debt reduction

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The Budget should be about building a just society, not balancing the books.

11/03/2020. London, United Kingdom. Budget Day . 10 Downing Street. Chancellor of the Exchequer Rishi Sunak holds up the red box outside Number 11 on his first Budget.Picture by Harriet Pavey/ No 10 Downing Street. Crown copyright 2020 via Flickr

Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.

John Maynard Keynes

 

The burden of the national debt hangs heavy; or so the economists, politicians and journalists want us to believe. In a Dispatches programme that aired this week on Channel 4, ‘Britain’s £400bn Covid Bill: Who will Pay?’ you could be forgiven for thinking that the game is up and we’re on the road to financial collapse unless we get our public finances back on track.

There would be an eventual price to pay as a result of all the money the government had borrowed to cover the costs of extra benefits, furloughing and business support schemes, a former Labour Chancellor Alistair Darling suggested. Our national debt had grown scarily larger than the overall size of the economy. According to the presenter, the magic money tree had financed the huge cost of the pandemic (erroneously referring to QE as the magic money tree even though it cannot be described as money printing and injects no new net financial assets into the economy – find out more here). Alistair Darling, who was referred to as having planted the original magic money tree back in the late noughties as a response to the Global Financial Crash, was apparently alarmed that it had become a forest and warned his audience that if not now, there will be a future reckoning. Indeed, the Chancellor confirmed on Saturday, in advance of the Budget, that the country’s finances were exposed and that there will be a future price to pay for the high levels of spending and borrowing. The fear mantra continues.

Since Britain’s lockdown, the economy, according to the presenter, had struggled to generate tax, with the direct implication that this had had an effect on the government’s ability to fund its spending, which then had required it to borrow vast sums to cover its deficit.

He asked what the options were to remedy the situation and restore the public finances to order? Tax rises? More austerity? Or kickstarting growth through investment in hard infrastructure through even more borrowing? And could that last option lead to bankruptcy in the end, even though, as so many of us know now, a sovereign currency-issuing government never needs to worry about insolvency, providing its liabilities are in its own currency.

The consequences of all the options discussed in the programme reflect the general media conversation which is currently dominating the run-up to the Budget on March 3rd.

Raising corporation taxes, implementing a one-off wealth tax, a windfall tax on profits, or hitting pension savers with a tax on their pension savings. All are posited as being potential mechanisms to boost the Treasury coffers to fill the financial black hole caused by the pandemic. Sunak is, according to some sources, considering raising Corporation Tax. However, whilst some companies have clearly benefited from the pandemic and seen a rise in their profits as a result, that will not be the case for many companies. In short, increased corporation taxes would affect many small and medium-sized businesses that are already struggling, especially in the face of the massive corporations that pay little or no corporation tax in the UK.

Such a decision could further stifle the economy and leave those companies with no option but to increase prices, lay off their staff or close down. Tax increases with the aim of balancing the public accounts would be a death knell for an already declining economy, at a time when politicians should be pushing hard instead to reduce the tax burden on all workers to rebalance the economy and make it fairer.

More austerity as a potential solution would not only also be unpalatable, given the damaging consequences of previous cuts to public sector services and local government, but would also further impact on an already decimated public and social infrastructure. If nothing else, the pandemic should have demonstrated beyond all doubt to the nation the vital nature of our public and social infrastructure and what happens when you cut spending on it. The economy, which reflects the lives of real people, suffers.

The final option discussed was stimulating regional growth through government investment in hard infrastructure, as part of the government’s so called ‘levelling up’ promises. It was suggested that it would generate the taxes to repay the debt and ensure that UK Plc would be ultimately better off. Once again, we have the incorrect suggestion that the government can be compared to a business and must manage its accounts like a company balance sheet. It is not. Although it is counterintuitive to most people, money is created by the government from nothing and unlike businesses does not need an income or to borrow to spend on day-to-day expenditure or infrastructure investment.

The programme then topped off with the usual fear-mongering idea that ‘money printing’ on this scale could spark inflation and/or a financial crisis. Zimbabwe or Venezuela awaits! As if it were ‘money printing’ in itself that creates inflation, rather than spending beyond the productive capacity of the nation. Whilst inflation is the only real limitation to government spending, the current economic climate is unlikely to produce it.

With unemployment already high (the jobless rate is at its highest since 2016) and likely to rise even higher over the coming months, along with the prospect of yet more business failures, it is highly unlikely that high inflation or Zimbabwe is on the cards, even if Andy Haldane the Chief Economist at the Bank of England, has suggested that interest rates may have to rise. Even his own colleagues on the Monetary Policy Committee at the central bank disagreed with his analysis. The economy is on a knife-edge and will be for some time to come. After 10 years of already punishing austerity, which has kept wages low, reduced living standards and cut spending on the public infrastructure serving the nation, the pandemic has, and will continue to add to that economic pain. A recovery is likely to be slow and painful without sufficient government intervention.

The whole premise of the argument presented in the programme is that government spending is constrained by its tax revenue or the ability to borrow to cover the deficit, which in turn leads to public debt, which will at some point in time lead to ‘hard choices’ at some future Budget. The vision of the Chancellor and his Treasury Team pouring over the public accounts and wondering how they can keep the Conservatives’ reputation for sound finance intact, is a powerful one, that is currently being exploited day in and day out as Budget Day approaches. Raising corporation tax, a stealth tax on wealthy pensioners, a one-off wealth tax, all grist to the mill in the discussion about what the Chancellor might do after the huge round of government spending, to reinforce his fiscal reputation as a sound manager of the public finances.

At the same time as Rishi Sunak is working on how to get the public finances back in order and pay down the debt, those on the left are continuing to promote endlessly across social media, the idea that we need to raise the taxes of the rich (in this case through Corporation Tax, wealth taxes or a tax on profits) in order to be able to spend on an economic recovery.

Last week, it was the Labour leader Keir Starmer proposing Recovery Bonds, or using the savers’ money, to fund the recovery. This week, it’s getting the rich to pay for it. According to the IPPR, which published its reportTax and Recovery: Beyond the Binary’ this week, we can pay for a sustainable recovery by raising taxes on the wealthy. Let’s tax the rich for equity, removing purchasing power and the influence their wealth affords them, but please let’s stop telling people it pays for stuff! It doesn’t. Using such redundant household budget narratives begs the question as to whether the left really want to create the more equitable and sustainable economy that they seek. In promoting reliance on the wealthy to achieve their objectives, they forego any claim to progressive politics.

In its favour, the report suggested quite rightly that the UK tax system is in serious need of reform because, ‘It is inefficient, unfairly taxes labour more than capital, exacerbates inequality, and fails to shape the economy in a sustainable way’. These are indeed the right arguments to make, and are fundamental to real societal change and the creation of a fairer, more equitable society. And yet those arguments are still couched in the household budget narrative that government needs our taxes in order to spend:

‘…in the aftermath of the pandemic, tax increases will be required in order to put public finances on a sustainable footing in the medium term. This will likely include addressing increased funding needs for public services such as health and social care. The exact size of this will partly depend on how quickly the economy bounces back (which in turn depends on the size of the stimulus this year).”

Once again, the implication is that our public services are dependent on the health of the economy, when instead it is the other way around.

Whilst one understands that people rightly feel that the rich should shoulder their fair share of the tax burden, they do so on the misunderstanding that these taxes pay for our public and social infrastructure, from which we all benefit, rich or poor. However, we are not beholden to, or dependent on, rich people for creating a better society through the payment of taxes or indeed trickle-down of wealth. We are dependent instead on a government with the political will to create that society. Over decades, the political, economic and media establishment have promoted sound finance over human well-being as if there were no alternative.

The Dispatches programme, while asking how we can pay the Covid-19 bill, then went on to cover the extraordinary consequences of the past year. But it made no specific connection between previous government legislative and spending policies and the rise in poverty and inequality, which is a phenomenon which predates Covid-19 and indeed can be traced back decades. GIMMS has covered these in many previous blogs.

The National Institute of Economic and Social Research indicated that the number of UK households living in destitution had risen from 0.7% of all households in 2019 to 1.5% in 2020. The NIESR Director, Professor Jagjit Chadha told Dispatches:

As a result of lockdowns, levels of destitution seem to be rising across the country. But what’s terribly worrying is that in certain regions – in the North West in particular – we might see some 4, 5 or 6 per cent of the population living in destitution,”

 

In places where income levels are relatively low compared to other regions, an economic shock drives more people into destitution and poverty. We’ve also been looking at the demand for food banks and that’s gone up at a really worrying rate over 2020. And I don’t see that that’s going to fall this year, particularly if furloughing or other forms of income support stop over the next month or two,”

There are no magic bullets. We have to be realistic and we might make mistakes along the way. The future is built on uncertainty. However, it is within the capacity of a sovereign, currency-issuing government with a real vision for the future to start making a difference. We could have a real road map for the future instead of Boris Johnson’s meaningless rhetoric.

A government that was really interested in ‘levelling up’ and making people’s lives better, would not only be investing in hard infrastructure, training and education to bring jobs to facilitate a green and sustainable transition, but also reinvesting in the public and social infrastructure which has been decimated by decades of rationalisation, cuts and privatisation.

As part of a proactive economic strategy, it would also commit to full employment policies, introduce legislation to ensure a proper living wage with better terms and conditions of employment, and introduce a Job Guarantee to manage the inevitable cyclical nature of the economy. It would ensure that the needs of those unable to work, for whatever reason, were provided for to allow a dignified and rewarding life. Nobody should have to rely on food banks or charitable donations in order to have a decent life. Nobody should have to feel that they are responsible for their poverty – the great neoliberal lie of meritocracy which has become embedded in the public consciousness. The government has the tools to ensure economic well-being for its nation.

This moment of great change offers an opportunity. Aside from the vast inequalities that exist, climate breakdown is no longer a distant threat; it is bearing down on us at great speed. We must address these challenges as a matter of urgency. GIMMS has indicated more than once that we need to initiate a conversation about our priorities. More consumption accompanied by more real resource and human exploitation by global corporations? Or a different choice? One with a collective vision for a better future, in which the government plays a greater role in addressing those challenges, and through its taxation and other policies, ensures it has sufficient real resources to create a fairer and less stressful existence for all, whilst ensuring the sustainable and efficient use of the nation’s resources.

After a year of great uncertainty, pain, suffering and death of loved ones, with a prospect of yet more to come, and life-changing choices to make, we have to decide what the nation’s priorities, and our own as families and individuals, should be.

 

 

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The post The Budget should be about building a just society, not balancing the books. appeared first on The Gower Initiative for Modern Money Studies.

Recovery Bonds – The very opposite of what is needed.

Seedling sprouting from the soilImage by Neville Kingston from Pixabay

“The same rule of self-destructive financial calculation governs every walk of life. We destroy the beauty of the countryside because the unappropriated splendors of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.”

John Maynard Keynes

 

As the Chancellor’s March Budget draws ever closer, there is no shortage of comment or recommendations by media pundits as to what its content should be. The question on people’s lips is how can the Chancellor raise revenues without wrecking the post-Covid recovery. Opinions are varied, ranging from higher taxes sooner or later, to another round of cuts to public sector spending to ‘get the public accounts back into health’. As if the consequences of the Great Financial Crash in 2008, and the austerity which followed when the Conservatives came to power in 2010, are not burned into the collective memory, the public is treated yet again to another round of the tired mantra of ‘How are we going to pay for it?’

Whilst the Chancellor has pumped huge sums into the economy to prop it up over the past year (even though that support has been selective, left some sections of society in financial distress and seen huge sums of public money being poured into private profit) the deficit and debt remain the bogeyman waiting in the shadows to justify unpalatable solutions, which will most certainly add to the nation’s pain, not reduce it.

Douglas McWilliams, a Director at the Centre for Economic and Business Research, suggests being ‘honest’ with the public about taxes having to go up at some point, says the government should encourage the rich to pay their fair share as a moral imperative, and claims that having worked with the public sector for many years, there is still plenty of inefficiency that the Chancellor could squeeze to close part of the gap.

Putting aside the issue of the hugely inequitable distribution of wealth, which needs addressing as a matter of social justice, the fact is that tax does not fund government spending, wherever it comes from, not even from the pockets of the rich. Public spending arises as a politically derived decision, not relating to the efforts of the bean counters in the treasury and their budgeting skills, but to the economic ideology which currently prevails. One which has been guided for decades by neoliberal thought which favours the primacy of the market (never mind that the market is a creation of the state, not a freestanding phenomenon to be obeyed at all costs) and monetarist orthodoxy which suggests that government spending is limited by tax revenue or the ability to borrow. Neither of which reflects monetary reality.

Furthermore, over the last 10 years, cuts to public sector spending have decimated public services and local government. Cuts which have impacted on and severely constrained their ability to meet the current challenges and will continue to do so without a change in public policy and funding.

Whilst further rationalisation might suit the current government, being intent on privatisation and pouring public money into private corporations with complete disregard for transparency and public accountability, the end result is aiming only to serve the bank balances of those corporations. Not that of the public interest.

The direction of travel is clear. Without any protest from the public, we are witnessing the potential end of publicly paid for, managed, and delivered services, accountable to Parliament and ultimately the electorate, in favour of a continuing alliance between the government and the corporations that it serves.

Earlier this week, the IFS issued a press release entitled ‘Look to the Budget to secure the recovery, not fix the public finances’. Whilst recommending quite rightly that the Chancellor set out plans for supporting the recovery, offsetting the impacts of Covid-19 on inequalities, and allocating substantial sums to health, education, local government and justice, in the next breath it suggests, despite all those fine aspirations, that the public finances were ‘likely on an unsustainable path’ which will need to be addressed at some unspecified time in the future. It jumps on the usual orthodox bandwagon of government being able to ‘borrow’ at extremely low rates of interest, but at the same time suggesting even modest rises in the cost of borrowing would impact on public debt, and put further strain on the public finances.

In the eyes of its Director Paul Johnson, abandoning austerity whilst at the same time expressing an aim to balance the books, will bring about an eventual ‘reckoning’ in the form of big future tax rises if growth is not fast enough to tackle the fiscal deficit. Once again, we have an accounting description of the public finances which treats income (in the form of taxation) and expenditure as if they were like those of a business or a private individual relying on an income to spend.

The bottom line is always, mistakenly, that at some time in the future when the economy bounces back into health, action will need to be taken to restore the public accounts back to balance. Even though the government as the currency issuer does not depend on taxation to spend, or borrowing to cover the deficit, and that deficits in themselves are not necessarily the bad things we have been led to believe, that is the narrative that finds its way relentlessly into the public arena and is reinforced daily so as to ensure the public don’t forget it.

The policies of successive governments, often pursued regardless of the damaging economic outcomes for many people whilst creating vast disparities in wealth, have arisen both as a result of the promotion of fiscal responsibility and the ideologically driven doctrine of market supremacy. The consequences of this harmful, decades-long narrative on society have been brought into the public gaze over this last year. GIMMS has covered them endlessly in its blogs since its launch in 2018. Consequences including low wages, insecure employment, unemployment and underemployment, all of which impact on people’s standard of living; leading to rising hunger and homelessness, ill health and increased crime.

Combine this with a decaying public and social infrastructure through lack of public investment, and you have a recipe for societal, not to mention environmental, breakdown.

Which makes it all the more a contradiction in terms when the IFS and other organisations write reports or launch reviews aimed at securing a better understanding of how inequality arises. A case in point is the IFS Deaton Review of Inequalities which was launched a year and a half ago, in which Sir Angus Deaton raised the astounding possibility that ‘inequalities may prove a threat to our economic, social and political systems unless they are tackled effectively’. A statement that declares the obvious, but often fails to make connections between the rise of inequity and government policies.

At the same time as arguing for a better understanding of how inequalities in health, income, wealth, educational opportunity and family life affect people’s lives, and seeking to identify the forces that combine to create them, 18 months on even as Covid-19 has added to pre-existing inequalities, the IFS is choosing to frame its arguments within the context of limited monetary resources and hard choices to be made, maybe not today, but in the future.

It seems to be quite confused as to the forces that have created this societal dissonance and inequity, although the elephant in the room is staring them right in the face. The economic policies of successive governments, which have given precedence to the notion of balanced accounts rather than economic well-being.

The premise that inequality is harmful to society is the right conclusion, but, according to the IFS, solving it may be more problematic in the future, given the already dire state of the public finances. Jam today but bread and scrape tomorrow. Everywhere you look the same paucity of thinking hinders real change.

Yet again this week, as the pundits try to outguess each other as to the Chancellor’s budget plans, the pros and cons of a wealth tax have been the subject of discussion in the media. Norma Cohen, an Honorary Research Fellow at Queen Mary University of London, whose PhD thesis was entitled ‘How Britain Paid for the War: Bond Holders in the Great War 1914-1932, argued in an article in the Financial Times that an Excess Profit Duty of the type implemented in 1917 to help pay for the war, should be considered today to deal with the ‘gaping deficit’ which has occurred as a result of the pandemic.

Such a tax, she suggests could be useful in thinking about how Britain will repay its debt, by allowing the government to extract higher revenues from businesses who have been able to ‘exploit the effects of the pandemic whilst shielding the weakest’. In a time when some sectors have profited hugely from the pandemic leaving others with staggering losses, and when the widespread inequality which predates Covid-19 has been exacerbated by it, equity is clearly an important consideration. But we should disregard the suggestion that such a tax could be revenue-raising, either for funding spending or paying off public debt.

In short, let us not indulge in the household budget nonsense which imagines that the treasury needs tax to fund public services or to repay the enormous sums which it has spent over the last year. If we are to make arguments for taxation, let us make the right ones. Not indulge in spurious arguments which claim we depend on the largesse of the excessively wealthy for the public and social infrastructure which society and the economy needs for its health and well-being.

  • Tax to drive the currency by creating demand for it.
  • Tax for equity and wealth redistribution through appropriate tax regimes.
  • Tax to remove the excessive purchasing power and influence wealth brings.
  • Tax to create fiscal space, meaning to make room in the economy to spend on essential services, when otherwise there would be a shortage of real resources and consequently, rising inflation.
  • Tax to drive essential behavioural change.

But let us put to one side the tax funds spending mantra. It doesn’t. Saying so endlessly won’t change the facts.

The measurement of a healthy economy is how much the government policies and spending decisions have done to improve people’s lives and create a fairer and more equitable society. Not whether the government managed to collect sufficient tax or balanced its books.

While the debate continues about the coming budget and what it will mean for the economy and people’s lives, Keir Starmer, the Labour leader, gave a speech this week that could be described as less a ‘A New Chapter for Britain’ and more of ‘Back to Business as usual.’ With no mention of a Green New Deal, he suggested that working with business would be a central plank of his leadership and that businesses would have to play an essential role in dealing with social responsibilities and the climate emergency. Plus ça change and all that!

A fairer society cannot be created by companies whose rationale for existence is to make a profit. A fairer society can only be created by a government with the will to do so by its spending and legislative decisions. Exploitation of working people and the planet’s resources require the government to be the arbiter on behalf of their electorate, not work hand in glove with corporations to service their greed. Haven’t we seen the consequences of the current government’s actions? Democratic governance is the only mechanism for defending citizens against the unchecked greed which is a shameful and unnecessary feature of economic life.

Under Labour’s leadership, he also added that its priority would always be financial responsibility. ‘I know the value of people’s hard-earned money – I take that incredibly seriously’ he said. Whoa! Labour spending taxpayers’ hard-earned money wisely. It seems that Labour, like other progressive parties, still have no understanding of the modern monetary realities and prefer to keep their heads firmly in the sand of orthodoxy, rather than spend the time up to the next election building a case for deficit spending without all the smoke and mirrors rigmarole of taxing and borrowing.

His big innovative idea, which was praised in some quarters, is his proposal for Recovery Bonds. A totally absurd scheme which not only demonstrates ignorance of macroeconomics, but also how governments that issue their own currency really spend. In an allusion to war bonds, he suggested that a future Labour government would spend the money raised through their issuance on rebuilding local communities, jobs, businesses and infrastructure, giving ‘millions of people a proper stake in Britain’s future.’

Let’s first put this proposal into a historical context. During the second world war, the government sold war bonds. They were not for the purpose of financing the war as one might have been led to think, but were offered as a mechanism to curb inflationary spending when the economy was already at full capacity/employment fighting the war. It allowed the government to purchase all the resources it needed to fight the war and manage inflationary pressures at the same time.

As the economist John Maynard Keynes made clear at the time, the money the government removed from circulation through offering War Bonds did not go anywhere and did not fund the war. Furthermore, with the present-day economy in a depressed state, which is likely to continue for some time to come, maybe years as our experience with the GFC showed, and made worse by economically illiterate years of austerity, this is not the moment to encourage saving. We need the exact opposite to recover and grow. As the saying goes one person’s spending is another’s income. What we need to do though is consider what that spending consists of. Will it be transitory, short term consumption which does nothing to add to our happiness, or useful spending,  contributing to creating a better, healthier planet and a sustainable mode of living?

As in the post-war period we need the government to spend, as only it can, on rebuilding the economy and deliver a Green New Deal by committing to full employment as a policy choice through a Job Guarantee and the restoration of the role of government in public service delivery. Doing this does not require the issuance of Recovery Bonds it just requires political will. The mistaken idea being perpetuated is the lie that the government has to borrow our money to do nice things. That lie has already done much damage.

Furthermore, what is being suggested is that asset-rich people can put their money in a bond (which goes nowhere except into a savings account) and get interest paid on top at maturity. Professor Bill Mitchell has a phrase for when big corporations buy them. Corporate Welfare. This is at a time when the richest half of the income band has increased their savings, whilst the poorest have fallen into debt. If people want safe places to save, then fine (but at current bond rates it’s scarcely going to be a steal). But let’s abandon the notion that the government needs their money.

GIMMS Associate Member Neil Wilson provided an MMT Lens perspective on the Labour Party’s proposal for Recovery Bonds this week:

“All that happens is the balance sheet of the commercial bank shrinks and a Gilt is swapped for a Banana Bond. Not one extra penny is added to the Consolidated Fund by the process.

Because, of course, money from the Consolidated Fund comes via votes in Parliament not by flogging cheap gimmicks to the public. If Starmer wants money for any project, all he has to do is put a Supply Estimate in and get Parliament to vote it through. And that funds the project. Each time, every time – in the same way it has been done for at least 150 years.”

 

 

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The post Recovery Bonds – The very opposite of what is needed. appeared first on The Gower Initiative for Modern Money Studies.

The “Market” is no solution for the NHS – or for any public service.

Published by Anonymous (not verified) on Mon, 15/02/2021 - 7:20am in

Graffiti art of a femal NHS medic wearing a mask and gloves making a heart sign with her signsPhoto by Colin D on Unsplash

The difficulty lies not so much in developing new ideas but escaping from old ones.

John Maynard Keynes

 

This week we begin our MMT Lens with a subject which, while not directly linked to monetary realities, is one that is connected to the toxic economic orthodoxy which has corrupted the public policy of successive governments for decades and is now culminating in the demise of the National Health Service as many of us have known it.

A decade of severe cuts to spending has left the NHS on its knees. This was a result of the bogus claims that in 2010 the Conservatives had no option but to implement cuts to public spending to get the public finances back in order, otherwise the country risked bankruptcy. The era of commitment to the false concept of sound finance began with huge cuts which affected every area of public service delivery and was used to justify the reforms and market-driven frameworks which ensued, leaving the NHS where it is today; ready for takeover by the private sector.

On the 5th of July 1948, the NHS was launched by Aneurin Bevan. It was the jewel in the crown of the government of the day. It brought hospitals, doctors, nurses, pharmacists, opticians, and dentists together under one umbrella to provide care, free at the point of delivery. Since that time much has changed. Dentistry and opticians became chargeable in 1952, and in recent decades successive governments, beginning with that of Margaret Thatcher, began to attack the principles enshrined in the creation of the NHS, of a publicly funded, managed, delivered and accountable service.

Over time, those principles have been smudged and the real political aims disguised by numerous rounds of reforms, implemented by successive governments, which created a fragmented NHS. An NHS behind whose logo lie a myriad of private or voluntary sector companies, both managing back-office operations and providing clinical services. Reforms from the introduction of the internal market by Margaret Thatcher, to Tony Blair’s continued changes (breaking an election commitment) which promised private healthcare providers a stronger presence in the NHS. The reforms were sold to the public by the claim that they would drive up the quality of service and offer choice, but, in fact, they opened the doors to the Health and Social Care Act 2012 which allowed NHS contracts to be put out to tender in the private sector.

Since that time, further reforms implemented by the ‘at arm’s length’ organisation NHS England under the direction of Simon Stevens (a former employee of the US healthcare company United Health) have aimed at moving the NHS towards a US-style integrated care system.

This week, following the leaked draft of the government NHS White Paper, journalists misled the public by claiming that it would bring about the scrapping of privatisation and competition introduced by Andrew Lansley’s reforms. The reality is something quite different. Boris Johnson ‘taking back control’ of the NHS, is yet another smokescreen for bringing a long-held objective to fruition.

The White Paper makes it clear instead that it will not lead to a reduction in the role of the private sector. It will increase it and indeed make it easier for the private sector to function within the NHS without all the bother of tendering for contracts. The deliberate drive to fragment the NHS has left it a shadow of its former self. Its logo, originally symbolising the positive change in the government’s relationship with its citizens, has become nothing more than a logo of no substance.

As the government has poured vast sums of public money into private contracts during the pandemic with little transparency or accountability, it has destroyed the validity of the claim that government has no money of its own, even though it continues to frame its spending in household budget economics. With the prospect of many more hundreds of billions of pounds of public money being spent on new independent laboratory networks and funding private hospitals to clear NHS waiting lists, it is clear that there is no scarcity of money. What is even clearer is that the government has made a political choice about where public money should flow to.

As the currency issuer, it could have made a political choice to invest long term in public health provision. Instead, the government has abandoned all pretence that as an elected body it has a duty to serve its citizens. It has used its monetary capacity to deliver its market-driven aims, which not only have given even more power and influence to big corporations through light-touch regulation, but also poured public money into private profit to keep the wheels of capitalism oiled.

At the same time, it has, also by political choice, left the public sector – health and social care, public health, and local government in a state of collapse, struggling with the consequences of 10 years of cuts which left the country unprepared for the devastating scale of the pandemic. Any claimed additional money is but a drop in the ocean in terms of what is needed to restore the NHS to a properly functioning service delivering public care. And Captain Tom’s efforts, laudable as they were, serve yet again as a distraction. We clapped for the NHS while it was sinking beneath the waves.

Deborah Harrington, director of Public Matters and Advisory Board member to GIMMS, describes government plans in an article in The Tribune this week:

“Boris Johnson’s health team is presenting this White Paper as the antidote, claiming that it gets rid of privatisation and the market, when it does neither. The White Paper does not herald a return to public service: to imagine that it could, would be to propose a political U-turn of unprecedented magnitude – a free-market government turned socialist overnight.

She goes on to say, in a very personal statement which we should all heed:

“I’m not just a patient now – I write and research on these matters myself. But as a patient, I’m worried. As a mother and grandmother, I am devastated to know that the range of care available to me throughout my life will not be guaranteed to my children and grandchildren. The NHS was an extraordinary gift – a gift squandered since by governments prepared to mislead the public on this most precious and important issue, because corporate approval means more to them than the public good.”

 It is important to note at this point that the roots of this process lie in decades of neoliberal ideology and its tentacles which have spread around the world through organisations such as the IMF, the World Bank, and the World Economic Forum.  As Stewart Player, the author of ‘The Plot against the NHS’, indicated in his article published by the Socialist Health Association in 2017:

[the] “basic strategy now adopted for the NHS in England has its origins in the business-dominated international policy circuit, of which the WEF is the apex, rather than in either the Department of Health or NHS England – let alone in the creative input of local communities, doctors and nurses […] What a comparison of the FYFV with the WEF reports suggests, instead, is that what is now planned for the NHS in England is not a home-grown response to meet distinctively English circumstances, which the FYFV presents itself as being, but what the global policy-making elite at Davos sees as a way of avoiding further growth of spending on publicly-provided health care.

 We are at the mercy of a global system which puts profits above people, and in this case, patient care. We are at the mercy of a group of people who claim, falsely, that money is scarce, and that public provision at its current levels is unaffordable, whilst at the same time cultivating a culture of private profit-based provision.

While our NHS slides into a potentially irreversible situation, as Covid-19 allows the government to use the pandemic to drive its agenda forward as quickly as possible, the consequences of years of government policy compounded by almost a year of the relentless gloom and indeed sorrow continue to play out.

It beggared belief to witness video footage filmed this week in Brent and Glasgow which showed residents queuing to access food banks or soup kitchens in freezing temperatures.  It was described rightly by many as shocking and humiliating and reminiscent of the Great Depression in the 1930s.

Journalists and other commentators have decried food poverty as if it were a discrete phenomenon, rather than asking the question as to why so many people are going hungry in one of the wealthiest countries in the world, notwithstanding the current crisis.  As GIMMS has commented many times the solution to hunger is increasingly seen as a charitable one – public donations to food banks or supermarkets distributing food through various organisations (to reduce waste as much as to feed people).

It is a situation which is being normalised in society.  At the exits of supermarkets, we are invited to donate a bag of pasta or a few tins of something – soothing our collective conscience perhaps.  Hunger and the poverty from which it originates predates Covid-19 and is the direct result of the market-driven ideology which is pursued by the government through legislation, spending and policy decisions which keep wages low and increase job insecurity. In other words, political decisions to serve business needs rather than those of citizens.

Nobody needs to go hungry, but we are institutionalising dealing with it through charity rather than government action.  Decades of neoliberal propaganda have demonised people by shifting blame to individuals, while in an act of sleight of hand, the real culprits are released of any responsibility for the state of the nation. Whilst at the same time, the coffers of private companies and politicians’ friends become bloated with public money which should be going into public provision instead.

Although we are told regularly it is a question of monetary affordability, it is not.  It is a question of what we want to prioritise in our society given the limitations that real resources pose. If we want better public services, to reduce inequality or deal with climate change then we will have to consider how we share out those resources in such a way as to deliver them for the greatest good possible rather than serve the greed of the few.

In the short term, as Yeva Nersisyan and Randall Wray of the Levy Institute pointed out in a paper which was referred to in a Guardian Editorial earlier this week:

[the] “government is engaged in relief, not stimulus, spending. It is offering much-needed assistance to the devastated balance sheets of households, school districts and local governments. Rescuing public services, making sure people do not starve and building COVID-19-testing systems is not an economic stimulus but a necessary antidepressant.”

In the longer term, the challenges are even starker. Addressing the vast inequalities which were created as a result of the pursuit of market dogma and the looming climate crisis bearing down upon us, begs an important question about how we deliver a ‘just, equitable and inclusive’ transition to a sustainable economy.

Currently, as politicians spew their climate rhetoric, Boris Johnson claims he is committed to action and the public express support for real change, there is also a desire to restore normality after such a gruelling year. This week Andy Haldane (and the Chancellor before him) invited the public to indulge in a spending spree with their savings once the pandemic releases its grip on the economy. Are they inviting us to return to our old spending patterns for short term gain? Putting aside the fact that for many people there are no such savings, and many have only increased their debt, face unemployment or future job insecurity, those with savings may prefer a more judicious approach in the short to medium term if they feel uncertain about where the economy is headed or indeed the planet!

This is an opportunity to reimagine what is important with concrete proposals for change. Growth is being touted as the mechanism to overcome the economic consequences of the pandemic. But what sort of growth? The destructive sort which has already been laid bare by the realities of an already over-exploited planet where huge wealth, poverty and inequity exist side by side or a radical rethink to how we live our lives. Consumption which brings transitory pleasure or creating a world that is sustainable, puts protecting biodiversity at the top of the agenda and focuses on human well-being rather than human and planetary exploitation.

In an article in the Guardian this week the economic commentator Larry Elliott suggested one option is to leave it to the market. But haven’t we had enough of the god of the market and its undelivered promises which have also brought about huge disparities in wealth, crushing poverty and inequity?

The WEF’s Great Reset posits a solution but in reality, positive as it is presented, it just leaves the same oligarchs and philanthropists in place directing the orchestra in their own image for their own benefit and a smaller role for public provision through elected government.

We make no excuse for raising these issues again and again in our blogs. It may seem like a broken record but there is a huge amount at stake for future generations and not so future.

It boils down to chumocracy, revolving doors and corporate control or the institution of a functioning democracy. The possibility that people can elect a government to deliver public purpose and create a public and social infrastructure to serve the public good instead of public money being siphoned off into private profit. Currently, the latter situation looks to continue as global corporations greenwashing their way to more power and profit consolidate their power through those seated in parliament who approve it.

We need a new way of envisaging well-being and it is only government that has the monetary and legislative firepower to create the change we need, should it have the political will to do so. It may seem that the human will to commit to real change may be in the balance but as Elliott notes in his article ‘The need for change is glaringly obvious and the opportunity is there too. That opportunity must not be squandered.’

And yet whilst the country and indeed the planet faces some exceedingly difficult challenges, the media oracles continue this week with their usual warnings about the level of government debt and ask how are we going to pay for the astonishing amounts the government has spent so far to manage the ongoing economic fallout from the pandemic and deliver government promises relating to promised societal ‘levelling up’ and dealing with climate change?

These questions dominate the discussion in the media and beyond on a weekly basis. Rishi Sunak, having already promised not to increase income tax, national insurance and VAT is running out of possibilities to bring the public finances back into balance, according to the economic pundits. An increase in Corporation Tax perhaps? Or a wealth tax which could raise up to £260bn in revenue to cover debt or future government expenditure or so the story goes.

Yet again, despite the incredible sums already spent there is apparently a limit to governments financing themselves through the ‘printing presses’ without compromising the ability of the central bank to keep inflation at an acceptable level. It denies yet again the monetary realities of the currency issuer and fixates instead on the wrong solution. Taxation. Whichever path the Chancellor takes going forward, he could cut short any economic recovery at all. Taking money out of the economy can only contribute to further pain at a time when the government needs to be spending more, not just to mitigate the economic effects of the pandemic but also address the future challenges looming in front of us.

If we want to redistribute wealth and remove the power such wealth commands, yes to increasing taxation. But believing it could get the government out of a sticky debt wicket or give it fiscal space to spend is to misunderstand the role of tax which, at base, is not to fund government spending. The real challenges the government faces are not budgetary, but of managing real resources to bring about change.

With this household budget understanding, the only solution might be to envisage yet more cuts to public sector spending which would add to the already underfunded and overburdened public and social infrastructure which the evidence of the last year has shown it to be unfit for purpose despite the brave and staunch efforts of public employees.

Furthermore, there is no ‘fiery pit of economic disaster’ if the UK does not get its financial house into order as was suggested by a senior analyst at the AJ Bell Investment Consultancy in a right-wing newspaper this week. The fiery pit is more related to the planetary disaster that faces us all if governments around the world fail to cooperate and spend sufficiently to bring about that just, equitable and inclusive transition we so desperately need.

 

 

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Build Back Better? Better for whom?

Lego workers standing in rowsPhoto by Markus Spiske on Unsplash

“The rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour. The freedom that results applies only to them. The many simply have to work harder, in conditions that grow ever more insecure, to enrich the few. Democratic politics, which purports to enrich the many, is actually in the pocket of those bankers, media barons and other moguls who run and own everything.”


― 
Charles Moore

 

We’ve been down Alice’s rabbit hole in previous blogs, but we seem to be digging ever deeper as we wake every day into a seemingly ever more dystopian world where nothing is as it seems.

On one side of the coin, a world of poverty and inequity in which employment security and good wages are a thing of the past, children go hungry, our public services and infrastructure decay and the planet’s resources are plundered in a race to keep the wheels of capitalism on track, with catastrophic consequences.

And on the other side, a world of ‘sacrifice’ and ‘hard choices’ where politicians, institutions, and the media grind on relentlessly about levels of government borrowing, the evils of public debt and how we can pay it all back; as if sound finance should trump the well-being of human beings and the planet which gives them life.

This week in a speech to the London School of Economics, a bastion of economic orthodoxy, the Governor of the Bank of England, Andrew Bailey, said of the claim that the institution had ‘flouted the rules’ and ‘damaged its independence, by purchasing government debt and lowering the government’s cost of borrowing’, that such arguments ‘were entirely without merit’. He then went on to deny that what it was doing had any links to modern monetary theory.

This was a surprising conclusion to come to in the light of the recently published working paper An Accounting Model of the UK Exchequer’ authored by Andrew Barclay, Richard Tye and GIMMS associate member Neil Wilson. A paper which exposes the myth of the Bank of England’s so-called ‘independence’ and illustrates the central driving role of HM Treasury in the UK. It also uncovers the lie, perpetuated by the reigning economic orthodoxy, which professes that the government funds its spending as if it were like a business or a household.

Quite simply, the claim that the government has been forced to borrow vast sums to finance its response to the pandemic, which will have to be paid back in one way or another either through increased taxes or more austerity, does not stack up in the light of the evidence. The paper challenges the economic dogmas which have dictated government spending and policy for decades and sweeps away the myths and legends to reveal the truth about how the government really spends. As the authors so rightly note:

‘Even if you previously believed it was firmly attached, the global pandemic of 2020 has caused the mask of ‘fiscal responsibility’ to slip away completely. Politicians that were previously preaching hair shirts of austerity have been able to find billions of pounds, dollars and euros from somewhere to prop up their economies while the inflation that we were told would run rampant if we were ever to undertake such an action has been noticeable by its absence.’

Last year, in the first week of February before the pandemic really took hold, the headline in the Financial Times was ‘Sajid Javid’s surplus goal at risk as UK finances face £12bn black hole’. The FT takes its responsibility seriously – that of keeping an ignorant population frightened and compliant.

The BBC took a similar tack last November, noting that the UK government had ‘borrowed’ £214.9bn to stave off the worst effects of the economic crisis facing the country because of Covid-19. It asserted that with higher spending and less tax revenue, the government had only one option, which was to borrow. It stated that even if the pandemic comes to an end quickly, there would still be higher costs and lower tax receipts in the future. This, it suggested, would again mean even more borrowing, which would have to be paid for either by spending less, or raising taxes or a mixture of both. This all reinforces the scare story that it could represent a huge burden for future generations.

This hokum pokum, which forms part of a wider economic orthodoxy, has had destructive ramifications for economies and societies around the world, and has been allowed to dictate public policy for decades. Mrs Thatcher’s dictum ‘There is no such thing as public money There is only taxpayers’ money,has formed the modus operandi for successive governments. Either to justify policy in cutting back our public services, or to involve the private sector to deliver them for a profit motive, on the basis both of their unaffordability and the proposition that the private sector is more efficient than the public; i.e. better value for taxpayers’ money.

The consequences of such narratives, particularly in the light of increased private sector involvement in the delivery of government policy with little transparency and accountability, are plain for all to see, whether we are talking about the NHS, social care, education, or our beleaguered social security system, not to mention many other publicly delivered services.

We have paid a terrible price for the idea that the national debt has to be paid back, and that government spending is limited in the same way as a household, which pervades the public understanding of how governments spend. The idea of a ‘black hole’ in the public finances is a powerful one, and yet the reality is that the deficit represents public money created and spent into the economy by the government, not a burden related to borrowing.

In fact, the deficit is nothing to worry about – it is nothing less than the private, non -government sector’s surplus, or quite simply the money in your pocket or your savings!

The government is the creator of the pound, does not need a source of income to spend and can never run out of £Sterling. To treat the country’s economy like a business or household is fraudulent economic illiteracy. But of course, it serves a purpose. That is to keep people in servitude to an exploitative system through an idea that someone, somewhere, will have to pay eventually for all this vast amount of government spending. The truth is that the government has the capacity to spend in the public interest and promote full employment as a policy objective, and both will prove of huge importance in the coming months.

Furthermore, if Rishi Sunak were to propose higher taxes, as has been mooted by the economic media pundits as a future possibility, the effect on an economy already in trouble would be to worsen the situation. Taxing people more does not mean that a government is collecting money to enable it to spend or pay back debt; it is quite simply removing money out of circulation. Anyone with an ounce of common sense would understand the implications of increasing taxes at a time when unemployment is rising in an already ideologically driven low wage economy, and where companies such as British Gas, sensing an opportunity, are aiming to renegotiate pay through a firing and rehiring strategy.

Of course, now the Chancellor finds himself in a dilemma as the economic consequences of the pandemic and 10 years of public policy continue to roll out. After all the handwringing about reducing the deficit and debt, he’s having to have a rethink. Or is that a flip flop? It’s the government trademark.

The fact that the government has already shown the power of the public purse to whistle up money to pour into the pockets of big corporations and those of their friends, means the people are becoming increasingly suspicious when they are told hard decisions may be ahead. A dilemma to a Chancellor preaching such hard decisions in the form of higher taxes or further cuts to the already besieged public sector. It will surely prove somewhat of a cleft stick as a direct result of the Tory preoccupation with sound finances; that of balanced budgets, saving for rainy days or paying back debt. His budget review next month promises to be interesting.

On the one hand, he wants to be seen as a safe pair of hands for the public finances (so he can continue to beat Labour over the head as profligate) and his language reflects that, but on the other, there is that little issue of an economy struggling with the human and economic cost of the pandemic. Even if we can return to some sort of normality in the coming months, it will be many more months, potentially years, before economies will return to normal, as the global financial crash in 2008/9 has already proved.

Factor into that picture, along with the already dire consequence of unnecessary cuts to public spending that occurred in the ten years before the pandemic, the need for massive government intervention (globally not just nationally) to ensure a just and equitable transition, as climate change forces the hand for real change. The idea of sound finance should surely be the last thing on Rishi Sunak’s mind. In fact, such ideas deserve to be emptied into the dustbin of history where they belong, regardless of whose political ideology one espouses. The real constraints to future spending will be those of real resources, not monetary ones, and that is the real challenge to be managed in the public interest.

Contrary to what we are currently experiencing, the government should have a duty as an elected body to provide leadership through its spending policies and legislation to address not just the pandemic fall-out, but also provide the framework for a just transition towards a sustainable future. Our future will depend on that intervention, not the increased influence of big business whose motivations are profit-led.

It should be of concern that, despite a landmark review commissioned by the Treasury which suggested that prosperity was coming at ‘devastating cost’ to the ecosystems that provide humanity with food, water and clean air and that radical global changes were needed to production, consumption, finance, and education, Boris Johnson has supported the opening of a coal mine in Cumbria.

This is the usual forked tongue we have come to expect from the PM, who is no doubt going to revel in presenting his government as committed to change at this year’s COP21 to be held in Glasgow in November. It will no doubt also prove an opportunity for more hot air from him and his government, who will be seeking to promote growth through the grossly misleading proposal of ‘Build Back Better’ which has become the mantra for change in many quarters.

We might think building back better has merit, given our current challenges, and it certainly is being presented as such. But the key question is what does it really mean? Who might be its beneficiaries?

In this respect, an article published this week about the care of vulnerable children in privately run children’s homes makes clear what is at stake.

It was claimed in the Guardian article that an oversight scheme was needed to help catch providers before they fail and ensure company changes don’t risk the quality of provision. From the perspective of child-care alone, we don’t need an oversight scheme; we need children’s homes to be restored to publicly funded and provided provision. The care of vulnerable children should not involve private companies for profit, overseen or not, any more than feeding vulnerable children should.

It is extraordinary to learn also, this week, that the DfE (Department for Education) seems totally unconcerned about the suspected huge profits (commercial confidentiality prevents the total from being made public) made by a private contractor at the heart of the free school meals debacle. It highlights the stink at the heart of government which has become a cash cow for private profit with few strings attached.

Let’s then extend this argument by turn to include all the vital public and social infrastructure which underpins a healthy economy (meaning people), which should be publicly paid for and delivered, not funnelled into private provision. And yet, over decades we have witnessed the ever-expanding tentacles of the private sector, where much of that infrastructure, both national and local, has been outsourced or privatised and proved a profitable exercise for private corporations. Huge outflows of public money going one way into private profit with no accountability.

This is not a time to reinforce the narratives of monetary scarcity, whether dovish or hawkish, or to continue the on-going shift of public services such as the NHS or education into private control, where profit is the only consideration. We neither need mitigation for a rotten system, nor to turn over the role of government to an unelected oligarchy of private interests with the supine agreement of elected officials claiming their commitment to democracy, but who will no doubt benefit through the revolving door. Corporations do not exist to further human well-being, they exist to ensure their own well-being; these days in the form of greenwashed growth and profits. Outsourcing ‘building back better’ is not likely to deliver the sort of public interest benefits we desperately need, if that is the direction we are headed in.

This knowledge should be the starting point for a public conversation about the sort of future we want. Is it to be one of excessive consumption, driven by market ideology and greed-driven global corporations? Corporations whose wealth has purchased political influence and enabled their interests to be served, whilst creating huge poverty and inequity and at the same time threatening planetary health? Or should we focus on deciding how we want the Earth’s real and finite resources to be distributed sustainably, via democratically decided state intervention which gives weight to serving the interests of people rather than profit?

Our survival depends upon the choice we make. The curtain has been ripped open to reveal the lies that have sustained this rotten system. There can be no excuses for not challenging it. It is a call to action.

 

 

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Happy 25th birthday, Modern Money Theory!

A guest post by Dirk Ehnts, originally published in German here

 

Warren Mosler with 2 Porche carsOn Monday, January 29, 1996, Warren B. Mosler, Director of Economic Analysis at III Finance, wrote a message on a message board in which he asks academics for references and help regarding his model. The model was spelled out in his text “Soft Currency Economics” (SCE), which Warren Mosler worked on in the early 1990s. The following collaboration of Warren Mosler with academics like Randall Wray, Bill Mitchell and many others led to the (further) development of an empirical theory of money now know as Modern Money Theory. In this article, I quote some juicy passages from SCE to highlight the early foundations of MMT.

Warren starts his text by stating that current policy would be a disaster:

When a member of Congress reviews a list of legislative proposals, he currently determines affordability based on how much revenue the federal government wishes to raise, either through taxes or spending cuts.  Money is considered an economic resource. Budget deficits and the federal debt have been the focal point of fiscal policy, not real economic costs and benefits. The view of federal spending as reckless, disastrous and irresponsible, simply because it increases the deficit, prevails.

 

He outlines why he wrote this text:

The purpose of this work is to clearly demonstrate, through pure force of logic, that much of the public debate on many of today’s economic issues is invalid, often going so far as to confuse costs with benefits. This is not an effort to change the financial system.  It is an effort to provide insight into the fiat monetary system, a very effective system that is currently in place.

 

Then, Warren Mosler focuses on these seven points, which I will comment on briefly:

  1. Monetary policy sets the price of money, which only indirectly determines the quantity. It will be shown that the overnight interest rate is the primary tool of monetary policy. The Federal Reserve sets the overnight interest rate, the price of money, by adding and draining reserves. Government spending, taxation, and borrowing can also add and drain reserves from the banking system and, therefore, are part of that process.

This makes clear from the very first sentence that Warren’s ideas (which went into MMT) are not based on monetarist ideas. The central bank controls the price of money (interest rates at different maturities), not directly the quantity, as the monetarists claimed. The other big innovation contained in this paragraph is the view that fiscal operations (government spending, taxation, and borrowing) are monetary operations because the “can also add and drain reserves from the banking system”. Remember that almost all macroeconomics textbooks divide economic policy into fiscal and monetary policy. The line between the two is artificial, Warren says. This perfectly fits reality where central banks are not only the bank (or clearing house) of the banks, but also the bank of the federal government. The Fed describes itself as “Fiscal Agents and Depositories of the United States”.

  1. The money multiplier concept is backwards. Changes in the money supply cause changes in bank reserves and the monetary base, not vice versa.

Again, Warren puts SCE in opposition to monetarism. Whereas monetarism says that central banks lend reserves to banks which these then lend on to the private sector, SCE says that changes in the money supply (including deposits created by bank loans to households and firms) cause changes in bank reserves and the monetary base.

  1. Debt monetization cannot and does not take place.

This is very important: there is no such thing as “debt monetization”. The reason is the following. If the central bank sets an interest rate target, its purchases of Treasury securities are not discretionary any more. If the interbank rate goes down, the central bank has to sell Treasury securities in order to mop up “excess” liquidity and thus stabilize the interbank market interest rate. If the interbank market rate goes up, the Fed does buy Treasury securities, but only to maintain its interest rate target. As Warren explains later in the text: “The Fed is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero.” Today, with the Fed Funds Current Target Rate set at 0.00-0.25 the Fed can buy all the Treasury securities it wants because the funds rate is supposed to be at zero or above. That has nothing to do with “debt monetization” and everything with bringing the interest rate down.

  1. The imperative behind federal borrowing is to drain excess reserves from the banking system, to support the overnight interest rate. It is not to fund untaxed spending. Untaxed government spending (deficit spending), as a matter of course, creates an equal amount of excess reserves in the banking system. Government borrowing is a reserve drain, which functions to support the fed funds rate mandated by the Federal Reserve Board of Governors.

So, government does not borrow to “finance” itself. It sells Treasury securities to “drain excess reserves from the banking system.” Borrowing does not “fund untaxed spending”. These are essential insights of MMT. Even today, many academics and commentators seem to believe that there are different ways a government can “finance” itself. That is not true. Government does not and cannot finance its spending.

  1. The federal debt is actually an interest rate maintenance account (IRMA).

By the way: Treasury notes only exist electronically, according to Treasury Direct. It is all just digital numbers in accounts at the Fed, owned by the Treasury. On January 21, 2021, the Fed holds $4,732,690 million worth of US Treasury securities. If it would be forced to sell them into the market, bond prices would collapse and yields shoot upwards. If it would buy up all federal debt (all Treasury securities), the interest rate would be zero permanently.

  1. Fiscal policy determines the amount of new money directly created by the federal government. Briefly, deficit spending is the direct creation of new money.  When the federal government spends and then borrows, a deposit in the form of a treasury security is created. The national debt is essentially equal to all of the new money directly created by fiscal policy.

The last sentence is worth repeating: “The national debt is essentially equal to all of the new money directly created by fiscal policy.” When government spends more than it taxes, it creates new (additional) money. That’s all there is to it. The implication is that if you want to reduce the national debt, you have to destroy money by fiscal policy. This only happens when tax revenues are higher than government spending. Since this reduces private wealth, it will collapse aggregate demand eventually. The Clinton surpluses and the collapse of the dot-com boom are a case in point.

  1. The amount and nature of federal spending, as well as the structure of the tax code and interest rate maintenance (borrowing), have major economic ramifications. Options over spending, taxation, and borrowing, however, are not limited by the process itself but by the desirability of the economic outcomes.  The decision of how much money to borrow and how much to tax can be based on the economic effect of varying the mix, and need not focus solely on the mix itself (such as balancing the budget).

Warren discards the idea that the mix of tax revenues and borrowing (issuing Treasury securities) should be driven by “balance the budget”. Instead, the “desirability of the economic outcomes” should be the guide to fiscal policy. This is Warren’s version of Lerner’s Functional Finance.

Summing up, the ideas contained in Warren Mosler’s SCE at the beginning of the 1990s already contained a lot of ideas that by now are accepted by large numbers of academics, policy-makers, bankers, journalists and the wider public. Expanding these ideas into MMT added more flesh and led to the formation of a proper macroeconomic school. At 25 years of age, MMT is now at the verge of becoming mainstream macroeconomic theory. This is well worth celebrating!

 

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The Covid-19 pandemic shows the need for change. For a real ‘Reset’.

Button with label "Push to reset the world"Photo by Jose Antonio Gallego Vázquez on Unsplash

‘We live in capitalism. Its power seems inescapable. So did the divine right of kings.’

Ursula K Le Guin

The year 2020 will be not be remembered with any great affection. So much suffering, loss of human life and economic uncertainty has left the nation in turmoil. Whilst in normal times we would be welcoming the new year with resolutions and hope for better days to come, the prospects for the future remain very uncertain.

Whilst the government’s handling of this pandemic crisis has been chaotic and indecisive with disastrous consequences, it has also revealed the dire state of our public and social infrastructure for which decades of ideologically driven government policies have been responsible. That, combined with the vast wealth and other inequalities that exist in both rich and poor countries across the planet and the climate tsunami following up frighteningly behind, should leave a bad taste in our collective mouth. It should start to make us question the very foundations of the economic model now turning to sand before our very eyes.

Covid-19 has exposed in the most distressing way the damaging consequences of the pursuit of balanced budget narratives which have allowed governments to justify public sector rationalisation or austerity on the grounds of unaffordability, and overseen a huge increase in poverty and inequality. Successive governments have abdicated their responsibility for the lives of citizens; their responsibility to create a fairer distribution of wealth and real resources and ensure that the public infrastructure meets their needs. Instead, they have plumped in favour of that elusive but all-seeing ‘god of the market’ which, in real terms, has meant ceding control to global corporations who direct the policy orchestra and pouring public money into the pockets of those same corporations with little transparency or accountability.

Whilst the government has found the power of the public purse to manage this crisis, there have been winners and losers throughout which reflect its ideological persuasion. It has only been with public pressure that it has been forced into political U-turns to help some of the poorest people in our communities, whilst leaving still others in distress and without adequate support. The road to Damascus moment still eludes a government which has chosen a path that so far has only led to economic hardship and inequity for many and yet great wealth for a few others.

It has also done so with the usual threats of a financial price to pay in the future to keep the household budget narratives of state spending alive and well. It would not do for the public to be disabused of the notion that taxes fund spending, that government has to borrow to cover its deficit and that public debt is real and will require difficult decisions at some unspecified time in the future. Such narratives are vital to government and will, without challenge, allow them to be able to finish off the job of destroying publicly paid for and managed public and social infrastructure and thus ensure the continuing dominance of global corporate power. We do indeed face a continuing hollowing out of democracy in favour of a growing alliance between the state and big business and the big political revolving door.

Whilst GIMMS and other educational organisations across the world have made huge strides in raising awareness of how money really works, the task ahead remains a daunting one. The weekly news is testament to the ongoing consequences of government policies and the spun narratives of how government spends but also encouragingly shows the power the public has to effect change, and not just through the ballot box. The on-going saga of free school meals continues to rumble on and elicit government U-turns. The latest, and most shameful, were the pictures on social media of the meagre ‘rations’ from a private company contracted and paid huge sums to provide substandard food packs which it turned out largely reflected government guidelines and did not meet the standards for the nutritious, balanced diet all children need to grow and thrive. It is to be regretted that the government, in the same week, went on to tell headteachers in England not to supply vouchers and food parcels to disadvantaged children during the February half-term, signalling it was already doing enough which is clearly not the case. There are no excuses for hungry children, or hungry adults for that matter.

The fiasco was yet another example of public money being poured into private profit and at the same time failing to address the reasons for children going hungry in the first place. Poverty and hunger are not new phenomena. Covid-19 has, without doubt, put a spotlight on the prevailing economic system and the economic decisions of successive governments which have not only been responsible for increasing poverty and inequality through employment, welfare and taxation policies but also shifted blame and created widening societal divisions which allow the real authors of economic distress to go scot-free.

It is therefore shameful that the Chancellor Rishi Sunak whilst facing opposition from campaigners is still considering cutting the meagre £20 per week universal credit uplift which has helped people struggling to get by during the pandemic. The consequences of the crisis will be with us for many months to come, possibly years, and therefore the government with its power of the public purse has no excuses when it comes to ensuring that its citizens can pay their bills and put food on the table while the disruption continues. Instead, its policy responses have proved not strategic but piecemeal and ill-thought-out with plenty of U-turns along the way.

Whilst we need the power of the public purse to mitigate the economic consequences of the current crisis, we also need a government with a long-term strategy for addressing the poverty and inequality that has arisen over decades and which has allowed top managers to reap excessive monetary rewards whilst depriving working people and their families, whose standards of living have declined substantially through low incomes and insecure employment.

Boris Johnson suggested earlier this week that he was still in favour of reducing Universal Credit saying:

‘what we want to see is jobs, we want people in employment, and we want to see the economy bouncing back. And I think most people in this country want to see a focus on jobs and growth in wages than on welfare’.

A change of heart? Given that the Tory government has presided over exactly the opposite over the last 10 years through austerity and economic policies which have increased economic instability whilst at the same time serving the corporate estate, instead, it is likely to be yet another in a long line of so far undelivered promises to level up. However, the sentiment is correct and is what should be driving government policy. We need a recognition of the power of the public purse to pursue full employment through a Job Guarantee and the vested power of government to legislate fair employment terms and conditions with the aim of shifting the balance of power back to working people instead of where it currently lies in corporate hands with government approval. We need a government prepared to address the key issues of our time using its currency-issuing powers, not just for the coming months but for always. Whilst Rishi Sunak calls upon the nation to spend the savings resulting from lockdown to get the economy going again (aside from the fact that he is turning a blind eye to the many millions of people as reported by the Resolution Think Thank this week who have lost out or got into further debt as a result of the pandemic adding to their already insecure lives) the looming crisis of climate change has been put on the back burner and time is running out. The god of growth must be worshipped anew to get the economy back into shape.

Aside from the fact that people are unlikely to spend their savings like drunken sailors in the near future, given the on-going uncertainty about the economy and jobs, exhorting the gods of growth and indiscriminate private consumption as a solution to economic slow-down would not only be folly but denies the clear power of government to spend to effect real and sustainable change.

We need a sea change in how we live our lives to address the already happening climate catastrophe and indeed, it will only be through large scale government action in spending policies and legislation that will enable this to happen. There is a pressing need for a national investment strategy that includes a massive and long-term investment in education and training in order to secure our future productive capacity. We much focus on high-skilled, low-carbon and well-paid jobs both for the private sector and in a much-expanded public sector to ensure high-quality basic services are provided to everyone, including our disabled and elderly citizens. Our nation must become more productive if we are to reduce our working week and support our retirees and support to those nations without the necessary real resources to support their communities.

The overarching need is to protect our environment for future generations which should also include acting to redress the vast wealth inequalities that exist. We need to restore our sense of the value of publicly paid for and provided public sector work to national well-being, implement a Job Guarantee to provide stability through an effective countercyclical response to the inevitable economic ups and downs all economies face, and a living income for anyone who is unable to work for health reasons or caring or other essential duties including higher education. Of course, these will not be magic bullets to bring about a perfect world, but provide a basis for a conversation that we need to have.

These are important decisions, not just concerning the big macroeconomic questions about creating an efficient functioning economy, but also relating to the sort of society we want to see. For left-wing progressives, this would suggest creating a fairer and more equitable society where people have sufficient wages to live comfortably with adequate nutrition and good living conditions as well as good public services such as health and education. Assuming that the future will bring forth a political party that has the express intention of addressing these issues, change is in our collective hands as an electorate and we should not forget the power we hold.

It is regrettable that currently there is no such party dedicated to the change we need and that all roads are still leading to an ever-distorted capitalism wherever you place the X on the ballot paper.

Whilst the very real human consequences of government decisions and its policies continue to play out in our communities and our families the government, opposition politicians, economists and journalists continue to pound out the messages of monetary scarcity; either talking about the need for ‘hard choices’ to deal with the deterioration of the public finances or delaying the ‘repayment pain’ until economic conditions will allow.

Whether it’s Rishi Sunak the Chancellor or his shadow opposition sidekick Labour’s Annaliese Dodds, they both adhere to a household budget narrative of the public accounts, in other words, the diktat of sound finance as if a government suffered from the same constraints as business. The operative question in either case being, at what point do you enact such fiscal tightening, not whether you actually need to. How the state really spends cannot have escaped their notice, and yet they stick to the orthodoxy like glue.

Whilst that is undeniably to be expected with the Conservatives, whose agenda is more about creating an alliance with big business under cover of stories about monetary scarcity and ‘hard choices’, Annaliese Dodds in this week’s Mais lecture indicated clearly her party’s on-going adherence to the false notion that government constraints are monetary. Whilst, to be fair, she gave a cutting analysis of the effects of government policies on people’s lives both before and after the arrival of Covid-19, she stuck to the orthodox economic mantras. Namely keeping the City sweet by maintaining the joke of supposed Central Bank independence and having a ‘responsible approach to government debt.

She summarised her approach to fiscal policy as requiring ‘a set of rules around both annual and the stock of debt, that simultaneously demonstrates a prudent approach to the public finances and leaves space for investment in the future and the ability to adapt to crises’. A sound approach to the public finances she said must ‘also include consideration of the quality and effectiveness of public spending.’ Whilst such evaluation should always be a part of government spending strategies (and clearly, we have seen in recent months and years the exact opposite) the concept of sound finance continues to be the guiding doctrine of politicians on both sides of the political spectrum. They might have different spending objectives, but both are couched within the clear limitations of household budget thinking.

As society implodes as a result of rising poverty, inequality and ill health which has arisen as a result of government policies and placed increasing pressures on public services such as our NHS which this last year has bravely served the nation in a deliberately created environment of insufficient staff, facilities and other resources, there is only one direction in which we can place the blame. Governments whose decisions have favoured market solutions through privatisation and legislative policies which favour them – with shocking consequences.

In similarity to nature’s web of life, which is defined by its interdependence, our economy does not exist as disparate parts. The economy represents the lives of working people and the businesses that employ them, and its health is reliant on the public and social infrastructure provided by the government to support it. Remove one vital link and you risk that eventually the whole will collapse.

This is the frightening consequence we already face, not just in the real but finite resources upon which our societies are built and owe their existence, but also our dependency on the goodwill and care we express for others. As reliance on charitable institutions to feed hungry people or deal with rising homelessness increases, or rich philanthropists replace public institutions with the equivalent of poor law boards dictating the pace and deciding who will be a beneficiary, our society will continue to break down on the basis of a ‘convenient lie’ that the state has no money of its own and there is no alternative course of action.

Instead of examining the public accounts and deducting from the financial position the health of a country, a future government should be turning that idea on its head to see the reality of the challenges we face. The reality of the real constraints which are not money but real resources and how they can be managed fairly in the interests of all citizens. The fast-approaching reality of climate change and its consequences threaten to engulf us if world governments fail to work together to create better, fairer and more sustainable solutions.

We need a ‘Reset’. Not the ‘Great Reset’ being promoted by the World Economic Forum which, whilst sounding just the thing to address rising inequality and climate disaster, will maintain the same power structures with the same corporations dictating the rules in the interests of accumulating more profit and wealth whilst still clinging to the sham economic model which seeks to keep power in the hands of the few.

We need quite a different ‘Reset’ as suggested by Associate Professor Fadhel Kaboub in a GIMMS ‘in conversation’ event last week. One where public purpose, not profit or greed, directs government spending and legislative actions for a sustainable and fairer future and without which the light at the end of the tunnel will recede, not get closer.

There is an alternative and history is still to be written on the choices we make. We once believed that the Earth was flat, that it was at the centre of the universe and the sun and planets revolved around it. Those notions were disproved by the observations of scientists like Copernicus and Galileo. We need now to disprove the notions that money is scarce – not because knowing it makes a difference in itself, but because knowing it will enable us to decide what history will eventually record about the decisions that were taken as a result.

We can be on the right side of history if we choose to be.

 

Upcoming Event

Phil Armstrong in Conversation with Pavlina Tcherneva – Online

January 24th 2021 @ 4:00 pm – 5:30 pm GMT

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong, author of ‘Can Heterodox Economics Make a Difference’ published in November 2020, will be talking to Pavlina Tcherneva.

Pavlina is program director and associate professor of economics at Bard College and a research associate at the Levy Economics Institute. She conducts research in the fields of modern monetary theory and public policy and has collaborated with policymakers from around the world on developing and evaluating various job-creation programmes. Her work on the Job Guarantee spans over 20 years.

Author of the recently published book ‘The Case for a Job Guarantee’, she challenges us to imagine a world where the phantom of unemployment is banished and anyone who seeks decent living-wage work can find it – guaranteed. It will be of particular relevance as we begin to grapple with the economic fall-out of the Covid-19 pandemic but for anyone passionate about social justice and building a fairer economy it should be essential reading.

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Tickets via Eventbrite

 

Past Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

Author and MMT Scholar Phil Armstrong talks to professor of economics and president of the Global Institute for Sustainable Prosperity Fadhel Kaboub about how MMT insights apply to the global south, colonial reparations, the MMT Job Guarantee contrasted with Universal Basic Income, and much more.

Audio via the MMT Podcast here

Video will be available soon.

 

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The post The Covid-19 pandemic shows the need for change. For a real ‘Reset’. appeared first on The Gower Initiative for Modern Money Studies.

Will rising interest rates in the future bankrupt the UK government?

Published by Anonymous (not verified) on Sun, 13/12/2020 - 8:10am in

Pound coinsImage by Michael Brasuela from Pixabay

For this week’s MMT Lens, GIMMS is pleased to publish a guest article by Berlin-based economist Dirk Ehnts, author of “Modern Monetary Theory and European Macroeconomics

 

The Office for Budget Responsibility (OBR) issued stern warnings at the end of November stating that fiscal adjustment would very likely be required to arrest the continued rise in public debt. This led British finance minister Rishi Sunak to make the claim that public finances are on “unsustainable” path. According to the BBC reports, Sunak stated that “there are record peacetime highs in borrowing and debt, and the forecasts that were set out yesterday show us on a path where that continues to be at a very elevated level, so that’s not a sustainable position”. The elephant in the room is this: How is a sustainable position in public debt defined?

Some, like the OBR, apparently seem to think that the public debt needs to be “stabilised’. What that exactly means is not made explicit. The OBR warned:

The increase in borrowing does, however, render the public finances more vulnerable to changes in financing conditions and other future shocks. This heightened vulnerability is compounded by the shortening of the effective maturity of that debt as a result of both a greater focus on short-term debt issuance by the Treasury and further Bank of England purchases of longer-dated gilts financed through the creation of floating rate reserves. Taken together, these leave debt interest spending twice as sensitive to changes in short-term interest rates than prior to the pandemic. Arresting the continued rise in public debt is likely to require some fiscal adjustment once the virus has run its course. Only in our upside scenario, in which the pandemic is swiftly ended and there is little lasting damage to activity, does borrowing fall below the level required to stabilise the debt-to-GDP ratio by the forecast horizon. In our central forecast and downside scenario, tax rises or spending cuts of between £21 billion and £46 billion (between 0.8 and 1.8 per cent of GDP) would be required merely to stop debt rising relative to GDP.

 

Monopoly Money

Dr Phil Armstrong has written an article on fiscal policy for The Gower Initiative for Modern Money Studies that is worth reading in relation to this. In it, he mentions the “government budget constraint” which conceptualises government as a currency user – that is that the government would have to have income before spending. This is upside down because the government is the monopoly issuer of the currency, not a user. The Bank of England is today wholly-owned by the UK government, and no other body is allowed to create UK pounds. It can create digital pounds in the payments system that it runs, thus marking up and down the accounts of banks, the government and other public institutions. It also acts as the bank of the government, facilitating its payments. The Bank of England also determines the bank rate, which is the interest rate it pays to commercial banks that hold money (reserves) at the Bank of England.

The interest rate that the government pays on its government bonds (gilts) follows that bank rate closely. Looking at the figure below, it is clear that the interest rate on gilts with a 10-year maturity is mostly determined by the bank rate. The reason is that there is an arbitrage relationship. Banks can choose to hold their money in the form of reserves (deposits at the Bank of England) or they can purchase gilts with these reserves. When reserves pay a lower rate of interest than gilts, banks have an incentive to adjust their asset portfolio. Swapping reserves for gilts delivers more profit for commercial banks.

Line graph showing long term government bond yields in the UK against the Bank of England policy rateGraph via https://fred.stlouisfed.org/

 

Gilts and bonds

The interest rate that the UK government pays is a policy variable determined by the Bank of England. Furthermore, it is not the Bank of England’s remit to bankrupt the government that owns it. The institutional setup ensures that the Bank of England supports the liquidity and solvency of the government to the extent that it becomes an issuer of currency itself. Selling government bonds, it can create whatever amount of pounds it deems necessary to fulfil its functions. Given that the Bank of England stands ready to purchase huge amounts of gilts on the secondary market (for “used” gilts), it is clear to investors that gilts are just as good as reserves. There is no risk of default.

Moreover, consider that the Bank of England can always allow the government to spend using overdrafts of its ways and means facility. This prompted the Financial Times to publish this article: “Bank of England to directly finance UK government’s extra spending“. The Bank of England can, in effect, just execute all the payments that the Treasury sends its way. Issuance of gilts is optional. While this might seem strange at first sight, it is only a logical consequence of the fact that the Bank of England is the issuer of currency. Before gilts can be purchased, the government first has to spend some money into the economy. Alternatively, banks can borrow from the Bank of England before they purchase gilts. Issuing gilts provides a risk-free asset with some interest, but it is not needed to “finance” the government.

 

Deficit versus surplus

 

Line graph showing public sector debt outstanding in the UK against the Bank of Englan policy rateGraph via https://fred.stlouisfed.org/

 

The figure above shows the UK public debt to GDP ratio and the Bank of England’s policy rate through the centuries. Note that UK public debt peaked in 1945 at above 250 per cent of GDP. Unsustainable? Obviously not. In 1951, the interest rate started to increase from 2 per cent to 16 per cent in the mid-1970s. Unsustainable? Obviously not. What the figure shows is that the government of the UK cannot “run out of money”. When it spends more into the economy than it collects through taxes, a “public deficit” is produced. This means that the private sector saves a part of its monetary income which it has not spent on paying taxes (yet). When the government spends less than it collects in taxes, a “public surplus” results. This reduces public debt. That public debt to GDP ratio can be heavily influenced by GDP growth, which explains the fall in the public debt to GDP ratio in the second half of the 20th century.

I would like to raise one last issue, even though it should be clear by now that as a currency issuer the government will not run out of money. Lately, the Bank of England has purchased quite a lot of gilts through its Asset Purchase Facility. On September 30, 2020, it held 674.9 billion pounds worth of gilts. At the end of October 2020, the public debt to GDP ratio hit 100%. This was £2,076.8 billion in currency. Roughly one-third of outstanding gilts are held by the Asset Purchase Facility. Where does the interest go that the Treasury pays on these gilts and accumulates at the Asset Purchase Facility? The answer is this: “As a result of the Indemnity Agreement, all profits and losses are passed onto HM Treasury.” So, HM Treasury pays interest, then gets one-third of it back immediately. There is no technical reason why the Asset Purchase Facility couldn’t buy up all of the outstanding gilts. Then, all interest payments made by HM Treasury would come back immediately. The banks would have reserves at the Bank of England worth the public debt. These earn interest equal to the bank rate. Since this interest rate is set by the Bank of England, it can be set at zero if the Bank believes this makes sense. At positive interest rates, the Bank of England will pay the banks holding reserves by marking up their accounts. They do this with the computer and as the monopoly supplier of currency, there is no limit.

So, do rising interest rates in the future create a problem for the UK government? No. The Bank of England is the currency issuer. There is nothing that stops it from paying what HM Treasury instructs it to pay. Gilts can be issued in this process as an option. The government’s ability to pay is not put into doubt since the Bank of England acts as a lender of last resort, offering to buy up gilts on the market so that the price of gilts can never crash. Higher interest rates cannot bankrupt the UK government.

 

Upcoming Event

Phil Armstrong in Conversation with Fadhel Kaboub – Online

January 9th 2021 @ 13:00 pm – 14:30 pm

GIMMS is delighted to present another in its series ‘In Conversation’.

Phil Armstrong author of ‘Can Heterodox Economics Make a Difference’ published in November 2020 will be talking to Fadhel Kaboub.

Fadhel Kaboub is an Associate Professor of Economics at Denison University, and the president of the Global Institute for Sustainable Prosperity. He has held research affiliations with the Levy Economics Institute, and the John F. Kennedy School of Government at Harvard University. He is an expert on Modern Monetary Theory, the Green New Deal, and the Job Guarantee. His work focuses on public policies to enhance monetary and economic sovereignty in the Global South, build resilience, and promote equitable and sustainable prosperity. You can follow him on Twitter @FadhelKaboub and @GISP_Tweets

We invite you to join us for this informal event which we are sure will be both stimulating and insightful.

Register via Eventbrite

 

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Breaking free from false economic narratives

Published by Anonymous (not verified) on Mon, 30/11/2020 - 8:11am in

Silhouette of a woman breaking a chain to free her hands as the sun risesImage by Elias Sch. from Pixabay

Dear Dominic

One all night sesh we had playing Monopoly in college and the banker ran out of money. We just wrote out more notes and it worked fine. Should I tell Rish?

Financibus ad infinitium

Boris

 

Posted on Facebook by the author Michael Rosen

 

Anyone watching the media coverage before and after the Chancellor’s Spending Review could be forgiven for thinking that the UK was going to sink like the Titanic under the burden of unsustainable borrowing and debt unless the government took the necessary step to control its spending. The party of fiscal sustainability which has been reworked over these last few months to keep the economy afloat is now rowing back and an army of fiscal hawks and deficit doves are now back to playing the household budget game of the public finances.

After 10 years of punishing austerity and cuts to public sector spending, which have already done huge damage, Rishi Sunak told the BBC he would have to make tough choices on public pay.

Torsten Bell from the Resolution Foundation claimed that the COVID-19 crisis is causing immense damage to the public finances and tax rises will be needed to cover the extra spending.

Laura Kuenssberg, the political editor of the BBC, talked about the ‘eye-wateringly enormous levels of public borrowing’ as a result of the ‘massive gap between what the government takes in tax and what it has been spending’. Recalling David Cameron’s false claim in 2010 that the economy was nearly bankrupt, she suggested that the government’s credit card was ‘absolutely maxed out’ and ‘there was no money left’.

Daniela Gabor, an economist from the University of West England, whilst on the one hand accepting that the household budget narrative of the public finances was flawed, she like many others reinforced it by saying that ‘interest rates on public debt were at historical lows’ and that government, rather than making cuts ‘should be using the opportunity to borrow more in order to finance the country’s recovery’.

Tom Kibasi, a former director of the Institute for Public Policy Research (IPPR) thought that whilst we need structurally higher government spending that would, in turn, mean permanently higher taxes.

A former Treasury Minister described it as a ‘multigenerational debt which will have implications for the rest of our lives in terms of what the British state can afford’.

And the Shadow Chancellor Annaliese Dodds topped the titanic effort to mislead the public by saying ‘Britain must rebuild its economy after the Covid-19 pandemic with one eye on rising deficit and debt levels.’

STOP!

From politicians on both sides of the political spectrum, institutions and think tanks such as the IFS and the Resolution Foundation, and economists stuck in orthodoxy from fiscal hawks to deficit doves, all are choosing to be ignorant of how governments spend and all promote the same economic illiteracy. It seems that the Establishment is on a mission – to ensure that the public doesn’t get the wrong idea about the spending capacity of the UK government to address the fallout from the Covid-19 pandemic and to ensure that the lie of austerity is not uncovered and that cuts to public spending imposed from 2010 were driven, not by fiscal necessity, but by economic ideology.

The political and media tale of the vast amounts being ‘borrowed’ is a cynical reinforcement of a false narrative that is setting up people for the expectation that there is always a price to pay in cuts, pay freezes or ultimately higher taxation.  Like many Chancellors before him, Rishi Sunak is hiding behind the smoke and mirrors of public accounting which does not reflect the monetary reality of how a government which issues its own currency actually spends.

The most telling aspect of this narrative, which should instruct our views, is that the government has had no trouble finding the money to pour into the private sector and will continue to do so, as announced in Sunak’s infrastructure plan outlined in his Comprehensive Spending Review. This projects more than £100bn worth of capital spending next year on building projects for schools, hospitals, housing, transport and green projects. Whilst public money flowing into private profit in itself is not an issue unless we are talking about public services which should always be publicly funded and delivered, it will quite simply mean more contracts flowing to the private sector without parliamentary oversight and public accountability.

At the same time, Rishi Sunak plans to cap public sector pay, reduce the planned increases to the national living wage (from 49p to 19p per hour), cut the amount of money available for low-wage tenants through housing benefit and he has left Universal Credit claimants in a state of uncertainty as to a continuation of the current UC uplift in April.

After 10 years already of public sector pay freezes, imposing more will further reduce standards of living for public sector workers who have already suffered enough. As life becomes tougher and incomes even more stretched, less money will flow into our local and national economies – not exactly helpful at a time when the government should be ensuring sufficient spending to keep the economic wheels rolling.

As so many are already on low wages or in precarious employment, this will quite simply drive people into even more poverty. And worse, is it right to further deprive people of an income which allows them to support themselves and their families without a daily struggle to make ends meet?

Would it not be better, through adequate welfare and employment policies, to ensure that people did not fall into poverty in the first place, and not just in times of economic crisis? This is the moment for serious consideration of a Job Guarantee to get us through these dark days and beyond. Useful public work paid for centrally and organised locally at a living wage to keep money flowing through the economy.

After the last few months, we have seen the very real value of public sector work, and indeed those key workers, often on low wages, who have kept the economy functioning. They are the linchpins of a healthy economy and society. Government ministers clapped for them and now they want to throw them under a bus. The government, which is the price setter for labour and thus determines both the wages of those in the public and private sector through wage and employment policies, is playing a cynical but not unsurprising game of divide and rule to keep working people subordinate to the needs of corporations. Businesses which profit from policies designed to keep wages down and profits up, as the share of productivity continues to be shifted into ever fewer hands, causing more misery along the way. The expected huge rise in unemployment will indeed play right into their hands although, of course, that will eventually come full circle as people on low wages spend less into the economy.

These last few years, months and weeks, we have seen things that no civilised country should see, and not just in the UK. The huge growth in the use of food banks (covered in previous blogs) which predates the pandemic reflects government policies – people from all sections of society are now being driven to queue for food. Their stories should shame our politicians.

Dame Louise Casey, a former homelessness Czar and advisor to 5 previous Prime Ministers, was clear ‘This is the UK in 2020 we should be able to do a better job of looking after the destitute and the hungry … and no it is not ok to leave that to charity… Unless something is done, a food emergency will follow the economic emergency’.

Earlier this year, the Work and Pensions Secretary Therese Coffey described food banks as the ‘perfect way’ to help the poor, as if somehow the government had had no hand in their poverty. Which of course is the neoliberal way – blaming poor people for their situation. However, it cannot be emphasised enough that it is the government which has had a hand in their poverty. Not just this government, but successive governments who have idolised the god of the market and bow to its dictates.

The decline of our public and social infrastructure, from the NHS, social care and mental health provision, not to mention other vital public services and the social security safety net, is not an unforeseeable tragedy borne of events outside government control which necessitates hard financial choices. It has been a deliberate act of neglect, which looks to continue.

The former Liberal Democrat MP and care minister, Norman Lamb, whose voting record showed he generally voted for reductions in welfare benefits, bewailed this week the neglect of social care and mental health services. In the same breath, he suggested that the state of the public finances should be a cause of concern, implying that there was a lack of money to address the worsening state of our essential services. There is no lack of money. What we lack is a political will to act. The political will to serve the nation’s interests and those of some of the poorest and most vulnerable in our society.

In this respect, and over decades, we have been witnessing the decline of State responsibility as philanthropy (with its shades of Victorian ‘do-gooding’ and social control), charity and volunteering have slowly been taking its place as a mechanism to deliver public goods. It is serving to substitute public spending, which is increasingly being withdrawn by the state on the premise of unaffordability whilst at the same time maintaining those public services that the private sector can run for profit and receive public money to do so.

As evidence of this drift, this week Andy Haldane, the Chief Economist and founder of Pro-Bono Economics, said that civil society had been one of the unsung heroes of the pandemic crisis and that the social sector had been ‘operating as our institutional immune system’ supporting those most in need. It was heartening, he said, that civil society and charities have plainly risen to these challenges, helped by a surge in volunteering activity’. He then went on to note that the charity sector was in a fragile state financially with a funding gap for this year of around £10bn and this hit to income was expected to persist for the majority of charities.

‘An institutional immune system’? This gets to the nub of the issue. The idea that charities and volunteering can or should be a substitute for proper government-funded intervention and not just in times of crisis. The Big Society is now playing out big time. And whilst we should not criticise the goodwill of those people who give their time and energy to good causes, one might argue that the need for charity and volunteering is, in fact, a failure of the state. And as it is becoming very clear, such a model has one big flaw.

Charities, like all organisations, depend on volunteers being available and donations and other forms of raising money to run their activities. In times of crisis like today, they too suffer as businesses suffer, as economic conditions decline, and people have less money in their pockets to spend. These days, they have become little more than businesses, making money and having the same hierarchical business structures of top management with top salaries and volunteer or low paid workers at the bottom. This is not a good or sustainable model for the delivery of public purpose, serving economic and social well-being.

Only the government can step in as the power behind the public purse, and such an acknowledgement offers huge opportunities to create an economy that works for everyone and not just the few. If a job needs doing, then it should be the state that provides the wherewithal, either through a job guarantee to smooth out the cyclical ups and downs of the economy, or through an expanded public sector. The only constraint any government will face is one of real resources and that is the real political challenge. How those resources are shared to create a society that works for all.

The bottom line is that in reality there is no shortage of money; just a shortage of political will which is borne of a toxic ideology that reviles the state delivery of public services, combined with the newly coined word ‘chumocracy’ which serves the interests of the friends of the government and the corporations who can ensure their place through the revolving door.

On Tuesday’, Bill Mitchell hosted a guest blog by Professor Scott Baum, and it deserves to be quoted in this week’s MMT Lens. Whilst referring to Australia, it provides a valuable insight into where we are right now in the UK and what the challenges we face are in turning the ship around, or rather stopping it from sinking like the Titanic with all passengers aboard.

 

“The fairy-tale of government working for everyone is continuing to result in significant social and economic pain for many individuals, their families and their communities.

 

Why is it that the government says one thing, but then in practice does another?

 

What has led us down this path of accumulated social wreckage?

 

We know that it is not because sovereign currency-issuing governments are fiscally limited in their ability to work for the good of everyone.

 

The government, if they wished, could intervene in a heartbeat to improve the precarious lives currently being lived by so many Australians.

 

We have seen this during the COVID emergency where governments have been quick to step in and provide a wide range of support to a wider range of the population than has been the case in the past.

 

Politicians have been allowed to leave their ideologies (think neo-liberalism) at the door.

 

But what their ideology doesn’t allow them to do is to stray for long. Before too long they have to go back and pick up where they left off.

 

The apparatus of justification that is so entrenched within the neo-liberal ideology means that even when ‘business as usual’ approaches have to be abandoned due to a crisis, it is not long before we turn back to the usual ideas that have led us to where we are today.

 

Throughout the COVID slowdown statements by politicians have been steeped in this kind of ‘return to normal’ thinking.

 

Early on Australian Prime Minister Scott Morrison said

 

The measures are all temporary, targeted and proportionate to the challenge we face. Our actions will ensure we respond to the immediate challenges we face and help Australia bounce back stronger on the other side, without undermining the structural integrity of the Budget.

 

Reading between the lines, yes, we had to do something we were not comfortable doing because the ‘system’ wasn’t working.

 

But we can’t wait to get back to our comfort zone.

 

In short, as a society, we are where we are because of the failures of the neoliberal system, the inability of politicians to see beyond their ideological views and the ability of those who benefit most to continue to legitimate the system.”

 

Failure to leave our household budget comfort zone can only lead to more poverty, inequality, and environmental decay. As the pandemic has inadvertently set us on a different course, those of us who want to see a fairer redistribution of wealth and resources and a planet which can support future generations sustainably, need to ensure that the road taken is not a Great Reset towards a reinforcement of global corporate power and influence greenwashing its way towards greater control and higher profits.

That’s some challenge, but it’s not insurmountable.

 

 

Event Recording

The video of GIMMS’ event “Phil Armstrong in Conversation with Neil Wilson” is now available:

 

Also available as a podcast via the MMT Podcast. #75 Neil Wilson & Phil Armstrong: In Conversation

 

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The post Breaking free from false economic narratives appeared first on The Gower Initiative for Modern Money Studies.

Just getting by is not enough

Woman shopping in a supermarketPhoto by Kevin Laminto on Unsplash

“The rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour. The freedom that results applies only to them. The many simply have to work harder, in conditions that grow ever more insecure, to enrich the few. Democratic politics, which purports to enrich the many, is actually in the pocket of those bankers, media barons and other moguls who run and own everything.”

Charles Moore

In the light of the possible wage freeze for 5 million public workers, the economist Grace Blakely explained on Double Down News this week why billionaires should pay, ‘not working people who sacrificed their lives to keep our economy going.’ Whilst the sentiment is right that working people should not pay for the crisis, her suggestion that the billionaires should step into the breach and pay what they owe instead is just more neoliberally inspired claptrap. The implication that the very rich are stealing from the public purse and that we should bring back John McDonnell’s magic money tree from the Cayman Islands is a shameful and false narrative being peddled by a supposed left-wing economist who clearly is still caught in the headlights of false household budget accounting. By such shifting of blame elsewhere, Blakeley fails to acknowledge the real power of the public purse to spend, should the government choose to, on public purpose and also the power of the state to legislate to ensure that the rich pay what they owe. In this fairy tale narrative of taxes fund spending, she ignores the fact that, amongst other things such as redistributing wealth through progressive taxes, taxation is the mechanism to reduce the influence of the wealthy in the corridors of political power. That should surely be the left-wing argument for ensuring the billionaires pay their dues.

Blakely’s appeal came in response to the proposal by the Centre for Policy Studies for a three-year public sector pay freeze, which it claimed could save the government cumulatively £23m. It also suggested in its newly published report that the pain had not been shared equally and that private sector workers had suffered more than those in the public sector. The CPS put forward that NHS workers could be exempt from the freeze to account for their hard work and sacrifices during the pandemic giving an albeit reduced saving.

Robert Colville, the Director of the CPS, suggested that the public finances had been decimated and that it would be difficult to justify generous pay rises in the public sector when private sector wages were falling, given that there was a need to control public spending and reduce the structural deficit which the pandemic was likely to have opened up.

Once again not only do we see the powers that be aiming to drive further wedges of envy between the public and private sector, but also a reinforcement of household budget accounting in terms of how the government spends.

Over the last six months and more, the public sector has stepped up to the plate in response to Covid-19. The Prime Minister and his Chancellor have stood in Downing Street to clap for the NHS and social care workers and the nation responded. The public sector – the NHS, education, social care, and services provided by local government – has, along with other key workers in the private sector, ensured that services were kept going. That care for the elderly continued to be provided in difficult circumstances, that the food and other vital supply delivery networks continued to function, that supermarkets and other shops were stocked and able to provision the nation.

The pandemic has demonstrated, as no other event perhaps could, how interdependent society is and that key workers in the public and private sectors, many of whom are low paid, underpin the foundations of society so that it can function effectively. The world of Mrs Thatcher’s ‘there is no society’ has been well and truly discredited.

And yet after all the clapping and talk of levelling up, the government might be on the brink not only of creating more societal division in a cynical sleight of hand to distract attention away from government actions, but also of freezing the pay of public sector workers who have already suffered the consequences of a decade of Tory austerity. It is time to question who the government is serving. The markets and exploitative corporations or its citizens?

We have been brainwashed into believing that the government is at the mercy of the market and must serve it. The public has accepted the lie that government spending is constrained and dependent on private businesses generating the wealth which in turn generates the taxes that we are told fund government spending.

And yet the reverse is true. It is the government which sets the economic bar. It is the government which spends to tax, which sets the price for labour and legislates for protective employment law. It has been a political choice to cede responsibility for ensuring that people both in the public and private sector are paid wages commensurate with a good standard of living, that would put paid to continuing poverty and inequality.

At the other end of the scale, the power of the public purse has been shown to work perfectly when it is a question of pouring vast sums into private profit, in many cases with little accountability. The term ‘chumocracy’ has also been applied to how many of these contracts have been awarded.

Only this week, we have seen yet another demonstration of how the use of the public purse is a matter of political choice as the government agreed a four-year £16.5bn increase in defence spending. Boris Johnson called it ‘a once-in-a-generation modernisation of the armed forces … [required] to extend British influence and protect the public’ and restore Britain as “the foremost naval power in Europe”. We seem to be going back in time!

Labour unsurprisingly has supported these plans, but did ask how they would be paid for. Patrick Butler from the Guardian questioned how such a vast amount of money was justified when the ‘public finances have been stretched by the pandemic’.

The vision of stretched finances appeals to household budget explanations of how governments spend and is designed to reinforce the narrative of scarcity of money. Over the last few months, it surely must start to dawn on the public that there is no scarcity of money. The public finances have not been stretched, indeed they have been positively overflowing. The government simply made a political decision to spend money on defence, just as it did to support furlough or after public pressure to feed hungry children in schools.

In terms of how the government spends, it does not have to choose one expenditure over another. It does not have to match its spending to tax revenue or worry whether it can borrow money. It is just a decision based on political priorities. Feeding hungry children wasn’t a priority until it became politically expedient for it to be.

It is disheartening that time and time again mainstream journalists persist in toeing the establishment line that money is scarce and there will be a future price to pay. In an article in the Financial Times this week, it was suggested that that the Exchequer was running on empty and that the Tories in the wealthy south will soon be asked to support tax increases to help left-behind regions.

Let’s reiterate yet again that the state of the public finances is not dire, the Exchequer is not running on empty and, since tax does not fund government spending, increases will not help left-behind regions. In fact, taxing more in a period of economic decline or as a country was coming out of one would be positively harmful.

When it is suggested that drivers could be charged for using roads to help Rishi Sunak cover a tax shortfall of £40bn caused by the rising popularity of electric cars, one is tempted to point out that there is no hole in the finances to plug. Whilst we might want to use taxation to encourage people to use public transport, the only holes to plug are the potholes caused by cuts to spending on our road network.

It cannot now be any clearer that the UK government, which has the power of the public purse to authorise spending through its central bank, is not hindered by scarce monetary resources. That it just spends. The clear political priority is to spend on defence to ‘extend British influence’ rather than invest in a public and social infrastructure that serves the interests of the nation or addresses the rising poverty and inequality which has arisen as a result of government policies over the past 10 years.

The question of affordability has been used by successive governments to justify their spending policies. And yet, whilst successive governments have always found money for defence or prosecuting wars, whether it can be found to pay public sector workers decent wages is quite another matter.

In the same vein this week, the Treasury was reported to have been reluctant to commit more money to delivering the Prime Minister’s 10-point plan for moving to a low-carbon economy. Aside from the usual puff and rhetoric from politicians on a practical level, there are still questions as to whether words will be translated into real, firm actions. In an open letter to the government, it was reported this week that the UK would not be able to deliver on its zero-carbon commitments unless it intervened in the energy from waste sector and that recycling rates have reached a standstill. Ministers have also been accused of using the pandemic to justify further delay on promised action on food waste reporting until 2021. While the planet’s biodiversity continues to decline as the planet warms and valuable resources go up in smoke with few constraints, the government continues to prevaricate.

In saying that hard choices exist in relation to public sector pay or suggesting that we haven’t enough money to address climate issues, the Treasury ignores the elephant in the room. That the real human and planetary cost of not spending on these vital things will be immeasurable.

Over eight years ago George Osborne criticised green policies as a ‘burden’ and a ‘ridiculous cost’ to British businesses. Since then the environmental landscape has changed irrevocably as the climate tsunami bears down upon us with ever greater urgency. Governments have become masters at making promises or giving speeches with hat tips to change, but which result in very little. To suggest that there is a monetary constraint reveals much about the ideology which governs the government’s policies and the constituency it serves, but in the end, the burden of not acting will not be monetary, it will affect every aspect of our lives – economic and societal.

This is an opportunity not to be wasted. We have allowed an economic system to exploit working people. Businesses have justified low wages and poor employment conditions as prerequisites to competitiveness. Government having abandoned full employment policies in the 1970s has rolled over instead of assuming its considerable powers.

A recent report published by the Social Equality Commission quoted a female supermarket worker who said ‘when you dig really deep, I think it is about happiness and stability, and feeling valued … because money is secondary to all that. As long as you can get by, you shouldn’t worry about it.’

Happiness and stability are, without doubt, important but how such happiness and stability can occur when people are struggling to make ends meet is debatable. Just getting by is not enough and nor is it fair. Good wages and secure employment allow people to have a good standard of living, to be able to plan for the unexpected or indeed to save for the future. People are being brainwashed into accepting their lot on the lie of there being no alternative when there is such imaginable wealth in the hands of few people whose power and influence dictate its distribution.

From a macroeconomic perspective, the bottom line is that people with good wages and employment security spend their money in their local communities and the wider economy which in turn support local and national businesses. It seems the Chancellor, by suggesting he has to plug the hole in the finances either by higher taxes or public sector pay freezes, is displaying a deliberate ignorance, dictated by ideology, of the macroeconomic importance of people having money in their pockets. Let’s remember that one person’s spending is another’s income. It is fundamental!

To conclude this week’s lens, it is only right that we bring our readers’ attention to an editorial in the Guardian which highlighted that:

Coronavirus has thrown into sharp relief the inequalities in Britain. The bottom fifth of the working population have seen incomes cut sharply and their savings reduced to nothing. For the poor, there’s little or no cash to furnish even the barest of Christmases, while those at the top have seen cash pile up in bank accounts.

And then went on to criticise Sunak by saying that:

‘he continues to peddle the myth that the extra government borrowing during the pandemic means that he has to make “hard choices” to “balance the books”. The chancellor is softening the ground for austerity policies. Mr Sunak is making an ideological choice by using the wrong model of the economy. If he does not relent then he will be responsible for unnecessary unemployment and poverty.

It then urged Sunak to rethink his future policies by recognising that:

‘the government can take responsibility for maintaining the total level of spending in the economy at level that keeps the country as close to full employment as possible where a working week is at a reasonable length and paid at a reasonable wage.’

This is a moment of great change. A moment of great opportunity to create a fairer society for all. The economist Herman Minsky wrote: “a necessary ingredient of any war against poverty is a program of job creation; and it has never been shown that a thorough program of job creation, taking people as they are, will not, by itself, eliminate a large part of the poverty that exists”.

Unemployment and its associated economic and social ills could be mitigated by the introduction of a government-backed Job Guarantee, not only to deal with the economic fall out from the pandemic which will continue for some time to come but also act as a just transition mechanism as we address climate change. As a macroeconomic tool, it offers a cyclical approach to unemployment that would create a more stable economic environment to deal with the ups and downs of the economy with the added advantage that working people are not left to perish when times get tough.

Instead of talking about monetary scarcity and unaffordability, an argument which dominated the narrative for decades, the debate must now move to how we can create a more sustainable and equitable future in the context of the distribution of finite real resources and who gets them.

Society, through its elected government, has to decide its priorities. Real and sustainable human and planetary well-being delivered by powerful states with the power of the public purse governing in the interests of their citizens? Or a rehash of the current economic model which has at its heart a greenwashed control by global corporations.

 

Event Recording

GIMMS’ event “Phil Armstrong in Conversation with Neil Wilson” is now available as a podcast via the MMT Podcast. Our thanks to Christian Reilly for publishing it.

 

The MMT Podcast #75 Neil Wilson & Phil Armstrong: In Conversation

 

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The post Just getting by is not enough appeared first on The Gower Initiative for Modern Money Studies.

The deceitful image of money scarcity has no place in our society.

Hands of two women. A younger woman holding the hands of an elderly woman.Image by Sabine Van Erp from Pixabay

Society is indeed a contract. It is a partnership … not only between those who are living, but those who are dead and those who are to be born.

Edmund Burke
Reflections on the French Revolution – 1870

 

In the news this week the government did yet another turnabout following Marcus Rashford’s campaign and public pressure by announcing a £170m winter grant scheme to support low-income families. During the same week, the Trussell Trust reported that there had been a 47% rise in the number of parcels distributed via its networks in the 6 months to September 2020 compared to the previous year; that more than 1.2 million parcels were distributed, of which 470,000 were to children. And this was, it suggested, just the tip of the iceberg as these figures did not include the number of people helped by the numerous local organisations, independent food banks and local authorities who have stepped in to support their communities.

Whilst the Trust attributed some of these increases to the pandemic, which has had a devastating, effect the Trust was clear as to the underlying reasons why people need support. The key issues were related it said to a fundamental lack of income which has left people struggling to afford the essentials. As Emmie Revie, the Chief Executive of the Trust commented to the Guardian:

 

‘We have to find better ways of supporting one another as a society than leaving people to rely on food charity. It’s not just about ending food banks, it’s about finding an alternative to the need for mass distribution of charity food in the fifth wealthiest country in the world.’

 

The threads of poverty lie in adherence to a failed market-focused economic ideology and the government policies and spending decisions that result from it. Child hunger is just one of many interlinked consequences and research published this week by the Living Wage Foundation showed that during 2019/20 nearly three-quarters of independent care workers in England were paid less than the real living wage. They are, it said, among the 5.2 million workers in low paid, insecure jobs – 1.3 million of whom are key workers. The analysis noted that care workers earn an average of £8.50 per hour and 24% are on zero-hours contracts. It, like the Trussell Trust, highlighted the existing inequalities in our society which has hit the lowest earners the hardest and that was before the pandemic struck. Whilst the nation clapped with Boris Johnson Tabitha, a care worker, said:

 

‘I feel like a Roman Gladiator going into the ring on a night shift. Everyone is clapping for you, but you’re pitting yourself against a deadly disease without the proper pay and protection.’

 

As the government has increasingly ceded its responsibilities for its citizens through cuts to spending on public infrastructure both local and national, which in turn has led to an ideological and financial response at local level as private profit-seeking companies were invited to tender for contracts to deliver social care services, the consequences have been devastating. For those being cared for as much as those doing the vital work of caring for others.

As the government lauded its financial acumen in managing its accounts, its decisions have led to a vicious cycle of deprivation and poverty and public infrastructure decay. The connections are irrefutable. Surely it must dawn on the nation soon, as government and other institutions begin to wind up and reinforce the household budget narrative in support of action to get the public finances ‘back in order’ after all this spending, that its health and economic well-being is being reduced to one of balanced budgets and unaffordability.

At the same time as Rishi Sunak suggested that he may increase capital gains tax to pay for billions borrowed and the COVID-19 debt which is supposedly racking up, the Resolution Foundation published its report entitled Unhealthy Finances: How to support the economy today and repair the public finances tomorrow. In its report, it focused specifically on the dual challenge it believes the government is facing ‘to ensure that there is sufficient fiscal support through the crisis and recovery, and setting fiscal policy on a sustainable path.’

Even though it said that the government should commit not to start such consolidation until the economy had recovered, it still claimed that the government must do what is required to ensure that the public finances are sustainable and adopt a balanced current budget rule.

In the report, it suggested continuing to use low interest rates as a tool for supporting the economy and noted the fiscal damage being caused by lower tax receipts and higher spending. It proposed, amongst other things, reforming the tax system to raise revenue and imposing a health and social care levy to provide any additional revenue required.

Here we have all the usual implied but false language narratives about government spending – taxing to spend, borrowing and unsustainable public debt, repairing the public finances, financial sustainability, balanced budgets.

We’ve been here many times before and clearly the establishment is determined not to lose control of that narrative. The fightback is in full swing. The deficit and debt worrywarts are working overtime to keep the public in line. Heaven forbid that people should learn the truth about how the government really spends!

However, as that knowledge is going more mainstream, questions are being asked as it is becoming ever clearer that human and planetary well-being lies with government choice, i.e. who gets the money. It is therefore intolerable to think, in the light of this growing understanding of the spending capacity of government, that government and think tanks are suggesting that taxes be increased to pay for this imaginary round of borrowing and the subsequent imaginary national debt which has arisen from it.

Whilst one could certainly make a case for reforming the whole tax system to ensure a fairer distribution of wealth, the justification by the Resolution Foundation or the Chancellor for increasing taxes does not stack up for the following two reasons:

  • That such action would quite simply take money out of the economy at a time when it would still be recovering from the economic effects of the current crisis compounded by previous cuts to public spending which have had a cumulative effect on the economy. Private debt levels prior to the pandemic were already high but have soared by 66% since May to £10.3bn. The number of people in serious debt has doubled since March rising to 1.2m with a further 3 million at risk of falling into arrears. Raising taxes with this scenario in mind would seem self-defeating and destructive.
  • That taxes don’t fund government spending and cannot be used to reduce public debt

Quite simply the ‘taxes fund spending’ story is just a lot of accounting smoke and mirrors to suit an agenda which aims to keep people downtrodden and accepting their fate. The trope of financial unaffordability is deep within our own household budget psyches and shifting such narratives can be hard work. Much depends on loosening our attachment to them through knowledge and more importantly the desire for something better.

Taxes will not pay off the national debt any more than they will boost financially a failing social care system. Our public services including social care and the NHS are in crisis as a result of government choices, not a lack of tax money the government can collect. Privatisation and the profit motive, along with public spending cuts have both played a role in destroying what could and should have been funded publicly.

The deceitful image of money scarcity, with government reliant on taxes and borrowing to spend, has no place in our society as children go unnecessarily hungry and our young people face a gloomy future.

In this week’s Guardian, Patrick Collinson wrote that the COVID-19 crisis could have a lasting impact on young people’s pensions: indeed, the lives of young people have been turned upside down with future employment prospects damaged and life opportunities curtailed. However, future private pensions are the least of the worries of young people as they start out in life. It is the government’s role now to ensure, through its policies, that young people can thrive and build themselves a future and decent state pension provision should be a significant part of that.

We need to expose the con of private pensions which are reliant on fickle markets and a stable economy. Margaret Thatcher’s economic vision which was inspired by Friedrich Hayek and Milton Friedman reflected her belief in the superiority of the market. The idea implicit in this dogma was that the welfare state deprived people of the opportunity to make their own provision for old age. Thus, we witnessed the opening up of the market for private pensions in an attempt to weaken the state’s own pension provision. The current crisis is exposing their weakness which even before the pandemic was becoming clear and invites us to question the state’s ideological reliance on the private pension sector.

The solutions are to provide decent state pensions to give retired people financial security and ensure a decent standard of living and to reduce the pension age. The current round of retirement age increases is based on the lie that state pensions will become increasingly unaffordable as the birth rate falls and tax take reduces which will, it is claimed, cause an unacceptable burden on future taxpayers. We need to break the false connection between the payment of tax and receiving a pension.

The question of how it can be paid for doesn’t arise if we understand how the government spends. It would be paid for in the same way the government always pays for things; by creating the money out of nowhere. A simple transfer with a few computer keystrokes authorised by the Treasury and carried out by the Central Bank. We need to knock on the head the idea that a portion of our tax is being collected somewhere in a savings pot to be divvied out at retirement or indeed that taxes serve to pay for public services.

Assuming that government has invested through sufficient spending on public and social infrastructure including education, training, new technologies and by embracing full employment policies, then an earlier retirement and a good state pension is possible. Such investment will not put a financial burden on the lives of future generations, it will enhance them and those of retirees. We just have to decide as a nation how we want the real, but finite, resources we have at our disposal to create a better life to be shared out.

Earlier this week, there was an interesting exchange of views on a Facebook labour group when someone posted the following:

 

‘You do realise the Bank of England are printing new notes by the million. All we will get from Johnson is a bankrupt country.’

 

It is disappointing to observe in that post and the thread that followed that some individuals on the left seem to get pleasure from continually shooting themselves in the foot. By excoriating what they see as a reckless Tory government because in their view it is spending too much and driving us towards bankruptcy or hyperinflation, adds a certain touch of irony to the criticism since it was the Conservatives who used similar arguments against Labour’s spending plans in the last election. It all boils down to where is the money going to come from and who is going to pay?!

This type of scaremongering is damaging to a left-wing agenda and is borne of lack of knowledge. It is regrettable that, even when presented with the facts about how the government spends, many still choose to persist in reinforcing the myths and ignore the fact that it is impossible for the UK government to go bankrupt or run out of money and that government does not need our taxes to pay for public services not even the taxes of the rich. Ultimately, that is to deny monetary reality and what that knowledge could mean for any future progressive government’s spending plans if such a government were to exist although that is currently quite another story!

If we are going to debate, let’s do it from a position of knowledge rather than making exaggerated and untrue statements about how we are all going to hell in a hand cart because the Tories have spent too much. Let’s remember that in 2010 the same arguments were being levelled at Labour following the Global Financial Crash; another era of suffering and hardship for many. And that it was the Tories who said in 2010 that there was no alternative to cuts to public spending to get the public finances back in order and yet have suddenly without a problem found the monetary wherewithal to save the economy from the worst effects of the crisis. For the left to use this argument against the Conservatives is counter-productive to future progressive agendas.

The household budget ping pong played by successive governments at election time, which examines critically the fiscal record of a government or asks how its spending plans will be paid for, has done great damage to society and the economy. Such arguments overlook the real measures of economic health relating to how government serves its citizens in real social improvements from the provision of health and social care, education, policing, a social safety net and public transport networks to local service provision of libraries, municipal parks and refuse collection. All these things which previously were determined as the public good have been attacked by a governing elite serving its own interests and those of its financial donors.

As Peter Fleming, professor of business and society at City, University of London wrote:  Austerity [redefined] these things as fiscal liabilities or deficits rather than shared investments in common decency’.

Let’s argue for a better, fairer and kinder society based on real knowledge of monetary reality and not baseless statements which only serve to promote continuing political inertia on the left in terms of understanding how money works and how that knowledge fundamentally changes how we can respond to today’s and tomorrow’s challenges.

 

Newly published

This week, we published a fact sheet on Negative Interest Rates

Negative Interest Rates

and a new paper by Phil Armstrong and Warren Mosler

Weimar Republic Hyperinflation through a Modern Monetary Theory Lens

 

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