Dear Philip Hammond, Chancellor of the Exchequer

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A letter to the Chancellor of the Exchequer from Prue Plumridge

I feel I must write to you in response to your speech at the Conservative Conference in which you referred to the medium-term challenge of dealing with the public finances so as not to burden future generations.

Aside from the fact that your government has been promising to deal with the public finances for the past seven years whilst regularly moving the goal posts for achieving it, failed Tory promises show astonishing ignorance about how the state finances work in practice.

Or, is it, perhaps, that you do know but prefer to keep the public in the dark with fake messages about household budgets, living within our financial means, paying down our debts and saving for a rainy day.

You (and George Osborne before you) have abused the trust of the public with your myths and lies about maxing out the credit card and going broke.  Neither of which can happen in a sovereign currency issuing state.  I’m sure you know that really.  In truth, this has suited the pernicious ideology of the Tory government which claimed that Labour overspent and austerity was unavoidable.  Neither was true.  But, as a result, seven years of cuts to public spending have led to rising poverty and inequality through the redrawing of welfare provision and the decimation of public services not to mention the on-going attacks on employment rights and the rise of insecure working and the gig economy.

And, all the time, while you tell us that there is no money for those services upon which we all depend from the NHS, to public infrastructure and services and local government we are witnessing the ongoing transfer of wealth into ever fewer hands and public money being poured into corporate pockets.

Admit it, Chancellor, this exercise has never been about necessity.  It has always been about ideology which can be best expressed in the words of the former head of John Lewis who said recently ‘the only way to provide good public services is to ensure a vibrant business economy’ …… which is not only neoliberal bunkum trading on the lie of discredited ‘trickle down’ but shows how this false narrative dominates the mainstream and infects public understanding.  To quote Richard Murphy from Tax Research on the NHS  (and whilst he doesn’t mention it, public services too)

there is no reason why we should not have health care in thirty years’ time, whatever that care might be…… All we have to do is decide we want it. Then we can pay for it. It will not be a matter of not affording it. It’s just a matter of setting priorities. “

Moving on to your claim that borrowing takes money from the pockets of future tax payers is plain wrong to put it bluntly.

As the economist Professor Bill Mitchell notes “Each generation chooses its own tax rates and that means that the mix of public and private sector involvement in the economy is a political choice”

In this case yours.  Government spending in the form of deficits (assuming of course a government that takes seriously its responsibility for the well-being of the nation) can work on behalf of citizens to create a healthy economy and a fairer distribution of wealth.  This not only helps today’s citizens but also creates investment in public education, public health and other infrastructure which benefits both current and future generations.  Or, of course, it can, as in the case of the Tories and already noted, represent wealth transfer to the already rich and public money leaching into private corporate pockets.  And just to be clear as I can hear you whispering but what about the printing presses, inflation and Zimbabwe I am not suggesting that deficits don’t matter – they do but not in the way you tell us they do.  The fact is that whilst governments are never revenue constrained spending will always be limited by available productive capacity and resources.  And that is what has to be managed.  It should never be about balanced budgets rather it should be about creating a balanced economy.

So, Chancellor, in conclusion, I will finish by saying that a time is coming when you will no longer be able to fool the public into believing your household budget version of the state finances which has claimed that we can’t afford public services, the NHS and the welfare safety net.  They will then understand that you made a choice to deny them the public infrastructure that ensures a healthy economy and the well-being of their families.  They will understand that you played with their lives and their survival.

It is to be hoped that in the near future you will indeed have plenty of time as a shadow minister in her majesty’s government to reflect on where the Tory party went wrong but then again you probably won’t.

Regards

Prue Plumridge

It’s all a game of Monopoly really

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It’s all a game of Monopoly really by Prue Plumridge

When Labour left office in 2010, Liam Byrne left a very unfortunate message saying there was no money left. The Tories have dined out on this lie ever since. We were compared to Greece and next in line to be affected by a sovereign debt crisis, and in 2010 Osborne claimed that the Tories had taken the country back from the brink of bankruptcy. The Tories have used the household budget narrative of deficit reduction, balanced books and surplus to justify the need for austerity when, in fact, it is not just the wrong recipe to return our economy to health but also a deliberate deception about how our state finances and economy actually work.

This deception has allowed the Tories to funnel more and more money into ever fewer hands and make the claim that we cannot afford public services or the NHS. The mantra of ‘there is no money’ has been used to justify the dismantlement of the safety net for when we are at our most vulnerable, and worse still the selling off of every aspect of our publicly provided services to the private sector. This government is making a political choice and people across the country are paying the price for it.

Most of us will identify with Dicken’s character Micawber in David Copperfield who wrote:

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

So it is easy to understand how we buy into the idea that we have to pay our national debt down and balance our books. However, one cannot, in any way whatsoever, compare our own household budgets with the state money system.

And this is why:

A sovereign government:

  • Issues fiat money which is not backed by gold or anything else. (The gold standard ended in 1971 with the oil crisis)

 

  • Is not like a household. It doesn’t have to balance its budget (even though George Osborne says we do). In fact, reducing the deficit or going into surplus will remove money from the non-government/private sector.

 

  • Doesn’t tax first then spend later which means it doesn’t have to rely on raising taxes to spend. It doesn’t save its tax revenue – it destroys it.

 

To explain this strange concept think of a game of monopoly. You appoint a banker but he doesn’t collect taxes to get the game going because no-one has any money yet. The banker has to issue the money before it can collect anything back or the game can’t even begin. The issuing of the currency comes first. The bank can never go broke. If it runs out of money it can issue as much as is needed to keep the game going. So, you move about the board and you draw a card from the Community Chest or Chance – so you pay £50 – there goes a leakage. You play another hand and tax is due. The game will end very quickly if there isn’t a replacement for the money that is leaking out. Which is why every time you pass GO you collect £200. This keeps the game going. The banker always has to spend out more than he collects otherwise the game will quickly come to an end.  Which is to say that in this instance if the banker aka government is not deficit spending the game will end much sooner. (From Angry Birds by Dr Stephanie Kelton)

So to be clear taxes are not paying for anything not even your pensions!

However, they do have a function to:

control inflation or otherwise by raising or lowering taxes

redistribute wealth and income through progressive taxation

express public policy by subsidising or penalising certain industries or economic groups – for example railways for the first and polluting industries for the second.

To continue, a sovereign government:

  • Doesn’t spend money like we do – it isn’t the user of the currency. It is an issuer of the currency and creates money as it needs it.

 

  • Can’t ever run out of money and it definitely can’t go bankrupt. (Unless it is a European government and a member of the Eurozone. In that case a country becomes a user of the Euro and not the issuer. Then it is perfectly possible for it to go bankrupt as it is using what is, in effect, a foreign currency).

 

  • Can’t borrow its own money through selling bonds or treasuries to fund deficits and doesn’t’ ever have to worry about selling bonds to do so. When such bonds or treasuries are issued it is not about financing government spending it is a mechanism for controlling the interbank lending rate and the money supply. These treasuries/bonds are a bit like our bank accounts where we have a current account and a deposit/savings account where we park spare money we don’t need to get some interest. This is what the private sector does – pension funds for example – stash their money in a risk free place to earn some interest. Some call this corporate welfare and it is completely unnecessary. To follow the logic to its natural conclusion. If a government can issue the money it needs, it doesn’t have to borrow a bean from anyone at all. Indeed, why would it borrow money it had issued in the first place?
  • Can’t save up its own currency for a rainy day. Last year George Osborne announced that he would attempt to bind future governments to maintain a budget surplus when the economy is growing saying ‘we must act now to fix the roof while the sun is shining’. Budget surpluses do not represent ‘public saving’ which can be used to fund future public expenditure or a cache of money that can be spent later. A budget surplus only exists because private income or wealth is reduced so when there is a budget surplus private wealth is destroyed.

 

  • Can’t live beyond its means. Wait I hear you say won’t the magic money tree lead to inflation like it did in Germany or Zimbawe? Whilst it is the issuer of the currency that doesn’t mean that it can carry on spending ad infinitum as this would be inflationary. The only thing that will restrict government spending is access to resources. So, assuming there are idle physical resources including labour a government can continue to spend without concern for inflationary pressures.

Just before I go a word about that scary national debt. The online debt clock is designed to have us shaking in our boots at our financial recklessness! The national debt, however, is not like a mortgage or a car loan that has to be repaid. Paul Segal in an article describes it thus:

‘It is the money the government owes to us – not money we owe to anyone else. That’s right 80% of our government debt is owed to the British people. What is called the national debt is our own savings looked at from the other side of the balance sheet.’

Banks, businesses, people or countries may choose to invest their money in bonds as they earn some interest – they are in effect non-risk places to park money. This is our ‘National Debt’. To explain: you have a current account receiving no interest at all. So you put some of the money you don’t need into a deposit account like a Bond for example. The bank debits your current account and credits your new savings account. When it matures the bank debits your bond account and credits your current account with a little bit of interest to boot. You are always in the same financial position plus you get a little bit of interest. Nobody ever says that the bank is ‘in debt’ because you moved money from your current account to your savings account. So saying that the UK government is ‘in debt’ because people, institutions or corporations have exchanged their pounds for government bonds is just as misleading. Government bonds are basically £ equivalents and the government creates them both from thin air.

The “National Debt” is not by any measure a debt, but a measure of saved pounds.

And since that pile of saved £ never gets any smaller, you can consider those £ to be “retired.” Government bonds, in a net sense, don’t ever get cashed in and spent (although they could). They just sit there, unused, and once in a while a small bit of interest is added to the pile. And that pile has no discernable effect on the economy.

So there you have it – we are not in debt up to our ears – George Osborne and the media just want you to think we are.

Finally, on the subject of the burden of debt on future generations. Only today, the Chancellor shamelessly used yet another scare tactic in response to his plans for more public spending cuts by saying “We need to act today now so we don’t pay later”.

To quote the economist Professor Bill Mitchell:

“The fact is that a government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there have been deficits in the past. The idea that fiscal surpluses (as indicated above) provide more spending capacity in the future or lower tax rates is just plain false. Every generation will choose its own tax rates. That is, a mix of public and private sector involvement in the economy is a political choice. Currency issuing governments do not draw down on the savings provided by previous government’s surpluses. It is a nonsensical notion to think that a sovereign government would ‘save’ in its own currency.”

However, this is not to say that we shouldn’t be concerned about the direction in which the country is travelling in. Reducing the deficit and aiming for surplus simply removes money from the private sector which means that people have to take on debt. There has, over the last few decades, been a huge increase in private debt and the trade deficit (that is the difference between our exports and imports) is at worrying levels. But that’s another story.

 

Links and credits:

http://ineteconomics.org/ideas-papers/interviews-talks/demystifying-modern-monetary-theory

https://petermartin2001.wordpress.com/2014/01/27/the-earth-is-not-flat/

https://www.youtube.com/watch?v=bTZGU9s0idM

https://www.youtube.com/watch?v=d57M6ATPZIE

https://alittleecon.wordpress.com/2014/08/06/government-debt-is-not-a-burden-on-future-generations/

http://www.theguardian.com/commentisfree/2010/jun/17/fiscal-deficit-threat

http://theaimn.com/its-all-just-numbers-in-a-computer/

http://www.theguardian.com/commentisfree/video/2015/feb/04/another-economic-crash-is-coming-how-did-this-happen-video

http://www.3spoken.co.uk/2015/07/taxes-for-revenue-are-obsolete-precis.html

http://hubpages.com/politics/The-US-National-Debt-explained-MMT-style

 

Note: These articles whilst written for largely for a US and Australian audience you just need to replace $ for £. It’s all the same!

 

Deficit Fetish: Just say “No!”

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Balancing Budgets: The Austerity Dogma

By John Weeks, previously published here on Piera

Twitter: @johnweeks41

Austerity NO

The Austerity dogma of George Osborne asserts that a negative balance between public revenue and overall public spending (deficit) is a problem requiring immediate policy measures to eliminate it.  He has gone further, asserting that the fiscal balance should be positive (surplus) when the economy is at or near its capacity.  His invariant form of “correction” is expenditure reduction (aka “austerity”).

He and his supporters give three justifications for this dogma.  There is the reductionist argument that compares public sector budgeting to households, so obvious to the austerity-advocates that it requires no explanation  Households must balance their books (“cannot spend more than their incomes”), and the same applies (or should apply) to governments.

Anyone who believes that households must spend no more than current income has never bought a house, sent an offspring to university or found her/himself between jobs (due to redundancy, firing or voluntary employment shift).

Statistics refute the like-households argument. Households across the income distribution spend more than their incomes, early and often.  That is why PwC projects average UK household debt to reach £10,000 at the end of 2016 excluding mortgages.  The very limited truth in the false comparison comes at the bottom of the income distribution, where households have no choice but to engage in desperation borrowing (see study by Johanna Montgomerie).

The more fundamental falsifier of the household-equals-government argument is that the UK government can borrow from itself and a household cannot. The government of a country that has a national currency is not constrained in its spending by revenue flow alone.  However, macroeconomic conditions can impose binding constraints to public spending, which I discuss at a later point.

Superficially more serious is the argument that public sector deficits put upward pressure on market interest rates.  Government bond sales compete with private borrowing, interest rates rise and private debt become more expensive and investment declines (“crowded out”).  Whether this represents an important macroeconomic interaction in general remains subject of empirical debate.

At the moment it is obviously irrelevant because the Bank of England rate is below one percent and money market rates hardly higher.  Indeed, a rise in interest rates could bring benefits, such as higher returns to pension funds.  Were the UK government concerned about “crowding out” it has an obvious way to avoid it, borrowing directly from the Bank of England (“monetizing” the deficit).

Another frequently encountered assertion is that the Chancellor should avoid public sector deficits because they generate inflationary pressures.  There exist concrete circumstances when this would happen, but at the moment the overall rate of inflation in the UK is slightly negative, and the “core inflation rate” is barely over one percent.

Finally, the deficit has been falling (albeit slowly), and for fiscal year 2014/15 was less than £60 billion (below 5% of GDP compared to over 10% in mid-2012).  With inflation at zero, government borrowing falling, and no empirical or theoretical basis for the dangers of deficits, further budget cuts would qualify as gratuitous and ideological.

Balancing Budgets: Anti-Austerity Variations

Among critics of Chancellor Osborne’s policies appear two counter proposals for fiscal policy guidelines, 1) borrow only for investment, and 2) balance the budget “over the economic cycle”.  Close inspection of these suggests that they are variations on the austerity argument rather than refutations.

The first would maintain balance or a surplus for current expenditure, and fund public investment through borrowing by sale of government bonds in the financial market or borrowing from the Bank of England.  In mainstream economics the former has no impact on the supply of money, while the latter increases it by the amount of the borrowing.  The qualifier “in mainstream economics” is necessary because a considerable portion of the economics profession rejects the implicit assumption that the supply of money is independent of the level of output.

We need not wade into the money supply argument to see that the “borrow only to invest” position accepts that deficits are a problem, though limiting the problematic role to the current budget, total revenue flows less non-investment expenditure.  In practice the distinction between current and capital (investment) expenditure is far from black and white.

By usual definition investment includes all expenditures that increase the capacity of the economy, now or in the future.  There should be no argument that much of education and health spending does exactly this, which explains the origin of the term “human capital”.  However, all but the building and equipment component of health and education fall into current expenditure.  This arbitrary definition treats activities of doctors, nurses and teachers analogously to those who repair and maintain capital equipment rather than improve human health and skills.

Finally the borrow-only-to-invest policy encounters a serious problem.  When economic contraction causes public revenue to fall below current expenditure, should a government cuts in public services and social support?  If so, this policy becomes a variant on the Chancellor’s austerity dogma.  And not making cuts implies that the policy cannot be implemented.

The second approach also considers deficits as problems needing correction, over the economic cycle rather than continuously.  The concrete guideline is that the fiscal balance can be negative when the economy falls into recession, then moves into surplus as it recovers.

In practice this policy framework flounders on several empirical and analytical flaws.  First, defining the length of the period over which the sum of deficits and surpluses sum to zero defies consensus.  Without clear definitions of the beginning and end of a cycle this framework cannot be implemented without arbitrary guidelines.

Both approaches offered as a counter to austerity suffer from the same fallacy as the dogma itself.  Any rule requiring a fiscal balance must apply arbitrary assumptions and definitions in order to define when the outcome conforms to the rule.  Supporters of budget cuts have attacked critics of austerity as “deficit deniers”.

The meaning of this accusatory term remains elusive, but it carries the implication that opponents of expenditure cuts “do not care” about the deficit and/or do not consider it a problem.

The counter proposals might be seen as being “semi-denials”.  Those advocating balancing the current budget deny the need for revenue to cover public investment.  The cyclical balancers deny any necessary to correct deficits in the short run.  Arriving at sensible and rational fiscal rules requires abandoning budget balancing as a goal and converting it into an outcome derivative from effectively achieving macroeconomic stability and high levels of employment.

The Role of Taxation

The various versions of deficits-are-a-problem might be epitomised in the cliché, “governments must live within their means”, with disagreement arising as to whether “their means” refers to the current or overall budget and/or the relevant time period.

Aversion to deficits comes from an analytical confusion, the commonsense generalization that the purpose of taxation is to fund public expenditure.  For the government of a country that is part of a currency union (e.g., the euro zone) or a regional or local government the generalization is valid.  These governments do not control the monetary system in which they operate their fiscal policy.  The generalization is not true for a government of a country with a national currency over which it has control either directly or via the central bank.  I call the former shared currency countries (SCC) and the latter national currency countries (NCC).

A SCC government has two methods of funding expenditure, taxation and selling bonds to the private sector (typically to banks and other financial institutions).  The SCC government must pay the debt service, interest and principle, to private bond holders from taxation for the life of the bond.  For SCC governments borrowing is similar to what households and businesses do.  The cliché “living within means” could be applied, meaning precisely that the combination of current outlays and debt service must be consistent with revenue flows.

NCC governments operate within quite different fiscal constraints, possessing an additional funding option and a quite different goal for fiscal policy.  The core purpose of fiscal policy for an SCC government is to provide necessary and discretional public goods, and fund these in a sustainable manner.  The core purposes of fiscal policy for the NCC government are to maintain macroeconomic stability and increase productive capacity for the medium and long term.  The NCC government uses current expenditure to achieve stability and capital expenditure to enhance capacity.  Any expenditure by an NCC government, current or capital, obtains its funding from taxation, bonds sales to the private sector, and/or borrowing directly from the country’s central bank (“monetization”).

The defining characteristic of borrowing from the central bank is that in practice the debt need never be repaid;  for example, the Treasury could sell the Bank of England 100 year bonds (though in practice the maturity period is much shorter), or “roll over” the bonds (issue new ones to replace those that reach their redemption date).  The Bank of England holds about 25% of UK public debt.

The short run goal of macroeconomic stability determines the mix of these three funding alternatives.  If the economy falls into recession with deflationary price pressures the NCC government increases expenditure to compensate for the fall in private demand, covering the increased outlays through monetization.  As the economy approaches full capacity with inflationary pressures, monetization ends.  Rising tax revenue from the expanding economy replaces bond sales.

Whether the public budget is in balance should be of no concern for the NCC government.  If economic activity is declining or stagnant, public borrowing should increase.  Whether this results in a deficit on current expenditure is little importance, for the policy purpose is recovery not hitting a fiscal target.  An overheating economy calls for increased taxation, perhaps generating an overall surplus.

Balancing Policy rather than Budgets

For the British government, and all other NCC governments, expenditures and taxation have different policy functions and motivations.  Current expenditure delivers public goods and services to the population, and regulates the short term stability of the aggregate economy.  Simultaneously achieving those two goals represents the main challenge of a rational fiscal policy.

The capital budget, public investment, enhances capacity and only in extreme circumstances such as the threat of high inflation would be adjusted for short term policy goals.  How our government funds any part of public expenditure is derivative from the overall goals of short term stability and long term capacity enhancement.

The rational approach to fiscal decisions is to balance policy not budgets.  The fiscal balance in itself is neither a target nor an indicator of successful policy.  Whether the fiscal balance is positive, zero or negative reflects the outcome of this rational approach.  This is not deficit denial.  It is rejection of deficit fetish.

Labour MP in urgent need of lesson in economics

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A response to Chris Evans MP by Prue Plumridge

Just before the vote on the Fiscal Charter Chris Evans MP (who abstained) said:

Labour should be proud that when we were last in government we ran a budget surplus for four years and achieved some of the lowest deficits both in UK history and in comparison to other economically developed nations.
There is nothing progressive about budget deficits. Every pound we spend on debt interest is one less we can spend on the NHS, on vital public services, on helping the poor and vulnerable.
Fiscal discipline allowed us to commit record funds to education and healthcare without damaging the public finances. This was the foundation of the trust people used to place in the Labour Party. We were seen as safe custodians of economy, delivering on the issues people care about.”

It seems from this, that Chris Evans is in urgent need of an economics lesson for dummies.*  His statement shows dire ignorance of how the State finances and money system works.

He claims that there is nothing progressive about budget deficits and lauds the fact that Labour ran a budget surplus for four years whilst achieving some of the lowest deficits in UK history.

So is this something we can be proud of and does it fit with any sort of reality?

I would suggest that politicians should actually take some time out to learn about how our economy really works before they make such assertions.

Firstly a short lesson in deficits and surpluses.  Government deficits sound bad, don’t they, when we are told that they are like of our own household accounts?  Going into the red is something we avoid if possible – the consequences of doing so as a private individual or company could be ruinous.  However we have been conned by the language used to describe our economy which equates it to a household budget and suggests that going into debt risks bankruptcy.  Nothing could be further from the truth.  A sovereign country issuing its own currency cannot go bankrupt unless we live in the Eurozone, a country like Greece, which does not control its own currency issue.

Equally, if a government aims to reduce the deficit it will take money out of the economy in the same way as going into ‘surplus’ does.  It’s back to front to our understanding in terms of our own personal income/expenditure/savings.

Firstly, taxation is not income or revenue as we are told since a government which issues its own currency is not constrained by its tax take assuming it has idle resources available.  A ‘budget deficit’ represents the money spent into the economy and is the way a government can add aggregate demand and influence output and employment levels. Whilst there is unused productive capacity the actual ‘budget deficit’ is of no relevance. The only legitimate goal that any government should pursue is the real goals of employment and output.  In fact budget deficits are simply the mirror image of non-government savings.  Government spending represents all those things we take for granted which make our country a better place to live and work.

As Professor Bill Mitchell puts it ‘The government deficit rose and generated higher levels of wealth for households and firms.’
The word ‘surplus’ is equally misleading as it implies savings.  A ‘budget surplus’ does not represent national savings at all.  Households save to increase their capacity to spend in the future. But a government cannot save in its own currency. It does not apply to the issuer of the currency who can spend at any time it chooses.

It seems that like many politicians, Chris Evans simply has no idea of how the macro economy actually works.  They, like many of us, have been taken in by decades of neoliberal economic thought which declares categorically that deficits are bad and balanced budgets and surpluses are good.  In truth they are neither good nor bad and are dependent on economic circumstances – the state of the economy, the trade account and the level of private debt.

The budget surplus of which Chris Evans is so proud was made possible by sky rocketing household debt.

As Steven Hail puts it:

‘the ignorance of this politician on the fact that government surpluses mean non-government deficits, and that countries without trade surpluses cannot run budget surpluses for long without a private debt explosion and growing financial fragility is beyond worrying.  It is pure ignorance’.

Boom and bust had been abolished so said Gordon Brown as he put his faith in financial deregulation to facilitate an economic miracle which, in reality, actually encouraged household debt and asset bubbles.  It gave all the appearance of a growing economy when in fact it was built on sand.  Financial speculation replaced the solid foundations of a real economy which should be concerned with investing in the well-being of a country’s citizens and the protection of our natural environment.

So let’s get it right Mr Evans and all those who abstained from the Fiscal Charter vote it’s nothing to be proud of at all.

John McDonnell’s decision, if a little late, was the right one to make and let’s hope that the real story of how our economy actually works will start to see the light of day sooner rather than later.

UKHouseholdDebt9311
* Unfortunately Chris Evans is not the only MP in need of a lesson in economics.