Economics
Tax does not pay for government spending
I posted this video on YouTube this morning.
As I wrote in the explanatory note that accompanied it, probably the biggest challenge to understanding how the economics of governments really works comes from the need to understand that governments of the sort we have in the UK are not funded by taxes. They are funded by central bank money creation. Tax exists to control inflation (and tackle inequality, market failure and other things). Until it's appreciated that spending creates taxation and not that tax funds spending, nothing else about how the government works makes sense.
The transcript is as follows:
Taxes do not pay for government spending. It is one of the hardest things that anyone has to get their head around when they really come to understand economics. that taxes really do not pay for government spending. I promise you it's true.
Every single penny that the government spends is created by the government. Let's be totally honest, you do know that. If you pick up a five-pound note, it says, ‘I promise to pay the bearer on demand the sum of five pounds’.
They haven't paid the bearer on demand five pounds. They promise to pay the bearer on demand five pounds.
Why? Because money is debt and the government has created a debt to you.
So where does tax come into all that? Tax comes into all that because when you pay your taxes, the promise the government has made that it will accept your money in payment is fulfilled. They'll take your money back. in payment of your debt.
Let me be clear what happens then in the real financial world that we actually live in. Whenever the government spends it simply extends its overdraft with the Bank of England. Day in, day out, that's what happens. And then it asks us to pay tax because if it allowed all that money to float around the economy, of course we would get inflation remarkably quickly.
So, it asks us to pay tax to cancel the impact of the new money that it has created. And that cancellation is by taxation, and it's there to control inflation.
The spend comes first. It's paid for by money created by the Bank of England.
The tax comes second. It's there to control inflation, to ensure that the value of the money that we have in circulation remains broadly steady over time. That's the goal.
But it's never the case that the tax pays for the spending. The spending has to come first, or the money doesn't exist with which the tax can be paid. It's really that straightforward.
It takes a lot of effort to reverse what you've always thought, that tax pays for spending, to realise that spending actually pays for tax.
But it is literally true that without government spending, there could be no tax paid. There could be nothing, in fact, because there'd be no money at all.
So we have to get our heads around that fact because then we truly understand how the government functions and then we can talk about what it can do with this extraordinary power it has to create money at will, whenever it wishes, if it wants to, to deliver the outcomes that we as a society want, balanced by the taxation that we pay to control the inflationary consequences of doing so.
The Premier League is an oligopolist erecting effective barriers to market entry. What is anyone going to do about it?
As the Guardian notes this morning, this is the current state of the UK's football premier league:
There is, I promise, good economic reason for noting this.
The bottom three clubs in the league will be relegated at the end of the season, which is now just three games away. And it so happens that all three of those clubs now facing the likelihood of relegation were promoted from the second-tier league, the Championship, just one year ago. After a single season in the top flight of English football, they will very likely be returning whence they came.
The economic point that I am making is a very simple one. As is apparent to anyone who follows football, the English Premier League acts like an oligopoly. In other words, the well-established clubs within it make sure that it is organised to their advantage. They do, as a result, collect vastly more revenue than anyone else in the football. Their players are remunerated at extraordinary levels that would be exceptionally difficult to justify without this oligopoly power. In economic parlance, they earn rents on top of any reasonable level of reward they should enjoy. And, as is all too commonly the case when oligopoly exists, there are massive barriers to entry into this market, as the likely relegation of all three clubs that were promoted into it last year makes abundantly clear.
The current UK government has suggested that the UK needs a football regulator. I agree. One of the things that it needs to do is to control the abuse of market principles by the most powerful football clubs in the country. I am not anticipating that any such thing will happen. The idea that fair competition might prevail is, I think, very unlikely to win the support of those who might lose out as a result.
The biggest threat to the UK’s borders comes from climate change
Rishi Sunak was interviewed by Trevor Phillips on Sky News this morning. He was petulant, pedantic, defensive of his record and simultaneously aggressive towards Phillips, whilst also being inappropriate and evasive. Apart from that, the interview went well.
I do, however, wish to ignore all those points and pick up an issue which he did not, of course highlight. Nor did Phillips.
Sunak’s claim was that we have to increase defence spending in the UK as part of our programme of defending our borders. It’s all very Trumpian.
Simultaneously, he was adamant that we have to ‘stop the boats’, and that those words should be interpreted in accordance with their plain meaning. In other words, he was saying that there should be no more of what he describes as illegal immigration, even though the vast majority of people crossing the Channel do so legally, meaning he entirely misdescribes the problem.
In all this Sunak downgrades the significance of any measures to tackle climate change. He has no interest in doing that. Trump does not believe climate change is real, so nor can Rishi. In doing so he does, however, miss the glaringly obvious point, which is that the biggest threat to our borders comes from climate change.
We face the threat of serious inundation of large parts of the country from floodwater, whilst anyone who pretends that climate change will not create refugees in record numbers is straightforwardly in denial of a glaringly obvious truth that is staring us in the face.
That is what Sunak is now doing.
Unfortunately, it seems to be what Labour is doing as well.
We have a particular problem there seem to be no grown-up thinkers in UK politics right now who can look at the underlying long-term causes of the issues that we face and base policy upon addressing those issues so that we might anticipate and even prevent problems arising. They prefer short-term posturing instead.
It would really help if we could have politicians who could think beyond their need for instant gratification right now, but Labour and the Tories (at least) do not seem capable of providing them.
Large company accounts are works of fiction
I have this morning posted this video on YouTube, addressing an issue of accounting and transparency that matters to me.
I think the format for accounting used by large companies might provide data of use to financial markets. However, the impression that these accounts give to the world is also seriously misleading, not least because they suggest that a company undertakes transactions that it has never had legal responsibility for.
Most people need different data from that which large companies provide about themselves. They need detailed information about the individual trading entities that those large companies own, wherever they might be in the world, and a great deal of that data is still too often hidden from view by the accounts that large companies present. It’s time that these largest companies were a great deal more transparent about themselves.
The transcript is here:
The accounts of large companies in the UK are complete works of fiction. Now, I don't make that claim lightly. I make it because that's, well, completely true.
If you pick up the accounts of any large company - the bank that you probably save with, or an energy company like BP or Shell, or the companies who are going to supply you with your water if you live in some parts of the country, or the energy suppliers, or a retailer - the accounts that you'll pick up are really big.
If you've got a physical copy, hundreds of pages - and they are literally a work of fiction. Why? Because those accounts are presented as if they are the financial performance of the parent company. Call it Marks and Spencer PLC, call it Tesco PLC, or Barclays PLC, whoever it might be. It literally makes no difference. Those accounts pretend that they are the trading of that particular parent company. But, every single one of those companies operates through very large numbers of subsidiary companies.
In other words, if you go into a supermarket, you don't buy from Tesco PLC. You'll buy from Tesco Stores or something like that.
If you go into a bank in the UK, you will probably not trade with the parent company but with its banking subsidiary.
If you deal with a manufacturing company, you won't deal with the parent company. You'll deal with the company that operates the particular site where you are buying from or selling to.
Now this really matters because, first of all, there is literally no company that undertakes the transactions that are reflected in those accounts, which is why I call them a work of fiction. They are simply created by adding together in a very particular way the accounts of all those subsidiary companies.
And I say in a very particular way because in accounting we call it consolidation, and that means we take out of view all the transactions between the subsidiary companies - which is where vast amounts of tax abuse takes place, by the way - and exactly how tax abuse in tax havens always occurred.
So first of all, we don't see the true picture about what's going on with regard to the true level of trading within the group and between group companies.
And secondly, if we're trading with a particular subsidiary, or if you're employed by a subsidiary, the fact that the group as a whole might claim to have great performance doesn't mean to say that the part of the group that you're interested in - who might owe you money, who might employ you, who might be polluting your environment, or whatever else it might be - you don't know how they're doing.
Nor do you know if they're paying tax.
And you also don't know if you look at the group as a whole, how much of its activity is hidden in tax havens or anywhere else. Where in the world is it operating?
Large companies might want to present this particular view to the world as if they are a single entity, which makes their shareholders very happy. But the rest of us who deal with that group need to know, who are you?
What companies do you own?
Where are you?
Where are you trading in the world?
What do you do? Because no group does just one thing.
How many people do you employ?
How much profit you make in that activity?
So, will that particular activity survive?
Do you pay your tax?
How much is invested in this? Because if that money is withdrawn from your community, it might have a real impact.
Something called country-by-country reporting, an idea that I created in 2003, and which was endorsed by OECD - the Organisation for Economic Cooperation and Development, based in Paris, in 2015 - would deliver that information for us, but as yet, it's not on public record in the UK.
We need it because we need to end the fiction that one set of accounts will tell us everything that a large company is doing and we need to find out what it is doing in every single one of its subsidiaries as well. And we can never do that at present because they aren't required to even put the full list of their company names in their accounts.
And they aren't required to put a copy of the subsidiary accounts for every company that they own on their website.
Those last two things will make a big difference. Talking about what is going on in all their subsidiaries in clear, unambiguous language to everybody they engage with is critical if they're to have the license to operate that we as a society give them. And we aren't, as yet, getting a fair bargain in that process.
Labour’s plan for rail nationalisation make sense – but do not go far enough
I posted this video on YouTube this morning. It is a particularly current topic. Railways are an issue in which I have particular interest. I first read a textbook on the economics of the nationalised rail industry in 1975. I still have it somewhere. And I have never changed my opinion about the importance of state control of our railways. In that case Labour’s plans appeal to me, but I have reservations. Watch on….
The transcript is:
Labour's plans for renationalising our railways make sense as far as they go, but they don't go far enough.
Let's talk about the basics of this. The basic fact is that railways should never have been privatised. As long ago as a century ago, in 1923, Winston Churchill and others realised that the idea that private companies could run railways was really rather bizarre because that imposed enormous cost and did not create competition, simply because there's rarely going to be more than one set of tracks between two places in the country. Sometimes, but rarely.
And so it made sense to bring companies under common control. Now in 1923, they backed off nationalisation and instead went for something called ‘the grouping’. There were four large companies in the UK. That didn't really work. Frankly, it didn't produce the benefits they wanted. So, in 1948 we got British Railways.
That worked until the era of the 1970s when a lack of finances, or what the Labour Party and the Tories of that period thought were a lack of finances, undermined the delivery of a combined new rail network, because of underinvestment in the main. And then we limped towards privatisation, which was meant to bring in vast amounts of new private capital to transform our railways.
Let me give you some numbers. In the last year, 2022-23 - that's the last one we've got data for - we know that the government subsidised the UK railway system by nearly £20 billion in a year. Now that was much higher than before Covid, but that's the total cost. The total amount of private capital that was brought in by the railway operating companies was just 4 percent of that total.
So let's not pretend we have an effective privatisation model of railways right now. We haven't. We've got a nationalised system of railways already, and we need that system because it will deliver efficiencies.
I bet you, if you travel regularly on railways like I do, you have suffered the problem of arriving in a station to see the connection that you were hoping to make disappearing because it's run by another train operating company than the one that you came in on and they are not required to coordinate with each other.
If we have an integrated railway, which is what I hope Labour will try to deliver, then such things shouldn't happen. The customer, and not the profits of the operating company, should come first. So, if Labour do that, we should get benefit.
And they will be able to fund benefit, because nationalised railways are cheaper to run.
Why? Because there's vastly less accounting to do. Nobody has to agree who's responsible for a train running late. It doesn't matter whether it's the operator, RailTrack, or somebody else. It's late, and the compensation is due. Hundreds of people have to work that out at present.
There's also no problem with ticketing. If I move from where I am in East Anglia to, say, Lancashire, I'll go through several railway operating companies to get the journey completed. They have to agree how they split the ticket. Now you can say there's a formula to do that, but setting the formula still takes time.
And the point is, all those costs will be saved. Everything should work better as a nationalised railway.
But one thing - and this is where Labour's plans don't go far enough - Labour needs to have its own train leasing company, because right now all the trains run on all the British railways are leased by three companies to the railway operating companies, and those leasing companies make a fortune.
They make around 25 percent of what they charge to the railway companies a year - probably a billion in profit. That's excessive, unnecessary, inappropriate, call it what you will. Labour has to invest in its own trains for the future.
The average train in the UK is 16 years old. We now need new investment. We need to maintain the ability to make trains in the UK. We need to do so persistently. Labour has to also fund it with government because that will be cheaper than the option of using private finance. We know that. Labour has to genuinely believe in nationalisation.
Its claim that it's not interested in dogma when it comes to this issue is ridiculous. It should be interested in economics and the economics of this demand a nationalised railway service.
Labour, stop prevaricating. Deliver what this country needs. And that is a nationalised railway service.
Why Kemi Badenoch was wrong about the Glorious Revolution
It is a week or so ago now that Kemi Badenoch claimed that it was wrong to suggest that the wealth of the UK was founded on the basis of its slave-owning and imperial past. She did, instead, suggest that the foundations of modern British wealth could be found in the relationships embedded in the Glorious Revolution that ended the rule of the Stuarts and brought William and Mary to the throne in 1688.
In a post I published here I expressed my considerable doubt about this claim, with reasons given.
In response a commentator named Steve Cushion offered a much more detailed analysis. He has, since then, explained that this comes from academic research that he has been undertaking on behalf of Caribbean Labour Solidarity, who have published his work here.
I did, however, feel it worth promoting both that paper and his original comment as a weekend read on the blog, just to show how utterly unfounded is the claim made by people like Badenoch.
This is the comment that he posted:
A different explanation of the “Glorious Revolution”
The Royal African Company, which had a monopoly on the trafficking of enslaved Africans, acted as a means for the Stuart royal family, Charles II and James II, to finance their dictatorial rule without Parliamentary sanction, while personally enriching themselves and their associates and backers from the City of London. However, denying other City of London businessmen, as well as traders based in other cities, access to this profitable trade was one of the reasons the increasingly powerful capitalist class in England turned against Catholic King James II. It led to their support for the 1688 invasion from the Netherlands, led by Protestant William of Orange and James’s daughter Mary Stuart, resulting in the coup d’état known as the Glorious Revolution. Opposition to the monopoly of the Royal African Company also came from the owners of the slave plantations in the West Indies, whose increased wealth enabled them to buy growing influence in the British Parliament. The Royal African Company could not supply enough enslaved labourers to meet the West Indian landowners’ requirements for the growing slave-based economy. At the same time, restricting the numbers shipped by the Company enabled it to exploit its monopoly to force up the price of enslaved Africans.
Pressure from those businessmen excluded from the trade, as well as the demands of the West Indian plantation owners for ever increasing supplies of enslaved labour, forced Parliament to pass the Trade with Africa Act 1697. This opened the slave trade to all English merchants who paid a ten per cent levy to the Company.
Colonial commerce, including the business of slavery, was one of the driving forces of the capitalist economy from its earliest manifestation, encouraging the expansion of a manufacturing economy. Exports from Britain accounted for around half of all industrial production in the 18th century. Inikori tells us that, in 1770, the slave trade and the plantation economy furnished as much as fifty-five percent of gross fixed capital formation investment in Great Britain.
The increased rate of industrial growth based on exports depended on purchasing power generated by the British West Indies. Demand stemming from Africa, the Caribbean and North America based on the sugar industry was responsible for more than half of the growth of English exports in the third quarter of the eighteenth century. The business of slavery greatly contributed to increasing investment in the British Empire, particularly the construction of the infrastructure that such trade required. Additionally the re-export of sugar to the Europe brought enormous profits. Half of the non-agricultural workforce in England and Wales was employed in production for export, accounting for much of the growth in manufacturing output.
Based on: Patrick K. O’Brien and Stanley L. Engerman, “Exports and the growth of the British economy from the Glorious Revolution to the Peace of Amiens in Barbara Solow (ed.), Slavery and the Rise of the Atlantic System (Cambridge: Cambridge University Press, 1994) and Joseph E. Inikori, Africans and the Industrial Revolution in England (Cambridge: Cambridge University Press, 2002)
The non-existence of economic laws
In mainstream economics, there’s — still — a lot of talk about ‘economic laws.’ The crux of these laws — and regularities — that allegedly exist in economics, is that they only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at hand to give rise to them. […]
Penalties on carers make clear that we are being governed by people who do not care
As the Guardian has noted:
New figures show more than 150,000 unpaid carers are now facing huge fines for minor rule breaches, as MPs, charities and campaigners demanded an immediate amnesty.
They added:
The Guardian can reveal 156,000 unpaid carers are repaying severe penalties – in some cases tens of thousands of pounds – for often unwittingly overstepping the £151-a-week earnings limit while caring for a loved one.
11,600 carers hit by the penalties are paying back sums of more than £5,000. About one in five unpaid carers in work breached the strict weekly earnings limit last year, an illustration, campaigners say, of a broken system.
The last point is the key one. Of course, benefits have to be limited as to who can claim them. But benefits also have to recognise the realities of life - where rigid control of everything that happens within chaotic real-world situations - as the lives of carers usually are - cannot be controlled. That is most especially true when care-giving is the absolute and necessary priority of those providing it.
A system that does not provide for that is callous.
A penalty system that imposes costs way in excess of the loss suffered by the government, as this one does, is beyond callous.
Creating the capacity to pursue claims that impose poverty when the object of this benefit was to relieve it is indicative of a mindset that has lost touch with reality.
Of course, if there is fraud, chase it, but I very much doubt that many of these claims involve fraud. They refer to simple human error. In that case, there should be forgiveness in most cases, coupled (perhaps) with repayment, at most, of a part of the sum overpaid, representing a fair tax rate (ten per cent?) on the excess earnings not declared.
But so long as this persecution continues, we are living in a country governed by a political party that shows it just does not care.
Why more government spending can require more tax revenue
I posted this video, which explains why more government spending in the UK is likely to require more tax revenue to be raised, at least whilst the benefits of that spending are generated if infaltion is to be avoided, on YouTube this morning:
The transcript is:
Do we need to raise more taxes if the government is going to spend more? It's a really important question and one that people are asking me because I've written the Taxing Wealth Report. That shows that the government could, by simply changing the rules on some of our taxes with regard to the way that they impact on the wealthiest people in our society, raise up to maybe £90 plus billion of extra tax a year.
So, people are saying to me, do you think that's what we should do? And is that a precondition of making the extra spending that we want? Let me explain what the relationship between government spending, money and tax is, because that provides the answer to the question.
The government creates our money.
If you doubt it, look at a five-pound note. Who made it? Ultimately, all the money in our economy was made by the government, just like that fiver.
I know some of it is theoretically created by banks, but they can only do it because the Bank of England gives them a license to do so, and who owns the Bank of England? The government does. So, in other words, all the money that is ultimately created is done by or under license from the UK government.
How does that money get into circulation? In the case of the government, and they start the whole process rolling, it is by spending. That five-pound note was not gifted to somebody by the government, it was spent into the economy.
They used the fiver - of course they could have used a bank account as well, but in this case we'll say the fiver - to buy something. They spent. And then they taxed. It has to be that way round, because if they hadn't spent first of all, there wouldn't be the money in existence to pay the tax.
So, it's always spend and tax and never tax and spend in an economy.
But when we look at spend and tax, the tax element is there for one very important reason, and that is to cancel the spend. If the government did not tax, and it spent £800 plus billion a year into the UK economy, and therefore let all that money float free, we would of course have massive inflation.
Now, that obviously isn't possible, so therefore, you have to tax to prevent inflation. That's its primary purpose.
All its other functions - redistribution, repricing market failure, reorganizing the economy through fiscal policy, and so on. - those things are all secondary - important - but secondary to cancelling inflation.
Now, if we are at or near full employment, and we want to spend more - the government wants to spend more - the risk is that it will create inflation by doing so. So, if, as at this point of time, we are either at full employment or we have unused resources that can only be put into use gradually, we have to tax whilst those resources are put into use or else we create inflation in the meantime.
Then we could go into a vicious downward cycle, the benefit of that spend would not be received by society, and therefore things would fall apart. So, the tax is put into place because of the additional spend, but not to fund it. It is part of the transition process to let us grow, that we must tax more.
And that is why the Taxing Wealth Report talks about raising more revenue, because these issues are fundamentally related.