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WE NEED a radical rethink on the tax and spend deficit myth.
Economic commentators and politicians of every stripe perpetuate the delusion that public spending is paid for by governments taxing or borrowing and that fiscal deficits are something to be concerned about.
We saw it again last week in the discussion around the mini-Budget.
These misconceptions have dominated the last five decades. Unfortunately, Labour has been unable to escape from the misguided but longstanding monetarist doctrine.
We all laughed when John McDonnell said the only numbers in the 2017 Tory manifesto were the page numbers.
But John’s amusing soundbite was unwittingly reinforcing Margaret Thatcher’s specious pronouncement that “there is no such thing as public money … only taxpayers’ money.”
Although it’s trotted out ad nauseum, the “taxpayers’ money” notion is a sham.
The new shadow chancellor Anneliese Dodds is repeating the same errors as all her predecessors.
Her calls for a wealth tax on the richest to boost recovery from the coronavirus pandemic is the right policy but for the wrong reasons.
We need a wealth tax to reduce inequality, not to fund a fiscal stimulus, which can be easily delivered with a few keystrokes on the Treasury’s computer.
As Mark Twain said: “It ain’t what you know that gets you into trouble. It’s what you know for sure, that just ain’t so.”
Unlike countries in the eurozone, Britain has monetary sovereignty — in other words, it issues its own currency.
Moreover, in 1971 Richard Nixon ditched the Bretton Woods Agreement, which linked sterling to the US dollar, and the pound has been a floating currency ever since.
But ministers and MPs on both sides of the chamber have been either oblivious to these realities, or feigning ignorance, for almost 50 years.
The consequence of this fundamental misunderstanding has entrenched the tax and spend deficit myth, which is an ill-conceived creed with no basis in fact.
This deluded dogma has been incredibly damaging for working-class communities, because Conservative, Labour and coalition governments have all used the myth as justification for severe cutbacks.
The imposition of austerity by the coalition in 2010 and Labour in 1976 are just two examples.
Both were based on a completely false premise. George Osborne used the note, left by Liam Byrne, the outgoing chief secretary to the Treasury, saying “there is no money” as cover for the coalition’s austerity programme.
Similarly, chancellor Denis Healey negotiated a bailout for the Labour government from the International Monetary Fund (IMF) in 1976 to supposedly avoid a situation where Britain would run out of money.
But as Britain issues its own currency, it can never run out of money.
The ensuing public expenditure cuts demanded by the IMF paved the way for the Conservative election victory in 1979, and Thatcher’s full-throated monetarist mania that has held sway ever since.
The big question now is, how can we escape this misconceived monetarist maelstrom?
Modern Monetary Theory (MMT) offers us a lens to better understand what has been going on and gives us the tools to demand that policy-makers change course.
It has been gathering momentum in recent years, but a new book by leading MMT proponent Stephanie Kelton really blows the gaff on the confidence trick that successive governments have played on the public.
The Deficit Myth obliterates the basis for the long-running and economically illiterate status quo.
The book’s 263 pages could be a catalyst for the Copernican shift we need to create a people’s economy, making it essential reading for anyone interested in reducing inequality and eliminating poverty.
Kelton shatters the myth that has shackled Britain to a system that has served the interests of wealthy elites and corporations at the expense of everyone else.
She explodes the Thatcherite myth that government finances in nations like Britain are comparable to the finances of a domestic household.
In reality, there is no similarity whatsoever, because the government is a currency issuer while households are currency users.
She explains why fiscal deficits are not evidence of overspending, do not burden future generations and don’t crowd out private investment either.
She also makes clear that social security, including pensions, is eminently affordable and shows that foreign investors holding government bonds pose no threat to our economic wellbeing.
Tony Benn said if we can find money to kill people, we can find money to help people — and he was right.
When it comes to waging war or delivering tax cuts to the super-rich, money is no object, whereas calls for investment in public services and social security, or increased salaries for key workers in the public sector, are usually deemed unaffordable because of the impact on the fiscal deficit.
But it’s inflation not fiscal deficits that offer evidence of overspending, which can be generated by too much private sector as well as too much government spending.
Kelton challenges these perverse priorities and sets out the true purpose of taxation.
She details why it’s the availability of real resources in the economy, such as unemployed workers and spare industrial capacity, not the availability of money, that matters.
The deficits that we should be concerned about include the response to climate change, the deficit in well-paid jobs, public services, infrastructure, social security, healthcare, decent pensions, housing and education.
Of course, the reason why these deficits are not addressed is because of the deficit in our democracy, which she also tackles in her book.
Kelton challenges us to imagine a people’s economy and gives us the tools to make it happen. It’s up to us now.
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