The Centre for Progressive Policy recently published an important report, Funding Fair Growth – How to Transform the UK Economy making clear that the UK needs substantial additional public spending if it is to regain its position as a successful modern economy.
In response, 99% members Lynne Jones (former MP for Birmingham Selly Oak) and Vince Gomez (former investment banker and member of the Bank of England’s Citizen’s Forum) have written an open letter to the authors suggesting that their report could have been even more powerful if they had explained that the UK runs a fiat money economy and remembered the words of John Maynard Keynes.
Your recent report Funding Fair Growth – How to Transform the UK Economy, makes the important point that public spending will have to increase to maintain even the existing, grossly inadequate, levels of public services. You advocate £19 billion per annum of additional public spending targeted on areas proven to have an impact on productivity growth including public health, early years, childcare and adult skills. With the latest Budget imposing further real-terms cuts of a similar amount, the total shortfall is not far short of £40 billion.
We feel that the Report would have been even more powerful, and you could have been even bolder in your calls to rebuild Britain, if you had explained that the UK is the sovereign issuer of a fiat currency which means it can take advantage of the ability to invest without necessarily requiring additional taxation or worrying about future debt.
The Bank of England, like other central banks, is capable of creating money – and has done so recently and in huge quantities via Quantitative Easing (QE reached £895 billion). As Alan Greenspan stated to a House Committee back in 2005: “There’s nothing to prevent the Federal Government from creating as much money as it wants…. The question is, how do you set up a system that ensures that [there are sufficient real assets to purchase]. Cash is nice but it has to be in the context of real resources created.”
More recently in 2020, we saw that the UK was the first developed country in the world to adopt direct monetary financing to fund government spending during the coronavirus crisis when the Bank of England expanded the Ways and Means facility to accommodate lockdown spending by central government.
Taxation is important but for entirely different reasons than those you suggest in your report. The primary roles of taxation are to:
- control inflation;
- create demand for government currency;
- alter the distribution of income; and to
- incentivise or disincentivise certain behaviours.
Governments are not like households and a moderate deficit is to be celebrated, not feared. Let me explain. The law of sectoral balances implies that the sum of Government surplus plus Private sector surplus plus Foreign surplus will always be zero. The UK runs a trade deficit, meaning that the Foreign sector has a surplus. That means that the sum of the other two sectors is negative – and if the Government runs a surplus as well, then the Private sector is condemned to a significant deficit. It is that which is not sustainable.
When governments run a deficit, the money doesn’t just disappear but ends up as a surplus somewhere in the private sector. In our unbalanced economy it ends up highly concentrated in a few hands. A fairer tax system, such as you propose, could fix this, especially ensuring that earned income is not taxed at a higher rate than wealth and unearned income. This would give opportunities for tackling the “fiscal drag” affecting those on low and medium to high incomes. In fact, there is no reason to suppose that taxes on ordinary working people need to be raised.
It must also be recognised that future debt is a non-issue. Today’s debt is around 100% of GDP and this has caused much hand-wringing. But in fact much of this debt is – thanks to £895 billion of QE – debt which the government ‘owes’ to the Bank of England, an entity which it owns. It is ‘debt’ which the government ‘owes’ to its own subsidiary. It may be a political issue, but it is not an economic problem.
Although you did explain that some of the so-called constraints on government spending, such as the “fiscal rules” adopted in similar form by both government and the Labour opposition, are artificial and self-imposed, you seemed to suggest that it is “fiscally prudent” to follow them anyway.
You convened a citizen’s jury, and you could have helped their deliberations by tackling these myths and misunderstandings and showing that we do not have to continue to work within the economic framework that has been responsible for bringing us into the state we are in today.
As explained above, the UK Government can and does vote money into existence. But they cannot vote, for example, construction workers, nurses, childcare places, etc, into existence. You might have had very different results if people understood that debt resulting from any public spending today cannot lead to bankruptcy for our children and tax rises are not inevitable if government plans public spending increases that will create those tangible assets we so desperately need!
The real issues for future generations are the continued whittling away of the UK’s social contract and the threats arising from our ongoing failure to invest adequately in measures to deal with the climate emergency. We have changed or interpreted laws differently during the Global Financial Crisis and the pandemic. We can do so again.
As John Maynard Keynes said in 1942,
“Assuredly we can afford this and so much more. Anything we can actually do, we can afford. … We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?”
In 1945, UK government debt was 250% of GDP, yet post war governments followed this wise advice. The next Labour Government should do the same.