A reader of this blog shared the following email exchange between him, and the Bank of England with me and asked me to comment upon it. I do so with his explicit permission to share the correspondence.
Glynn Worthington wrote to the Bank saying:
Hello,
I came across this article from Tax expert Richard Murphy, which says that taxes are not used/are not necessary to fund public spending.
Further reading shows this is not a new revelation, going back (at least) to Keynes and former Head of the New York Federal Reserve Bank, Beardsley Ruml.
Can this be correct? It seems to me that it must be. How can you rely on me for money that only you can issue?
Could you please confirm or deny this?
MPs are often asked "which taxes would you raise to pay for this", but this would seem like a malformed question, if Richard Murphy is correct.
Thanks,
Glynn Worthington
The Bank of England replied as follows:
Dear Mr Worthington,
Thank you for your email. The proposal you refer to falls outside of the Bank of England's remit as a central bank and accordingly, we are not in a position to consider it. The Bank's responsibility currently is clearly defined and fiscal policy, including responsibility for taxation policy, falls to the Government.
As compelling as the proposal you refer to may seem, it would be illegal, as it violates Article 123 of the Lisbon Treaty, which forbids central banks from financing government spending.
In addition, the idea of printing money to fund public services could undermine faith in the fiscal and monetary framework. Printing money would cause inflation which cannot easily be reversed if it became too high. Excessive inflation is not good for the economy as it effectively reduces the value of money. More money is needed to purchase goods and services. People on fixed incomes such as those that are retired would see a decline in their purchasing power and generally consumers and businesses would also be less likely to spend due to the uncertainty. This would impact economic output and in turn economic growth.
Also, if the inflation rate is high in comparison to other countries, domestic products become less competitive as goods and services will cost more in comparison to elsewhere.
I hope the above information answers your question. Thank you once again for writing to the Bank of England.
Kind regards,
Brendan Manning
Public Enquiries Group
Bank of England|Threadneedle St|London EC2R 8AH|+44 (0)20 7601 4878
So what does this mean? Am I right, or are they?
I have to say that the answer is laid out between the lines of the Bank of England's letter. They say that it would be illegal for them Bank to finance government spending. And so they claim that they have not done it. But, let's not beat about the bush here. let's call that out for what it is. It's a lie. And everyone knows it is a lie.
As the Bank of England says on its own web site:
Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target.
How does that work? In a time when the government has issued substantial new debt (more than £1.1 trillion since 2008) it was widely believed by the finance community that this process would suck too much money out of the private sector economy and reduce real levels of investment and so economic activity. As a result the Bank of England bought that debt back from those private sector actors that had bought it in the hope that this might encourage them to invest alternatively.
But in the process what they did was take away from the private sector its role in providing loan finance to the government and implicitly took on that task itself. In fact, quantitative easing has been sufficient to cover all government borrowing from 2012 to 2016. And in that case it is quite clear, and obviously true, that the Bank of England has quite emphatically provided financing to the government for the purposes of covering its spending. That is all QE can and does do.
And that's obvious by the fact that the Bank ends up owning large parts (about 25%) of the government's total debt which it has quite explicitly funded through the creation of new money as a result. This cannot be denied. As a result the Bank of England is lying.
And yes, it probably is breaking the law as well, but since it's happening all across Europe and it has been universally decided (one ongoing court action in Germany apart) to ignore this fact because it is clearly in the public interest to ignore such a badly conceived piece of law, no one cares.
What is more it has printed money: it says so on its own website. Again, its denial is a lie.
And that has not created inflation. The suggestion that it might is another lie.
So why is it doing this? Three reasons. One because it is pretending it is not breaking the law.
Second, because it remains committed to a version of economic theory on money, money creation and inflation that died ten years ago, but which the Bank of England has refused to bury (there's another post on this coming next on this site).
Third, because I strongly suspect that the Bank is part of a conspiracy that spreads beyond the City that does not want to know that money can be printed for use for social purposes like creating full employment, funding the green economy, delivering the NHS we need and providing the social security safety net that most have to rely on. They want it to be thought that money is in short supply when the evidence is that the Bank can create it as it wishes.
To be blunt, the Bank is lying because it knows there is a Magic Money Tree but that it does not want to use it for the benefit of the people of this country, which shows that it is neither apolitical or independent of the government in its actions.
That's my explanation for the Bank of England's reply. Their lawyers are welcome to contact me if they wish. I'd win in court.
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I think you over-state the difference between you and the Bank here, Richard. Basically, their letter does not deny what you state. They just express worries about it.
And they have of course clearly admitted in the last ten years that banks are the main money creators, and central banks most of all: see e.g. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
I am completely familiar with that Bulletin
But they don’t express worries about it
They say they can’t do it
Thank you Richard, I too suspect that the BoE is playing its part in protecting the powerful canard that money is some oil-like resource which could run out if not carefully managed, rather than like water, which could nourish us all if properly directed to where needed. They must fear a crack appearing in this illusion, and that would never do.
It’s probably more accurate to say elements within the bank are playing their “part in protecting the powerful canard that money is some oil-like resource which could run out if not carefully managed,” while others within the bank have bought about the publication of the 2014 bulletin referred to above which makes a nonsense of this stance. There do seem to be conflicts opening up in our major financial institutions lately. I’m encouraged 🙂
Properly informed regulators are one of the things to which we must aspire
Chancellors and the BoE are in the business of propagating myths about money. Money is the new religion and myths are a control mechanism, see under “Keeping the faith” here
http://www.progressivepulse.org/economics/basic-econimics/what-is-fiat-money/
How is the UK’s central bank printing money not causing inflation different from Zimbabwe’s central bank printing money that has caused inflation?
You may have noticed the two countries have slightly differing economies and governance structures
And one has a functioning tax system, which is the primary mechanism that controls inflation, and the other does not as a result
My understanding is that Zimbabwe printed cash as a result of inflation (caused by government policy which ravaged the economy) rather than the printing of money being the cause.
Yes, hyperinflation is initiated by a supply shock. Land grabs in the case Zimbabwe, see
http://bilbo.economicoutlook.net/blog/?p=3773
Jonathan:
In addition to Zimbabwe having a dysfunctional tax system the other main causes of its hyperinflation are a combination of corrupt and incompetent land reform and corrupt and incompetent money creation.
The combination of decreased real production with increased money creation caused inflation. Corruption led to powerful people using domestically created money to purchase foreign currency instead of investing in infrastructure, education and technology – that or they flogged off public assets to acquire foreign currency thus further decreasing domestically controlled productive capacity. The dysfunctional tax system allows rich Zimbabweans to pay no tax meaning ever greater quantities of money accumulate in the system rather than having taxes destroy some to maintain the right quantity for a functioning financial system.
The other big Monetarist poster child for the dangers of hyperinflation is Weimar Germany. Like modern Zimbabwe Weimar Germany had just suffered a huge loss of productive capacity due to loss of manpower, capital and the occupation of its main industrial heartland following WW1. In addition Weimar Germany was forced by the Treaty of Versailles to pay war reparations in gold. Consequently they had no choice but to print money in excessive quantities to purchase gold from abroad (like corrupt Zimbabweans acquiring foreign currency).
Basically you can only create money up to the point that you mobilise all available productive resources in the economy. Producing any more money once you are running at full capacity causes inflation. Keep doing it in a big way and you get hyperinflation.
However, the UK, Europe, USA and other developed countries are nothing like Weimar Germany or Zimbabwe. They are more like Japan which, try as they might can not reinflate their stagnated economy – they’ve been trying for nearly two decades.
Modern countries have huge productive capacity that’s pretty much universally under utilised. We also face an uphill battle to invest in new green, sustainable tech, infrastructure and systems if we’re to avoid civilisation ending ecological damage and climate change.
With the political will sovereign powers like the UK could and should use a combination of spending and taxation policies to radically alter our economy. Collectively the British people have the system, resources, technology and skills to transform ourselves into a cutting edge sustainable economy. We just don’t realise that’s possible because we’ve all fallen for the money myths peddled by the BOE and the rest of the establishment.
We’re also in the process of sacrificing the manufacturing and R&D capacity we have left on the alter of Brexit for the sake of turning the whole country into a giant tax haven and secrecy jurisdiction. We go down that route and, like Zimbabwe and Weimar Germany we will struggle to replace our productive capacity and be bogged down by corruption.
We have a small and ever narrowing window of opportunity to strike out on in a better direction
http://bilbo.economicoutlook.net/blog/?p=3773 This is a good explanation of what happened in Zimbabwe from Bill Mitchell’s blog. I’ve shown it to a few people now when they bring it up.
Perhaps what’s needed is a UK version of this article by JD Alt, together with UK versions of his diagrams?
http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html
As a one-time illustrator I might be willing to give the drawings a go, but I’d need some thorough and accurate briefings in order to get it right, because sometimes the all reserve adding, draining, and bond issuing operations that the BoE conducts inside the banking system can leave me slightly confused!
If you have never worked in banking, it all seems very abstract, and I’m *interested* in getting a grasp on this stuff – heaven help those who aren’t!
Anyone offering?
How much money can be printed without causing inflation?
The amount that creates full employment at a liveable wage
At bottom I don’t argue with that as an underlying basis. (In part because I don’t understand it).
It seems to me that in the aftermath of 2008 that it is not the quantity of phoney money that matters, but where in the economy it is released.
Had this vast amount of money been entered into the economy via increased pensions, benefits and bottom-end wages there would have been inflation. There would also have been an economy in motion and all the money would one way or another have been back in the finance sector in weeks and have done some good on the way there.
Ironically this notion is poh-poohed by the establishment by calling it jocularly ‘helicopter money’ and implying the idea is inherently silly.
What was inherently silly is what we did do. For central bankers and politicians to pretend they are mystified by the non appearance of inflation is disingenuous or as you might put it ‘a lie’.
I have been considering my remarks on inflation and would add that there actually HAS been vast inflation since 2008. Current measures of inflation are based on a variety of indicators which are basically, but not precisely a ‘shopping basket’.
If the ‘shopping basket’ were to measure boardroom pay, football transfer fees, property prices (masked to some degree by the policies to prevent collapse of property prices which should have ‘corrected), equity prices etc the inflation figure would better reflect where inflation is and what the rate is.
It is a part of the BoE ‘lie’ to continue to use metrics which apply to an economic model that doesn’t reflect current reality. Low unemployment figures, for example, don’t reflect the under engagement of the workforce in a ‘post industrial’ society.
@ Charles “Keeping the faith” requires Bankers to act as saviours as well. A relative has worked in the BoE for a long time. ‘They’ are happy to teach me about the wonders of their Fiat money system and ‘they’ reminded me that the finance industry funds 1 in every 6 tax pounds thus keeping public services alive by the miracles they work every day.
But they don’t fund anything, I argue
They are just the vehicle to return those funds that the government has spent
I can see why the finance sector denizens don’t subscribe to these views. So without tax and inflation money would circulate for ever or be saved. Thus tax stops money circulating (or accumulating too much) through too many transaction cycles whilst not requiring higher inflation to expire it. Tax is easier, fairer and immediate to control than inflation. Engineers call this feedback, used to control a process such as signal amplification in an electrical circuit. Electronic circuits can not work without employing signal feedback mechanisms (tax for financial regulation – stable system), otherwise the output (accumulated wealth) would exponentially increase with time. Biological cells use such regulation by signalling mechanisms which biologists are learning more about daily.
“the finance industry funds 1 in every 6 tax pounds thus keeping public services alive” only by taking money from others including getting most of it from government.
The economy would certainly perform better and be more stable if financial services declined to a level where they no longer crowd out real production.
[…] The second thing we’re in denial about is the fact that policy and politics have been in conflict since 2010. Quantitative easing is the obvious example of this. If markets worked it should not have required £435 billion of government created money to keep the financial system solvent and flowing since 2009, but it has, and that intervention did not produce inflation (the current bout of inflation being Brexit and not QE created). The government has stepped in, because it has had to. The failure of austerity, or perhaps the inability of government to deliver the balanced budgets it promised, is the second indication of this. Whatever the political will, the fact is realpolitiks did not permit austerity in the way neoliberalism continually demanded. The real world is not the same as the space the policy wonks and their ministerial adherents think it is, bit this is still denied, not least by the Bank of England. […]
It’s why they call it ‘quantitative easing’ rather than ‘money printing’. So that it doesn’t frighten the horses. I’m only surprised that the Bank of England didn’t mention Zimbabwe in its totally disingenuous explanation of what QE can and can’t do. And I heard Ian Duncan-Smith on Radio 5 yesterday give a completely bogus explanation of the same thing.
There are also those who think that one day, QE will be reversed, rather than what will inevitably happen is that when the purchased bonds mature, they’ll just be quietly taken off the books as if nothing has happened.
It’s amazing. But I guess if people really understood how the mechanism worked, they might say ‘hang on; if we can print money to buy back debt without it having many ill effects, why can’t we print money to fund the NHS?’
It’s smoke and mirrors. But at least there are websites like this that shed a little light on what’s really going on.
“There are also those who think that one day, QE will be reversed”
Yes, the BoE announced that QE is going to be reversed in the last hour.
It Sid it was sticking to current limits actually
I’ll quote today’s BoE minutes:
“A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”
Yes
And such things have been said before
interesting you characterise a functioning tax system as the primary mechanism that controls inflation. Can you elaborate?
I am afraid I have to say it’s in The Joy of Tax
Perhaps there’s another reason for this economy with the truth: there is a political project abroad, especially in the US (orchestrated by Koch & his propaganda tanks), but here too, which is to demonise the State, shrink it and hand over virtually everything to the Market (whatever that is supposed to be) aka politicians’ cronies with the money. We’ve seen the signs: eviscerated Unions, privatisations, running down the NHS so it can be privatised, attacks on State schooling, forcing individuals to be almost wholly responsible for their pensions and then there’s the mythology of political rhetoric – living within our means, maxing out the credit card, balancing the budget and of course the greatest lie of all – TINA.
If it is illegal to print money because of Article 123 of the Lisbon Treaty, then in a way the BOE has a good argument to NOT print more money. Also, this would mean that the Lisbon Treaty took away an essential right of a sovereign country to continue to create money, which clearly one can see is damaging the UK and EU economy. So what was the thinking behind this law?
I am finding it very hard to work out what you are asking
I believe the thinking was that it would limit money creation to the private banksters, thus further empowering the banks, tightening their grip on us. Banksters uber alles, basically.
“The process by which money is created is so simple that the mind is repelled.”
John Kenneth Galbraith, in “Money: Whence It Came, Where It Went”
As Richard implies, QE is an accounting trick (and it’s not even QE! See Richard Werner: http://www.bbc.co.uk/news/business-24614016)
The farce was revealed in 2012 when the BoE handed back the ‘interest’ in the bonds it owes to the treasury like some bizarre ritual where you take money out of one pocket and put it in another thinking you have gained something. See: http://www.thisismoney.co.uk/money/news/article-2230579/Treasury-receives-35bn-money-Bank-England-QE-gilts-interest.html
Furthermore, Bernanke let the cat out of the bag in this, now (in)famous interview: http://www.youtube.com/watch?v=U_bjDAZazWU
The public is being scammed and the whole thing lacks genuine transparency and authentic accountability. Politicians are making little effort to help by either egregious ignorance or just remaining silent because of vested interests (largely ignorance).
The wording of the BoE’s letter is utterly disgusting using misleading terminology like ‘printing money’ and linking that with inflation fears at a time when the likelihood of creating it is very low given private debt of nearly 2 trillion, underemployment, unemployment.
Thanks Simon
Bloody hell.
If had £20 for every time I’ve heard people bang on about Zimbabwe (and the Weimar Republic) when we mention the printing of money I’d be able to buy all of Richard’s books (and few more besides) as well as booking a few more holidays giving myself the time to read them!
Preposterous – so much so that wheeling these two examples out as a reason to not print money is just desperate in my view.
Richard, I try desperately hard to understand this but always fail! I know from talking to others that I am not alone. I have attempted to reduce it to a level that simple minds like mine can grasp and this is what I have come up with…
No money exists without banks creating it. It then circulates in the system through gov’t created bonds, qe, government spending and private loans.
If this carried on indefinitely it would eventually render money worthless.
It’s value is only ratified by businesses and individuals paying tax back to the government.
This explains why tax avoidance and evasion is so damaging, because it creates a sideways route out of this perpetual circulation of money.
Am I anywhere near close?
Chris
I have tried to find time to reply and am failing
My others pleas comment?
Sorry….sometimes there are other demands on time
Richard
@Chris W Pretty close. Government also creates money. Money is destroyed by loan repayments and tax but the rate of creation is usually larger than the rate of annihilation so the money supply keeps on growing.
You are right that tax avoidance is a leak that breaks the circuit and undermines the system. Evasion is breaking the law.
For more detail I tried to write about it here:
http://www.progressivepulse.org/economics/the-duopoly-of-money-creation/
“As compelling as the proposal you refer to may seem, it would be illegal, as it violates Article 123 of the Lisbon Treaty, which forbids central banks from financing government spending.”
So, according to Brendan Manning, once we’re out of the EU it will be fine.
We’ve just got to watch out for a bit of inflation.
Roll on Brexit.
Glynn Worthington needs to write back to Brendan Manning to tell him it’s incumbent on him as a public servant to tell the truth and to quote the BoE’s own statements and data back to him as to the reasons why he Glynn Worthington believes he is not telling the truth. If Manning refuses to reply he should persist and take up the matter with Mark Carney. He might quote Carney’s letter to the MP Caroline Lucas as evidence:-
https://www.carolinelucas.com/latest/financial-times-mark-carney-boosts-green-investment-hopes
“The Bank of England could buy new types of assets instead of UK government bonds if it ever has another round of the money-printing programme it launched in 2009 to combat the economic crisis, its governor, Mark Carney, has said. Mr Carney made the disclosure in a letter to Green party MP Caroline Lucas, who is part of a body called the Green New Deal Group that wants billions of pounds funnelled into environmentally beneficial infrastructure projects with what it calls “green quantitative easing”.”
When the government sets its expenditure budget for the year, say £780 billion, and then begins to credit the various Departmental / Non Departmental bank accounts with that year’s allocation, where do people think that this money is coming from? Departments and NDPBs spend first – taxation and other receipts follow at a later date. If the Ministry of Defence overspends it creates money.
It seems obvious to a growing number of people that the creation of money by commercial licensees, the BoE and the government always come first – there is then the question over the extent to which this is subsequently cancelled out and inflation controlled (and for me the more important question of how the 93% of the money supply created by the commercial licensees enhances the fabric of the economy rather that supporting usury and speculation). However there appears to be a conspiracy of silence based upon the expolitation of ignorance.
A good example – if increases in public sector pay are funded from existing provisions this means that the Treasury is taking funding from the NDPB / Agency / Authority since Employer’s / Employee’s NIC increases along with the employees increased PAYE and pension payments. I have waited patiently for this to be explained by the media but alas
to no avail.
We really do need universities to come together to challenge this economic narrative, why is it not happening?
Because money is almost ever taught as part of macroeconomics
Actually, money hardly appears in a great deal of macroeconomic theory
The US Fed has been saying the same fictitious rubbish as the BOE has with talk of, ‘Quantitative Tightening’. I’ll eat my marzipan hat if any central bank actually does this.
This has been a interesting post. Glyn’s lovely, innocently put questions ( I suspect Glyn is not an innocent ) brought forth the sort of bureaucratic – please go back in your box – reply that anyone who has written to a government department of any sort is familiar with. But as some of the responses make clear the Bank cannot deny the truth that money is created out of thin air whilst at the same time trying to deny it ; presumably for fear that, as Henry Ford said all those many years ago if people knew how the banking and monetary system worked ‘ there would be a revolution before tomorrow morning ‘ . The knowledge that money is created simply by putting digits on a computer screen is just too hard for most people to even begin to accept right now in my experience . Why ? Because it calls into question the whole of our existence on this planet in an age in which we have thrown away all other more substantial connections between us . So we have to deal with this reality, which is why I check in with this blog everyday – to see who apart from myself – is concerned with the reality of money and its creation and destruction and what they have to say about it. Keep it going Richard there are precious few opportunities to enter into this debate.
I try
Even on days like today when finding time to look at comments is hard going
Well one can clearly see from the reply that the bank of england is being diplomatic in its answer to please all parties. “Yes we can but we dont because laws and ideology” Pity the UK has had to follow the lisbon treaty.
As for your belief in the consipracy richard, could you please elaborate on this? This is very serious if true.
It’s simply the politics of neoliberalism which is a conspiracy of an elite to oppress a majority
It is difficult, if not impossible, to reach any other conclusion.
“Article 123 of the Lisbon Treaty, which forbids central banks from financing government spending.”
This is simply incorrect.
Article 123 of the Lisbon Treaty states:
“1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”
The key word here is DIRECTLY.
Article 123 of the Lisbon Treaty, which forbids central banks from DIRECTLY financing government spending.
QE has all been executed indirectly via the secondary market. No bonds or debt instruments have been purchased DIRECTLY by the European Central Bank or national central banks.
The word DIRECTLY was inserted into the Lisbon treaty to specifically allow the type of activity required to support QE – i.e. bond purchase by a central bank from the secondary market (via printed money), this was presumably to allow the normal activities where the BoE needs to be able to hold gov bonds.
Thank you
Who are these elites? And why do they want to oppress a majority? In the name of what?
Just head Nancy MAclean Democracy in Chains
It’s interesting to note that Glynn’s question is closed: it demands a yes or no reply.
“I came across this article from Tax expert Richard Murphy, which says that taxes are not used/are not necessary to fund public spending… Can this be correct?”
It’s also then interesting to note that Brendan does not explicitly and directly answer yes or no to this question of correctness.
He says all manner of other things except yes or no.
What could that imply and what could we infer from that?
All sorts of things: he hasn’t understood the question, he doesn’t want to say yes or no, it cannot be answered with a simple yes or no, or that it can but he doesn’t want to because it would shatter the myth that the Bank of England does in fact create money which is used for public good, as evidenced by the information on its own website.
Is Brendan lying? Or is he spouting a falsehood? That remains to be seen and both have very different legal ramifications.
Personally, I find it unlikely that an employee of the Bank of England doesn’t know that the bank creates money. Especially not an employee who is responsible for communicating with the public.
The question then remains, why say what he said and how accurate is it?
The accuracy element is easy to solve. The Bank of England does indeed create money.
The reason why Brendan won’t say that is up for grabs and demands a reply from him.
I suggest the Governor of the Bank of England ring up the Governor of the Bank of Japan and ask her how come the Bank of Japan owns 40% of the Japanese Government debt, and that it is buying the rest up at the great rate of $730 BILLION A YEAR, and still couldn’t move the inflation rate to above .2%, and the unemployment rate is at a measly 2.8%???
Please help me if I’m being a bit thick here but it seems to me that the two points of view can be (over)simplified as follows:
1. Taxation raises money to be spent for public purposes. Printing money causes inflation.
2. Printed money is spent for public purposes. Taxation prevents the resultant inflation.
It seems to follow that in the absence of all other variables, these amount to the same thing. Looking at the recent past, money has been printed by QE. This has been channelled through the banking system to the 0.1%. It has therefore lead to inflation in the sorts of things the 0.1% spend their money on – stock, shares, real estate etc. This has depressed yields and ruptured pension funds. There was no break on this inflation as no meaningful wealth taxes were levied. There has been little or no inflation in the things the 99.9% spend money on as little or none of the printed money has found its way to these people.
But when are we ever in the absence of all other variables?
Let’s imaging now that printed money is invested. By “invested”, I mean spent on creating or enhancing things or circumstances that increase wealth and wellbeing. I do not mean simply buying stuff that already exists. I therefore regard money spent on education, skills, housing and healthcare as investment as an educated, skilled, secure, healthy population is (a) more productive and (b) happier.
Would this create inflation? I suggest maybe not. I agree that it will result in more people having more money in their pockets and this will increase demand – a driver of inflation. But I also believe that (a) a more productive population will increase supply and (b) happier people will be less inclined to buy useless c**p just to assuage their unhappiness, both of which will counteract the inflationary impact of the increased spending power.
Does any of this make sense?
I admit I do not see your propositions as the same
Some of your conclusions flow nonetheless
In haste….apologies
Others might do better
For years I believed the mantra “tax and spend” as though it were a law of physics: indisputable and unquestionable.
We have been told that this is how government pays for public services: it taxes people and then it spends the money.
This idea has been promoted in the press and by political parties for years and especially at election time, “We’ll raise income tax by 1p to pay for new schools, hospitals and roads: the things we all use and need!”
This mantra is connected to a belief that the government and political parties must explain which tax will pay for which public service.
But why should we question this mantra? The government – or any party wanting power – should explain how it is going to fund public services. That’s part and parcel of honest and transparent government.
That may be true, but that doesn’t mean tax must be raised first to pay for anything.
It turns out, after all these years, “tax and spend” doesn’t exist at all.
The government can create its own money without needing to first raise a penny in tax. It does this, not by planting a magic money tree, but by instructing the Bank of England to create it. Just as it did to help us out of the 2008/9 banking crisis.
It instructed the Bank to create £435 billion, which it then used to buy back government bonds and in the process inject money into the financial markets.
Did the government tax anyone before instructing the Bank of England to create that money?
No. It never raised a penny in tax to pay for it. There was no “tax and spend”.
But the government did collect tax as a natural and necessary consequence of creating that money. Because when a bank lends money to someone to buy a house, or to a business to buy raw materials for example, the buyer then pays Stamp Duty and or VAT on the goods and services bought.
In other words, tax is collected by the government after the money has been created and spent.
It cannot be “tax and spend” because you can’t collect tax from non-existent money or a non-existent sale or a non-existent salary: money must always be created first, otherwise there is nothing to tax!
Which means…
The correct order is in fact: create money, spend money, collect tax.
Which also means…
The government doesn’t need to tax anyone or any business a single penny before it can build a school, hospital or road.
It can simply instruct the Bank of England to create whatever amount is needed and ask the builders to get on with the job. Tax is then collected when the builders use that money to employ workers and buy raw materials etc. And tax is collected again when the doctors and nurses who are employed by the hospital take home their salary and use it to pay for their mortgages, rent, food, petrol etc. etc.
So, the money created by the Bank of England to pay for public services comes back to the government when they collect tax from people and businesses.
Which means…
There is no such thing as “tax and spend” – as Mr. Spock would say, “It’s illogical Captain.”
Yet still we demand the government tell us where the money will come from to pay for public services!
This is not unreasonable.
What I mean by this is that yes, government must explain how it will pay for things like pay rises for nurses and nuclear submarines, but the answer to this question is not to state which tax will be raised.
Instead, the correct answer is to state how much money the government will ask the Bank of England to create. Because public services are paid for by creating money first, then spending it and then collecting tax.
So, it’s not “tax and spend”. It’s create, spend and collect.
That’s where the money comes from.
That’s how public services are paid for.
So what is tax for then?
Tax is actually raised to control inflation i.e. to take money out of circulation when the economy starts to overheat.
Which means…
What the government can’t do is suddenly create a gazillion bazillion pounds and blow it all in one day. The amount of money they can ask the Bank of England to create needs to be calculated and managed with respect to how it would influence growth and inflation.
But no tax of any kind needs to be raised first, because it’s impossible to tax something that does not first exist.
And that is why tax and spend is dead.
Long live create, spend and collect!
Lee Carnihan
Author, editor, father – http://www.carnihan.com
An observation: Article 123 of the Lisbon Treaty seems to have German Weimar paranoia running through it.
Echoes, or more likely the follow-on of the failed “Stability and Growth” pact which laughably provided neither.
In trying to consolidate my understanding of Richard’s (and Ann Pettifor’s and Keynes’s etc.) work, questions keep popping up that I find hard to answer on my own. This particular thread has been very good for answering a few of them.
There are a couple of others preoccupying me at the moment, however, that I need help with:
1. Sovereign wealth funds. Norway is frequently lauded for saving up its oil revenues and using them to invest in infrastructure (unlike Britain which frittered them away on tax cuts etc.) . What role does the oil revenue actually play, however, if the government could anyway produce the money for the infrastructure “out of thin air”. The whole People’s QE/Green New Deal thing would essentially play the same role as a progressive and wisely managed sovereign wealth fund, right?
2. Technically (not morally) is there any difference between money being taken out of the national economy (destroyed) by taxation, and money being taken out of the national economy by unscrupulous people hiding it in offshore accounts.
Any help gratefully received
I admit I have not got the energy to answer tonight
Sorry
1. There is no such thing as sovereign wealth funds. The tax on oil is to control the use of oil resources, not to provide revenue for the Norwegian government to spend. It doesn’t NEED TO BALANCE ITS SPENDING WITH ITS TAX REVENUE EVER.
2. Money is money, whether it is taken out of the local monetary stock via taxation, or exchanged for foreign currencies. No ethics involved here.
@James: I’ll give it a try – different to Tuan Nguyen :
For the first query:
There is no particular benefit for the Norwegian Wealth Fund except that it doesn’t require borrowing from others if it should need to import goods. Any imports can be offfset against the sovereign wealth which will already have an inflow of funds from abroad.
However many would say that as long as you have the rule of law, investment from abroad for imports supplied is no problem. Interest producing wealth from abroad (for the exporters) could even be regarded as advantageous.
For the second:
The difference between money being taken out of the economy by tax havens and tax itself is that money to tax havens are a complete loss until – if ever – the money comes back. So, in effect, you are exporting money to tax havens.
By contrast (domestic) tax gets the accounts in order.
Positive Money – for example – thinks money spent isn’t ‘destroyed’ by tax. But it doesn’t matter – it is really an accounting concept to show that any spending is cancelled out by receipts. And receipts generally cancel completely in the end see: http://www.progressivepulse.org/?s=tax
But with tax havens there are more than likely never any receipts. That’s why they’re often referred to as leakage!
As compelling as the proposal you refer to may seem, it would be illegal, as it violates Article 123 of the Lisbon Treaty, which forbids central banks from financing government spending.
But there is nothing to stop the Bank of England to buy bonds issued by the British Government. Same outcome. So yes, the Bank of England is stretching the letters of the Lisbon Treaty a bit.