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

The riddle of the deficit (or deficits for Dummies)

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Riddle: When is a ‘deficit’ not actually a deficit?

Answer: When it’s a Government budget deficit.

 

 Dear [insert name of virtually any Journalist or Politician]

It seems that you’re still having a bit if a struggle to understand what a budget deficit is, and what it does.

Let me try and explain.

Imagine that I’m the ‘Government’ and you are the ‘Private Sector’.  I give you a bar of chocolate.  Now, I (the ‘Government’) am in deficit to the tune of one bar of chocolate… but you (the ‘Private Sector’) are in surplus to the sum of one bar of chocolate.

Are you with me so far?  The government sector and the private sector or non-governmental sector, are opposite sides of the same coin.  A deficit for the government means a gain in the private sector and vice versa.  (The private sector means everything in the domestic economy, which is not government – I’m leaving out exports/imports to keep it simple).

One way or another, Government spending all goes into the private sector … payments for the NHS, Education, the military, unemployment benefits, working tax credits, child benefit, the Police, the judiciary, pensions, motorways, new infrastructure, grant to local governments and much more, are each paid for out of government spending.

OK?   So government doesn’t just spend, it also taxes.

So I’ll be the ‘Government’ again, and I’ll give you (the ‘Private Sector’) a bar of chocolate and then take back half of it, as a tax.   Now both the ‘Government’ and the ‘Private sector’ have half a bar of chocolate each but the government has a budget deficit of half a bar of chocolate whilst the private sector is increased by half a bar of chocolate.

With that extra half a bar of chocolate you have a lot of options.  For example, you could eat it (i.e. consume goods and keep someone in a job replacing them); give it to someone to mend your bike (i.e. create employment); put it in the cupboard for another day (i.e. save) or repay your friend the chocolate you owe him (i.e. pay off debts).

The way to work out if the government has a budget deficit, a balanced budget or a surplus is simply to subtract the total amount collected in tax from the total amount that government spends.   At the moment, the UK has a budget deficit, which means that the amount spent is greater than the amount of tax collected.

However, George Osborne says this is absolutely ‘frightful’ and that under his new policies, the UK will be in surplus by 2020 (!)

So what does a surplus mean for those of us in the private or non-governmental sector?

Well, if I pretend to be the ‘Government’ again, and I give you (the ‘Private Sector’) a bar of chocolate and then take it all back again … the budget will be balanced. Government spent a bar of chocolate and collected a bar back again… but you in the private sector have nothing more than you had before the ‘Government’ started spending!   (How great does a balanced budget sound now?)

To be in surplus, I as the ‘Government’ would give you a bar of chocolate and then demand a bar and a half of chocolate back from you (the ‘private sector’).  Now you have the problem of how you are going to get me that additional half a bar of chocolate?  Maybe you have some saved bars of chocolate which you can use for a year or two but eventually you may have to go into debt or even sell your house to give me, the Government, that extra half bar of chocolate!

As J.D. Alt writes in his excellent US post:

 If [government] runs a “budget surplus” for long, the Private Sector will either have to diminish its economic activity in general (go into recession)—or plunge hopelessly into debt (borrowing bank money it can’t repay, possibly causing a banking crisis)—or both.

 

Instead of creating jobs by spending, paying off debts or saving, a surplus budget eventually leads to redundancies, greater household indebtedness and greater precariousness of the workforce.

Obvious questions are raised by this simple story, like where did I (the ‘Government’) get the money to buy the chocolate in the first place?   Answer: I created it – that’s what Governments do if they’re the sovereign issuer of its own currency!   This is an incontrovertible fact – only the UK government can create Pounds Sterling – anyone else is committing the criminal act of counterfeiting.

If sovereign governments can create as much money as they want, why does the UK government need to collect tax to fund public spending?   Answer: It doesn’t – there are many essential reasons* for the government to collect tax but taxes do not pay for anything.

Think about it, if government kept on spending into the private sector without having a means of also draining the economy, we would have rampant inflation. (Literally, if it was all in bars of chocolate!)  So tax is one of the means of keeping the amount government spends into the private sector equivalent to the number of goods and services available for people to buy… thus preventing price inflation.

That is probably enough for now. I would recommend this and this for more information but please don’t hesitate to contact me if you need further explanation as to how the economy really operates.

Kind regards

Yours sincerely

Syzygysue

* Tax is important for lots of reasons including giving value to the currency but it does not fund government spending.

PS.  We’re constantly told that the deficit means that future generations will have to pay off our debts. This is simply rubbish.  Which would your children really benefit** from?   Half a chocolate bar (deficit budget), no chocolate bar (a balanced budget) or increased household debt and a potential recession (a surplus budget)?  It would be no contest in my family!

(** Obviously, caveats re: inflation apply)

 

DIAGRAMS & DOLLARS: modern money illustrated (Part 1) 

DIAGRAMS & DOLLARS: modern money illustrated (Part 2)

 

How can pay rise be unfair when mega-rich get tax cut?

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In reaction to a letter in the local press, COUN JIM GRUNDY (Lab),  Hucknall member of Ashfield District Council replied:

I was saddened, if not surprised, by Mr P’s response last week, to the news that Ashfield District Council had signed up to the Living Wage (a promise to ensure that all employees receive at least £7.45 per hour, around £275 per week or £14,300 p.a.).

He argued that this was unfair since other workers, particularly in the private sector, won’t receive it too. Perhaps Mr P doesn’t know that public sector workers are in the third year of having received no pay rise whatsoever, meaning that they’ve seen their incomes cut in real terms. Has that made anyone else feel happier about their lot? Thought not.

It is sad, indeed, when the classic divide and rule tactics employed by the Tories and the Lib Dems gain any traction. But what it does best is to betray a certain lack of imagination in this kind of thinking, that there is no alternative than to accept that low pay is inevitable, whilst having nothing to say about the £107,500 p.a. tax cut handed to 8,000 multi-millionaires by George Osborne.

If anyone can explain to me what’s fair about VAT being raised to 20% and pay being held down for everyone else to fund a tax cut the size of which the rest of us could hardly dream of ever receiving as a salary, let alone as a tax bill, then I’ll think paying people enough simply to get by is unfair.

Low pay is hardly a badge of honour for those unlucky enough to be included in that bracket.  And if someone manages to secure a fair — if still modest — pay settlement then how is the unfair treatment of others a sensible reason to oppose it?

A commitment to the Living Wage shows what can be done, beyond a race to the bottom that will do nothing for anyone struggling now or in the future.

Applying the same ‘logic’, if you’re with a friend and they’re attacked and mugged, the only fair thing to do would be not to help your friend fight off the mugger, but to insist that you hand over your own wallet too. And, I suppose, if someone’s seriously ill, don’t try and cure them because you’ll only make the dead jealous.

There is a wider practical purpose to this move. Putting more money in the hands of low paid workers makes perfect economic sense. Where will this money be spent? It will be spent in local shops and that can only help to maintain the viability of our town centres. Or, since gas prices have risen 31% in the past three years, it might be spent on luxuries like keeping warm.

Where will the lucky 8,000 multi-millionaires spend their extra £107,500? It’s just a hunch I have but I’m guessing it won’t be in any shop in Hucknall.

Even at the level of their new ‘unfair’ salary, council staff would have to work for seven and half years merely to earn the same amount that is being given away as an unearned tax cut each year to people who are hardly struggling. We are not all in it together, are we?

We all have to ask ourselves who’s side we are truly on? Low paid workers or millionaires? I know where I, Hucknall’s other district councillors and those who will contest the Notts County Council elections for Labour next May stand.

Can Mr P tell us who he stands by?

The Autumn Statement and long-term Austerity

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First posted Wednesday, 12 December 2012 – Socialist Economic Bulletin

The Autumn Statement and Long-Term Austerity

 By Michael Burke
George Osborne’s Autumn Statement brings home the stark reality that on current policy settings economic stagnation and ‘austerity’ will be a permanent feature of the British economy for many years to come.The Office for Budget responsibility (OBR) has a hopelessly over-optimistic track record in forecasting GDP growth.  Fig.1 shows the actual outturn on GDP compared to its forecasts. In 2010 a recovery of all the output lost in the recession was two years away, according to the OBR.  Now it is still two years away.

Figure 1
12 12 10 Autumn Chart 1

The updated forecast may also prove to be overly optimistic. The OBR uses the UK Treasury’s model of the economy.  In 2010, it forecast that investment (Gross Fixed Capital Formation) would lead the recovery, rising by 11.5% between 2010 and 2012.  In fact it is the only component of GDP which has fallen over that period, down by 2.8% to the 3rd quarter of 2012.

Since the OBR was established by the Coalition government real GDP has risen by just £27bn.  As SEB has previously shown that was largely a function of the momentum established by increased spending under Labour in 2009.  Since Osborne’s first Autumn Statement in 2010 the economy has grown by just £8.2bn and excluding the Olympics’ effect in the 3rd quarter of it has actually contracted by £5.6bn.

Fig.2 shows the change in real GDP and its components since the OBR was established in 2010. GDP over the period rose by £27bn.  All other main components of GDP also rose, although the rise in household consumption limped to an increase of just £2.6bn.  But the fall in investment has been the main brake on activity falling by £6bn over the period.

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12 12 10 Autumn Chart 2

This highlights the essential fallacy of official economic models shared by the Treasury, the OBR and others.  The private sector was said to respond to lower government spending by increased spending of its own.  The opposite has been the case.  Faced with government cuts the private sector cut back on its own investment (and pushed up government current spending in the process as poverty and underemployment rose).

Therefore the government’s insistence on continuing ‘austerity’ not only for the rest of this parliament but also out to at least 2018 will not produce a different result.  Economic stagnation and ‘austerity’ are set to become embedded in the economy over the next period, for at least a decade since the recession began.

Osborne has already challenged Labour to continue and deepen the cuts well into the next parliament.  But only a decisive break with Tory cuts will produce a different result. Reversing the cuts and growing the economy through investment is required.  In light of the private sector strike only the state has the capacity to do that.  Enacting slower, shallower cuts will produce only a somewhat less stagnant economy and both poverty and the public deficit which grow more slowly.

How the Cuts Work

On the right of the Tory party John Redwood consistently argues that there are no cuts as government spending continues to rise in cash terms.  Very few misrepresentations consist of a complete fiction but instead rely much more on a large distortion of the truth by disregarding key elements of it.  The Redwood argument is typical.

Cash spending is rising because of three factors.  It includes rising interest payments on government debt, not on services, welfare or public sector pay.  Secondly, it includes increases in the numbers entitled to welfare payments because of the stagnation caused by government policy.  Thirdly unchanged nominal spending includes the effects of inflation.  Once inflation is taken into account real government spending is falling.

This is an important point.  The process of ‘fiscal consolidation’ is frequently accounted in a cumulative way for this reason.  If a benefit is frozen in cash terms (or held below the rate of inflation) over a prolonged period the effect of the cuts deepens over time as inflation continues to rise.  There are a few benefits which have been cut outright and scandalously these include benefits for people with disabilities, support for childcare and the education maintenance allowance and housing benefit for poorer households.

But the overwhelming majority of cuts are based on freezes or sub-inflation rises in benefits.  These have now been increasingly back-loaded to the next parliament as the table in Fig. 3 shows, taken from the Autumn Statement.  Osborne’s plans increasingly rely on fiscal consolidation in the next parliament.  In addition to those tabled here, there are nearly £19bn in further cuts which have already been outlined for the two further years to 2018.

Figure 3
12 12 10 Autumn Chart 3

If Labour is elected but does not reverse these plans it will be implementing cuts much greater in 2015/16 than the cuts that were implemented in 2011/12.  The real effect of the cuts will be more than three times greater.  To give one example, pegging the new Universal Credit to a rise of just 1% is expected to save £640mn in 2014/15, but to save more than £2.2bn in the two following years.  Of course, this supposed saving is in reality only a measure of how much these benefits will be cut.  As incomes of the poor are cut, spending is cut by an equal amount.  This would otherwise circulate in the economy and largely return as government tax revenues.  It is also planned that government investment will be cut even further to a level barely above the rate of depreciation.

Whichever party or combination of parties is elected in 2015 it can expect only long-term austerity and economic stagnation unless it is willing to break decisively with current failed policy.