fiscal policy

Assessing progress on St. John’s Plan to End Homelessness

Published by Anonymous (not verified) on Mon, 30/12/2019 - 1:25am in

I’ve written an assessment of the 2014-2019 St. John’s Community Plan to End Homelessness. The full assessment can be found here.

Points raised in the assessment include the following:

-Newfoundland and Labrador has the highest unemployment rate of any Canadian province. This pulls people into homelessness, while also making it more challenging for the provincial government to finance policy asks (such as subsidized housing with social work support).

-People interviewed as part of the assessment process expressed concern over the fact that nearly 40% of emergency shelter beds in St. John’s are run by for-profit providers (but paid for by the provincial government).

-The Trudeau government increased annual federal funding for homelessness (beginning with the 2016 federal budget) and this has been helpful at the local level in St. John’s (just as these increased federal funding levels helped other communities across Canada address homelessness).

-One promising development in Newfoundland and Labrador has been new child welfare legislation allowing youth to continue receiving care until the age of 21 (it used to be 18).

Assessing progress on St. John’s Plan to End Homelessness

Published by Anonymous (not verified) on Mon, 30/12/2019 - 1:25am in

I’ve written an assessment of the 2014-2019 St. John’s Community Plan to End Homelessness. The full assessment can be found here.

Points raised in the assessment include the following:

-Newfoundland and Labrador has the highest unemployment rate of any Canadian province. This pulls people into homelessness, while also making it more challenging for the provincial government to finance policy asks (such as subsidized housing with social work support).

-People interviewed as part of the assessment process expressed concern over the fact that nearly 40% of emergency shelter beds in St. John’s are run by for-profit providers (but paid for by the provincial government).

-The Trudeau government increased annual federal funding for homelessness (beginning with the 2016 federal budget) and this has been helpful at the local level in St. John’s (just as these increased federal funding levels helped other communities across Canada address homelessness).

-One promising development in Newfoundland and Labrador has been new child welfare legislation allowing youth to continue receiving care until the age of 21 (it used to be 18).

Who Pays the Corporate Income Tax? Don't believe the IFS

Published by Anonymous (not verified) on Tue, 10/12/2019 - 3:25am in

Tags 

UK, fiscal policy

 The Assertion

Even before Corbyn launched the Labour Manifesto, the Institute of Fiscal Studies launched its critique of Labour tax policies, asserting that Labour’s proposed tax increases were not limited to the richest,:

"The truth is of course that in the end corporation tax is paid by workers, customers or shareholders so would affect many in the population". 

On the BBC Shadow Chancellor John McDonnell politely rejected the IFS critique, which in essence asserts that the corporate income tax is not progressive.   Well he should, because the "initial reaction of IFS researchers" (as they entitle their article) is wrong about the corporate income tax.

For the public this argument may seem obscure.  Why is there disagreement over something as apparently obvious as who pays a tax?  Surely it is a question of tracing the money flow.  The question proves more complicated on inspection.  However, when considering the complications we must not lose sight of the central issue for every tax, is it progressive? 

 The Reality

The general rule is clear.  Indirect taxes, such as VAT, are regressive.  They fall more heavily on lower income groups because they tax spending, and as incomes rise expenditure declines as a share of income.  High income groups save and low income groups do not, with savings in the middle almost entirely mortgage repayments (which are not subject to VAT).  

 Further, it is extremely difficult to make indirect taxes progressive beyond relatively unimportant examples of taxing luxury goods that raises little revenue.  Also, indirect taxes can be “shifted”;  that is, the group that actually pays the tax can by increasing prices shift the payments to the purchaser of the VAT covered item.  Market power determines the extent to which a company can do this.  An energy company will have considerable scope for tax shifting, since due to their heating systems households find it difficult to switch from electricity to gas (and vice-versa) in the sort run.  On the other hand, producers and sellers of generic consumption products such as common household wares may find it difficult to pass on tax through higher price without debilitating loss of sales.

 By contrast, direct taxes on household incomes, corporate profits and property are progressive.  No serious argument exists that people or households can shift the personal income tax.  The most superficially plausible argument maintains that income taxes discourage working time, thus lowering the supply of labour and pushing up wages and production costs.  We find little empirical evidence to support this assertion. 

 Targeting higher income groups for additional tax proves a relatively easy technical task.  The policy stated in the Labour manifesto to limit income tax increases to the richest 5% of households implied in 2018 raising the tax rate for those with an average annual income in excess of approximately £75-80,000.  In 2018 that would have affected 1,356 thousand households and 3,326 thousand people. 

 In that year the richest 5% paid slightly over half of personal income tax, with the marginal rate of tax at 40% above £50,000 then 45% above £150,000 (41 and 46% in Scotland).  Current tax rates on the highest incomes fall far below the 83% that applied in the 1970s, a rate well above the 70% proposed for the richest in the current Labour Manifesto. In the Manifesto, a 45% rate would begin at £80,000 and 50% at £125,000.  The latter amount is slightly above the lower boundary for the richest 2%, and the former above but close to boundary for the 5%.

 While the income tax may be evaded but not shifted onto others, shifting of a property or more generally wealth tax is specific to each tax and defies generalization.  For example, householders will find it nigh impossible to shift their tax, while landlords can to some extent pass tax on to tenants depending on the nature of the rental market.  A 2016 IFS report shows that property tax raises relatively little revenue in Britain.

 The chart below shows the actual tax payments by households by level of income measured by deciles, with the lowest tenth of income receivers listed first through to the highest.  The chart verifies our generalizations.  Indirect taxes prove unambiguously regressive.  The poorest ten percent pay over 30 percent of their gross (cash) income as indirect tax, falling continuously to 9.8% for the richest 10%.  For all direct taxes and the income tax shares fall slightly from the first to the second decile, and again from the 2nd to the third, and then rise continuously. 

 All Direct, Income & Indirect Taxes, Share of Gross Income by Income Decile, 2017-18

JW IFS article chart.png

Notes: Deciles are households ranked in ascending order by incomes.  The average number of households in each decile is 2.711 million. Source: Office of National Statistics.

Now, we come to the matter of greatest contention - who pays the corporate income tax?  Is it the case as IFS “researchers” contend, that the “corporation tax is paid by workers, customers or shareholders so would affect many in the population"?  The statement is true, only due to its extremely vague choice of words, and is seriously misleading.  We can begin with the most obvious and non-controversial impact, on shareholders.  Increases in the corporate income tax by definition lower corporate profits after tax, implying lower dividend payments. 

 As a factual matter UK dividend recipients are few in number.  To quote the Financial Times, “overwhelmingly shares are owned by foreigners and various institutions who manage money on behalf of their clients”.  To be specific, in 2016 individuals in the UK held only 12.3% of the shares of UK-based companies (those falling under UK tax law).  Notwithstanding the narrow ownership of shares, some might argue that taxing corporate profit harms the many holding private pensions, which invest in the stock market. 

 The actual numbers are quite small.  For all households private pensions account for less than 5% of annual income flows, of which shares themselves generate far less than half.  The likelihood that increased corporate tax rate would have a substantial impact on pension payments either for the number of recipients or for payment per recipient is very low.

 The assertion that increases in the corporate income tax would be paid by employees is if anything less credible than the stockholder argument.  Corporations cannot directly charge employees for the tax they pay.  The mechanism that the IFS have in mind must be indirect, through wages levels, that higher corporate tax payments by reducing corporate profits reduce potential wage increases.  This is unlikely to be important in the UK current context. 

 Across companies the relative bargaining power of employees and employers determines wage outcomes.   Since the crash of 2008 private sector real wages have grown very slowly and remain below their pre-crash level.  These were years during which the corporate tax rate fell from 28% to 19% (shown in a graph from Trading Economics).  If as IFS believe higher corporate tax rates depress wage growth, then lower rates should have increased wage growth, for which there is no evidence.  In the abstract, corporate profitability is one of many factors influencing wages changes.  It does not appear as an important influence in the UK in recent years.

 Equally unconvincing is the IFS suggestion that “customers” pay the corporate income tax to any substantial amount.  Several of the largest corporations do not directly charge their retail customers, for example Google, Facebook and suppliers of business services.  Any link to customers would be very indirect indeed.  More generally, market conditions determine the ability of corporations to pass tax increases on to customers.  The IFS with its microeconomic focus should be aware that generalizations about market conditions across the private economy are not reliable.

The Evaluation

IFS “researchers” chide Labour for its mendacity:

“If you want to transform the scale and scope of the state then you need to be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.” 

That is, in practice Labour’s tax plans will not be limited to the rich as claimed, but widely spread.

 It is factually correct that Labour’s proposed income tax increases for those earning £80,000 or more would affect the richest 5%, and cannot be shifted only evaded.  By any reasonable assessment, the proposal to raise the corporate income tax will fall overwhelmingly on retained earnings and shareholders who are overwhelmingly in the richest 5%, and not on employees and customers.

 The IFS critique of Labour tax proposals is incorrect.  The Labour proposals do not pretend that companies and the rich will carry the burden of increased taxes; they mean that in practice.

Who’s Credible on Tax?

Published by Anonymous (not verified) on Fri, 29/11/2019 - 8:00pm in

We now have the manifestos for the election. We know what
the parties now say about tax, even if we cannot know what they will actually
do.

The differences in opinion are stark. Addressing, due to
space, those parties standing in most seats, it is clear that none of the
parties come close to understanding the true role of tax in the economy as yet.
All are fixated on the idea that current spending must be covered by tax and
only investment may be financed by borrowing. The household analogy within
macroeconomics is alive and well and living in the UK, and it’s wrong. The role
of tax in delivering social and economic policy in its own right is still being
ignored by all the parties, excepting the Greens, with their proposal for a
Universal Basic Income, and that will not be happening any time soon. This
misunderstanding is a massive contributor to economic mismanagement.

Within that framework there is enormous difference in tax
policy on display. In particular, Labour’s recognises a threefold need. One is
to address poverty. The second is to end austerity. The two are, of course,
related. And third, it wants to promote a Green New Deal. And it will spend to
achieve all three.

The IFS have said this plan from Labour is not credible.
I disagree. The plan for investment is largely in small projects that can be
ratcheted up quickly as skills become available. And the social plans will
achieve their goal, including of increasing incomes. This is a plan for the
moment.

The tax dimension of it (and it’s always an aspect) also
makes sense. To the extend that tax is needed the aim is threefold. Wealth is
taxed more, as it is dramatically undertaxed now. Labour is right to tax it
more. The same is true of corporation tax, where Labour’s proposed unitary tax
base for international taxation will lead the world, whilst the increase in
rates will simply bring the UK back into line with the world. No one is actually
going to change their behaviour as a result of either reform. And nor, when it
comes down to it, will almost any one those who are well off enough to earn
more than £80,000 a year flee the country, or even work less, as a result.
First, most of those people are on contracts that do not vary pay with tax
rates. Second, most people have no clue how much tax they pay. And third, most
people work harder when they earn less if (as is true of many of those on high
pay) they have fixed and very expensive commitments. The plan does, then, make
sense. Inelastic behaviour will result in the higher taxes being settled with
little issue arising.

The Tories on the other hand are locked into the belief
that tax sells election victory, and so are committed to maintaining the status
quo. But in so doing, a very small change to national insurance apart, they
also lock in the existing social infrastructure and with it the income and
wealth inequality that even organisations like the OECD and IMF say is harmful.
Not only are the Tories not using spending to break austerity and defeat
inequality, they’re refusing to do anything at the top end either, meaning that
all the divisions in society that have been so destructive of our well-being
will be maintained. In this sense the Tories are really being true to form
conservatives.

And in the meantime the LibDems are so far out in the tax
cold that they think hypothecated taxes for the NHS might work with the
electorate and in practice. But that is not how tax works, and even given the
terribly low level of understanding of tax that pervades the UK I suspect
enough of the electorate realise that is the case to be indifferent to the
promise. The LibDems do really need to try harder.

As for the Greens, carbon tax dominates their agenda. It worries me. They are almost always regressive. The Greens proposal would be, I fear. And I am not wholly convinced a universal basic income makes up for that. The Green manifesto is only of interest on tax because it is a place where ideas can be explored. I suggest that this one still needs a lot more exploration.

Overall? Labour has a good offering that makes economic
and social sense. It has, thankfully, abandoned its fiscal rule. But like the
other parties it still shackles itself unnecessarily on tax by adopting an
inappropriate and discredited macroeconomic view of tax. The Tories do the same
to reinforce division in society that will cost millions a great deal
financially and even more in their wellbeing. And the rest took part, but without
serious intent.

All of which leaves only one rational choice when it comes to tax, and that is Labour.

The views in this piece do not necessarily represent the collective views of PEF, but those of the author.

Photo credit: Flickr/_SiD_.

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Fiscal Policy, Debt and Deficits

Published by Anonymous (not verified) on Fri, 29/11/2019 - 4:04am in

Labour and Conservative Parties, plus the Liberal Democrats, commit themselves to increased public expenditure, apparently ending almost a decade of debilitating fiscal austerity. PEF welcomes this change in policy by the Conservatives and the Liberal Democrats. No voter should conclude that the fiscal frameworks of these parties are essentially the same.

First, while the Labour Party commits to the most substantial budgetary expansion, it is a mistake to focus on the overall size of the expenditure increases each party promises. This quickly leads in bickers over what is actually new and whether commitments are sufficient for the goal sought. Second and equally unenlightening, focus on amounts invariably degenerates into assertions about “affordability”. The commitments of all parties are “affordable” in the basic sense that they are easily financed by an appropriate combination of growth-generated revenue flow, new and higher taxes, and borrowing.

These two considerations
identify the central difference that divides the party approaches. Of all
parties, large and small, only Labour places its expenditure programmes into a
clear fiscal framework, part of an overall plan for reversing austerity,
environmental protection, inequality reduction and economic modernisation.
Without an expenditure framework, commitments may be laudable, but their impact
is piecemeal. It is for that reason, their structured nature linked to
outcomes, that PEF assesses the Labour Party’s fiscal plans as the most
credible and effective.

Most assessments of the party
fiscal commitments by think-tanks will focus on their impact on the fiscal
balance (“deficit”) and the public debt. This approach is both misleading and
banal. It is misleading because few if any of the assessing organizations
employ a systemic framework and covers the entire economy. As a result, many
direct and indirect effects of expenditure and tax are ignored. For example,
spending tends to expand the economy, which generates more revenue. Tax
increases slow expansion, thus reducing revenue growth. Only a systemic
framework allows evaluation of the net effect of spending and taxation on
deficit and debt outcomes.

The narrow focus on deficit and debt is banal because it judges a broader public purpose, rejuvenation and transformation of UK society, on the basis of cost accounting. In the autumn of 1939 with Britain facing an existential threat, no major politician made the decision of war and peace based on affordability. Nor should we now, as we face existential threats of climate change and social cohesion.

Photo credit: Flickr/Rain Rabbit.

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We need to talk about the Institute For Fiscal Studies

Published by Anonymous (not verified) on Sat, 23/11/2019 - 12:20am in

In recent weeks political parties have started to announce their policy platforms for the forthcoming general election. Numerous organisations, including the Progressive Economy Forum (PEF), will be offering expert assessments of these policies and manifestos.

The Institute for Fiscal Studies (IFS) is perhaps the most well-known of these organisations. Its analysis frequently crowds out that of other institutions, such as the Institute for Public Policy Research (IPPR) and the Women’s’ Budget Group.

On its donations page, the IFS describes its purpose as follows:

“During an election campaign, objective analysis of economic policy is more important than ever…Our commentary on party manifestos and campaign promises leads the public debate, providing individuals with the tools to understand and evaluate complex decisions. What’s more, the IFS is entirely independent of political parties, companies and pressure groups, allowing us to hold politicians of all stripes to account when their numbers don’t add up or their policies are poorly designed.”

The key components here are 1) a commitment to “objective analysis”, 2) providing “the tools to understand and evaluate complex decisions”, and 3) independence from political parties that allows the IFS to hold politicians to account. Its guiding purpose is to show when “numbers don’t add up” and when policies are “poorly designed”.

The meaning of words is quite important here. One can claim “objective analysis” by applying the same assessment criterion to each proposal and still be biased. It is possible for a policy to be “well designed”, with numbers that “add up”, which would also impose devastating social costs. The IFS’s narrow criteria implicitly (or in some cases explicitly) ignores these social costs. This judgment reflects a clear bias in favour of accounting balance over social outcome.

Similarly, the claim of “independence” explicitly refers to no links to political groups. Crucially, however, this does not prevent political bias.

The political ideology of the IFS

Olivier Blanchard, Senior Fellow at the Washington-based Peterson Institute for International Economics (PIIE) and former chief economist of the International Monetary Fund (IMF), recently sparked debate in the economics profession with the following tweet:

The IFS’s view of fiscal policy conforms to Blanchard’s “counterproductive” approach. Its pledge to verify “the numbers” clearly presupposes a tendency for “politicians of all stripes” to “misbehave” by misrepresenting their policies as more favourable than they actually are.

This presumption of misbehaviour also manifests itself in the IFS’s use of the term “net giveaways” in relation to spending measures. The term carries a pejorative connotation, implying that the purchase of votes dominates the fiscal decisions of politicians. For example, free bus services for the elderly is portrayed as a “giveaway” – not a policy designed to reduce social isolation.

The IFS’s political ideology reveals itself most obviously in its approach to inequality. At several points on its website we are warned that “reliance on taxing ‘the rich’ and big companies to pay more has its limits and would be far from risk-free”. We find no equivalent warning about the risks associated with increased inequality or the growing concentration of corporate power. Repeatedly placing rich in inverted commas is in itself an indicator of political orientation.

Another concrete example of political bias can be found in the discussion of “living standards and prospects of younger generations”. The IFS attributes the problems younger households face entering the housing market to demographics, a rising average age of the population and (strangely enough) low interest rates.

The financial market deregulation that has fuelled property price inflation goes unmentioned. We are warned of a “long-term change in the balance of economic power” between young and old – but not poor and rich, or labour and capital.

The economic ideology of the IFS

My PEF colleague Richard Murphy has succinctly identified the fundamental economic bias in IFS’s work, namely its application of microeconomic techniques to what are macroeconomic issues. The assessment of fiscal policy should be placed in the context of the economy in its entirety to identify the direct and indirect effects of policies as they work their way through markets over time.

The standard way to achieve this economy wide approach involves using an interactive “model” of our economy. Ten years ago the IFS offered training in “dynamic econometric models”, though it does not appear to use models for its assessment of the fiscal proposals of political particles, offering instead what it calls “best educated guesses”.

The IFS suffers from serious misbranding. It identifies itself as an organisation that studies fiscal issues, when in practice its subject is a very narrow version of what is known in the economics profession as “public finance”. The difference comes out clearly in the description of a “Public Finance” course at the London School of Economics, which “draws on microeconomic theory [for] the development of analytical tools and their application to key policy issues relating to the spending, tax and financing activities of government”.

That emphasis on microeconomics is in contrast to another course at the same institution, “Introductory Macroeconomics”, described as “[a]n overview of the behaviour of the economy in the short term”, where one finds fiscal policy in the “part of the course [that] reviews business cycle fluctuations, the design of monetary and fiscal policy, budget deficits and government debt and the open economy.”

To the extent that the IFS provides “the tools to understand and evaluate complex decisions” they are the wrong tools. The IFS’s microeconomic approach by its nature presumes the economy to be stationary at maximum output (full utilization of resources). At maximum, an increase in spending has no feedback effects on tax revenue through household or corporate incomes. Treating the economy as stationary excludes feedbacks as our economy grows.

We find a clear example of the fallacy of microeconomic arguments in the recent IFS study of the impact of Conservative and Labour plans to raise the minimum wage. The IFS report inspects who would receive the proposed wage increases and concludes that the vast majority of poor people in work would not benefit, in part because they are self-employed.

However, an accurate assessment would also consider the impact of changes in the minimum wage on the economy as a whole, not merely those directly affected. Research indicates that the overall impact of minimum wages includes effects on aggregate purchasing power and productivity plus its spread effects through the entire labour market. The IFS’s focus on direct effects is at best trivial.

Independence and bias

The IFS is regularly called a “watchdog” for politicians’ policy proposals. But it would be more accurate to describe it as an expert in the bean-counter approach to policy assessment.

The basic problem lies not in the political bias or orientation of the IFS. I directed a small research organization for 20 years, which was, as the IFS claims, objective, independent and unaffiliated to political parties or interest groups. Our analytical orientation was clear and well-known. Our studies tended to be critical of mainstream analysis, and organisations came to us with that outcome in mind.

The basic problem of the IFS is not that the conclusions of its studies are predictable and easily anticipated; it is that its studies are not well done. They apply the wrong tools, and treat macroeconomic issues as if they were microeconomic. As Robert Chote, the former director of the IFS admitted: “they don’t do macro”.

By ignoring social, political and macroeconomic effects, IFS studies do not tell us whether a policy is a good idea, only whether “the numbers add up”.

At this election, we deserve better.

This piece is cross-posted from Open Democracy. The views in this piece reflect those of the author, they do not necessarily reflect the views of the Progressive Economy Forum as a whole.

Photo credit: Flickr/Howard Lake.

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Review: The Debt Delusion by John Weeks

Published by Anonymous (not verified) on Sat, 16/11/2019 - 1:58am in

When Ha-Joon Chang exhorted: “We need an economic literacy campaign so people understand the language used by the ruling class”, he was probably thinking of books like John Weeks’ “The Debt Delusion” that has just been published by Polity. As the subtitle “Living Within Our Means and Other Fallacies” explains, this work sets out among other things to expose the Swabian hausfrau myth popularised in 2008 by Germany’s chancellor, Angela Merkel, with regard to state budgets: “One should have simply asked the Swabian housewife. She would have cited the wise maxim: one cannot permanently live beyond one’s means.”

Weeks systematically and painstakingly dissects such populist arguments to which – as we were repeatedly told by governments – “There Is No Alternative” (TINA). Such arguments were used to pave the way for one of neo-liberalism’s most virulent and destructive political crusades: austerity. He writes the book for the non-economist with a patience and warmth that truly should make it accessible to a broad swathe of readers. Not only does he avoid using technical terms, he also does what he terms “jargon-busting”, explaining in simple language many economic terms that are often used by “experts” and politicians to obfuscate. The examples he employs are often taken from daily life, not from the economic textbooks.

In his book Weeks sets out to debunk six austerity “myths”:

1) “We must live within our means”

2) “Our government must live within its means”

3) “We and our government must tighten our belts”

4) “We and our government must stay out of debt”

5) “The way for governments to stay out of debt is to reduce expenditures, not to raise taxes”

6) “There is no alternative to austerity”

Austerity is not the devil’s work for Weeks. It is just an economic tool that needs to be utilised wisely, such as for reducing inflation. The same is true for deficit spending. But as Weeks makes clear: “Public sector spending and taxation are overwhelmingly about politics and only secondarily about economics”. Following the Great Financial Crisis of 2007, it was politics that prompted the wave of austerity, as we know, based on prescriptions by those same economists who had so egregiously failed to predict the crash, and rewarding the same minority whose greed had led to that calamitous event. A cosy affair indeed. Weeks presents us with the smoking gun.

The real beauty of Weeks’s book is its simplicity and irony, going from the political rhetorical to the practical. He commences his odyssey through the austerity myths with the claim by Margaret Thatcher in the 1980’s (Merkel stole the idea in 2008 for her speech, giving it a German touch) that government and household budgets function under the same premises. “She was half right for the wrong reason,” Weeks explains, because, just like governments, many households – and wisely so – “do not operate with balanced budgets”. Yes, even the Swabians, as obsessed with owning a home as the Anglo-Saxons, take out major mortgages. There are many good reasons for individuals to resort to credit, short and long term. Long-term credit often even reduces expenditure. The same is true for a government. As Weeks emphasises, most long-term credits for governments are used to purchase assets (capital spending), some of which even produce income (such as social housing), others that serve important functions for our societies (for example schools, hospitals, public transport). The money is not gone or wasted. It has simply been transformed into an asset or investment. And yes, governments also borrow short-term to cover emergencies, such as in a recession to combat unemployment and hardship.

A crucial element, as Weeks explains, is that most governments in high-income nations have strong currencies and a powerful central bank, can create money at will, and most importantly need not borrow in a foreign currency. Creating money is something no household can do, as it does not produce their own currency. Not only can a government create money, it can also borrow by selling bonds, even purchasing its own bonds (debt) via its central bank or other public institutions, saving by not having to pay interest. But bonds sold to the public have an important, if not crucial function, providing citizens, pensions funds, and banks with safe assets to invest in. In other words, government debt is not something negative, it is simply someone else’s asset that can have a positive role in the economy. Weeks takes the time to analyse the pros and cons of both methods of deficit financing. With regard to government deficits, even the Germans, those paragons of a balanced budget, have only had a surplus in seven of the past 24 years, and more than half of these were in the past four years.

Weeks continues just as methodically with Myth 2: “Governments must balance their books”. The two contentious issues he deals with are the formation of a “debilitating debt burden” and deficits resulting in inflation. He examines government expenditures, and on the other side, tax policies. The goal of taxation, Weeks explains, is not to have a balanced budget, but to manage the economy, balancing between excessive inflation and excessive unemployment. A government also has a political mandate regarding its finances, setting priorities in furthering the interests and well-being of its citizens.

While Myth 3, “We must tighten our belts”, concentrates on social benefits and their financing, especially with regard to the neo-liberal discourse concerning the demographic tsunami an ageing population, Myth 4, “Never go into debt” examines the difference between productive debt and other debt that results in disaster. Weeks begins with private debt, which has driven Western economies since the attack on workers’ wages began under Thatcher and Reagan. On the one side there is the predominant “secured debt”, backed by an asset, especially a mortgage, and on the other the “unsecured debt”, which one finds mainly among the less well-off in society. In other words, the wealthy take on debt to buy an asset to increase their wealth, the worker borrows to survive. Government finances have nothing to do with secured and unsecured debt, since a nation has not only its physical assets, but also a greater asset, its people. It is the management of this second element that especially concerns Weeks. A society that is well managed (infrastructure, education, health, environment, etc), and has its welfare – “the benign circle in which all benefit” – as its prioritised goal, will be able to deal with its debt.

Weeks make short shrift of Myth 5: “Taxes are a burden”. Starting with “Taxes reduce people’s ability to spend”, as if taxes do not provide value, Weeks moves on to examine who is taxed and how – in other words taxes as a means to promote political goals, such as reducing inequality or CO2. A government also decides to what degree essentials of society are paid directly by the individual or by contributions divided throughout society. He goes on to explain that we are following the wrong narrative: after massive tax reductions for the rich, resulting in increased public debt, the answer is not to reduce the debt (austerity), but to increase progressive taxes.

“Austerity: There is no alternative”, Myth 6, starts with the question of defaults by nations. Most of these were less developed countries that had borrowed in foreign currency and had thereby lost the ability to determine their own finances. Interestingly, as Weeks highlights, of the more recent cases of a default (resulting in bailouts) by developed nations, all three were in the euro zone: Greece (2012, 2013, 2015), Ireland (20139 and Portugal (2013),which he sees as a political, backed up with the usual myths dealt with in the previous chapters, not economic causality.

Weeks concludes by challenging TINA (There Is No Alternative) made famous by Thatcher. There are always alternatives, especially with regard to dogmatic, politically-motivated balanced budgets. This could be labelled Myth 7: “The narrative of neo-classical economists”. Of course Weeks concludes by listing and explaining what these alternatives are.

H. G. Wells wrote “Civilisation is a race between education and catastrophe.” With “The Debt Delusion“ John Weeks has made a major contribution to bringing economics to the people. Let us hope that they value this useful tool.

The Debt Delusion: Living Within Our Means and Other Fallacies by John Weeks

This piece is cross-posted from Brave New Europe. Photo credit:

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The Green New Deal means the UK has no shortage of “shovel-ready” projects

Published by Anonymous (not verified) on Wed, 13/11/2019 - 7:30pm in

This is a copy of Richard Murphy’s letter to the guardian on 10/11/2019.

Labour’s clear commitment to a £250bn “green transformation fund” correctly puts climate centre stage in this election (Turning on the spending tap: How the parties’ plans compare, 8 November). The usual economic suspects have immediately lined up to wring their hands, worrying about levels of debt and the availability of “shovel-ready” projects. They miss the real points.

The first is whether there are buyers for the bonds that will fund this spending. At present, more than 80% of UK personal wealth is invested in tax-incentivised assets.

In that case simple tax rule changes will drive buyers towards Green New Deal bonds. For example, if the rules on Isas were changed so that all funds saved had to be invested in Green New Deal bonds, and an interest rate of 1.85% (the current average cost of UK government borrowing) was paid then the £70bn that goes into Isas each year could be directed towards the Green New Deal. Simple changes to pension rules could provide the rest.

Second, as for a lack of shovel-ready projects, Labour’s plans include making the UK’s 30m buildings energy efficient while shifting energy supply to renewables. We already have the skills and knowledge to restart this transformation, since many in those sectors lost their jobs when the Conservatives cut support for such activity. Of course, a massive retraining programme will also be required, but if the government makes the money available you can be sure that the shovels will come.

Photo credit: Flickr/john-briody-photography


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Ten things to know about the 2019-20 Alberta budget

I’ve just written a ‘top 10’ overview of the recent Alberta budget. Points raised in the post include the following:

-The budget lays out a four-year strategy of spending cuts, letting population growth and inflation do much of the heavy lifting.

-After one accounts for both population growth and inflation, annual provincial spending in Alberta by 2022 is projected to be 16.2% lower than it was last year.

-Alberta remains Canada’s lowest-taxed province. It also remains the only province without a provincial sales tax.

The full blog post can be read here.

Ten things to know about the 2019-20 Alberta budget

I’ve just written a ‘top 10’ overview of the recent Alberta budget. Points raised in the post include the following:

-The budget lays out a four-year strategy of spending cuts, letting population growth and inflation do much of the heavy lifting.

-After one accounts for both population growth and inflation, annual provincial spending in Alberta by 2022 is projected to be 16.2% lower than it was last year.

-Alberta remains Canada’s lowest-taxed province. It also remains the only province without a provincial sales tax.

The full blog post can be read here.

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