I have already published an explanation showing that the simple reallocation of the tax incentivised savings of UK taxpayers could more than fund the costs of the Green New Deal. In that article I did, however, suggest that this was not the only way that the Green New Deal could be funded. The full range of options was:
- Reallocating existing resources;
- People depositing money with the government;
- Additional tax;
- Private investment;
- Green quantitative easing.
Although, as I have shown the reallocation of the existing capital of the UK's savers could more than fund the Green New Deal, and at the same time provide most of those savers with a significant increase in their return on their savings, I think that the other issues also need to be looked at and I do that here.
It has long been my argument that tax does not directly fund government spending, which is always paid for by credit form the Bank of England in the first instance which is then cleared by tax, the type of borrowing to which I refer below, and by government money creation (usually in the form of quantitative easing) and I don't change that view in the case if the Green New Deal. Not do I change my view that the primary uses of tax are then to:
1) Ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) Reclaim the money the government has spent into the economy in fulfillment of its democratic mandate;
3) Redistribute income and wealth;
4) Reprice goods and services;
5) Raise democratic representation - people who pay tax vote;
6) Reorganise the economy i.e. fiscal policy.
But let's be clear that there will be significant interactions between tax and the Green New Deal. That's already clear from my suggestions on reallocating resources, where I suggest that the tax incentives for saving be shifted towards Green New Deal related activity. This fits into categories three and six above, and is, therefore, tax-related activity.
There will be other consequences though. One is that all the new activity the Green New Deal will give rise to, especially if all is paid at a real living wage (at least), will increase earnings and this will mean more tax is paid. And given that multipliers will be at play, and these tend to be high in the ace of investment, which much of the Green New Deal will be, there is actually a real chance that the Green New Deal can pay for itself in this way, subject to the cost of the tax relief that will have to be given on at least some of that investment. Because I have already shown that tax-driven reallocation of capital can cover the cost of the Green New Deal I am not going to agonise over what these tax implications are: I simply make the point that they will make a significant contribution towards the cost. That is inevitable when a great deal of the spend will be on labour, and on average people pay about a third of their incomes in tax. Let's agree for the time being that this suggests at least one-third of the cost will be recovered in this way: I strongly suspect it will end up as somewhat more.
Increasing deposits with the government
So what is the role of increasing deposits with the government? This is conventionally called government borrowing but since we don’t call bank deposits saved by those with money to spare ‘bank borrowing’ I object to the term 'government borrowing' being used when people save with the government instead of banks. That's because when people buy government bonds or gilts they are saving, and so that's what we should recognise this as.
My suggestion is that we should permit this saving to the extent that people want to deposit their funds in bonds to finance the Green New Deal. I have, of course, already mentioned this when discussing the reallocation of capital, and some of this activity will be done through tax incentivised mechanisms such as pensions and ISAs. But this need not be the only way that they should be available. National Savings should also be involved, making these easily available products.
One way to increase their appeal would be to allow savers to indicate how they want the funds used e.g. in their own locality, or nationally. They might also want to indicate in which sector they want the funds used e.g. I would encourage housing, transport, energy and other bonds. This is not hypothecation: it is letting people indicate how they want to contribute to saving our planet.
I would also encourage a National Investment Bank to issue bonds. Some of them might be performance related and so carry variable rates of return. I would be happy with that.
But the consistent feature of theses suggestions is that given the climate crisis we face we need to stop the continual flow of savings into the purchase of second hand shares - which is what almost all the shares on stock markets are - and second hand buildings, which is all that most commercial estate agents have on their books. These are utterly unproductive savings mechanisms. We have to instead direct savings to where they might be used - and right now that is likely to be government based savings schemes used to provide capital for the Green New Deal.
This direction of savings might change if and when business realises that it will also need massive capital to adapt to the Green New Deal. Then people might have a market choice of Green New Deal options as well. I would be more than happy with that, when and if it happens. But for the sake of safety I suspect many want to save with the government. We should let them.
Green quantitative easing
Every plan needs a backup or backstop? The backstop is to use green quantitative easing (QE).
Let’s be clear, no one would use QE unless they have to do so. QE is the process by which the government buys back its own debt. Why might it want to do this? It would only do so if investors either lose faith in saving with it (which is unlikely in any foreseeable situation) or if investors are not willing to save enough too fund the government’s plans and there is still capacity to use additional funds in the economy, and the government effectively creates them using quantitative easing. That’s it: those are the only uses of Green QE, but having the option available is a powerful weapon.
And let’s remember what it in reality Green QE really is in this situation. In effect it’s a guarantee that anyone who saves with the government will always be repaid, come what may. That’s a valuable guarantee. I can say that with some confidence. It’s a governmetn guarantee that underpins the safety of the majority of individual’s bank deposits in banks at present, to a limit of £85,000 per operson, per bank. Without that guarantee all those desposist are literally unsecured bank borrowing. With it they became secure saving. All the promise of Green QE does is extend that promise to anyone saving with the government: whatever happens it says that the government will create the funds required to guarantee that theit savings are safe. I can see no conceivable objection to that.
In my first post on this theme I suggested that simply reallocating pension and ISA saving could more than cover the likely cost of a Green New Deal tranisition. I stand by that. What I have argued here is that the opportunities extend beyond those mechanisms, and should because the Green New Deal has to be at the core of all government thinking in the future.
Do all these sources of funds add to the at least £50 billion required for a Green New Deal for the UK as a whole? Yes, easily. Could they do the same for Scotland? Yes, I guarantee it.