The IFS published its analysis of the Spring Statement yesterday. The headline was that if the government was to meet need in the economy within the next few years then it was going to have to raise £41 billion pa in additional tax to pay for the that demand and balance the budget.
This is so typical of the IFS, which seems to specialise in persistently misunderstanding tax, the economy and the relationship between government spending, money and well being. Given the IFS is the, supposedly, most revered think tank on the issue this is some claim to make, so let me unpack that just a little.
First, let’s be clear that since 1694 the UK government has run almost persistent deficits and made no real attempt to ever clear its debts. The result is that in 324 years the government has not tried to run a balanced budget, and we have made decided economic progress despite (or rather precisely because of) that fact. So why is the IFS endorsing a goal, in the shape of a balanced budget, that makes no economic sense at all and which has been proven to be unnecessary by experience?
This is, secondly, most especially true when it is appreciated that since 1971, when money ceased to have any relationship with the gold standard, the so called national debt is, in fact, the largest component in the money supply. What the IFS is then doing is suggesting that although they believe the economy will grow that they want this to happen without the government playing a role in it so doing by injecting the essential liquidity that will fuel the increased activity that will be undertaken. How, I wonder, do they think that helps?
Third, what this shows is that, as ever, the IFS think that we live in a world of tax and spend, where the ability of the economy to supply care for the elderly is entirely dependent upon the capacity of large firms of accountants, staffed by highly paid individuals, to seek tax abuse at a significant profit on which they pay tax for as long as they think it worthwhile living in the UK.
And I kid you not: the IFS actually made a statement that we are dependent upon rich, highly mobile, individuals paying tax in the UK for the supply of government services in this country, and this despite the fact that they often say that imposing taxes on the high paid will never fund the services we require. It is as if they are wholly unaware of the completely paradoxical nature of these parallel claims.
The reality is that we are dependent on the overall level of income in the economy and, as importantly, whether income is spent or not. The actions of the wealthiest and highest earners (groups who usually overlap because the wealthy reach that state by not spending, which is easier when you don’t need all your income to live on) in not spending suggests they are not that valuable to the economy. That they contribute is savings: and we already have a glut of them. That's one good reason why national debt is rising: they are buying the government binds in question.
The rich and wealthy are also not that valuable because their low overall rates of tax compared to both income and wealth suggests that our dependency upon them is tenuous, and that their replacement by lower paid, but likely to be as ambitious and in truth equally competent people of sound judgement, might in the event that there was an exodus from the country of the current incumbents of the highest paid posts actually be for the overall best of the country by creating a considerably improved income distribution.
And there are two other key issues the IFS ignore. The first is that national debt is £435 billion less than they say because of quantitative easing. John Redwood understands that. The IFS persist in not telling the truth about this. QE cancels government debt.
Last, the IFS continue to suggest that government spending is akin to pouring money into a hole. They ignore the fact that it is wealth creating in its own right. They ignore the fact that this spending is other people's income, on which they might pay tax. It seems that they, like the Office for Budget Responsibility, massively underestimate the economic multipliers on government spending, which is why both have got their forecasts so wrong in the past. And the result is that the IFS becomes part of the government propaganda machine for austerity.
It really is time that they stopped being given the respect that they get for largely following the Treasury script, which on this occasion would be exactly what the IFS is saying rather than what Philip Hammond did. This would not matter except for the fact that the Treasury has truly been the home of dismal economics for decades now. And so too then is the IFS.