According to Rachel Reeves, she and Kier Starmer need to find £22 billion to fund the levels of government spending that Rishi Sunak and Jeremy Hunt planned for the economy from March 2024 onwards.
The first thing to say about this claim, which very clearly originates in the UK Treasury, is that delivering the plan that Sunak and Hunt created in March 2024 would be wholly inappropriate. That plan was for austerity. Everything but health, defence, and maybe some parts of education would have seen real-term cuts in funding if that plan was to be delivered, with enormous consequences for all services supplied by local authorities, and for social care, benefits and much else. Therefore, as a matter of fact, finding £22 billion is an insufficient goal for this government.
It also has to be said straightaway that no government needs to find money before it spends. Neither tax receipts nor government borrowing funds what the government spends. Instead, the Bank of England always funds government spending in the first instance.
Taxes are then charged to cancel the inflationary impact of that process of money creation that the Bank of England undertakes daily on behalf of the government, whilst what is called government borrowing is nothing of the sort: instead, those who end up holding the money that the government has created if it runs a deficit are offered the chance to place those funds on deposit with the government because it provides the most secure place for any institution to save. The sums the government creates to fund spending do, as a result, return to it, either by tax or as sums deposited, but they never fund the spending that it undertakes. This is why “black holes” are not technically possible: money the government spends into the economy never disappears, so “black holes” can never be created.
It is also vital to note that there is absolutely no need for a government to “balance its books“, as it is commonly suggested. Historically, governments never have. Since 2010 the consequence of the government not balancing its books has been that approximately £1,700 billion has been injected by the government into the economy by way of money creation, and without it having done so we would be in the almightiest mess. Why Reeves and Starmer want to do something no wise government has ever done is very hard to fathom.
But what this also means is that the claim that we have a “black hole“ is completely false. There are never black holes in government funding. There are simply deficits, and they are entirely normal and appropriate within a growing economy that needs new government-created money to facilitate trade, which, in fact, makes them desirable.
All this being said, what could the government do if it wanted to fill this fictional “black hole” it claims exists? There are numerous options available to it.
Borrow from the Bank of England
The Bank of England, if it so wished, could make a £22 billion overdraft facility available to the government to fund this so-called “black hole”.
It offered a £20 billion facility to the government in March 2020, using what has historically been called the Ways and Means account, and there is absolutely no reason at all why it could not do the same now.
As in 2020, we now face a government funding crisis. Services that are needed cannot be delivered. Investment that must take place if essential infrastructure is to be renewed is not happening. Spending that is essential if climate change is to be tackled is not planned. And all of these are at least as big an issue as Covid was.
There is no reason at all why, in that case, the Bank of England could not lend this money on overdraft to the government.
What is more, since the government owns the Bank of England, there would be no reason to pay interest on the loan because the government would, in effect, be paying itself.
If the government did not want to borrow from the Bank of England, even though it can, it could instead issue a bond at any time now for at least £22 billion. I would suggest that the bond in question should last for at least 25 years.
At the time of issue of this bond, the government should make clear that it fully intended to re-purchase this bond from the financial markets within a week of its initial sale. In other words, it should always be made clear that it would use quantitative easing to re-acquire this gilt.
The effective consequence would be that the Bank of England would have advanced a loan to the government, albeit through the slightly more internationally acceptable structure of QE, rather than by way of simply offering an overdraft facility. The net outcome would be the same, either way (although quantitative easing is more expensive): the supposed “black hole“ would have been filled.
Borrowing
Alternatively, the government could just issue the bond that I refer to above and beyond a shadow of a doubt, the City of London would acquire it. The “black hole” would be filled in a moment.
Cancelling quantitative tightening
To make sure that the City had the capacity to buy the above bond and any further bonds that needed to be issued to ensure that the government could fulfil its mandate to the people of this country, the government could also instruct the Bank of England that it bring to a close its quantitative tightening programme. As a result of this programme, the Bank is selling back to financial markets approximately £100 billion worth per annum of the bonds acquired under the QE programmes that existed from 2009 to 2021. So far, approximately £200 billion of bonds have been sold in this way, with £33 billion being sold between April and June this year. As a result, it is obvious that there is capacity in the City to sell a new £22 billion bond, but that this could be guaranteed if quantitative tightening was cancelled.
Cutting interest rates
The only reason that the Bank of England is undertaking this programme is to keep interest rates high. The last thing that our economy now needs is high interest rates. That is also true for the government: it could greatly benefit from a cut in its borrowing costs. If the government were to tell the Bank of England to cut its base rates by at least two per cent, the likely saving to the government would more than exceed the £22 billion required to fill the so-called “black hole”. That supposed “hole” would simply disappear.
Raising taxes
The Taxing Wealth Report 2024 shows how Labour could raise more tax from those with wealth. I suggest these options:
- Equalise capital gains tax and income tax rates, raising £12 billion a year.
- Charging VAT on financial services that are only consumed by the wealthy would raise £8.7 billion a year.
- Removing higher rate income tax relief on pension contributions would raise £14.5 billion a year.
- An investment income surcharge, equivalent to national insurance on investment income, might raise £18 billion a year.
There are many more options available.
Summary
In conclusion, Labour is not facing a £22 billion funding crisis. There is no crisis in government funding of any sort right now, and nor is there any in prospect.
There is, as a result, nothing within the current economy that requires Labour to deliver austerity.
Nor is there any reason at all for Labour to suggest there needs to be more pain in our economy. Funding the £22 billion (and more) Labour needs would be easy.
So, what is Labour doing, and why? I am genuinely clueless as to why Labour is talking itself into a situation that is wholly unnecessary and which can only be bad for it. Reeves and Starmer have to answer that question, but I seriously doubt that they could provide a rational answer to it. Nothing I can see suggests that there is one available to them.
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Spot on. We must keep reiterating these options.
Regular readers of this blog will be familiar with these ideas but repetition is important because someone will be reading/hearing this for the first time.
Rachel, Keir… There IS an alternative.
Danny Blanchflower read a draft of this last night and liked it
He will also be reiterating it
Richard,
We have talked about increasing the National Minimum Wage, both in terms of the basic hourly rate and adding higher rates for overtime/late working/certain establishments eg bars restaurants & care homes.
Clearly this can be in effect a tax on employers who are generally the better off and at the same time would result in a reduction in the ‘in work’ benefits bill and more revenue to Government via Income Tax & NI
Any thoughts on the potential implications of this from a tax point of view or might it not be big enough?
I do not see it as a tax. I see it as fair pay
It’s not an angle I want to go down – srry
UK GDP is about £2.2 trillion, so £22 billion is about 1% (I think it is a good idea to inject concrete numbers into the discussion, which politicians almost never do). Would it be bad if the government simply spent that much into the economy (without issuing bonds)?
The answer is no; the government needs to create much more than that.
Assume that the economy grows at 2% per annum. Then it will need 2% more money each year simply to avoid deflation (if there are 2% more goods and services, which is what increasing GDP means, then prices would have to decrease by 2% if there were no more money).
But wait, we also want 2%, perhaps more, inflation (the economy works better than way; it avoids “sticky” prices and wages). So we need 2% more money for that too.
So far we’re up to needing to create about £88 billion per annum.
Furthermore, within about a year, most of the money created last year will have been cancelled through taxation, so more money creation will be required.
Reeves and Starmer say there is a £22 billion black hole. What nonsense. They need to create much more.
A painless “extra” £35bn? Stop paying banks interest on their regulatory deposits.
Thanks. This comprehensive rebuttal of Reeves’ & Starmer’s claims (mirrored in media too) is exactly what’s needed to resist the proposed budget. If Reeves doesn’t U-turn, she must be forced out of office.
There is one thing that the UK is spending on that neither the tories and now labour have mentioned so far (and the media too has been strangely silent, I notice) – but then perhaps I am just blind and deaf?
What are the costs to the UK of war, that is, what is being spent on the support the UK is giving to Ukraine and Israel?
Is all of the expenditure so far coming from the existing defence budget?
And
What is allocated for future expenditure?
Someone in the Treasury must know the answers already. There must also be figures for these two line items for furture years.
Firstly, thanks for your continuing economic insights and analysis which I very much support. Much appreciated.
In answer to the question ‘What is Labour doing and why ?’
Isn’t the answer that the Labour right in taking power from and distancing themselves from the Corbynite left and socialist ideas are happy to make Labour the leading party of capital and the establishment. And of course by becoming a moderate, ‘adult’, centre right political force Labour gamed the FPTP system to win a remarkable landslide victory in the election.
It is no surprise then, that right wing Labour genuinely believes that supporting capital and business elites by minimising taxes on wealth, reinforcing the orthodoxy that cheap government and fiscal rectitude encourages enterprise, reassuring the City – will secure the levels of private sector investment to achieve the ‘surpluses’ to spend on restoring the public sector at some point in the distant future.
What’s in it for the Labour right and its multitude of advisers and consultants ? The pleasure of turning Labour into an election-winning establishment party and defeating the Corbyn left plus high paid jobs and positions in the private sector when Starmerism has run its course.
Only 4) investment income surcharge, among the tax proposals could be considered actually to raise tax rates. That may make 4) the least attractive for government. All the others do is adjust over-generous tax relief exceptions.
The screams of rage will still come from the Telegraph, Express and Mail. For them, only the poor, moneyless and powerless are supposed to pay any tax penalties from fourteen years of bad Government.
🙂
Richard, nicely put. Good to read, again, the range of options open to government other than austerity.
But could I suggest that your continuing and informed posts for the benefit of your readers though valuable, do not seem to be having the required effect on the Treasury mandarins who are fixated on the economic dictates of yesterday.
How can we turn the screw and morph Taxresearch (TR) into an impactful lobby group? For example, TR could ask for volunteers who are willing to email their MPs on a regular basis with material generated by TR. Debates in the house would hopefully be more informed, and eventually, impactful.
What about setting up a Zoom call of interested parties to brainstorm how this could be done?
Note, this lobby idea does work, Results to End Hunger have made, and continue to make, huge gains adopting this technique. See https://results.org/
The trouble with that Bob is that it all increases the demand on me – and I am finite
If I stopped university workj it would help – at a cost
How to square that circle? I do not know…..
Alternatives aside, what is actually at the heart of the collective blindness of ‘Stymied’ and the the ‘Reeves-cividist’?
It could be their advisers prattling on about Labour still being perceived as having ‘spent up’ the Treasury before the 2010 election (thank you Liam Byrne). Fear mongering.
Or is it to do with America and it’s desire to expand further into the UK. Is this just ‘market making’ State style – by just breaking your promises and throwing us to the wolves and looking after your funders?
Unfortunately, none of it seems implausible.
@PSR
“Or is it to do with America and it’s desire to expand further into the UK”
I do not understand this statement.
There is a book doing the rounds called ‘ Vassal State’ which apparently goes into great detail about how the U.S. likes exploit the UK.
It could very well be that the retrenchment we are seeing in our public services in the UK is driven by our politicians giving in to what is American expansionism (or even trade as warfare as Michael Hudson talks about it). When the Tories got in in 2010, American healthcare provider shares went up.
If you think about it, for a long time America expanded internally (kicking out the indigenous Indians) and then needed to keep expanding everywhere else. We have their bases over here, their music and culture – some of it not bad at all – so why not the way in which they do business as well, although the way they do that can only be described as exploitative in some of the markets.
America is everywhere Tampa Bay – seen and unseen. The more the British state withdraws, the more the Americans can get in there – maybe some Europeans too. Our freight carrying railways were mostly owned by an American firm Winsconsin Central for a bit, before I think it was sold to DB Schenker from Germany.
Is it American CEOs and corporations going around the world transferring wealth to themselves? Highly likely, it was an American company that took over my fathers engineering firm and asset stripped it in the mid 1970’s. But America is not he only one for sure who gets up to this. But they will make the most of the ‘special relationship I am sure.
Have a look at the infiltration of the NHS by American companies.
Also listen to UK politicians and broadcasters , some of whom have gone to American University for postgrad degrees. They all seem obsessed with how things work in America and replicating them / allowing them to happen here. Never any suggestions about looking at how things work in Europe.
And of course, we have that very special relationship – which usually involves supporting any war at great cost to ourselves, extraditing UK citizens to face potential death sentence or life in prison, with Starmer directly involved in one case https://www.declassifieduk.org/cps-has-destroyed-all-records-of-keir-starmers-four-trips-to-washington/
And Starmer’s murky past relationship with rightwing America https://www.declassifieduk.org/keir-starmer-joined-secretive-cia-linked-group-while-serving-in-corbyns-shadow-cabinet/
There is a more hopeful story.
Labour are just playing a narrative.
Ignore ‘black hole’ until elected.
Spin a narrative, ‘much worse than we thought’ (you’ve had some right cowboys in here)
Spin it out until the Autumn budget, really making it clear just how bad things are.
Autumn budget, no choice but to put up taxes on the wealthy. When the inevitable howls come out from Tories and RW press, they have cover, ‘we told you how bad this was’ they will say.
However, I am not holding my breath, but there is a slim hope this is just a piece of political theatre.
Tax Chinese imports. 50% of goods have a duty rate of zero. Only 5.6bn collected in duty (on everything) last year. UK being flooded with competition damaging stupidly cheap goods. Even if you increased duty they would still be cheap. It will also encourage people to source goods from domestic manufacturers.
What does the US charge / raise?
This is a hot global issue at the moment and the US is considering how to deal with it (as are many other countries – a fixed charge is another option) but they must raise far larger sums in duty than we do (I don’t know US figures). When I went to America with a band taking T Shirts with us was not an option…40% tariff on cotton. We had them made there. We made money selling them and a local US business made money making them.
I have a piece out in Croners Tax Weekly next week on this very subject…will post link
can you clarify for an economics student:
“funds on deposit with the government because it provides the most secure place for any institution to save.”
but saving is lending money to the person saved with, whom we traditionally call a borrower?
“Borrow from the Bank of England”
why is that now borrowing if we just ask the BofE to ‘save’ £22bn with the govt?
“The effective consequence would be that the Bank of England would have advanced a loan to the government”
isn’t a loan not also lending therefore borrowing?
Loans between the BoE and government cancel out – they are all one organisation at the end of the day, so they are irrelevant, as consolidated accounting for the government proves.
And do we say banks borrow from depositors or panic about the fact that they do? No, we don’t. We celebrate the fact. The government is running a banking facility that the UK economy needs. What is your problems with that?
no problems but trying to understand a difficult concept you are proposing.
so surely if govt/boe are the same entity, there can’t be a loan and so no money is available. it would be like me lending money to myself?
and yes my gcse textbook does say banks borrow from savers. something like:
“borrowing is defined as the acquisition of funds from different sources,… to be paid back… in the future”
is that wrong?
So we agree on the first point.
And I would point out most textbooks on banking are wrong. The Bank of England said so in 2014. See https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
And, no banks do not borrow from depositors. They take deposits, and have to be able to repay, but borrowing implies a dependency and no such thing exists. So, there is no loan.
Interesting article in Tribune:
https://tribunemag.co.uk/2024/08/labours-austerity-is-a-choice-starmer-pain/
“For many decades now, one of the favoured tactics of neoliberal policymakers has been to claim that, in the modern globalised economy, the nation-state is too powerless to effect meaningful economic change. If a government tries to raise taxes or impose new regulation, wealthy individuals and corporations will simply leave.
As former Chair of the Federal Reserve Alan Greenspan once put it, ‘Thanks to globalisation, policy decisions in the US have been largely replaced by global market forces’. The state, in other words, is powerless.
This argument, however, always seems to go out of the window as soon as capital finds itself in crisis.”
“Whenever anyone has attempted to resist the exercise of its power, similarly, it has become very clear quite how powerful the state really is. Whether imprisoning peaceful protesters or imposing brutal anti-union legislation, the British state has had no problem exerting extreme force against any groups that pose a threat to the status quo.
The problem is not that the modern state lacks power in a globalised economy. The problem is that the state’s power has been captured by vested interests, and is therefore only ever used to support them.”
“Lobbyists are deeply embedded within the current Labour government and are using this power to promote their clients’ interests. Despite Rachel Reeves claiming that her aim would be to significantly reduce the amount the government was spending on private consultants, KPMG recently won a £223 million government contract — the second largest contract the firm has ever won.
Keir Starmer would never admit it, but he has the power to raise public spending and investment, increase taxes on the wealthy and big businesses, and properly regulate big businesses and financial institutions. Instead, he will impose renewed austerity on those least able to bear it. Not because he has to, but because he wants to.”
Fascinating post which I greatly enjoyed. One thing is niggling me though. If it is expected that the government should take action to fill the black hole, even if it doesn’t exist, what would the market reaction be if it did something else? In other words, would there be a risk of a Liz Truss type reaction if an unconventional approach were adopted?
The thing worrying the City is the absence of a plan
And given my comments on QT, they could be appeased at any moment on the debt issuing capacity issue. They, I think, would rather QT was over.
And remember, Truss did not cause the September 2022 crisis. The BoE did by announcing QT. She got the blame for something Andrew Bailey did. He created the LDI crisis that brought Truss down. I am not defending any of her actions. I am interested in facts.
One thing should now be clear the Single Transferable Party is really the Bungler’s Party and chief amongst the reasons for this bungling is the failure to understand double-entry accounting at a macro or aggregate level forcing a politician to work out where money comes from and goes to. It should be very obvious that rabbiting on about “black-holes” reveals a high level of technical illiteracy which is echoed by mainstream journalists!
Good article. How many of these 6 options would support the government’s fisical rules? which in my mind are arbitrary and unhelpful
The tax ones do
Not much else
But the rule is stupid
And there was me thinking when the APF starts buying bonds from the treasury it was at least using it’s base reserves as some form of collateral/reserve to purchase said gilts. But no the loan money really is created out of thin air!, i’m sure this is not done in unexceptional circumstances, the normal method for borrowing is to sell gilts on the open market to domestic and foreign investors, I suppose if the government owns the bonds then they are at least not beholden to private companies or outside governments/investors.
I have written extensively on this issue