“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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