“The objective should be to organize the economy around human needs and well-being. If toward this end we decommodify key goods and services, or legislate longer product lifespans, use-value will clearly increase even if GDP declines. We must focus on what matters”.
Jason Hickel, Economic Anthropologist
Whether we admit it or not, we are living in perilous times. From the climate crisis to the ongoing obscene disparities in real wealth and income, which affect billions of people around the world, they are the outcomes of a distorted economic system. A system which is underpinned by exploitation of labour and the natural resources which sustain its greedy search for profit, no matter the actual costs to the planet or human lives. This distortion is upheld by a false narrative about monetary scarcity, and from 2010 onwards led to the Conservative government claiming that without action we faced bankruptcy, and prescribing austerity with the destructive consequences we are living with today.
The arrival of the pandemic over eighteen months ago challenged that notion, as governments around the developed world loosened the purse strings to accommodate the consequences of the pandemic on global economies. But now, even though we are not yet out of the woods, and the climate crisis continues to bear down upon us, politicians are doing their best to reclaim that redundant narrative of fiscal discipline.
This week has been yet another example of macroeconomic ignorance, idiocy and callousness coming from both sides of the political spectrum.
First up, this week at the Labour party’s conference in Brighton we learned what the future might hold in the unlikely event that Labour wins a future election. The shadow chancellor, Rachel Reeves, boldly pledging £28bn of capital investment to be spent on tackling the climate crisis, then went on to stress the party’s commitment to the straitjacket of fiscal responsibility, by imposing fiscal rules that would both ensure that tax revenues matched day to day public expenditure and that the ‘burden’ of public debt would be on a downward trajectory. Although, to be fair, whilst she said she saw them more as principles rather than binding constraints, and that a permanent mechanism would be introduced to suspend those rules in the event of ‘exceptional shock’, the context of her speech was very much in line with the economic orthodoxy of borrowing, raising revenue through taxation to fund spending, and being fiscally responsible, even if at the same time, unlike the Tories, promising that it would not be ‘on the backs of working people.
Putting aside for the moment the facts about how government really spends, that taxes play no role in that spending, and that the ‘burden’ of public debt is illusory, as an Editorial in the Guardian made clear this week, capital investment whilst vital, must be considered within the context of whether it is achievable in real resource terms. In simple language, the question is never ‘is there enough money’, but do we have enough people and other real resources to deliver and service that capital investment? As the Editorial put it, ‘a better approach to policy would be to focus on how much is needed to accomplish a stated public purpose and work out whether the economy can absorb that amount of spending without price pressures.’
It is the real resources that are finite, and which need to be managed by the government to deliver public purpose and a fairer and more sustainable planet. As such, the choices to be made are not financial, but resource led. The power is in the hands of the government, through its taxation policies, to appropriate the resources it needs to deliver its policies from the private sector. The collection of taxes has, therefore, no funding purpose, and serves quite a separate set of objectives linked to equity, as a tool for controlling inflationary pressures, and driving behavioural change.
And yet, taxing to spend still forms the basis of all Labour’s future proposals, as Reeves also promised that instead of increasing National Insurance to fund the NHS and social care, she would be looking across the board for sources of revenue, which included increasing taxes for the wealthy and tax reforms. But she also told the Financial Times that she wanted people to know ‘that there are fiscal anchors, and that there will be restraints and [for] everything that Labour commits to we will explain where the money will come from’. When, in reference to Labour’s economic policy under Jeremy Corbyn, she was asked about the ‘magic money tree’, she responded that she didn’t believe there was one. Liam Byrne’s note in the treasury has left a lot to answer for in terms of Labour’s mediocre response, tied to sound finance rather than delivering real public purpose. It makes for painful listening when you know something about monetary reality.
Reeves then went on in the same vein to challenge the Conservatives to set out a costed plan to meet its green pledges. While the planet continues to burn and people’s lives are wrecked by government policies, it seems to be a game of household budget one-upmanship between the main parties about who can be the most fiscally responsible, with the eternal question ‘where will the money come from?’
However, the question in itself is borne from Margaret Thatcher’s handbag economics, which has dominated public policy and spending decisions since that time. This is not progress. It’s going backwards. The chink of light shining at the end of the tunnel, as financial caution was set aside to save economies from collapse, and which revealed the real possibilities for a fairer and sustainable future, is now less bright. As the incumbent at No.11 and his shadow opposition dig in their heels, anxious to reinforce their fiscal credibility, what is at stake in a continuing uncertain economic environment is our future, that of our young people and those yet to be born.
As the activist Malcolm Reavell pointed out in a social media post this week, in response to Rachel Reeves speaking at the Labour conference:
‘[…] we are doomed as a species if the monetary society in which we live is continually fed the “taxpayers’ money” trope. Nothing will change. The inequality we experience is caused by a deeply embedded false economics, supported by education, media, and politicians. There are few politicians who are willing to stand up to the establishment and call out the lies about currency creation, least of all those who seek personal gain from the perpetuation of the lies.’
Whilst Labour, whatever they are promising in terms of policies, continue up the one-way street to nowhere except the maintenance of the status quo, the Conservatives are way in front having led the way.
Research published this week by the Health Foundation think tank indicated that the NHS and social care services will need more than a million extra staff over the next decade to keep up with growing demand. It was estimated that government would need to invest around £86bn into services to deal with the consequences of an ageing population, a rise in chronic illness, and the backlog of healthcare caused by the pandemic.
To put some context to this report, we are already 100,000 short of health workers which includes nurses, doctors, and other healthcare professionals. We have a chronic shortage of social care workers with over 300,000 people on waiting lists, and social care provision on the brink of collapse due to financial and staffing issues.
This is not accidental. It is related to a decade of public sector spending cuts that have stripped out public services to the bone and shown a complete disregard for the role of government in long term strategic planning to ensure the nation’s needs are met. Every aspect of our public and social infrastructure has been whittled away, government employment and other policies have been responsible for a decline in living standards, poverty wages and precarious working practices, which, in turn, have affected people’s health and well-being. And now, with the ending of furlough and the £20 a week Universal Credit uplift, along with price hikes in energy and food, and the ending of the suspension of evictions, the government is condemning people to further hardship and uncertainty, with its continuing emphasis on sound finance.
Rishi Sunak’s hasty announcement in which he promised ‘to throw the kitchen sink’ at resolving his crass decision to remove the uplift, turns out to be a measly £500m grant to provide support on a discretionary basis to families facing emergency situations, and was described as ‘crumbs off the table.’ The Joseph Rowntree Foundation called it ‘an eleventh-hour attempt to save face’, saying that ‘it does not come close to meeting the scale of the challenge facing millions of families on low incomes as the cost of living crisis looms. By admitting that families will need to apply for emergency grants to meet the costs of basics like food and heating through winter, it’s clear the chancellor knows the damage the cut to Universal Credit will cause.’
At the heart of these problems lies a government fixated on a market-led economic ideology, which combines with its associated balanced budget narratives to form the basis for the policy and spending decisions that have led us here.
In short, and to put it proverbially, ‘a stitch in time could have saved nine’, albeit on a far larger scale. For the narrative of monetary scarcity and the primacy of the market, we are now paying a hefty price in terms of human, economic and planetary health. This will continue unless this government or future ones rethink their priorities.
Putting it right is possible. At its heart, it will require huge investment in infrastructure and the people who will be needed to restore our public services to a functioning system. It will also demand consideration about how we organise society’s priorities for today and the future, in light of the climate emergency.
We seem, however, a very long way from that, and as if on cue, the government this week announced plans to cut the graduate salary threshold for paying back student loans, as the taxpayer bill is deemed too high.
David Willetts, a former universities minister who oversaw the switch to the £9000 student loan in 2012, backed up the plans saying that it was ‘in the interests of students that universities are well funded. But that should not come at the expense of taxpayers.’ He also said that it would save the government nearly £3bn a year. Yet more economic bilge from one of the supporting acolytes of Conservative austerity.
Apart from the fact that taxpayers are not footing the bill for unpaid loans, because as we should know by now, the government doesn’t need taxes to spend, it also won’t save a penny of future government spending or release funds for other priorities. It represents a continuing part of the ongoing smoke and mirrors that keep people in ignorance, divided and under the control of the ‘how we pay for things’ narrative.
Worse, it will further affect the incomes of those who are just starting to build a future for themselves, and who will suddenly find themselves burdened, unless they come under the repayment threshold being set, or their parents can foot the bill in advance. Under such a proposal, we will be continuing to enslave our young people to a rotten, stressful, debt-ridden system of social control, at a time when we need to harness their youthful energy and nurture their creativity and imagination to see a better way forward. We should be investing in our young as only a currency-issuing government can do, not burdening them with debt.
GIMMS would like to give the final words in this week’s lens to Ellis Winningham, who responded on social media to Keir Starmer’s question posed in his essay ‘The Road Ahead.’ It applies equally to the Tories as it does to Labour and should be the starting point for challenging the wrong-headed notions about how the government spends. It shows that contrary to public belief, it is never about monetary scarcity and always about political choice, and such choices, in their turn, are dependent on real resources and how they are employed and shared for the wider good, or not. The future of the planet and our children’s children hinges upon this fundamental knowledge. So far politicians have failed to embrace it, so the challenge remains for the modern money movement to keep passing that baton of knowledge to as many people as possible, until those holding the reins of power can no longer ignore it.
“Why when government departments are funded by taxpayer money are we so lax about ensuring that money is spent appropriately?” – Keir Starmer, “The Road Ahead”
Starmer is obviously out of his depth here. We know this because were he not, he wouldn’t be asking the question. Little do people realise that inside this simple question lies the root problem of nearly all of the economic and social problems we see today. The answer to Keir’s question is simple, and here it is:
Government departments are not funded by “taxpayer money.”
The funding occurs when Parliament decides that a department must be funded and then settles on the appropriate figure. The BoE then credits the spending account with the figure Parliament desires, and the funding is complete. In other words, the UK government does not spend “taxpayer money;” it simply creates the money and then spends what it created. All government spending is “money creation” from the moment that Parliament decides to spend.
Now then, when the Tories decide to spend departmental funds inappropriately, giving their friends handouts, the bank accounts of their friends are credited, and the BoE credits the reserve accounts of those banks to ensure that the payments will clear.
Many people in Britain want to know why the government could find the money to bail out banks and so forth but cannot seem to find the money for the things which ensure the public’s well-being. The explanation above is the answer to their question. It’s not a financial thing; it is a political thing. The government can always afford anything priced in GBP, so it can always “find the money” to fully-fund things like the NHS, care services, education, full employment, Social Security, and pensions. Parliament simply chooses not to fully-fund the NHS, care services, education, full employment, Social Security, and pensions.
But what happens to “taxpayer money” if the government doesn’t spend it?
It is deleted from the banking system upon receipt and replaced by new money when the government spends again. What is vitally important to realise here is that the government always spends prior to collecting taxes. Spending places GBP into circulation, and taxation removes GBP from circulation.
To correct Starmer, it is never a question about spending “taxpayer money” inappropriately. It is always a question of spending newly created public funds inappropriately. And concerning the issue of spending public funds inappropriately, Starmer is right to question it. The Tories create the money they wish to spend, and then spend it for whatever they choose because they know there is always more money to be had. If departmental funds are running low after giving their friends and pet projects most of the money, the Tories will create more money to spend. I definitely question that.
So, yes, there is a “magic money tree” as many of you might have heard, but it is not exactly the Bank of England as some would think. The “magic money tree” is Parliament itself. Currently, the Tories are in command of the “magic money tree,” and they are only interested in that which benefits corporations, the financial sector, and the rest of their wealthy benefactors.
That is why the Tories seem so lax about ensuring that the money they authorised to be created is spent appropriately.
Join our mailing list
If you would like GIMMS to let you know about news and events, please click to sign up here
Support us
The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here