I noticed this Tweet yesterday:
Labour's unfunded spending pledges add up to more than £20bn a year, @theipaper analysis suggests - equivalent of a 3p rise in income tax.
And IFS's Paul Johnson casts doubt on the party's ability to meet capital spending promises without pushing up debt.https://t.co/R8XGF3911B pic.twitter.com/eFQoaUC78x
— Hugo Gye (@HugoGye) May 31, 2023
There is so much wrong with this.
'Unfunded' is a meaningless word. The government can never have 'unfunded' spending: it has its own bank to fund whatever it wishes to spend. Starting a tweet with an inherently wrong claim is not clever.
Second, there is no reason for £20 billion to equate to 3p on income tax. The country desperately needs a bigger deficit to stimulate appropriate economic activity to mend all the broken parts of the country that the Tories have made their legacy. Running a deficit will be exactly the right thing for Labour to do, and this sum might be 2.5% of spending or less than 1% of GDP. That is a much more appropriate description because it shows how insignificant the issue is.
And third, there is no national debt. There is only money saved with the government because that is where people wish to deposit their funds knowing it is the most secure place to save. What is more, the extra funds to be deposited in this case will be created by the additional government spending, because that's the way the system works.
But, more significantly, this view is so incredibly static. The assumption is that the increased spending has no consequences. There is no account taken of the multiplier effect that results in much more tax being paid than that due from those directly in receipt of the benefit of the spending. That additional tax is aid precisely because those who do benefit from the direct spending go on to spend most of what they receive, meaning that the gain from the government spending is spread over many more people than those who directly benefit, with most of those additional people also paying tax on it, whilst some of them will eventually save - which is where the additional funds despised with the government come from.
And then there is also no awareness that government deficits represent increases in private wealth - and if that wealth is spread appropriately, then this is a benefit to society.
Nor is there any clue that this planned level of spending is far too small. For example, the spending required to stop water pollution is in my estimate £26 billion a year (more to come on this soon). The list of issues not covered by green investment and the Northern Powerhouse is almost endless.
So what is this Tweet about? If it is a demand that Labour be clearer, I am all for it.
If, as Paul Johnson's involvement would suggest, it is neoliberal debt paranoia, then it is just a demand that Broken Britain stay broken.
The media (and Labour) are going to have to make a decision sometime. They have to decide whether they want the country to work, or whether they'd rather allow a fear of deficits to crush it. There is only one right answer, of course. The trouble is, it seems to be very hard for both the media and Labour to understand that without a decent dollop of deficit spending Broken Britain is here to stay, for good.
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On one of MRks Steel’s radio 4 comedy shows, he asks how the UK ever afforded libraries (amongst other things) when it was a poorer country than it is now. Looking at the list (universal childcare, mental health support) the cruelty inherent in the tweet is obvious – nothing that offers care or support can be afforded (he didn’t choose corporate subsidies as the extra spending). I wonder where the IFS think money goes when it’s spent – they must think it’s chucked in a ditch and burned.
Let’s not forget that paranoia is always a fascist project and we live in a fascist country believe it or not.
In the 20th century, the ability to write memorable (and beautiful) English crossed the Atlantic. In the field of economics (and human behaviour) perhaps the greatest exponent was J.K.Galbraith.
“These are the days when men of all social disciplines and all political faiths seek the comfortable and the accepted; when the man of controversy is looked upon as a disturbing influence; when originality is taken to be a mark of instability; and when, in minor modification of the scriptural parable, the bland lead the bland”
(Chapter 1: The Affluent Society. 1958).
Nearly 70 years have passed since this was written. The current situation with governments and money shows that nothing has changed. “Conventional Wisdom” (coined by Galbraith) still rules and nice people continue to believe (no thinking is involved) that they are doing the right thing, they parrot what they have been told by others and believe it is holy scripture. They are functionally incapable of standing back and reflecting along the lines of “hang on a sec….”.
A 9 year old Ukrainian refugee & her mother have been staying with us. Last night I explained to the 9 year old the basics of gov finance & MMT. She understood. A 9 year old.
Great quote
And yes, 9 year olds can get it
JKG always so readable and quotable. Thanks for the reminder.
…. and yes, children get it because they come with no baggage.
I have most of his work – including his one novel, which was rather good
Indeed when will the mainstream media ever get down to doing some joined up “blogging” and news reporting? Here’s what I mean typical examples from The Guardian:-
https://www.theguardian.com/commentisfree/2023/may/31/brexit-britain-future-economy-jaguar-land-rover-industrial-strategy
https://www.theguardian.com/commentisfree/2023/jun/01/brexit-labour-tory-policies-rachel-reeves-jeremy-hunt
https://www.theguardian.com/money/2023/jun/01/uk-house-prices-fall-nationwide-high-interest-rates
In retrospect historically Thatcherism (Neoliberalism/Neoconservatism) will be seen as the era where joined up thinking fell apart in the UK.
Why is it always x p on income tax why not 1% on unearned income???
does Johnson of IFS — & Starmer/ Reeves
etc. not really understand the difference between individual economic behaviour & aggregate state behaviour ?
Is it not called ” fallacy of composition ” ?
or drawing the wrong conclusion
or are they being deliberatively provocative ?
the plebs will never understand !
as Wray put it in ” Making money work for us ”
” It is thus wrong to think that if at aggregate level we spend more on one thing , then we must spend less on something else ”
As the song goes ” when will they ever learn ? “
Apparently not
It would appear that Starmer and Reeves have not joined up the dots namely that in normal times productivity drives down prices thus allowing the state to spend more than it refluxes!
So right Richard, And lo and behold – BBC radio 4 picked it up eagerly and trumpeted it several times.
As is their won’t – no curiostiy as to whether there was any merit in ‘3p tax’ scare etc. The BBC have their own agenda – which just happens to be to reinforce ‘deficit paranoia’
Their method is to let the nutcases ‘prattle on’ – whether about deficits or the need to bomb Russia – while engaging in direct challenging verbal combat with any union leader having the temerity to act to stop real wages falling further.
It is striking that deficit paranoia is an established universal truth, to the extent that it is not possible to even enquire whether the total accumlated quoted debt is actually a debt – owed to whom.
The IFS does some things well, but macro is not one of them and they know it.
“the equivalent of a 3p rise in income tax” is an entirely fallacious comparison. Not least because as far as I am aware no one is talking about increasing the basic rate of income tax.
A penny on the basic rate of income tax might raise £5 billion. Total UK public spending is over £1000 billion. That is over 200 pennies of income tax per pound of income. But what do we get in return? Social security, pensions, schools, hospitals, defences, courts, police, etc etc. It builds the infrastructure of society. It is not thrown away.
And total UK tax revenues are approaching £800 billion. That is 160 pennies of income tax per pound of income. If we ignore national insurance, VAT, capital gains tax, inheritance tax, corporation tax, customs and excise duties, etc etc.
I think it was you who described Galbraith as the second greatest economist of the 20th century, Keynes being the greatest.
The IFS doesn’t seem to have heard of the ‘Keynesian multiplier’.
I don’t regard the IFS as an unquestionable authority -even if the BBC does. I wonder why such an important concept is ignored by its economists?
Though having said this on the BBC Unspun World last night Faisal islam was talking about the Biden administration and how they had tried to balance the books etc while when the Republicans were in power they had run enormous deficits to pay for wars and tax cuts, so they are determined to invest in climate change spending and social measures. I get the impression that, perhaps, the BBC economists do know there is another way but have to work within imposed guidelines.
I did say that of Galbraith
Re constraints – how does Andy Verity break them then?
As far as I am aware -he puts out tweets or implies there is an alternative. More discerning people will pick it up but it doesn’t seem to amount to what get, or used to get, in Panorama, which lays out a case or educates.
Education , along with entertain and inform, is part of the BBC core function.
We often see this don’t we, “the equivalent of a 3p rise in income tax”. It makes a good story for the media. Politicians, especially Tories like to use it as well, because it will tug at the heartstrings of potential voters. Meanwhile, last year the Tories chose to freeze the tax threshold meaning that millions of people would now pay more tax.
“The freezes are expected to raise £25.5bn more a year by 2027-28, than if the thresholds had increased in line with the CPI measure of inflation.”
https://www.bbc.co.uk/news/explainers-63635185
So, another Tory stealth tax. At the time even the Tory press were pointing this out. In fact, I think they said it was equal to, yes you’ve guessed it, 3p on income tax! Seems more than that to me.
Income tax is just part of Government spending, but it is the main one that tends to be used for political propaganda purposes. It’s a bit like the notion of “taxpayer’s money”.
We could ask the question, how much did it cost in income tax terms to pay for the pandemic?
“The Covid-19 pandemic resulted in very high levels of public spending. Current estimates of the total cost of government Covid-19 measures range from about £310 billion to £410 billion. This is the equivalent of about £4,600 to £6,100 per person in the UK.”
https://commonslibrary.parliament.uk/research-briefings/cbp-9309/
That would be a lot in income tax terms. Add in the bank bailouts, financial crisis, etc, but it would all be pointless because it wasn’t funded by income tax. Yes, it would be possible to come up with a cost in terms of income tax, but it would make no sense given the crisis faced.
I think it just shows how powerful, especially with the public, the words income tax are. Better education of such matters would show that income tax is just part of the equation and often there are times when there are other financial ways and means to deal with things open to Government and there always have been.
“lack of understanding of the monetary system has been the worst enemy of the progressive agenda” Warren Mosler
The simple question “well, how are you going to pay for it?” leads to much squirming and fudging except in the very rare instance when the interviewee has a plan that sounds plausible (i.e. fits in with the poplar understanding of government finance).
So many of the UK’s problems – child poverty, affordable rental housing, NHS funding etc – can only be resolved by government spending, which is always translated as government debt, which is understood to be bad, and hence the spending is deemed unaffordable, and more austerity is thus the only solution.
Can anyone suggest how we can get out of the “how are you going to pay for it” trap?
I am working on it…
Excellent post. Incredibly the greatest Fed Chair fought this fight publicly over 80 years ago with the debt paranoids. On an NBC radio broadcast, he essentially explained what progressive economists now call the household fallacy – with facts and logic.
https://fraser.stlouisfed.org/files/docs/historical/eccles/Eccles_19390123.pdf
I am half way through reading….. thank you
I do like that address very much ~ it cleverly reassures the listener that the speaker is no radical by stating all the “common-sense” notions:
“I do not believe in government spending at any time for spending’s sake.”
“I believe that inefficiency and waste should be eliminated.”
“I am as anxious as anyone to see the Federal budget balanced.”
“I am just as much against inflation as I am against deflation.”
“I do not believe, and I have never said, that the Federal debt should continue to grow
indefinitely and no part of it ever paid.”
But goes on to make a solid argument, noting that conventional wisdom doesn’t apply:
“Admirable as these maxims are for the individual, they cannot be applied realistically to business or to the nation. It there were no borrowing or lending in the business world, there would be no business except by the primitive methods of barter.”
Like Keynes (“what we can do, we can afford to do”) it highlights the folly of not using the nation’s resources:
“The only way that we can impoverish ourselves is by failing to utilize our idle man power, resources, productive facilities and money in the production of real wealth.”
Notes that the capabilities of government can be applied for humane and practical reasons:
“The same government credit that can be used to protect human lives in time of war against the encroachment of a foreign enemy can also be used in times of peace to protect these human lives against demoralization and despair.”
And finally it points out the risk to democracy from policies of impoverishment.
Pertinent, as neoliberalism, for a sizeable fraction of the populations subjected to it, has meant stagnation, precarity, and in the worse cases, impoverishment and the loss of health, dignity and hope.
It would be wonderful to hear similar points being made by Starmer and Reeves.
I so agree with your last sentiment
Michael It would be good to see other current chiefs of central banks show how misguided our politicians are! It would be good to see them call out the manipulative dunderheads, and servants of the plutocrats!
Definitions are just part of the diffculty in communicating the alternative narrative on spend/deficit/debt/tax.
Thus ” ‘unfunded’ is meaningless” – yes but we know what they think they mean – that it will increase the deficit in year zero , they dont mean that there is no money to enable the immediate spend.
Simlarly with ‘there is no’ national debt ‘only money saved with the government’. Can’t see the body politic (or Paul Johnson!) being prepared to shift to this definition immediately – when the whole global sysem, IMF etc uses ‘debt’.
Perhaps your two easiest killer points to get across are:
1 the – entirely ‘static’ view – that spending has no consequenses – no mulitplier – ignores the boost to tax income , stimulus to growthc etc. This doesnt require them to change accepted definitions
2 the proposed spend is far too tiny ( 1% of GDP) to tackle pollution, and the vast array of urgent needs from the collapsing NHS to the green new deal etc
Hi
Just a quick question, which you have probably already answered. I’m quite new to your site.
What is the objection to the Treasury borrowing at zero interest from the BoE. Particularly as between 2008-14 we have substantial evidence that, depending on where the money ends up, it doesn’t affect either inflation or the value of the pound.
Also most companies borrow to invest, why is this so frowned upon by Conservatives, if the ‘company’ is the government?
I will try to do this – and have delayed replying – but right now cannot see when it will happen
Apologies
I am finite
“The assumption is that the increased spending has no consequences.”
That is what always seems so daft to me, as if there was no such thing as “investment” and “return on investment”. It would be so easy to turn the narrative. People borrow to invest in a house, an asset. Businesses borrow to invest in greater productivity leading to increased profit.
In 2020, out of the blue, Boris Johnson announced a £16.5 billion increase in defense spending. Nobody asked ‘how are you going to ay for it’.
Agreed
I can top that! Australia signed up to the crazy $368 billion AUKUS nuclear submarine deal and there wasn’t a whisper of “how will you pay for it”.
If it had been for any or all of schools, universities, scientific research, climate change, or public transport or heath the Australian Financial Review and the media in general would have been apoplectic!
https://www.theguardian.com/world/2023/mar/14/aukus-nuclear-submarines-australia-commits-substantial-funds-into-expanding-us-shipbuilding-capacity