As the Financial Times noted yesterday:
Sir Keir Starmer has rejected calls from senior Labour figures to fill a growing fiscal hole with big tax rises, warning: “I don't think you can tax your way to growth.”
They added:
Starmer is under pressure from the likes of deputy leader Angela Rayner and former prime minister Gordon Brown to increase taxes to pay for higher public spending, including on welfare.
They then noted:
[T]he prime minister insisted the biggest problem facing Britain was a lack of growth. “The question is how do we grow the economy and create wealth,” he told the BBC's Today programme. “I don't think you can tax your way to growth. We have high tax as it is.”
For the record, Starmer is right. No one taxes their way to prosperity. However, he is right for all the wrong reasons, and the consequences for his economic policy and this country are terrible.
The reason for my suggestion is that tax does not ever pay for government spending. In fact, it does not pay for anything. It cannot, therefore, deliver growth. All it can do is manage, to great effect, the consequences of additional government spending, paid for as all such expenditure is by new money creation via the Bank of England.
What Starmer needs to know is that tax has at least six purposes:
1) To ratify the value of the currency: this means that by demanding payment of tax in its own legal tender, a state requires that it be used for transactions in its jurisdiction, giving it macroeconomic control of the economy as a result.
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate. That money was created by the Bank of England on the government's behalf. The Bank of England will always do this: it has a legal obligation to make any payment requested by the government if the spend has been authorised by parliament. It does, in effect, mark up the government's overdraft as a result, never asking how that sum might be repaid, whilst knowing that in practice taxation is the primary means of recovery of that sum expended, which tax payment then cancels the process of money creation that the Bank has undertaken on the government's behalf.
3) To redistribute income and wealth.
4) To reprice goods and services, most especially where markets have failed to take the cost of externalities into account, e.g, in the cases of alcohol, carbon, tobacco, gambling and other such items.
5) To raise democratic representation because there is evidence that people who pay tax also tend to vote.
6) To reorganise the economy, i.e. through fiscal policy which establishes the government's economic priorities.
Starmer does not realise this. Whether he has never been told, or whether he has ignored the advice he has been given, is beside the point: the consequence is that he spreads misinformation and promotes an economic policy that sells the country short, whilst imposing unjust burdens on some (the working people he claims he exists to serve) whilst demanding too little from those with the so-called broadest shoulders (the wealthy).
Ideas are powerful. If he simply understood this one blog post, he could transform the fortunes of the UK.
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Dear Sir blue labour,
As an economist, I share the view (held by the vast majority of those in my profession) that you certainly can’t encourage growth by continuing with austerity and cutting much-needed liquidity where the evonomy needs it the most.
Perhaps if you focussed on that, you may improve your current score, which is 0/10.
Correct
Perhaps Starmer might like to explain how many similar Northern European counties such as Denmark, Norway, Sweden, Germany, France, Belgium, etc manage to have higher GDP than the UK and also greater overall tax burdens. Typically with better standards of living, greater equality, and higher happiness index. How awful that must be.
I do think that the language we use is important, Andrew. Even though I absolutely agree with the point you are making, the continued use of the word ‘burden’ whenever tax is mentioned immediately suggests that it’s a bad thing that ought to be avoided or minimised, which in turn may have a subliminal effect on subsequent comments and/or the thought processes of those in power. I know that not everyone might go as far as Richard with “The Joy of Tax”, but could I make a modest suggestion for a campaign to substitute ‘tax contribution’ or ‘tax ratio’ as preferred terms?
Good point
I take your point about the implicit negative connotations of “burden”. (Interesting that “growth” in GDP is almost always framed as positive when as Kate Raworth often points out in most contexts “a growth” most definitely is not.)
I was simply using “burden” as a shortcut for the somewhat more wordy “overall level of tax revenue as a percentage of GDP”.
It is of course the contribution that we collectively make towards returning public spending to the public purse from which it came. But speaking as an individual taxpayer, however joyous I should feel about that at an intellectual level, it often feels like a burden on an emotional level when I look at the deductions on a payslip or the VAT on a shop receipt, or when I am sending funds from my bank account to HMRC.
One of the aims of the JustMoney Movement, of which I am a Trustee, through their programme, Church Action for Tax Justice, of which I am Chair, is to counter this narrative of ‘tax burden’. Last year we ran an online campaign inviting people to make short videos in which they declared: “I’m grateful for Tax because….”. My contribution was that by enforcing health and safety standards for food providers I can go out for dinner without (usually) being poisoned. We desperately need a new community story
Thanks and good luck
By definition austerity precludes growth.
Austerity is easy to reverse, the government only needs to do the opposite of what it does to cause austerity (i.e. invest in the country).
Once people have disposable income, they’ll have confidence to spend.
An excellent post; thanks.
It seems difficult for many people to understand money creation. Whilst people do need to know the whole, unexpurgated, truth, I wonder if it is easier to start by suggesting that the government borrow from a bank (like everyone else). Specifically that they borrow from their own, wholly owned, bank, the Bank of England. This is, in fact, what happens; they only pay off their overdraft later by selling gilts. And selling gilts is wholly unnecessary. If they didn’t sell gilts then their overdraft would build up at the BoE (but they have an unlimited overdraft facility). And that’s OK because they own the bank (and any interest they pay is returned straight back to try them). Yes, people need to know the whole truth about money creation but I feel that the familiarity of borrowing froma bank may be an easier way in. Hopefully it may then lead to people asking deeper questions.
Noted, and a good point Tim.
That maintains the nonsense that a national economy is like a household and comparing the two has validity. It also reinforces the false notion that government debt is the same as household debt and therefore implies that it must be paid back and if not the borrower will be bankrupt.
Issuing Gilts is not borrowing money in the normal meaning of the word, it is a very different process, it should not be called “borrowing”.
I am old enough to remember earned income being taxed at 83% and investment income at 98%. There is plenty of scope for tax rises without impacting growth.
I am not sure they entirely useful tax rates.
I have encountered the likes of Starmer many times in my professional career. They are either managing partners in large law firms or, more appropriately in the case of Starmer, the Head of Chambers (“assisted” by his senior clerk McSweeney). They view renegotiating the chambers’ photocopier leases as some sort of commercial stroke of genius rather than routine housekeeping. I have known such people to view, incorrectly, the total aggregate income of all the members of chambers as equating to chambers income and borrowing accordingly when, in reality, the chambers is little more than a service company taking a percentage of that total aggregate income of the barristers. I will spare you the details but on occasions this type of thinking can produce devastating results. Bluntly, lawyers rarely make good business decisions and they have a very limited knowledge of economics. Their experience of commercial reality is, at best, vicarious and based on the cases that they have been involved in. Starmer strikes me as no different. He has no knowledge of economics (its not a part of a lawyer’s training) and when he was DPP he was the head of a large, long-established public organisation that required housekeeping decisions not commercial ones. We must stop seeing Starmer as being the head of government and begin looking at him as a mere Head of Chambers. A good lawyer should know when, on any particular case, the team of experts that he is working with are insufficient and that more experienced and relevant experts need to be brought on board. If he was truly on top of his brief he would advise ditching Reeves and bring on board someone who does understand economics, based on training, knowledge and experience i.e. an established track record. I won’t get on to the subject of clerks as I will be here all day!
Very good
Like most lawyers, he is effectively innumerate as well as financially illiterate.
Ooh you are naughty. BtW truly aposite blog.. But how is it that apparently three people can run things in semi dictatorial manner in this way given that vast numbers of specialists are there to stop them
A (ex) international lawyer who, when asked for his opinion about openly stated genocidal policies, replied: “Israel has a right to self defence” is so far removed from any competence in law, truth or decency that the “lawyer” tag simply does not fit.
As the UN Special Rapporteur on the occupied Palestinian territories, Francesca Albanese, has stated: “Israel cannot claim the right of self defence against a threat that emanates from a territory it occupies”
Agreed
Starmer lied his way in, and he will lie his way out.
Nothing grows if it is starved. Government, the real economy and ordinary people are being choked off.
And that’s what every neoliberal apparatchik like Starmer must do. Oversee death by chronic neglect.
What struck me in the quotes (I haven’tseen any video of the speech), was a sense of desperate frustration.
Starmer knew:
– he had staked his shirt on “growth”.
– “growth” wasn’t happening, in fact the reverse was likely.
– he didn’t know how to get “growth”.
– maybe spending some of the welfare, aid and education budgets on weapons might sound good? Yes, lets “promise” that, ‘cos that’s what Fa***e would do. “We’ll fight them on the beaches etc.”
The overall impression was one of desperation, of wheedling complaint, why wasn’t it working? McSweeney said it would all be fine!
Agreed
Andy Burnham on Radio 4’s “Week in Westminster” programme on Sunday night made several good points, including insisting that government spending was investment. Unfortunately his point was ignored (maybe not understood) by the other panellists. The programme was not well chaired chaired and I switched it off when two of the panel were allowed to go on talking simultaneously.
Andy Burnham – a genuine voice of sanity amidst the oppressive madness of McTweenie, Starmer, Reeves, Streeting and Philipson.
I feel he has vision. And pragmatic, achievable ideas.
I wonder why he is not looked at as a TRUE leader of the labour party? He did a book called Head North, which I must get round to reading.
I feel Starmer understands, as do the others in his coterie, that they know exactly what they are doing.
Your argument always makes me think of those perpetual motion machines that are claimed to be able to conjure up energy from nowhere. Money is just the means of exchange. In order to have goods and services these things need to be provided by people doing work. These people get paid and use their money to purchase goods and services provided by the work of others. Printing money doesn’t contribute anything to productivity just inflation.
Then you don’t undertsand money destruction.
Read it up.
I have covered it many times.
Isn’t the point that money created by being spent into the economy can activate the deployment of goods and services. A ‘perpetual motion’ machine it is not. Money creation starts the ‘machine’, the friction (tax and offshoring) removes it over time, so more ‘energy’ ( money) needs to be added to keep the machine going.
‘which tax payment then “cancels the process of money creation” that the Bank has undertaken on the government’s behalf.’ – should this perhaps read “cancels out the process of money creation” or “cancels the money that..”
If you like…
Starmer doesn’t know macroeconomics from macaroni. He just follows the orders of his McSweeney/McFadden puppetmasters and the Treasury.
But it’s infuriating to observe him propagating economic illiteracy. I suppose it comes naturally to him.
Btw, I was able to reserve ‘Get In’ at my local library today, so they have a copy! As only an expensive hardback is available as yet.
Andy Burnham on Radio 4’s “Westminster Hour” programme on Sunday night made several good points, including insisting that government spending = investment. Unfortunately his point was ignored (maybe not understood) by the other panellists. The programme was not well chaired chaired and I switched it off when two of the panel were allowed to go on talking simultaneously.