Britain needs a new economic strategy to end its stagnation and close its £8,300 living standards gap with its peers.

Taxation doesn't fund public spending, Grantnow.

Taxation didn't fund the £billions spent during covid, neither did 'borrowing. The Bank of England, on the instructions of the government created money to purchase Treasury bonds. Theoretically the government is in debt to the BoE for the money it created for them, but as the state owns the BoE it cannot owe money to itself...

There is absolutely no reason why the government should hold back on spending into the domestic economy, spending would promote growth. If the government doesn't do it no-one else will; private companies & investors are holding back from investing in the UK because, after 13 years of cuts to public spending and frozen wages plus the increase in the cost of living meaning that people have little spare money, there is very little profit in it for them.

MaizieD

Taxation doesn't fund public spending, Grantnow.

Taxation didn't fund the £billions spent during covid, neither did 'borrowing. The Bank of England, on the instructions of the government created money to purchase Treasury bonds. Theoretically the government is in debt to the BoE for the money it created for them, but as the state owns the BoE it cannot owe money to itself...

There is absolutely no reason why the government should hold back on spending into the domestic economy, spending would promote growth. If the government doesn't do it no-one else will; private companies & investors are holding back from investing in the UK because, after 13 years of cuts to public spending and frozen wages plus the increase in the cost of living meaning that people have little spare money, there is very little profit in it for them.

Of course taxation doesn't pay for all government spending on public services - I didn't say it did - but (1) it pays for some of it; (2) it pays the interest on government borrowing; and (3) it provides a degree of redistribution of economic benefits within the population. The creation of money by having the Bank buy Treasury bonds presumably implies the Treasury will buy back the bonds at some future time.

I agree that government spending can be used to stimulate the economy. Not doing so was Osborne's mistake imho. But Keynesian ideas don't apply in all circumstances.

Taxation doesn't pay for any of it, Grantanow.

Taxation has several functions, the key ones being a) creating an obligation for people to obtain our currency in order to pay their tax bills and b) draining excess money from the economy. Without taxation there would be too much money in the economy with the resulting loss in value of the currency and most likely hyperinflation.

It doesn't even at the moment contribute much to redistribution because at the moment the tax regime favours the very wealthy over the rest of the population. It could do much better at redistribution given the political will to implement changes.

The creation of money by having the Bank buy Treasury bonds presumably implies the Treasury will buy back the bonds at some future time.

The Treasury has no need to buy back the bonds. Why should it?

In what circumstances does Keynesianism not apply?

It's nonsense to suggest taxation of the UK population does not provide Treasury funds for spending on the NHS and other public services. The Treasury doesn't hide the tax income in a secret vault never to be opened. During ww2 taxation rose rapidly to partly fund the war effort.

It is of course true that taking money out of the economy using taxation resists inflation but so does allowing domestic energy and mortgage costs to rise sharply so restricting household discretionary spending. The Tories haven't mentioned that counter- inflation benefit.

In former times when there was no income tax the economy did not suffer from hyperinflation.

Keynesian principles were ineffective during UK stagflation which is why monetarist ideas were drawn upon. If Keynes had survived he might have revised his theories to address stagflation.

It's nonsense to suggest taxation of the UK population does not provide Treasury funds for spending on the NHS and other public services.

Sorry, Grantanow, it's not nonsense it is an empirically proven fact.

Try this:

Abstract
This paper constitutes a first detailed institutional analysis of the UK Government’s expenditure, revenue collection and debt issuance processes. We find, first, that the UK Government creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector. The spending process is initiated by the government drawing on a sovereign line of credit from the core legal and accounting structure known as the Consolidated Fund (CF). Under directions from the UK finance ministry, the Bank of England debits the CF’s account at the Bank and credits other accounts at the Bank held by government entities; a practice mandated in law. This creates new public deposits which are used to settle spending by government departments into the economy via the commercial banking sector. Parliament, rather than the Treasury or central bank, is the sole authority under which expenditures from the Consolidated Fund arise. Revenue collection, including taxation, involves the reverse process, crediting the CF’s account at the Bank. With regard to debt issuance, under the current conditions of excess reserve liquidity, the function of debt issuance is best understood as a way of providing safe assets and a reliable source of collateral to the non-bank private sector, insofar as these are not withdrawn by the state via quantitative easing by the Bank of England. The findings support neo-chartalist accounts of the workings of sovereign currency-issuing nations and provide additional institutional detail regarding the apex of the monetary hierarchy in the UK case.
The findings also suggest recent debates in the UK around monetary financing and central bank independence need to be reconsidered given the central role of the Consolidated Fund

The analysis is based on an extensive review of current and historical primary legislation, official publications from public authorities including HM Treasury, the Debt Management Office, Her Majesty’s Revenue & Customs (HMRC), the Bank of England (BoE) and other relevant institutions, additional pertinent literature describing the historical evolution of the system, and requests made to the above-mentioned departments under the Freedom of Information (FoI) Act 2000 (Berkeley et al. 2021).

www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_purpose/files/the_self-financing_state_an_institutional_analysis_of_government_expenditure_revenue_collection_and_debt_issuance_operations_in_the_united_kingdom.pdf

Oh yes, now I see where you are coming from. This paper is one essentially supporting chartalism (a historical term now largely replaced by Modern Monetary Theory). Essentially it claims that governments don't need to worry about national debts and that they create money by spending. Its a heterodox theory heavily criticised by most mainstream economists of international standing like Krugman. I'm not wasting any time on it.

Whatever economic theory you think is relevant it hasn’t worked for the UK because for political reasons the government has chosen to give away benefits and services yet not applied enough taxation or borrowing to pay for it.

Any economic theory relies on receiving payment for whatever product or service, that income is then taxed and either saved or spent. The major way we save is by owning our own home, there is no taxation for the vast majority and that money cannot be used in a productive way. The major service that is free is the NHS, demand is unlimited yet those that can afford to contribute don’t need to.

Over the decades government borrowing has increased to cover the shortfall and the value of sterling has fallen. If we want to recover we demand less for free and/or pay more tax. Increasing borrowing to pay for services only weakens the currency, we pay more for imports and is self defeating, which is exactly what has happened in the last 25yrs.

Of course Katie59, I agree. If the public want better services that means higher taxes or more borrowing (which requires interest payments) or cutting other government spending or some combination of the three. The borrowing to fund during COVID entailed the Treasury selling bonds to the Bank which printed/created money to pay for them but the Treasury still has to pay interest on those bonds and hence will buy them back at some point.

Grantanow

Of course Katie59, I agree. If the public want better services that means higher taxes or more borrowing (which requires interest payments) or cutting other government spending or some combination of the three. The borrowing to fund during COVID entailed the Treasury selling bonds to the Bank which printed/created money to pay for them but the Treasury still has to pay interest on those bonds and hence will buy them back at some point.

In recent decades we havn’t paid any back we have simply borrowed more to pay them off.

Katie59 Don't forget that people who receive benefits do pay tax. Only about 25% of the Treasury's income is raised through income tax.

I'm a prime example. I receive housing benefit, but I pay tax. I pay council tax, VAT on utilities including my phone and TV, VAT on car fuel, insurance and maintenance, VAT on some of the goods I buy plus income tax on some of my pension. The tax of the companies and employees who provide me with services and goods is factored into the price I pay.

I spend almost all my income every month, so almost all of it is taxed and returns to the Treasury in one form of other. Even the housing benefit goes indirectly to my landlord, who pays tax on his income and whatever else he does with my rent.

Grantanow

Of course Katie59, I agree. If the public want better services that means higher taxes or more borrowing (which requires interest payments) or cutting other government spending or some combination of the three. The borrowing to fund during COVID entailed the Treasury selling bonds to the Bank which printed/created money to pay for them but the Treasury still has to pay interest on those bonds and hence will buy them back at some point.

Over the last decade or so, inflation has exceeded interest rates, so any money borrowed is effectively less than the initial amount.

growstuff

Grantanow

Of course Katie59, I agree. If the public want better services that means higher taxes or more borrowing (which requires interest payments) or cutting other government spending or some combination of the three. The borrowing to fund during COVID entailed the Treasury selling bonds to the Bank which printed/created money to pay for them but the Treasury still has to pay interest on those bonds and hence will buy them back at some point.

Over the last decade or so, inflation has exceeded interest rates, so any money borrowed is effectively less than the initial amount.

GDP has also been affected by inflation so the comparison is the same.

Grantanow

Oh yes, now I see where you are coming from. This paper is one essentially supporting chartalism (a historical term now largely replaced by Modern Monetary Theory). Essentially it claims that governments don't need to worry about national debts and that they create money by spending. Its a heterodox theory heavily criticised by most mainstream economists of international standing like Krugman. I'm not wasting any time on it.

I am coming from a position of being informed by empirical evidence rather than theory. I'm not prepared to dismiss the work of researchers who have actually trawled through masses of material to determine how the management of government finances works and what the actual the source of public money is.

This is the first time anyone has bothered to do this and, to my knowledge (and goodness knows I've looked for it) there has been no critique of the paper, no alternative empirical research which challenges or refutes its conclusions.

If you can produce any empirical research which in any way challenges the paper I would be more than happy to read it. (you do know what empirical research is, don't you?)

Of course, just because something is heterodox it doesn't make it wrong. I don't think that Darwin's Theory of Evolution is regarded as heterodox these days, but it certainly was when first propounded..

So, have I got this right? The government decides on a particular spending plan and raises money from the UK's Consolidated Fund (CF). The very first time they did this, they would go into debt. Taxes then raised from Income Tax go into the CF as credit which hopefully, equals the debt. If it doesn't, we borrow and increase taxes to pay this borrowing.

If this is right, our taxes are used to pay for the government's choice of spending, aren't they?

As for benefits, if they enable people to be well (not possible while we insist on underpaying government-paid workers), to be trained appropriately (see last brackets and also note we haven't any law for the politics of place) and sufficient jobs (predicted to go down this year), they would end up paying for the befits they have received when they return to work.

The very first time they did this, they would go into debt.

Who would they be indebted to, DAR?

The Consolidated Fund nets to zero at the end of each day. 🤔

If we accept that there is indeed a Magic Money Tree the government can borrow/create as much as it needs to pay for its needs.
How that is achieved isn’t important - the borrowing or creation is recorded as debt, there was one caveat the UCL analysis, that the government will be able to repay the debt from taxation at some point in the future. So debt is in practice limited by the confidence of lenders, as we saw in 2022 that confidence is very easily fractured.

MaizieD

^The very first time they did this, they would go into debt.^

Who would they be indebted to, DAR?

The Consolidated Fund nets to zero at the end of each day. 🤔

How?

There is little point in asking me questions. I'm still trying to work out what all this means and if and how it makes any difference. You could at least recognise that I do keep trying.

At least, in the process of looking some of it up, I found out what they are doing with the National Insurance Fund. I don't think I like it. It seems like more wool pulling and my eyes don't get much of a view of the truth after the last 14 years.

Having just heard what the Post Office has been trying to do and read yesterday how NI is used, the only conclusion I could come to is we need extreme simplification of the Government accounts.

Much as I want to understand the difference in MMT Maizie, I can only see the same system being viewed from a different perspective. Maybe this is partly due to the fact that I've never had a problem with borrowing to invest and grow.

I realise my idea of investing and growing is far from that of the far-right. However, now we know even Sunak sees his party as five mafia families; which honest person would share their view? As far as I can see, the complexity of the system has been a deliberate move to aid duplicity and dishonesty.

As you prefer empirical reasoning to theoretical approaches I suggest you read the recent paper at hdl.handle.net/10419/238387 by Professor of Economic History Emilio Ocampo from the University of Buenos Aires. You can omit his first 3 sections which are a profound look at the theory but do read section 4 in which he examines empirically in detail the experiences of Nazi Germany and Argentina in applying MMT.

His main conclusion is that any country which followed the MMT route would experience both high inflation, lower or negative economic growth and increased macroeconomic instability. Note that he reaches this conclusion by studying empirically the facts of two sizeable nations.

MMT ideas are helpful to populist politicians of the left and right because they support simplistic and arbitrary policies attractive to voters as they suggest public spending has no limit. But implementing large scale spending on public services not only leads to the disasters outlined by Ocampo but also ignores any lack of physical resources to carry through such measures - a lack of personnel caused by historic low birth rate, equipment not available at any price, unwillingness of other nations to permit trade on acceptable terms, and so on.

This is my final contribution to this thread as I think MMT is a worthless theory which can't be justified by the facts.

There is little point in asking me questions. I'm still trying to work out what all this means and if and how it makes any difference. You could at least recognise that I do keep trying.

Well, sometimes you tell me off for posting my understanding of how state finance works, but thanks for this today.

The difference for me is if one understands that state spending comes before taxation, and that state spending contributes to economic activity and growth, it enables one to make better judgements about spending proposals in party manifestos. Instead of working from 'can the country afford it?' one can work from 'how is this proposal going to benefit the country in terms of economic activity and growth', and, dare I say it, from judging whether proposals are going to promote a more equable distribution of the country's wealth and people's wellbeing.

Allied to this understanding of how state finance 'works', one has to understand that a country with its own sovereign currency can never run out of money because it is the state that creates and issues the currency. At a practical level it has to do this else, with population growth over the years, and with people's tendency to save when they have surplus money, or to spend money abroad, the supply of money available for the continuation of economic activity would diminish and individuals would just get a smaller and smaller share of it.

'Money' is just a unit of exchange which is trusted by the population using it. I'm sure most people are familiar with the story of prisoners of war using cigarettes as 'currency' in prison camps. We know of cultures which have counted wealth in cattle, or shells, which worked as a unit of exchange because they were universally accepted as such in that culture.

Even in the days when our currency was backed by gold or silver there would be more 'money' circulating in the form of Bills of Exchange or promissory notes (bank notes are just promissory notes) than there was actual gold or silver to back them. So long as people trusted and had confidence in the 'value' of those bills and notes they circulated and enabled economic activity. If everyone had lost trust in them and demanded their value in gold and silver there would not have been enough to go round and the currency system would have collapsed.

Since the world came off the Gold Standard in the early 1970s there has been nothing backing the 'value' of a country's currency except trust. So long as a country is politically stable, with a thriving economy and no excessive foreign debt it is able to issue as much money as it needs to promote economic activity.

Which brings me back to money creation by the state. So long as its money is trusted, resources are available to spend it on, it doesn't have excessive foreign debt, and it controls inflation by destroying excess money (taxing it away) it can issue as much as it needs. For those who mutter about 'printing money' and Wiemar, Zimbabwe, Venezuela I can post many economists' analyses of why hyperinflation occurred in those countries because of circumstances peculiar to them. 'Money printing' is not an invariable cause of hyperinflation.

I entirely agree that 'borrowing' for investment is a reasonable strategy, though some heterodox economists would argue that even that isn't necessary, the state could just create the money needed. But the bonds and savings schemes which the state offers and which are termed 'borrowing' are also regarded as a very safe way to save money, and earn some interest on savings, because the state will not go bankrupt. It will always pay, because it can.

OTOH, financial markets are the stamping ground of speculators out to make their money earn more money, which makes state 'borrowing' more vulnerable to market choices...

Premium Bonds are government 'debt', but when I suggested on a PB thread that the government might 'repay' that debt arbitrarily no-one actually wanted to be 'repaid'...

Economics is a complex area and, it appears, not a particularly scientific discipline for the most part. I have been reading and reading round it for the past few years and have chosen to follow what I judge to be the most logical and empirical evidence based ideas.

I don't think, Grantanow that you really understand that MMT is not a 'theory' in the general understanding of the word (which would actually be better understood as a hypothesis) but a theory in the scientific understanding of the word. It is an empirically researched description of how state with a sovereign fiat currency finances its economy.

If you think that an analysis of some countries' hyperinflation is a killer argument I'm afraid that it isn't. It's just an example of how a state can get it disastrously wrong.

MMT is emphatically NOT about unlimited state spending but if you're not prepared to go beyond that facile understanding that's fine. Just stop maligning my intelligence...

I'm sorry if you felt I was telling you off Maizie. What I was trying to say is that telling people who believe, have always believed and have always been told that their taxes pay for essential products and servicess that they are simply wrong, puts people's backs up and shuts them down to considering anything else.

(I'll read the rest of your post now)

Why has a country rated as the sixth or seventh richest in the world performed so badly?

Because of high and ever rising inequality.

The mission of the Conservative Party is to ensure that the rich get richer, even if that means the poor get poorer.

Although they have been spectacularly incompentent in running the country, especially since 2015, they have actually achieved this goal.