Rachel Reeves says the UK needs tax rises to balance her budget. That's simply wrong. Tax doesn't fund government spending: spending comes first. Raising taxes now would drain money from an economy already struggling with low demand and weak wages. The only people who should pay more are the idle wealthy, who are those hoarding unproductive wealth in property and shares. Everyone else needs the government to spend, invest, and rebuild the economy. Reeves' plan will do the opposite.
This is the transcript:
There's a big lie being told by Rachel Reeves, which is that we are going to need tax rises to balance her budget.
We don't need tax increases because they take money out of our economy. And right now the UK needs more money being spent into our economy and not less.
And there's only one exception to that general rule that I've just made, which is that the idle wealthy hoarding cash and assets that do nothing for growth, do need to pay more tax so that their wealth can be redistributed to those who will spend it. But that's it. That's the only tax increase that we need.
So let's just stand back for a moment and consider what the facts are here. Politicians still pretend that tax funds public spending in the UK. It doesn't, and they still pretend that we must balance the books of the government, and we don't need to.
The truth is that government spending always comes before tax, and it has to because otherwise, where else would the money have come from to enable tax to be paid? Just think about it. If the government didn't make money in the first place, how would there be cash available to pay tax?
And so no sane government would actually believe that tax funds government spending, and yet ours claims to.
And no sane government would also believe it has to balance its books when it knows that it must run a deficit if it is to invest and if it is to fuel growth by spending more into the economy than it takes back by way of tax, because that's the stimulus that is needed to get the outcome that it claims it wants, which is more income this year than there was available last year.
Raising taxes now would just remove the fuel that drives our economy. And yet that's what Rachel Reeves says she wants to do.
Tax rises now could only make things worse. The reality is that ordinary households in the UK are already struggling with real-term pay cuts. Taxing them more would kill demand, and demand is what keeps people in jobs, and austerity thinking, which is associated with tax rises at this moment, would create more self-harm, even if it's dressed up as responsibility.
The exception, as I say, though, is taxing idle wealth. Idle wealth is represented by savings that have not been put to constructive use. It's money saved in stocks and shares, which were bought secondhand because almost no new shares are now issued by companies and therefore, the money that is used to buy stocks and shares these days is simply money stored out of use rather than money used to create new jobs and growth in this economy.
And it's also money used to buy secondhand properties, whether they be business properties or properties that are then let in the buy-to-let market, because that's also about buying secondhand assets and no new real wealth is created as a consequence either.
So, that idle money that represents most of wealth in the UK isn't circulating in our economy. It's stagnant. It's dead. Moribund. Choose whichever word you like. It's nailed to its perch if you are old enough to remember a Monty Python sketch.
The point is, if we had a decent, fair tax system, we would recycle that money from the idle wealth and their savings back into productive use to create investment in our economy. Investment in the things we want, like housing and the defence from floods and all sorts of other things, from green energy generation onwards. And that would, of course, then create wages and public services, which we could enjoy.
So tax rises for everybody but the idle wealth of the country don't make any sense at all. They just drain money from working people, slowing economic growth. But if we were to tax idle wealth, we would give people more money to spend, and that would fuel demand.
So we must change our ideas on tax. We don't need overall tax rises. We need smarter taxes. Taxes that actually ensure we get what we really want, which is prosperity rather than wealth inequality.
If we did that, we could fund our future and rebuild hope. But at present, Rachel Reeves is planning to do the exact opposite. She's going to leave the wealthy untouched, and she's going to harm ordinary people and their prospects. And the result will be the exact opposite of what she says her goal is. There will be a decline in economic activity in the UK rather than growth, and that really does mark her out as a failure in the making.
Taking further action
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Richard I agree with everything you said here.
Just one small point…
You said “If the government didn’t make money in the first place, how would there be cash available to pay tax?”
But the government don’t ‘make money’ they create money. I ‘make money’ by buying a raw material adding value to it and selling it on at a profit. The government create money by spending it into existence.
I know I’m being pedantic here but I’m not apologising for that. The words we use are important because the concepts words convey need to be as unequivocal as possible, otherwise the meaning gets lost. You yourself have said MMT is not a helpful title to describe what MMT tells us and that Government borrowing is a misnomer. So saying that the government ‘make money’ is technically accurate but misleading.
Sorry but I think it needs said.
Best
Steve
Noted
To reinforce the importance of language, Steve you don’t ‘make money’ either by your hard work. You accumulate money.
This distinction while clumsy in standard conversation, does reinforce the reality that money collects in pools in some parts of the system and is drawn from others – we call this inequality in the current iteration of our economic system
A comment if I may please?
No one but the government – and licensed creators of credit such as banks – ‘make money’ (base money and credit) – that is that they create money from nothing. Fiat money. Fiat money is a fact.
What people call ‘making money’ is just moving money around. That’s what a properly functioning capitalist system does.Everyone’s wages is someone else’s wages as Paul Krugman once said in an enlightened moment.
The false capitalist system we have, enables money to be essentially stolen from others by the most wealthy.
The term ‘making money’ in the micro economy denies where money actually comes from and Krugmans accurate thesis – it awards the mythical creation of the power of creating money to he or she who receives it; he or she whom money comes from is totally ignored, just like modern capitalism ignores what it takes from the planet as well. Thus also, the morality of how that money is ‘made’ (acquired) is neutralised. It’s all credit focused, not debit.
Thus by giving people mythical powers and a poor use of language surrounding the money they receive, plus a confusion of macro and micro concepts ignoring how money is sourced, modern capitalism becomes a system of taking and hoarding, rather than of exchange, and real economics essentially stops. An emphasis on private credit creation (private fiat money) at the micro level also causes instability BTW but huge profits.
To recap – governments can ‘make’ (create) money – fiat money – through MMT; banks can create fiat money as debt (credit). The first is macro; the second micro. Then all exchange of money – and theft – takes place in the real economy – the micro economy.
Our job should be to reclaim the language of ‘making money’ from the markets and the extreme capitalists as well as the money itself, through taxation. To listen to politicians and millionaires talk, there is no such thing as macro economics anymore. Money is ‘just there’ apparently and beyond the laws of reason. Thomas Hobbes spoke of how humans abuse language to justify anything. On the subject of money, the abuse of language is rampant.
And because of the cunning of unreason, we have to have conversations like this and language is a battleground too.
Except make and create are synonymous.
People claim they ‘make money’ when talking about their salary (I make 3,000 per month) or about their profit margins. That is neither making nor creating money. That is acquiring it.
‘Except make and create are synonymous’.
Sorry Cyndy but what exactly is your point? Did you read my post?
There is no ‘except’ in my post – I’m saying that ‘making’ money and ‘creating’ money are the same thing? But only at the level of the macro economy – the source of money. The only money that seems to be created in the micro economy is the interest bearing debt of the banks – car loans, mortgages (if you can get one). A constant source of problems.
The language being used when individuals say ‘I’m making money’ is the hyper-individualization of the economy at work – with the individual sovereignty mistakenly being put at the centre of money creation, when in fact – as you should know by now – money is created and upheld as legal by the sovereignty of the state.
I can’t disagree however with your assertion saying that people acquire money. True. But they also have to part with it, so I think that the micro economy does indeed just move money around – it does not make it.
There is a lot to be said for a ‘Mansion Tax’ and I have a few ideas about how it might work.
Clearly a wealth tax ‘stocks and shares’ is do-able, Land Value Tax ditto
How you tax the other forms of wealth holdings however is as discussed very difficult
Not only is Reeves planning to increase taxes but also to decrease spending. Yikes! A double whammy. 🙁
You say that the economy is struggling with low demand. I find it difficult to reconcile that claim with the two biggest sectors of the economy which the public makes demands of, namely government services and housing. The demand for those does not seem low at the moment. What am I missing.
Is that a serious question?
‘Demand’ for government services and for housing is for essential needs. There is reduced demand for ‘wants – items for which there is a choice.
British Governments only borrow when they choose because they/we own the bank. But what kind of bankers are we/they? That’s the question.
I don’t disagree, in principle we should be taxing the idle wealthy not the hard working people generating the goods and services in the economy we all rely on. Only concern is I find I’m one one of them! I’m a pensioner. The only pension I have which will keep place with inflation is the state pension, I’ve company pensions which are probably invested in stocks and shares. I have savings but I’m not adding to them and they are slowly reducing because any capital expenditure comes out of them. Don’t get me wrong I’m not complaining, I have a house that’s paid for and I’m confident I’ve enough to last me the time I have left. However if we are advocating taxing the ‘idle wealthy’ we have to look at reassuring people in my position (and anyone who is currently saving for what they hope will be a comfortable retirement).
I am not suggesting any additional taxes that would impact you.
A small but vital point: The proposition is not to “tax the idle wealthy”.
Rather, it is to tax the idle wealth.
I very much like the nuance from Anne S to ‘tax idle wealth’ as opposed to the ‘idle wealthy’. As one comment on this very thread shows it is easy for people to fear they are part of the ‘idle wealthy’ and take a reflexive stabce against tax proposals.
Rephrasing the proposal as taxing ‘idle wealth’ refocusses on the ACTIVITY of saving into idle wealth schemes – probably in the mistaken belief that their money is helping the economy grow
It’s the behaviour of putting money into idle schemes that is the problem, not necessarily the person. Obviously there are a minority of abusers/avoiders and chancers that need to be called out as a seperate group identified by the worst behaviours
I think this is one of the most important messages to get through to the electorate (not just Reeves and virtually every MP). Most people (including those on the left) believe if you increase taxes on the rich you’re taking money away from job and wealth creators. I have plenty of middle class, educated lefty friends who think that, and pull a sad face.
Paraphrasing you: “The idle wealthy are hoarding unproductive wealth in property and shares. Ordinary people spend their money straight into the economy, creating jobs and growth. That’s why taxes should be raised on the rich.”
Correct
MMT is derided by the neos as the “Magic Money Tree”.
Maybe, but in reality the UK Government really is the “Magic Money Tree”.
As Richard states above “if the government didn’t make money in the first place, how would there be cash available to pay tax?”
Simples.
Sometimes I like to play with ideas that might help others to grasp concepts which to many are abstract. One such is to imagine a gov that completely abolishes all taxes. A fairy story, I know, but it’s just imaginary. What would happen?
The government would still create the money to provide all necessary services and every citizen would get a huge increase in their incomes by not paying taxes. Spending would increase greatly. The economy would be awash with spare money, but what next? Economists would predict shortages caused by excess demand forcing up prices and therefore inflation of the classic variety- too much money chasing too few goods. Interest rates would rise as inflation rises and the real value of the £ would fall, as would exchange rates. There would then be uproar as people’s savings and assets were devalued and economists might suggest the gov removes money from the economy by some forms of deductions (taxation).
Maybe a pointless exercise and no gov would ever do it, yet it shows why taxes are necessary to avoid inflation and it’s knock- on effects.
I often hear a version of the phrase used in the blog, where the tax taken from the idle wealth can be ‘redistributed’ for other uses. I’m not sure I can wrap my head around the logic correctly.
Would the tax collected from the idle wealth be paid to the treasury? If so, does this simply then alter the numbers in the government accounts, or would this pot of money THEN be ‘redistributed’ by whatever spending process in a second round of spending without touching the accounts? For example moving into a special account dedicated to redistribution for housing however that might work.
Maybe I have totally misunderstood, I think I am struggling to understand where the redistribution occurs, if at all, if I have understood correctly that all spending comes before the taxation has commenced. Apologies if the question is poorly worded, cheers Sammy.
I will be replying in a blog post, Sammy
Yesterday, we discussed the “multiplier” effect of carefully directed government spending, at our church gathering, and the way money “dies” once it reaches the savings accounts of the rich – all in the context of £12m levelling-up money being spent in our ward.. We then went on to talk about 2 housing projects we are involved in. One houses 3 locals from the housing list, in charity-run good quality supported housing nearby and we provide friendship support for the tenants (but have no financial interest in the property), and the other will see us build a small refugee house on church land after a 2yr battle for planning consent. We hope to help bring locals in our group and refugees together, to put human faces and human stories on the “immigration/stop the boats” issue which is hot round here, and there will also be an income stream to keep our group going in this deprived ward (we don’t pass round a collection plate).
Our scriptures inspiring the project were Ezekiel 47, the river flowing from the S side of the temple, providing life for the community, and in Ezekiel 14:7, the importance of equality of distribution, and from Ezekiel 47:21-23, an inclusive principle that includes a share in the inheritance for foreigners and their children, and in 2 Corinthians 8.1-13, a reminder about the principles of generosity and equality and mutual support.
This “spending to make good things happen” WORKS but government shows only cosmetic interest when it senses a photo-opportunity, while itself going in the opposite direction despite having the resources to do so much more.
A hint from my former pastor, from about 30 years ago. One way of really annoying an unsupportive local MP, is to name your “woke” project after them (a bail or refugee or homeless or domestic abuse hostel that they tried to stop you building) then invite them to cut the ribbon and say a few words at the opening ceremony, plus press photographs, and put a plaque on the wall to commemorate their involvement for as long as possible, and to help immunise the project against closure by their government.
I love it
Does your housing project need support?
If you have an appeal it could be promoted here.
Thanks – I’d rather not go diectly public, but if anyone wants to approach privately, please put them in touch.
The Radio 4’s Moneybox programme last night Martin Lewis was talking about Reeves’ need to fill a “black hole”. Today I sent a message to the programme saying I respect Martin Lewis but was disappointed he went along with that sort of thinking rather than call out RR’s idiocy. I sent a message to the programme, mentioning your blog, Richard.
Thanks
I went to the video on this. Very clear and as always, you are pretty concise. I trust it will live long and prosper on YouTube. My soothing diet of gardening videos yesterday evening was disrupted by diverting to watch Jimmy the Giant talking to Gary Stevenson – very rambling but I was struck by their discussion about the impact of having a more middle-class/educated accent in getting across a message. Sadly I believe they have a point. I remember a time when regional accents and backgrounds in industry were represented on the front benches of the commons.
Accepted
My mother is to blame for my accent: she was so obsessed with integration havuing been brought up in poverty that BBC received English was required.
[…] A new commentator on this blog, called Sammy, asked last night: […]
Could you please elaborate on how a tax on “idle wealth” is different from a “wealth tax?” The latter won’t work, you argued in https://www.taxresearch.org.uk/Blog/2024/05/10/wealth-taxes-wont-work/.
Is taxing unrealized capital gains an example of taxing “idle wealth?” There is an interesting (and readable) report arguing for unrealized capital gains taxes from the US-based Center on Budget and Policy Priorities: https://www.cbpp.org/research/federal-tax/arguments-against-taxing-unrealized-capital-gains-of-very-wealthy-fall-flat. It notes that home owners (many of whom belong to the middle class) are already taxed on unrealized gains, because the property tax on their home (often their most valuable asset) increases with the market value of their home.
Many thanks!
Please read the Taxing Wealth Report 2024. Just Google it.