the first year of a Labour government.
The basis for the apparent 'unraveling' of Labour's promise to spend more on the NHS is the apparent requirement that it must raise the money it has promised to spend before it can apparently do so.
This is absolutely bizarre logic. The Coalition government will borrow £107 billion this year based on reasonable projections of the August borrowing data. It has, therefore, not stopped spending because it has not raised money first. This has been true, of course, throughout its period in office, when it will in all have borrowed (in my estimate) £572 billion in all. But apparently Labour cannot borrow £2.5 billion to spend on the NHS in anticipation of the receipts it will secure by raising taxes.
Not only is it ridiculous to suggest that separate rules apply to such spending when compared to all other spending(and it is Labour's fault that they have got themselves into this daft position by doing they will not spend without taxing) but this whole argument defies the logic of tax.
The fact is that throughout history government spending has always preceded taxation. So, in deep dark history kings went to war and then wondered how they would pay for it. They did not patiently save up their tax revenues and then decide who they would have a fight with.
And very obviously it is always spending that drives the spend and tax process because glaringly obviously there's not a democratic government on earth who would want to tax without good reason: it simply makes no sense to do that.
This is why spending always slightly precedes revenue. And this is also why so called 'structural deficits' that reflect that fact are not structural unless 'structural' means 'normal'. That is because this spending prior to taxation is the inevitable scheme of things when the reality is that governments always first of all spend to meet need - effectively printing the cash to do into the economy in the first instance - after which they then reduce the otherwise inflationary impact of doing so by reclaiming all or some of that that money they have spent into the economy back in the form of tax, the combined process then giving them control of money and so effectively creating both monetary and fiscal economic controls in the process.
However, apparently none of our political parties have the slightest notion of this economic reality that we do not tax and spend but do instead actually spend and tax and so are bickering about whether it is now possible to spend without taxing first when day in, day out, they do the exact opposite and unless they did that every tool they have to control the economy would not work.
I sometimes want to scream in despair that politics, and this variation of political economy, is undertaken at such a banal level. I cannot be alone, surely?
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Richard
I agree the debate is conducted at a horribly low level. When Labour lost the last election an MP scrawled a rather bad joke to the effect that “sorry, we’ve spent all the money”. You’d be surprised how many people on the internet believe that to be true, even though the Govt controls the supply of sterling (except insofar as they allow the banks to do it, but that’s another story).
I’ve argued until I was, quite literally, blue in the face (I am, in fact, part Klingon on my Mother’s side but I don’t wish to boast) with people who honestly believe that to be literally true. When the coalition came to power we were down to our last few fivers!
I’ve said, look, the Govt can always print money. It isn’t an easy answer &, used to excess it can lead to devaluation & hyperinflation, fair enough, but to say the Govt would run out of money is just being stupid! You can’t explain anything to some people. The Tories win because it is more tricky to explain Keynesianism than the simplest form of monetarism, (The complicated form of monetarism, as Hayek propounded it, is so tricky that hardly anyone understands it, including, I suspect, many on the Tory right who swear by it).
I agree with almost all that
The only trouble being that if we need to rely on Klingon understanding it may take a while to get this message through
You are most certainly not alone. After a lifetime of listening to Today on R4 my tolerance has been completely exhausted by the superficial and inaccurate assumptions that frame the political interviews. I have started watching Al Jazeera which is certainly not perfect, but superior to the BBC by a country mile.
Richard, there are two different meanings of the word spending here. If we mean commitments, then yes, the government can make commitments ahead of time colloquially spending money that it may not yet physically yet have. But if we talk about making payments for something. ie. Public sector salaries at the end of the month or a new aircraft carrier as the scheduled payments become due, then the exchequer must have actual cash in order to make the payment. So how does it get this cash? The only way presently is to raise it from taxation or borrowing. There isn’t a button called print money that the exchequer, treasury, debt management office, or any department can simply press to get the cash. So, therefore, the government just like everyone else has to do cash management.
You are simply wrong
Of course the government can and does print money
It printed £375 billion during the QE programme
The one thing any sovereign government with its own currency can always do is print money
That’ not to say it always should – which is why reclaiming money printed through taxation is vital – but you are just as wrong about tax as most economists were about money
And if you do not know that Bank of England had to say economists were wrong about money earlier this year
Go and read here – because what they said is important and shows your shallow analysis is completely flawed
Yes, the BoE can and does print money. But it cannot hand this money to the government to spend. Your post implies that there is a mechanism by which the government can spend without first taxing and borrowing, but it simply can’t. Indeed, that this is how it works. Maybe such a mechanism could be put in place but it would mean significant changes to the current system, which is not how it works. As things currently stand, QE is used to buy private sector assets. This does create new money, but notice that the government does not spend this into existence in the sense of paying for public services. These are all verifiable facts.
QE is used to buy gilts
And everyone – including the BoE says it is money printing
It could spend it into existence – Carney has confirmed that
Actually, the government does it via bonds first right now
So you’re either wrong or playing silly semantics
Yes, that’s all correct. So right now, if it wants to spend an additional billion pounds it does need to borrow that extra money before it can send chaps or bacs payments for that spending. So spending (in terms of sending a payment through the payment system) does not precede revenue (in the form of taxation or having a gilt auction). It must come first, right now.
I don’t think I’m being pedantic to point this out. Double entry and the order of transactions is important.
No: it sells gilts
Yes. The government sells gilts which gives it cash to fund itself above tax receipts. The BoE buys gilts during QE using printed money which gives the owners of the gilts cash. But the BoE is not allowed to give the government cash that it has printed. Although this could of course change with the right legislative adjustments. Both the selling and buying of gilts in these operations is done on the market.
So?
Spending can proceed without tax then
As I said
That’s how we get deficits
It’s that obvious
Yes. Like I said in my first post. It has to raise it either through taxation or borrowing. My point is entirely technical, which is that it can’t print it directly to spend as the system currently operates.
But you are assuming a standing stand
And we don’t have one
And as I said, spend can come before tax
Not sure what you mean.
Let’s leave it there then
Ok. Not sure what a ‘standing stand’ is!
Perhaps you ought to check your history more. Kings who went to war, and could not find the taxation after, tended to fail once their subjects realised the danger had passed,- and got toppled. And there is a limit to what national governments can do, surely international capital flows can swamp individual economies? Please show me an economy in history that has spent its way out of recession- maybe the USA in the New Deal but that is arguable, World War II maybe the alternative reason.
Every economy has always spent or inflated its way out of recession
There is no other way, barring war, when the rule of spending first applies
And since when did the English topple Kings – barring 1649 and 1694 – both tax related, I admit, but not for the reasons you note
Your history and economics are both wrong
What about the 1920-1 recession in the US? In response the US raised interest rates and balanced the budget. The economy snapped back very quickly after a large and dramatic deflation and unemployment increase.
If you call that a recovery, I wonder what elements of human empathy you embrace?
No, the deflation etc was during the recession.
It was really a depression actually, with Gdp falling 24%. But it only lasted 18 months. And the policy followed during it was what we would now call austerity, with the government slashing spending to balance the budget and interest rates being raised. I guess it’s largely forgotten because the recovery was very quick.
It was probably the most disastrous episode in economic management and self imposed harm in 20th century democratic states
Don’t you think it’s weird though that the government pretty much ignored one depression and it corrected itself in 18 months. (The president was ill and they didn’t have the data to know how bad it was). The economics books would argue for the opposite response: stimulus and lower interest rates. Then when the great depression came the government took action and it lasted 13 years. It at least suggests the thesis that recessions self correct if ignored. And then we have parallels to today where the government has taken action and the crisis lasted 5 or so years at least.
I tried to get the energy to reply to this
But the logic of your argument is so callous – and can only be predicated on the arrogant assumption that you would be all right and sod the rest – that I simply could not do so
Please don’t waste you time commenting again. An economics based on hatred of your fellow human beings is not one I want shared here
What did Keynes say about people who considered themselves hard headed business men but were devotees of some long defunct economist?
Indeed
Economists like Richard Werner have questioned the whole idea of bonds as a mechanism for public spending. Wouldn’t it be better to get out of the Maastricht induced smoke and mirrors money printing and find a direct and more transparent way of getting money circulating that doesn’t support the bond market makers?
If we could reform the EU, yes, of course
Good Morning Richard,
I have just been looking up the government figures on cost of unemployment and came on a very large payment for Social exclusion. I have been unable to discover what this payment is for. can you explain. By the way I have just bought a copy of The Courageous State. Great read so far but finding the time to read it all is a problem
Bob
Thanks re The Courageous State
Social exclusion is a term for the impact of poverty. See http://www.jrf.org.uk/sites/files/jrf/poverty-exclusion-government-policy-summary.pdf
Best
Richard
People perhaps forget that the Chancellor of the Exchequer is also the Second Lord of the Treasury and Master of the Mint. Until Gordon Brown passed that ludicrous Bank of England Act of his in 1998, Chancellors set base rates, too, and had complete control over monetary, as well as fiscal, policy. It would be quite straightforward for an incoming Government, with a majority in the House of Commons, to repeal that Act, and restore the status quo ante. The City wouldn’t like it, but s*d ’em.
Of course the Government can print money. I can’t, Richard Murphy can’t, Mr Micawber couldn’t – which is why, when HE got into debt, it was bad news. But when the Government gets into debt, there is no need for either the Government itself, or anyone else, to worry in the slightest. The Government can spend money it doesn’t have without having to worry, like we poor souls would have to if we started going crazy with our credit cards (one reason I won’t have one).
People get agitated about the inflationary consequences – but a certain amount of inflation is a good thing, and an awful lot better than deflation. Too much inflation is bad, granted – but it can be dealt with by prices and incomes policies, which can be successful provided they are not imposed from on high by arrogant Governments acting unilaterally and without consulting or involving anybody. There is absolutely no reason why a ‘neo-Keynesian’ economic policy cannot be made to work – it’s just that it’s never been properly implemented in the first place.
Richard
Agreed – especially re need to abolish Bank of England independence – a wholly undemocratic act
Richard
Would I right in assuming that if the government print money to invest in the manufacture of goods we currently import from Asia. The reduction in unemployment and other income support costs plus the saving import cost would pay for this. We would however have to protect these home grown industries from low wage competition I assume.
There is always a risk any stimulus can be exported
That is why how we spend it into the economy is important
Thinking about this resulted in the Green New Deal
Bob- one of the main reasons we don’t manufacture much here is that wages are too low at present (in relation to housing costs [average 37% of income])-this creates pressure for cheaper and cheaper goods. The low wage economies (we’re becoming one!) that produce these goods are chasing their tails to repay IMF ‘restructuring’ arrangements and can’t provide basic amenities to their own citizens -so the whole thing is an unvirtuous circle of debt. Until we sort this mess out and the rentier culture that syphons off the gains we will be going ’round in circles.
One of the reasons Tony Benn and Peter Shore, when they put their proposals to the Callaghan Cabinet in 1976, at the time of the IMF loan debacle, included the idea of import controls, was precisely to stop the economic stimulus they were arguing for simply resulting in people buying a whole load of imported finished goods, instead of domestically produced ones, made by British firms employing British workers taken off the dole. Unfortunately, their plan was rejected in favour of Denis Healey’s ‘sado-monetarism’. The result was the Winter of Discontent, and Margaret Thatcher in Downing Street.
Part of the reason for the rejection was that import controls would have been against ‘Common Market’ (as it was then) rules. This is something to bear in mind if and/or when we are asked to vote in an In/Out Referendum on EU Membership.
I suppose Richard Blaber, is that in a common market, there are reciprocal agreements. If I block your your exports to me, you can block my exports to you. If foreign trade is a small proportion of GDP, this can be endured but the UK traded a large percentage of its GDP and we wanted to increase exports to recover.
I would not rule it out in the future in regard to China and the Far East or elsewhere given the inequality in pay between them and the West .
Something to remember when we vote on membership of the EU.
Don’t forget, this was in the 1970s, before the Single European Act, and before that levelled the playing field somewhat. The Benn/Shore proposals were entirely compatible with the GATT rules (GATT being the General Agreement on Tariffs and Trade, predecessor to the WTO, the World Trade Organisation – Shore was Trade Secretary, and had his civil servants go through his plans to make sure they were).
There were trade wars in the 1930s, and historians think that they contributed to the political atmosphere that led to the Second World War. I wonder about that, because I suspect that it was the nationalism that caused the trade wars, rather than vice versa. Furthermore, rather more of our trade was extra-Common Market rather than intra-Common Market, and the idea that ALL of our Common Market (or EU) trade would suddenly be cut off _in toto_ if we were no longer members of the EU is simply fanciful, and just scaremongering. It does the pro-EU cause no good whatsoever. Au contraire, it makes people more, rather than less, Eurosceptic, in the literal sense!
Ricahrd B I am in general agreement with your posts today. I am. of course, not arguing that exports are lost in toto. You are better informed on Shore’s proposals than i am. However, whether or not our exports were to the EEC or elsewhere, the argument still applies. If there is no reciprocity -except for a short period- then we are likely to face reprisals. Wilson in the mid 60s, i recall, put a surcharge on imports in his efforts to shore up (no pun intended!) the pound at $2.80 to the £.
The motive of the Shore -Benn proposals was realistic -to stop the ‘recovery money’ being spent on imports. The problem was that e.g. in cars, the British designs were often inferior to the European ones. Some of this was down to levels of investment but not all. Would you agree that along with getting the finance right, we also have to the attitudes which develop the technology and skills to keep competitive?
The raising of tariffs was a reaction to the Great Depression. Britain ended her century free trade policy by introducing Empire Free Trade and devaluing the Pound. The US had tightened its tariffs Smoot Hartly Act.
I do agree with the view that the trade wars led, but not inevitably, to war. Hitler was a fringe politician until the Great Depression, end of foreign loans and six million unemployed.
The parallels of increased ethnic scapegoating, reactionary economic theory and advocacy of non-solutions such competitive devaluation, deflation and poverty which set people against others-both within or without the country -are frightening.
So if the government can’t print money without raising taxes. what is Quantitative Easing?
It is printing money – in a convoluted way
Tax is not involved
Going back to the original Denis Campbell article, it’s a storm in a teacup in any case. Labour have pledged an extra £2.5bn per year in extra NHS funding *by the end* of the 2015-20 Parliament, not at the start. Given that they have agreed to accept ConDem spending plans for the 2015-16 financial year (idiotically in my view, but there you go) they wouldn’t be able to spend more on the NHS that year anyway, even if they raised taxes immediately on coming to office. Richard is quite right that a government can just electronically print money without raising taxes if it needs too, but even if that weren’t the case, the Campbell article is garbage even on its own terms. If this guy is a “good journalist” what is a bad journalist like?!
Good question