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 report ‘Tax 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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