At the end of 2018 the economic wizard, George Osborne, entertained the public, yet again, with the claim that at the time of the general election in 2010 the country had been close to bankruptcy and that his fiscal prudence (in other words cuts to public spending) had saved the nation. As we start the New Year the same old tired narratives are still in evidence, this time about how to fund the ‘black hole’ in our public services and health and social care thus reinforcing the economic orthodoxy that to stop further deterioration of public services the government will have to collect more tax.
First off the block was the Resolution Foundation which claimed that one of the biggest challenges the country faces is how to fund the cost of public services as the UK’s ‘ageing population with complex needs’ continues to put pressure on health and social care. In an article on the Foundation’s website entitled ‘How Wealth Taxes can raise billions more without scaring any horses’ Torsten Bell takes his reader through a number of potential solutions all predicated on raising more tax in one way or another, £7bn to be precise, to meet the ‘challenges’ associated with maintaining the welfare state. Expert analysts concur that government will, ultimately, have no option but to increase taxes as the demographic landscape changes. In orthodox parlance, this refers to an ageing population coupled with a drop in the birth rate resulting in fewer taxpayers to fund future public services. The claim is that the state must keep its expenditure under control now so that it will not drown future taxpayers under its burden.
Next up Guardian readers were treated to yet another exercise in economic misdirection this time from Rafael Behr in which he challenged Theresa May’s claim that the ‘extra funding’ for the NHS and social care wouldn’t involve tax rises. Alarm bells should be ringing he said. His entire article was based on asking questions about where the money would come from to finance the NHS in the future. He blamed politicians for the impasse referring to their unwillingness to engage frankly with the public in a discussion about how public services should be funded. He made it clear that funding for universal services must come from taxation as he expressed it; ‘to spend big, you have to tax wide’. The cherry on the top of the cake was to seemingly attribute demand for expensive treatments on the old and overweight completely ignoring the government policies and public spending cuts which have decimated Public Health, the NHS and Social Care. He then went on to reiterate his argument that difficult discussions about who pays for it are being shelved by politicians afraid of their voters at the ballot box.
In the words of the plain-speaking Richard Murphy from Tax Research UK ‘Not understanding money and government finances should be a disqualification from offering economic commentary’. In fact, not understanding money and government finances should not just disqualify journalists but also Think Tanks and even politicians proclaiming from their orthodox silos that, in so many words, taxes fund spending.
The simple truth is that in this era of fiat currencies taxation has nothing to do with raising revenue and the magic money tree planted in the Cayman Islands referred to by Labour’s John McDonnell is just that a magic tale of no substance. Collecting tax from the rich adds zilch, ‘nada’ to the capacity of the UK government or any sovereign currency issuing country, for that matter, to spend. Taking a purely logical stance and one that is never recognised or discussed by the mainstream how is it that taxpayers can pay their tax before the government has issued the money to do so? Why has no-one ever taken issue with this illogical descriptive process of how governments spend? It’s time to call it out.
On the assumption that one accepts the reality that government spending is not constrained by taxes and has nothing to do with raising revenue, then the next obvious question is, if governments don’t need my tax to spend why am I paying it?
Principally, taxes drive the currency, meaning that their imposition is how government drives the need for people to earn that currency, so they can settle their taxes. In the words of Warren Mosler:
Secondly, it can be used to deliver a more equitable society by redistributing wealth to deprive the excessively well-heeled of the vast purchasing power that their wealth gives them and reallocating it. These are very good reasons for taxing them at a higher rate and also for tightening tax regulations to ensure that the rich pay what is owed. If we subscribe to creating a fair society for all surely no-one should have any objection to paying their share. However, on this point we must reject the Robin Hood fantasy that in order for the government to spend it has to literally ‘take from the rich to give to the poor’.
Thirdly, it can be used as a mechanism to control inflation thus taxing more when the economy is over-heating to ensure that the productive capacity of the nation is not exceeded or taxing less to boost aggregate demand when the economy is slowing. A government may also choose to tax more in order to free up resources for public use. A government’s role is to balance the economy and it must do so by not exceeding the productive capacity of the nation. Taxing is how that can be achieved when necessary.
And finally, it is a mechanism to express public policy. That could mean imposing a tax to change the public’s behaviour whether that’s encouraging drivers to abandon their cars for public transport, or people to use reusable coffee cups instead of disposable ones which end up in landfill in their billions every year or even a tax on sugar to deal with the obesity crisis.
Once it is understood that the government is the currency issuer and doesn’t need our tax to pay for universal public services, pensions or social benefits, the next question can only be why has the Conservative government pursued fiscal austerity and the policy of balanced budgets? Given its consequences on the economic health and well-being of the nation the only answer can be that it has chosen to do so for reasons other than fiscal prudence.
Critically, it is important to understand that the real issues about the provision of public services, the NHS and Social Care, education and social security have nothing to do with taxing or borrowing or whether a government has been sufficiently fiscally prudent and responsible with public money. The crux of the matter is never whether there is enough money but whether there are sufficient resources to deliver government policies. Using the NHS as a good example, Labour responding to Theresa May’s boast about additional funding made it quite clear the real issue was not money but whether there were sufficient clinical staff to deliver services. It won’t matter how much money the government pumps in, if because of government policies the service doesn’t have enough staff, equipment or hospitals to deliver the first-class service it is promising (after eight years of funding starvation) it won’t then deliver anything in the short term except potentially inflation.
This is the real question that the Resolution Foundation and Rafael Baer should be asking. Not whether or how sufficient can be raised in tax to deliver future public needs but whether the government has sufficient resources to deliver its policy agenda. How will it use the resources at its disposal to ensure that the productive capacity of the nation is used to its fullest potential, to serve the interests of the nation to create well-being for its citizens and a healthy and sustainable economy now and in the future?
To put it into basic terms when government spends on public sector services and social security benefits it injects its currency into the real economy, the benefits of which are two-fold. In the case of the NHS, for example, a healthier and productive workforce or in Education an educated and skilled workforce serving both current and future generations. And in both cases when people are paid, their wages circulate to drive demand for the goods and services that power the economy.
On the current trajectory, the radical change we need might seem unattainable. However, with a progressive government in place which has recognised modern monetary realities we could deal with the most pressing challenges of our time, poverty, wealth inequality, unequal access to resources and the serious threats posed by climate change.
It’s a bit like fighting the medieval church. The church was wrong about so much, but it held all the reins of power.