Two excellent letters in the Guardian this morning on the fallacy of the government's claim there is a black hole in its finances and both from people I know and am working with:
Larry Elliott rightly sees the current panic about a “black hole” in public funding as demonstrating a fundamental misunderstanding of public economics (The UK economy is about to be thrown into a black hole – by its own government, 2 November).
As he points out, the widespread use of state money creation (quantitative easing) after the financial crisis of 2007-08 and the Covid pandemic fundamentally challenges the fairytale that the public sector is totally dependent on private funding. QE also challenges the assumption that public “money printing” automatically leads to inflation. The current inflationary spike comes from non-monetary factors: the war in Ukraine and the Covid slowdown.
The problem with Trussonomics was that it looked to the wrong agent of growth: trickle-down from the rich, rather than public investment. If there is a black hole that sucks in all the monetary energy, it is the gross accumulation of private wealth in fewer and fewer hands while public services are run down and more families are forced on to the breadline. An economics for the 21st century must thrust aside the ideological strictures of neoliberalism and develop the use of public money for the public good.
Prof Mary Mellor
Newcastle upon TyneWhat a relief to read Larry Elliott's article and your Bank of England editorial (2 November) showing that at least some people in the media are not, as John Keynes put it, “slaves of some defunct economist” or economic theory. There is indeed no black hole in the country's economy requiring more austerity and tax rises. There is, however, a social and environmental hole in the economic solutions parroted endlessly by the rest of the media.
As Elliott and your editorial showed, the Bank needs to stop putting up interest rates and instead reintroduce a massive QE programme, which predominantly funded the government deficits following the banking and Covid crises.
With an eye on the next election, it's time the opposition parties started to make this funding case. The next time they grill Rishi Sunak or Jeremy Hunt, they should demand that they explain exactly where the roughly £400bn injected into the economy during the Covid era came from, and whether it involved us being beholden to bondholders or being funded by huge tax increases. The answers to which are QE, no and no.
Colin Hines
Convener, UK Green New Deal Group
Speaking out is so important.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
It would be useful if journalists -both newspapers and television-also did a bit of homework.
I was reminded this morning of the Geddes Axe – a substantial cut in public spending in the early 1920s in response to agitation about “waste” by Lord Rothermere. Things can very definitely get worse.
Yes, I saw those. The ideas are getting traction.
You are right. They were excellent. There were a couple of other reasonable ones, too. One can hope that the message is getting through.
Try telling that to my City Council.
They are in panic mode – the latest modelling we are using for affordable housing development is a worst-case scenario and has made all our forthcoming schemes unviable. This is despite growing waiting lists and the potential loss of RTB receipts to Government because they will not be spent in time.
So, what we are shaping up for is for local Council’s everywhere preparing to contribute to the recession in their cities! Great! There is no consideration of any potential up sides (that in order to clear inventories we might see price cutting in supply chains) it’s just doom and gloom at the moment and even worse – paralysis.
Most Councils think they need rent rises of 11% next year (having carried the cost of Covid etc), but are being groomed for as low as a 5% cap. Throughout the reign (rain!) of the Tories, even though the lie that was the Localism Act apparently gave us the Housing Revenue Accounts to manage, the Tories have capped our rent rises (income), and even told us to increase the internal rate return on our loans for development (increased the cost of borrowing from our own bank account).
Good with money? The Tories? No way. Policy with the Tories is snakes and ladders, with more snakes than ladders. Their tinkering has caused immense harm and smacks of deliberate destabilisation.
The objective?
Well, I can tell you now that where I work, the General Fund is fucked. It’s running on fumes.
So, there is only one thing many councils can do – sell off their land, offices and housing. That is the trajectory long term I assure you.
“So, there is only one thing many councils can do – sell off their land, offices and housing. That is the trajectory long term I assure you.”
Yes, that’s the plan. From Thatcher on: sell off state assets that can then be rented back to us for ever. The government is not protecting us, it is feeding us to the crocodile of rentier capitalism.
Applying logic to the government firing some of it’s employees.
The government saves the wages, but now consider the consequences. The ex employees are now out of work and they have to be paid unemployment by the government. In addition because unemployment is so low they will spend their unemployment pay on food which is not taxed. Thus the government looses PAYE of the employees and the VAT. A further consequence is that people still in work will get worried about getting fired so they will start saving as much as possible (there is no tax on savings) and the tax take will be further reduced.
The tax lost could be greater than the reduction in government spending so increasing government debt.
The multiplier effect
The `Divisor Effect` – needs to go in the economics books….
Bloody autocorrect and my haste
What angers me about the issue is highlighted in Prof Mellors letter.
The money we need in the public sector and at large is NEVER portrayed positively as investment – it is portrayed negatively as debt and or a tax burden.
Yet we know most if not all of the privatisations that will follow have been engineered by private debt!
Precisely
I do like Mary Mellor’s slant there. She highlights that the Truss/Kwarteng form of “unfunded tax and spending” plans were in reality actually “unproductive tax and spending” plans.
That is a very important difference.
In 1931 when the only orthodoxy was the gold standard, in the midst of the Depression, with banks failing across the USA, industrial production down 25%, prices falling by 7% p.a. what did the Federal Reserve do? Raised interest rates from 1.5 to 3.5%.
In 2022 the orthodoxy is now the neo conservative mantra of small government, low taxation but the policies remain the same.
Plus ca change .. there are none so blind..
An encouraging report from the Beeb’s Andy Verity here https://www.bbc.co.uk/news/business-63573989
“A group of economists has questioned UK assertions that a “black hole” in the public finances will need to be filled with austerity measures and tax rises.
The Progressive Economy Forum said the £50bn “hole” disappears entirely if the debts are calculated differently.
The government previously used a different measure of debt, and going back to using that would leave £14bn to spare, they said.”
It’s quite interesting.
The report is good
The Progressive Economy Forum threw me out for wanting to cite Stephanie Kelton. I was given the choice of removing the citation or being expelled. I chose expulsion. This is not a progressive organisation.