Friday, 8 June 2018

We need to talk about government spending and why there is plenty of money

Almost every day we see articles in the media about the lack of money governments have, and how things like nationalisation of the railways are 'unaffordable'. Then there's that famous 'there is no money' note left by Liam Byrne when Labour left government in 2010. So now we know - there is no money - right?

Wrong actually! There is plenty of money, and to understand why we have to look at how government spending actually works. One of the first obstacles we find is that we have always been told that governments tax and spend. This is something you will frequently hear politicians saying. And so we believe that government spending is paid for out of our taxes. But this isn't true, it's not how governments operate. What they actually do is spend and tax. They spend money into the economy and then tax that money as it circulates around the economy. Government spending is not dependent on tax receipts.

How did we get to thinking it was? Becuase we have been lead to believe that government budgets are like household budgets but they're not. Everyone knows about household budgets. You earn income and you spend that on food, clothes, the mortgage and so on. If you spend too much you go into debt. Government budgets aren't like household budgets they are very different.

Firstly a sovereign government with its own currency - like the UK with its pound - can create as much money as it wants - out of thin air. A recent example of this in the UK was quantitative easing or QE. The Bank of England created £435 billion of new money. How did it do that? A BoE official sat at a laptop and typed the money into an account. In fact, commercial banks do exactly the same thing when they issue loans. Money is created as debt by these banks because they are licensed to be able to do so by our government.

Furthermore, when a government spends money it gets most of that money returned to it in taxes. A simple example would be the government spends £100 and gets £80 back in taxes. This is called the 'fiscal multiplier'. Now you can begin to see why government budgets are not like household budgets because a government can create money and most of the money it spends is returned to it in taxes.

Its worth mentioning deficits at this stage. If a government spends more than it 'earns' (in taxes and other income) it will have a deficit. But this is a good thing. Why? Because if the government - public sector - has a deficit then the private sector - businesses and people - will have a surplus - which is good for us. Government surpluses mean private sector deficits and that is bad - for us. For a fuller explanation see this video by David Graeber.

The UK economy is struggling and growth in the last quarter was 0.1%. We may be heading into a recession. So what can the government do? The government needs to invest in the UK and here is one example of how it could:

1. Give public sector workers a decent pay rise - say 10% in one year (they are about 15% poorer than they were in 2010 because of an ongoing pay cap)

2. Some of that money - about 30% - will be returned immediately to the government through income taxes

3. most of the rest of the pay rise will be spent by public sector workers and will end up returning to the government in tax because it is taxed as is circulates around the economy. The pay rise will largely pay for itself.

That spending will boost businesses and the UK economy. One of the main reasons why the high street is failing is not internet shopping but the simple fact that millions have no money to spend.

This is a win-win situation which will boost public sector worker morale and wellbeing and help to lift the UK out of the hole it is in. The question has to be - why aren't the government doing this? I have no doubt there are many MPs who don't understand how government budgets work but the main reason is the poisonous ideology of neoliberalism and blind faith in the 'free' market.

Note: if you want to read more about this I recommend 'The Joy of Tax' by Richard J Murphy.

1 comment:

Peter Allen said...

Thise of us active in the Labour Party who agree with the basic arguement of MMT should seek to promote it within the party as an absolute priority. Its adoption by the party would allow it to develop a spending programme to address poverty, rescue public services and green the economy without having to accept the need to ‘ balance the books’ which has constrained discussion so far and which Labour has largely accepted. Billions of pounds were given to the financial sector after 2007. It was money which was, to all intents and purposes, created out of thin air and has not led to inflation. Similar initiatives were undertaken by the US government and by the European Central Bank. They have not resulted in inflation. They have resulted in a resumption of the share price bubble that preceded the 2007/8 crash. This time around the money needs to be invested by the government in the ‘ real economy’ .