There is is much discussion in the papers this morning on the need to increase government spending. This is not ostensibly because of a national demonstration against austerity yesterday but because the Tories are rebelling against further cuts.
The 1% pay cap is now seen to be counter-productive.
NHS recruitment is in free fall.
Education is near collapse because of cost stresses.
The young voted Labour because they resent being asked to pay £9,000 a year for what their parents rightly got for nothing.
No doubt the list will grow, and the demand for spending with it. And that is spending we need: this is an economy working at way below optimality and as such additional government spending adds to growth. The glaringly obvious consequence is that it also adds to taxable income. And so it adds to tax yield. In fact, because those who receive extra government spending do at present on average spend 98% of the after tax sum that they receive (which we know because the savings ratio is so low) then in effect it's only a matter of time before all the extra spending ends up being repaid in tax. A simple arithmetic progression requires that in the end this must be true, and that any debt increases the spending gives rise to are only temporary at best as a result. If in the meantime it has stimulated economic growth then more than the original government spend might be recovered. Again, that's a fact.
Despite this well known economic fact (for that is what it is) the FT wrote in an editorial yesterday saying that:
The national debt, however, still remains too large at 85 per cent of GDP. This will leave Britain without the fiscal flexibility it will need in the next downturn – a dangerous choice as the country faces the uncertainties of Brexit. And the debt is big enough to raise questions of inter-generational justice: how many of the country's bills is it fair to leave to its grandchildren?
And it continued with a discussion with which taxes must be increased to pay for this extra spending. It takes staggering economic incompetence to argue in this way, but I suspect that this is what we must anticipate in the 'national debate' that Damien Green has called for. Let me run through the errors.
First, the FT assumes that any extra government spending disappears down a black hole to be lost, forever. This is absurd. That spend does instead expand the tax base, immediately. On average we pay 39% of our income in tax. That's the pretty immediate payback in this case, but as I have noted, over time (and I stress the time factor, but let's not overplay it because these are big percentages that grow to asymptotically approach 100% pretty quickly) the spend is recovered.
Second, there is no evidence anywhere that 85% debt to GDP ratios represent either a risk or limit to what is desirable. Rogoff and Reinhart said so, but then we found they could not add up. To continue to argue on the basis of their discredited work is to bleat dogma and nothing to do with any known fact.
Third, whilst the recovery of the spend takes place I agree there will be more debt. But that is exactly what markets want and precisely what the national economy needs. I have explained why here.
Fourth, the national debt is money. It's just a savings mechanism, except for the fact that what it represents is the money the government has injected into the economy - which is the money needed to make the economy go round. If our grandchildren wanted to repay it they'd want to destroy money. That may make sense in the future. Right now it's hard to imagine the case will arise. Which is precisely why national debt has never been repaid. We, the country, still need the money it represents. So we've never repaid it. And nor will out grandchildren. Toi argue that they might reveals an extraordinary level of what might best be called ignorance when it's the FT saying this.
But the FT is right in one way: we do need more state spending. But the fact is that it pays for itself and we do not need more taxes that would suck spending capacity out if the economy and leave us even worse off right now. Instead we do need more debt.
And I also think Damien Green is right: we do need a national debate on this issue, but let's make it an intelligent one.
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[…] have already written this morning about the need for an intelligent debate on the need for an increase in government spending . Let […]
What if the counter-arguments to you are based on dogma and anew odd sort of moral “feel right ” sentiment from the Daily Mail
What do you think?
Serious question
There are two former senior civil servants quoted on the Guardian’s Politics Live blog today as saying taxes will have to go up to pay for the lifting of the public sector pay cap.
This country is truly doomed if even the Civil Service doesn’t know how money and government finances work!
Whoops, that was meant to be its own comment, not a reply.
Agreed
It’s difficult to find the related IFS calculations as discussed in today’s news, but as they have no mention of the additional tax revenues that come from lifting public sector salaries, I have to suspect they have simply multiplied the percentage rise by the current salary cost.
I used to think the IFS were really useful but I’m now starting to think they are simply austerians.
Multipliers?
Tax yields?
Heaven’s above – that’s macro, don’t you know?
Agree with all this. As discussed here before we should just rename “national debt” “national savings” and be done!
The FT is being disingenuous to suggest that this savings/investment is a burden to future generations. We have been passing on the national savings since the formation of the Bank of England in 1694 and only redeem the savers when we can borrow at even cheaper rates which is true at the moment. In 2015 Osborne redeemed 250 year old bonds because now we can borrow at even less than 2.5%, see
https://en.wikipedia.org/wiki/Consol_(bond)
Intelligent debate starts by telling people how money works! That if we redeem all the debt then there is literally no money left.
Precisely!
Thanks Charles
the public has had nearly 40 years of neoliberal brainwashing. I would have hoped better from the FT; I expect economic illiteracy from the right wing press such as the Telegraph.
“That if we redeem all the debt then there is literally no money left.”
This is probably a naive question so forgive me if it is! I am new to this.
Does the national debt = the total number of GBPs in the world then, i.e. £1.7tn?
No, it doesn’t: some money is also in the private banking system
But last time I looked total ‘money’ was about £2.8 trn, so it is a lot of it
The question how to communicate this stuff effectively. I think it needs to be kept simple and straightforward. Perhaps any time an “expert” on T.V. talks about the government’s need to save we can simply say “Please explain how a government that makes it’s own money can run out of it.”
And in the discussion we can ask “Will the government run out of the paper to make the bills?” or “Will the government run out of the ink to print the bills?”.
The point, I am thinking, is that to puncture the meme that the government can somehow “run out of money” we need to prick it with something short and pithy that brings people up short and makes them think. No doubt it can be done better than the above, but I offer it as a possible approach. Sort of thinking out loud here.
I agree we need that pithiness
The real answer is the government makes the only money we can pay our taxes in – so how can it run out of them?
Richard,
This post is, simply, devastating to the current neoliberal dogma that, currently, masquerades as “economic thought”.
It is quite clear, frankly, for anyone with the slightest grasp of the velocity of money. The very phrase screams its own meaning: money spent accelerates as if moves, in other words, spent, through the economy. This concept works equally as well for taxation. That money taxed and then invested by government conforms to the same principles.
The ability to tax, and then invest, idle asset pools (savings, property, casino style capital) is vital to increasing the velocity of tax monies into the economy.
James
Your reference to the Grauniad/Observer which states:
“The level of internal pressure for the abandonment of austerity puts chancellor Philip Hammond under huge pressure to consider raising taxes to fund any extra public spending.”
shows that along with a total failure to understand that taxes paid to HMRC are quite different to the payment of rates to a local council for instance. It seems once again the inability to see that a sovereign government with its own currency is different from a family is complemented by the inability to see that the same government is distinctly different from local government.
My humble suggestion is to baldly state, “Taxes Do Not Fund Public Spending!” at every given opportunity.
Once the dust has settled, the howling laughter subsided, an explanation will be demanded for such a seemingly preposterous statement.
And then it’s game on…
I think that’s really not bad….
Thank you.
If you don’t mind me saying so, Richard, I think you are pretty well placed to start the ball rolling in your not infrequent media appearances! ; )
I will try
While it’s true that taxes do not fund government spending (for a government sovereign in it’s currency), such a bald statement in my experience raises incredulity in people who have been told over and over that it does. Incredulity raises resistance. I think we need to make people think, and a question like “how can a government that makes it’s own money ever run out of it?” is more likely to do that. I am no psychologist so perhaps I am wrong about this, but surely it’s a matter of framing. And if we want the truth to get out we need to carefully frame it so it will make people stop and think.
Resistance to new ideas is inevitable
You can’t get round it
You just have to overcome it
I explain it to people who will listen like this : Government by granting licences to banks has outsourced the creation of 97% of all the money in circulation to those banks by allowing them to create money out of thin air when they make loans , the greater percentage of which are residential mortgages . The other 3% is coins and notes which the Government allows the Bank of England to create . Out of that 97% taxes are paid and some people, those well off enough to do so, save by buying Government bonds. These savings are the so-called ‘ deficit ‘ . Government does not have to wait until it has collected taxes , or sold bonds to pay for its expenditure because it and only it makes legitimate our currency . Government decides who should pay taxes and how much they should pay and thus all money in circulation is redistributed by government . QED there is only one lot of money in circulation and it is a matter of Government policy to decide how it is redistributed throughout society. For the last thirty years it has been Government policy ( whichever party was in power ) to redistribute in favour of the rich which has meant that less tax has been collected than might have been had the policy been different and therefore more bonds have been sold to rich people ( on the whole ) which is the deficit .
Of course this is simplistic, but as one simple soul trying to do his best to understand how money really works in our society and pass that on to others this is my simplified explanation . Do tell me if you think there is a fundamental flaw so that I can correct it.
In my view the FT and all the other organs of propaganda masquerading as financial journalism deliberately create this pretence that there is ‘ public money ‘ and ‘ private money ‘ to serve their corporate overlords and confuse the public.
Well written
Thanks
John, is the BoE and government spending included in that 97% and, if so, what is the breakdown between what the government is spending versus ‘private’ creation for loans etc?
This split is misleading: the reality is all currency is made by the government or government licenced banks
I’m in, but I have two questions for which I’d be interested in a good answer/clarification.
1. It’s a very interesting point about the household saving ratio being 2%, but is it not reasonable to use the total ratio of deficit/spending to estimate how much currently comes back, which is currently closer to 10%?
2. Many people splutter at the suggestion of more debt and give daft comparisons with Zimbabwe et al which are easily deflected, but at the heart of it is a more reasonable question, ‘if it’s okay to increase the debt from current levels, when do you say stop?’
Thanks!
Apologies for the typo in my post, I meant to say 90% comes back, 10% is saved.
10% is saved but not out of incomes that are taxed
Much of the rest is the overseas sector
a) We’re talking income not flows so 2% is fair
b) At full employment. Create more money then and inflation follows
Michael Gove reckons that the non-Uni attending tax payer pays for the person who does go to University.
There is the problem right there: our politicians do not understand any of this and they are meant to be in charge!
Why is it that our elected representatives, including our current Prime Minister are so completely ignorant of the reality of 21st Century economics?
They seem to have all studied at prestigious universities so is it Purley dogma or willful blindness or what?
Economic reality is simply not taught in most places