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.
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Is there any way of quantifying the effect on the economy of the £1 trillion debt held by us? What would happen if it were removed.
Can you explain what you are seeking in a little more detail?
I am not sure what you are seeking as yet
If the ND was written off what would happen?
We would have no money
No effective pension annuities
And banking would find it nigh on impossible to operate
And £1.4 billion would have been wiped off personal wealth
Denis,
“quantifying the effect on the economy” might sound articulate but it is not in any way specific. Its abit like saying: ‘how’s it all going’?
Richard,
That depends on what Denis means by “written-off”. That in itself is not clear. If he:
A. means that the debt was simply cancelled and the bondholders were left unpaid (a 100% ‘haircut’) then what you are saying is true in one way.
B. means that it was all paid pack with the govt. running continual budget surpluses until the stock of debt was zero, then what you are saying is true in another way
C. means that the debt is all monetised – that is the debt-holders are paid by the central bank leaving the govt. with zero debt, then that is a different matter entirely and not all of the outcomes that you described would follow.
Needless to say A, B and C are variously impossible, undesirable or unnecessary.
P.S. I should note that both A & C are sometimes referred to as “cancelled” or “cancellation”**.
I threw B in to complete the list. I also ommitted the 4th factor, QE “(a relative of monetisation) because the QE programs of various nations only account for a portion of government debt, thus no “write-off”.
** https://www.businessinsider.com.au/top-client-question-can-central-banks-just-cancel-sovereign-debt-2012-10?r=US&IR=T
https://en.wikipedia.org/wiki/Debt_relief
https://jubileedebt.org.uk/report/europe-cancelled-germanys-debt-1953
https://www.theglobalist.com/qe-debt-cancellation-world-economy/
Well said, Richard: particularly the point about the balanced budget, which is neither a necessary or a sufficient condition for a well-performing, socially just economy. IFS and other commentators really need to take off the blinkers regarding this.
I don’t think many people on the left take IFS’s budget or election commentary that seriously anymore, and their influence on a future Corbyn administration is likely to be minimal to non-existent. A shame, because good quality independent commentary on fiscal policy issues is useful. But we never seem to get that (with the exception of a few high quality commentators such as yourself!)
Thanks Howard
I value your support
This seems misdirected. The IFS don’t do macroeconomics. They were commenting on what Hammond would need to do to meet his goal of balancing the budget. They weren’t expressing any view on that goal.
That’s nonsense
If they talk about those issues they are doing macro
Saying they don’t do macro when they do is disingenuous
You can’t do “fiscal studies” without doing macro. If they are pretending to do so then they are not doing “fiscal studies”.
What they seem to be doing is engaging in a vacuous accounting exercise that results in sub-moronic notions like “net contributor” and “net beneficiary” being introduced into the discourse. IFS concepts like those perfectly exemplify their inability to comprehend the integrated, inseparable relationship between the private sector and the state.
And that is their problem. They assume that fiscal issues can be regarded separately, in isolation from the rest of the economy. Their entire existence , as such, is premised upon a misconception.
I agree
I suppose this is the sort of crap we can expect from a Tory think tank.
The polemics of despair.
It’s working.
“Think Tanks” are often a pernicious aspect of our political discourse. They are given the respect of academic institutions, but, like the IFS, too many of them don’t actually “think”, they regurgitate the propaganda of their donors, rather than, like good academics (i.e. excluding most Economics depts) question the current consensus and explore contradictions and flaws in the dominant paradigm and examine (or create) alternative viewpoints.
As you say, the IFS has been nothing other than a cheerleader for the “tax and spend” neoliberal paradigm, along with most of the press and most politicians.
and G Hewitt, are often quoted by the BBC or other media, as presenting valid alternative views. I feel strongly that they should not be quoted if they are unwilling to disclose their main donors.
I sometimes think I have Roundhead genes.
I commented a few days ago that the IFS were cheerleaders for austerity economics. Thanks for the proper analysis that confirms this. Am I too old to live long enough for this phlogisten based economics to be ousted and replaced by something more enlightened?
@ Rod White
“Am I too old to live long enough for this phlogisten based economics to be ousted and replaced by something more enlightened?”
You don’t state your age but if you were born pre-1965 then I regret to say you’re unlikely to live long enough. As Andy Crow says above – the Neo-liberal narrative is still ‘working’ in the sense that it continues to infect the general public mind-set.
IMHO 😉 there are only 2 feasible ways that it can be changed. Firstly, the ‘Kaisen Way’ … one step at a time. This is a lengthy process, necessitating a generational shift, but it will eventually achieve the objective. Blogs such as Richard’s provide essential building blocks.
The 2nd ‘opportunity’ for change would be another global financial crash on a scale of 2007. This could happen much sooner than via the Kaisen Way, but the cost in human misery would exceed that of the last GFC.
It is extremely unlikely the change will be introduced by any of the current mainstream political parties.
I suspect it will be GFC2
We are very ill prepared for it because the status quo survived last time
I was born in 1944. That’s some time before 1965 I believe. Maybe there’s hope for my grand daughters.
“We are very ill prepared for it because the status quo survived last time”
Unfortunately, Rick Parfitt is no longer with us.
Rod White says:
“Am I too old to live long enough for this phlogisten (sic) based economics to be ousted…..”
If you remember phlogiston, Rod I suspect you may be 🙂
Yeah, I remember it but obviously not how to spell it. Obviously it’s the dephlogisticated air.
Rod White says:
“Yeah, I remember it but obviously not how to spell it. Obviously it’s the dephlogisticated air.”
You’ve got it wrong way round. You need to read Flan O’Brien’s ‘The Third Policeman’ where you will discover Basset and Hatchjaw’s notes on the seminal works of the great philosopher and savant De Selby on the flammability of accretions of black air.
Just don’t read it in public. It had me laughing out loud explosively from time to time.
One of the sadder things of history is that the 1st Duke of Wellington did not have command of The Treasury for any length of time. We might have had fewer wars, less consequential borrowing and rather fewer crash causing financial arrangements.
Hmmm.
Yes, even if the claims that UK state debt are about 85% of GDP were true, that’s pretty close to the 300 odd year average. c.260% of GDP after the Napoleonic wars, c.240% in the late 1940s.
Discounting for the QE’s uncreative accounting, UK debt is well below the historic average.
It did actually pay down almost continually across the near century 1820 and into the early 20th, but they were in Gold Std territory back then and some of our newer better thinking wouldn’t apply in quite the same way. But it does today, and that says nothing about the general and evident truth that wisely managed state debt can drive growth and development.
What’s been annoying me of late is the BBC and others repeating what is patently false, e.g. that current debt levels are high historically – just nonsense and it isn’t being challenged as far as I can see. Media repeating the political-strap lines with no questioning.
If the IFS are at this nonsense too … .
It’s just depressing when they don’t get the basic understanding right and insist on supporting the same-old mistakes being made over and over. Definition of …
(PS UK doesn’t exist in 1694 – makes no difference to your point though)
Thanks…..
Hi Richard,
This is slightly off topic, but if one accepts that government spending is not constrained by the amount of tax they can raise (and the difference is made up by either borrowing or money creation as they see fit) what metrics would be measured to assess whether the stimulus to the economy was too much/not enough or just right (and therefore get the balance between money creation and destruction via tax at the right point)?
Would some form of monitoring of the money supply be used (I appreciate that that money supply measures have associations with Mrs T!) or is the absolute size of the money supply irrelevant and you simply measure how successfully or otherwise the productive economy is absorbing the demand via inflation statistics/wage growth etc?
I would be happy (ish 🙂 ) to be simply directed to a resource that would explain this in detail! I am in fact reading The Joy of Tax at the moment so I might get to a point where this is explained…
The measures are a) rising median pay and b) increase in gainful employment
Balance the economy, not the budget.
Yes I read the Guardian piece this morning and had exactly the same thoughts as you Richard. Is their ignorance of the relationship between money and tax actual, or wilful one wonders. So entrenched is this tax and spend, back to front narrative and just looking at the IFS people bios so many careers have been built on it that changing the narrative is going to be a long hard slog, unless by some miracle they see the light. As it happens I have just been reading a most interesting paper on the modernmoneynetwork.org website titled ‘ Taxation and Primitive Accumulation in Colonial Africa ‘ not at first glance a title you might think had a direct relevance to this issue. But what the author Mathew Forstater shows is that the introduction of taxation, paid in the colonial currency, was used as a means to force the conquered peoples in the European colonies to work as wage-labourers and produce cash crops so that they could pay taxes. Which is exactly what MMT says : you have to earn state issued currency to pay tax . In other words it is your work that matters ( or to put in the language of economists – the production of goods and services ) and the payment of wages to pay taxes which enables the state to exist . So there at that first stage the work , or the spending if you will, comes before the taxing. There’s a delicious irony here in that the ‘ elite’ who set this up and – fast forward a century or two- want to do their best to undermine the system set up by their ancestors by not paying tax .
John Hope says:
“…looking at the IFS people bios so many careers have been built on it that changing the narrative is going to be a long hard slog, unless by some miracle they see the light.”
I think we might have to wait until they see the the celestial light gleaming forth from the pearly gates before they change their minds.
They shoot horses don’t they ?
” The IFS persist in not telling the truth about this. QE cancels government debt.”
Well if they “don’t do macro” as such then they won’t understand how QE works and nor I suppose, do they pretend to.
This is to be expected. The IFS operates on the premise that fiscal matters can regarded in isolation. They don’t consider the government’s relationship with the private sector and they don’t consider its relationship with the Central Bank which is actually part of the government. In which case the IFS are pretty close to being useless
Meanwhile in the US, the Fed has, several months ago, announced that it is going to “unwind” QE over time by cancelling the debt as it matures. The government pays itself and the debt is cancelled as it falls due.
https://www.forbes.com/sites/timworstall/2017/04/06/the-feds-big-reveal-how-it-will-reverse-quantitative-easing/#250a74751871
Richard, re. linked article – you might be amused to note the author.
Richard, can you please explain to me why the £435 billion QE is being included in the national debt figure as my limited understanding led me to believe that any QE expenditure should automatically reduce the debt
It should not be included in national debt
It is not in the whole of gobvernment accounts where debt is shown as a reduced sum
http://www.taxresearch.org.uk/Blog/2015/08/05/qe-does-cancel-government-debt-its-own-accounts-prove-the-point/
That 2015 post is a beauty & good work too. We know that QE cancels debt but it is even better to get it from the horses mouth.
That 2015 post is a beauty & good work too. We know that QE cancels debt but it is good to get it from the horses mouth.
The IFS perfectly symbolises the bizarre place the UK has become where the majority of citizens self-harm through a reason and a non-reason; which are the government has no money of its own but have no idea where “rationally” the money (as a medium of exchange) can be created to pay taxes.