taxation
Austerity. The Past That Doesn’t Pass
[As usual lately, this is a slightly edited AI translation of a piece written for the Italian Daily Domani]
The European Commission recently revised downwards its forecasts for both growth and inflation, which continues to fall faster than expected. In contrast to the United States, there is no “soft landing” here. As argued by many, monetary tightening has not played a major role in bringing inflation under control (even as of today, price dynamics are mainly determined by energy and transportation costs). Instead, according to what the literature tells us on the subject, it is starting, 18 months after the beginning of the rate hike cycle, to bite on the cost of credit, therefore on consumption, investment and growth.
This slowdown in the economy is taking place in a different context from that of the pandemic. Back then, central bankers and finance ministers all agreed that business should be supported by any means, a fiscal “whatever it takes”. Today, the climate is very different, and public discourse is dominated by an obsession with reducing public debt, as evidenced by the recent positions taken by German Finance Minister Lindner and the disappointing reform of the Stability Pact. The risk for Europe of repeating the mistakes of the past, in particular the calamitous austerity season of 2010-2014, is therefore particularly high.
In this context, we can only look with concern at what is happening in France, where the government also announced a downward revision of the growth forecast for 2024, from 1.4% to 1%. At the same time, the Finance Minister Bruno Le Maire announced a cut in public spending of ten billion euros (about 0.4% of GDP), to maintain the previously announced deficit and debt targets. This choice is wicked for at least two reasons. The first is that it the government plans making the correction exclusively by cutting public expenditure, focusing in particular on “spending for the future”. €2 billion will be taken from the budget for the ecological transition, €1.1 billion for work and employment, €900 million for research and higher education, and so on. In short, it has been chosen, once again, not to increase taxes on the wealthier classes but to cut investment in future capital (tangible or intangible).
But regardless of the composition, the choice to pursue public finance objectives by reducing spending at a time when the economy slows, down goes against what economic theory teaches us; even more problematic, for a political class at the helm of a large economy, it goes against recent lessons from European history.
The ratio of public debt to GDP is usually taken an indicator (actually, a very imperfect one, but we can overlook this here) of the sustainability of public finances. When the denominator of the ration, GDP, falls or grows less than expected, it would seem at first glance logical to bring the ratio back to the desired value by reducing the debt that is in the numerator, i.e. by raising taxes or reducing government spending. But things are not so simple, because in fact the two variables, GDP and debt, are linked to each other. The reduction of government expenditure or the increase of taxes, and the ensuing reduction of the disposable income for households and businesses, will negatively affect aggregate demand for goods and services and therefore growth. Let’s leave aside here a rather outlandish theory, which nevertheless periodically re-emerges, according to which austerity could be “expansionary” if the reduction in public spending triggers the expectation of future reductions in the tax burden, thus pushing up private consumption and investment. The data do not support this fairy tale: guess what? Austerity turns out to be contractionary!
In short, a decline in the nominator, the debt, brings with it a decline in the denominator, GDP. Whether the ratio between the two decreases or increases, therefore, ends up depending on how much the former influences the latter, what economists call the multiplier. If austerity has a limited impact on growth, then debt reduction will be greater than GDP reduction and the ratio will shrink: albeit at the price of an economic slowdown, austerity can bring public finances back under control. The recovery plans imposed by the troika on the Eurozone countries in the early 2010s were based on this assumption and all international institutions projected a limited impact of austerity on growth. History has shown that this assumption was wrong and that the multiplier is very high, especially during a recession. A public mea culpa from the International Monetary Fund caused a sensation at the time (economists are not known for admitting mistakes!), explaining how a correct calculation gave multipliers up to four times higher than previously believed. In the name of discipline, fiscal policy in those years was pro-cyclical, holding back the economy when it should have pushed it forward. The many assistance packages conditioning the troika support to fiscal consolidation did not secure public finances; on the contrary, by plunging those countries into recession, they made them more fragile. Not only was austerity not expansive, but it was self-defeating. It is no coincidence that, in those years, speculative attacks against countries that adopted austerity multiplied and that, had it not been for the intervention of the ECB, with Draghi’s whatever it takes in 2012, Italy and Spain would have had to default and the euro would probably not have survived.
Since then, empirical work has multiplied, with very interesting results. For example, multipliers are higher for public investment (especially for green investment) and social expenditure has an important impact on long-term growth. And these are precisely the items of expenditure most cut by the French government in reaction to deteriorating economic conditions.
While President Roosevelt in 1937 prematurely sought to reduce the government deficit by plunging the American economy into recession, John Maynard Keynes famously stated that “the boom, not the recession, is the right time for austerity.” The eurozone crisis was a colossal and very painful (Greece has not yet recovered to 2008 GDP levels), a natural experiment that proved Keynes right.
Bruno Le Maire and the many standard-bearers of fiscal discipline can perhaps be forgiven for their ignorance of the academic literature on multipliers in good and bad times. Perhaps they can also be forgiven for their lack of knowledge of economic history and of the debates that inflamed the twentieth century. But the compulsion to repeat mistakes that only ten years ago triggered a financial crisis, and threatened to derail the single currency, is unforgivable even for a political class without culture and without memory.
Limitarianism: The Case Against Extreme Wealth – review
In the face of soaring wealth inequality, Ingrid Robeyns‘ Limitarianism: The Case Against Extreme Wealth calls for restrictions on individual fortunes. Robeyns puts forward a strong moral case for imposing wealth caps, though how to navigate the political and practical hurdles involved remains unclear, writes Stewart Lansley.
Watch a YouTube recording of an LSE event where Ingrid Robeyns spoke about the book.
Limitarianism: The Case Against Extreme Wealth. Ingrid Robeyns. Allen Lane. 2023.
Ingrid Robeyns’ Limitarianism is the latest in a long line of critiques – such as Thomas Piketty’s Capital and Branko Milanovic’s Visions of Inequality – of the soaring wealth and income gaps of recent decades. Limitarianism focuses on personal wealth, which is much more unequally distributed than incomes, and is arguably the most urgent of these trends. It draws most closely on the United States, where, according to Forbes, nine of the world’s top 15 billionaires are citizens.
Robeyns argues that given the wider damage from the enrichment of the few, with its negative impact on economic strength and on wider life chances and social resilience, we must now impose a limit on individual wealth holdings. Thinkers have been making the case for this “limitarianism” and the capping of business rewards for centuries. The Classical Greek Philosopher, Plato, argued that political stability required the richest to own no more than four times that of the poorest. The Gilded Age financier, J. P. Morgan – one of the most powerful of American plutocrats of the nineteenth century – maintained that executives should earn no more than twenty times the pay of the lowest paid worker. In 1942, President Roosevelt proposed a 100 percent top tax rate, stating that “[n]o American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year (about $1m in today’s terms).” “The most forthright and effective way of enhancing equality within the firm would be to specify the maximum range between average and maximum compensation”, wrote the influential American economist J. K. Galbraith in 1973.
The Gilded Age financier, J. P. Morgan […] maintained that executives should earn no more than twenty times the pay of the lowest paid worker.
One of the effects of the 2008 financial crisis was to trigger a debate about the role played by excessive compensation packages in banking. Others have argued that the introduction of guaranteed minimum wages – which limits employer freedom over employees – should come with a maximum too. As wealth inequality has deepened in recent decades, there have been growing calls for measures to reduce this concentration, not least among some members of the global super-rich club. Yet there has been perilously little political action. Each year the world’s mega-rich, facing few constraints, carry on appropriating a larger share of national and global wealth pools.
Robeyns sets out a powerful moral case against today’s wealth divide and asks the all-important question: “how much is too much?”. She calls for setting limits to the size of individual fortunes that would vary across countries. In the case of the Netherlands, where she lives, “we should aim to create a society in which no one has more than €10m. There shouldn’t be any decamillionaires.” This, she argues should be politically imposed. She also adds a second aspirational goal, an appeal to a new voluntary moral code applied by individuals themselves: “I contend that … the ethical limit [on wealth] will be around 1 million pounds, dollars or euros per person.”
Although there are many critics who dismiss the philosophical concept as either unfeasible or undesirable, history suggests the idea is far from utopian. Limits operated pretty effectively among nations – including the UK and the US – in the post-war decades and became an important instrument in the move towards greater equality.
War has long proved a powerful equalising force, and the post-1945 decades brought peak egalitarianism.
War has long proved a powerful equalising force, and the post-1945 decades brought peak egalitarianism. States shifted from their pre-war pro-inequality role to become agents of equality. This brought (albeit temporary) upward pressure on the lowest incomes and downward pressure on the highest. These limits operated in two ways: through regulation and taxation, and changes in cultural norms. Nations imposed highly progressive tax systems, with especially high tax rates at the top – that were sustained in the UK until the 1980s – the expansion of protective welfare states, and a shift in bargaining power from the boardroom to the workforce.
These policies were also enabled by a significant pro-equality cultural shift. This brought a tighter check on top business rewards and the size of fortunes. Until the early 1980s, business behaviour became more restrained, and wealth gaps narrowed. The kind of business appropriation that has become so widespread today would, for the most part, have been unacceptable to public and political opinion then. Gone were the public displays of extravagance and the high living of the inter-war years. Up to the 1970s, and the return of what Edward Heath called the “unacceptable face of capitalism”, executive salaries in the UK were moderated by a kind of hidden “shame gene”, an unwritten social code – similar in some ways to Robeyns’ call for voluntary limits – which acted as a check on greed. It was a code that was largely adhered to, partly because of fear of public outrage towards excessive wealth.
Up to the 1970s, and the return of what Edward Heath called the ‘unacceptable face of capitalism’, executive salaries in the UK were moderated by a kind of hidden ‘shame gene’
Robeyns is making a conceptual case. She doesn’t give much detail of how limitarianism might work in practice, and doesn’t draw lessons from the post-war experience (though this was the product of the particular circumstances of the time). She recognises the hurdles needed to make the politics of limitarianism a reality. There are plenty of questions of detail that would need to be settled. How, as a society, would we determine the appropriate “rich lines” above which is too much? Would the “undeserving rich” whose wealth is achieved by extraction that hurts wider society, be treated differently from the ‘deserving’ who through exceptional skill, effort and risk-taking, create new wealth in ways that benefit others as well as themselves?
The expectation that the tremors of the 2008 meltdown would trigger a shift towards a more progressive governing philosophy that embraced a more equal sharing of wealth has failed to materialise.
The greatest hurdle is political. The expectation that the tremors of the 2008 meltdown would trigger a shift towards a more progressive governing philosophy that embraced a more equal sharing of wealth has failed to materialise. The pro-market, anti-state politics of recent decades are now largely discredited. International Monetary Fund staff, for example, have called neoliberal politics “oversold”. There are widespread calls for the reset of capitalism, with as Robeyns puts it, “a more considerate, values-based economic system”. Although such a system may yet emerge, there are few signs of the kind of value-shift and new cultural norms that would be a pre-condition for a politics of restraint and limitarianism.
This post gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science.
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Abby Innes introduces Late Soviet Britain: Why Materialist Utopias Fail
In an excerpt from the introduction to her new book, Late Soviet Britain: Why Materialist Utopias Fail, Associate Professor of Political Economy at LSE’s European Institute Abby Innes considers how factors including the rise of neoliberalism have destabilised Britain’s governing institutions.
Late Soviet Britain: Why Materialist Utopias Fail. Abby Innes. Cambridge University Press. 2023.
Find this book: 
Why has Great Britain, historically one of the strongest democracies in the world, become so unstable? What changed? This book demonstrates that a major part of the answer lies in the transformation of its state. It shows how Britain championed radical economic liberalisation only to weaken and ultimately break its own governing institutions. This history has direct parallels not just in the United States but across all the advanced capitalist economies that adopted neoliberal reforms. The shattering of the British state over the last forty years was driven by the idea that markets are always more efficient than the state: the private sector morally and functionally superior to the public sector. But as this book shows, this claim was ill-founded, based as it was on the most abstract materialist utopia of the twentieth century. The neoliberal revolution in Great Britain and Northern Ireland – the United Kingdom – has failed accordingly, and we are living with the systemic consequences of that failure.
Britain championed radical economic liberalisation only to weaken and ultimately break its own governing institutions.
The rise of nationalist populism in some of the world’s richest countries has brought forward many urgent analyses of contemporary capitalism. What this book offers, by contrast, is the explanation of a dark historical joke. It explores for the first time how the Leninist and neoliberal revolutions fail for many of the same reasons. Leninism and neoliberalism may have been utterly opposed in their political values, but when we grasp the kinship between their forms of economic argument and their practical strategies for government, we may better understand the causes of state failure in both systems, as well as their calamitous results.
Comparing the neoclassical and Soviet economic utopias, [w]hat emerges are mirror images – two visions of a perfectly efficient economy and an essentially stateless future.
Britain’s neoliberal policies have their roots in neoclassical economics, and Part I begins by comparing the neoclassical and Soviet economic utopias. What emerges are mirror images – two visions of a perfectly efficient economy and an essentially stateless future. These affinities are rooted in their common dependence on a machine model of the political economy and hence, by necessity, the shared adoption of a hyper-rational conception of human motivation: a perfect utilitarian rationality versus a perfect social rationality. As the later policy chapters demonstrate, these theoretical similarities produce real institutional effects: a clear institutional isomorphism between neoliberal systems of government and Soviet central planning.
When it comes to the mechanics of government, both systems justify a near identical methodology of quantification, forecasting, target setting and output-planning, albeit administrative and service output-planning in the neoliberal case and economy-wide outputs in the Soviet. Since the world in practice is dynamic and synergistic, however, it follows that the state’s increasing reliance on methods that presume rational calculation within an unvarying underlying universal order can only lead to a continuous misfit between governmental theory and reality. These techniques will tend to fail around any task characterised by uncertainty, intricacy, interdependence and evolution, which are precisely the qualities of most of the tasks uploaded to the modern democratic state.
In neoliberalism, the state has been more gradually stripped of its capacity for economic government
The Soviet and neoliberal conceptions of the political economy as a mechanism ruled by predetermined laws of economic behaviour were used to promote pure systems of economic coordination, be that by the state or the market. Leninism, as it evolved into Stalinist command planning, dictated the near-complete subordination of markets to the central plan. In neoliberalism, the state has been more gradually stripped of its capacity for economic government and, over time, for prudential, strategic action, as its offices, authority and revenues are subordinated to market-like mechanisms. Both Soviet and neoliberal political elites proved wildly over-optimistic about the integrity of their doctrines, even as they demonised the alternatives.
For all their political antipathy, what binds Leninists and neoliberals together is their shared fantasy of an infallible ‘governing science’ – of scientific management writ large. The result is that Britain has reproduced Soviet governmental failures, only now in capitalist form. When we understand the isomorphism between Soviet and neoliberal statecraft, we can see more clearly why their states share pathologies that span from administrative rigidity to rising costs, from rent-seeking enterprises to corporate state capture, from their flawed analytical monocultures to the demoralisation of the state’s personnel and, ultimately, a crisis in the legitimacy of the governing system itself. This time around, however, the crisis is of liberal democracy.
The book’s policy chapters in Part II explore how the neoliberal revolution has transformed the British state’s core functions in the political economy: in administration, welfare, tax and regulation and the management of future public risk.
After setting out the philosophical foundations of these ideologies, the book’s policy chapters in Part II explore how the neoliberal revolution has transformed the British state’s core functions in the political economy: in administration, welfare, tax and regulation and the management of future public risk. In Part III I examine the political consequences of these changes, and demonstrate how Britain’s exit from the European Union has played out as an institutionally fatal confrontation between economic libertarianism and reality. The final chapter considers how the neoliberal revolution, like its Leninist counterpart, has failed within the terms by which it was justified and instead induced a profound crisis not only of political and economic development but also of political culture.
Under ‘late’ neoliberalism we can see a similar moment of political hiatus, as neoliberal governments likewise resort to nationalism and the politics of cultural reaction to forestall public disillusionment and a shift in paradigm.
I use different periods of Soviet history as an analytical benchmark throughout the book, but the Brezhnev years (1964–1982) were those of the fullest systemic entropy: the period of ossification, self-dealing and directionless political churn. Under ‘late’ neoliberalism we can see a similar moment of political hiatus, as neoliberal governments likewise resort to nationalism and the politics of cultural reaction to forestall public disillusionment and a shift in paradigm. I use the United Kingdom as the case study because it was both a pioneer of these reforms and, in many respects, has gone furthest with them. If neoliberalism as a doctrine had been analytically well-founded, it was in the United Kingdom, with its comparatively long and strong liberal traditions, that we should have seen its most positive outcomes.
By the early 2020s the Conservative government of Boris Johnson had sought to criminalise peaceful protest, to constrain media independence and to insulate the political executive from parliamentary and public scrutiny.
To be clear, Britain’s neoliberals were never totalitarians of the Soviet variety. They never used revolutionary violence to create a one-party state, deployed ubiquitous intelligence agencies to enforce repression or used systems of mass incarceration and murder for political ends. Britain’s neoliberal consensus has nevertheless favoured a one-doctrine state, and the violent suppression of specific, typically economy-related, protests has been a periodic feature of its politics since 1979. Britain’s neoliberal governments have also developed an increasingly callous attitude to social hardship and suffering. Most troubling of all is that the more neoliberalism has been implemented, the more the country has been driven to the end of its democratic road. By the early 2020s the Conservative government of Boris Johnson had sought to criminalise peaceful protest, to constrain media independence and to insulate the political executive from parliamentary and public scrutiny. In short, it had abused its authority to disable legitimate political opposition. What I hope to explain is why any regime that commits itself to neoliberal economics must travel in this direction or abandon this ideology.
What follows is an argument about the collapse of the empiricist political centre and its replacement by utopian radicalism. Specifically, this is a story of how the pioneering and socially progressive philosophy of liberalism is being discredited by utopian economics and the practically clientelist methods of government that follow from it, just as the politics of social solidarity essential to a civilised world was undermined by the violence and corruption of the Soviet experiment. As the old Soviet joke had it, ‘Capitalism is the exploitation of man by man. Communism is its exact opposite.’ There are, of course, many challenges distinct to neoliberalism and I pay attention to them, but my purpose here is to see what we can learn about the political economy of the neoliberal state when we look at it through the lens of comparative materialist utopias.
Note: This excerpt from the introduction to Late Soviet Britain: Why Materialist Utopias Fail by Abby Innes is copyrighted to Cambridge University Press and the author, and is reproduced here with their permission.
This post gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science. The LSE RB blog may receive a small commission if you choose to make a purchase through the above Amazon affiliate link. This is entirely independent of the coverage of the book on LSE Review of Books.
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Inflation as a tax
Last week I explored how Henry VIII resorted to coin debasement as a way to raise revenues in order to fight his wars. This provided Henry with the financial firepower to annex the city of Boulogne from the French in 1544, albeit at the price of England experiencing one of its greatest inflations ever.
Zoom forward five hundred years and Rishi Sunak, the Prime Minister of the UK, has ignited a controversy by referring to inflation as a tax, and further suggesting that the "best tax cut I can deliver for the British people is to halve inflation." His BBC interviewer disputed the claim, saying that inflation isn't a tax, a stance that the BBC upholds on its fact checking page.
Rishi Sunak, "The best taxt cut that I can deliver for the British people is to halve inflation."
Laura Kuenssberg, "Inflation is not a tax"
Rishi Sunak, "Inflation is a tax" pic.twitter.com/6LgMbeaprY
— Farrukh (@implausibleblog) October 1, 2023
If you recall, my previous article showed how Henry VIII's debasement functioned very much like a tax, say a new customs duty on wine or a beard tax. It did so by incentivizing people to flock to English mints to have their precious metals turned into coinage, Henry extracting a small fee on each coin. But the 21st century monetary system is very different from that of the middle ages. Is Rishi Sunak right to characterize inflation as a tax?
First, we need to better define our terms.
What do the BBC interviewer and Sunak mean by inflation? In the western world, prices have been rising at a regular pace of 2-3%
each year for decades as result of central bank policy, which targets a
low and steady inflation rate. Is this the definition they are using? Alternatively, Sunak and his interviewer may be referring to inflation as a *change in the change* in price. Since 2022 or so, that 2-3% rate has leapt to 8-9% all over the western world. Is it this jump that Sunak and his interviewer are talking about?
For the sake of this article, we'll assume that the conversation between Sunak and the BBC refers to the latter, a spike in the rate of inflation.
Secondly, what is meant by the word tax? Sometimes when we say that something is a tax we mean that it causes suffering. That is, inflation is taxing: it makes people's lives harder by increasing the cost of living, with salaries failing to keep up. It creates unfair changes in winners and losers.
Fair enough. But the more precise view I want to broach in this article is that inflation is actually a tax, where we define a tax as a formal charge or levy, set by the political process, that leads to cash flowing from the population to the government.
What does the data show?
Interestingly, a surprise jump in inflation leads to the very same effects as a new tax. All things staying the same, a new tax leads to an increase
in government revenues. This improves the government's fiscal balance,
or the difference between its revenues and expenses. A recent IMF paper by Daniel Garcia-Macia using data from 1962 to 2019 shows how an inflation shock typically achieves this exact same end result, boosting government revenues and improving its fiscal balance. This effect lasts for a few quarters, even up to two or three years, then recedes.
The IMF's chart below breaks down exactly how an inflation shock tends to improve government finances using quarterly data going back to 1999:
Charts source: IMF
Total tax revenue (the first panel) immediately begins to rise after the inflation shock at about the same rate as inflation.That's because most taxes are set by reference to values or prices, say like the prices of goods and services, or the price of labor, or the value of corporate profits. Since inflation pushes these amounts higher, this gets quickly reflected in tax revenues.
Income taxes and profits taxes (the second panel) rise particularly fast. Inflation is presumably pushing tax payers into higher income tax brackets, a process known as "bracket crreep," and so the government very quickly starts to collect a proportionally-larger amount of income tax.
Meanwhile, the government's total expenditures, the third panel, typically stay flat or only marginally rises in the quarters after the inflation shock hits. Notably, the amount of wages that are paid to government employees and social benefits (panels 4 & 8) tend to fall.
The net effect is an improvement in the government's fiscal balance. More specifically, for a 1% increase in inflation, the government's overall balance tends to improve by about 0.5% of GDP. And so an inflationary shock ends up at the same endpoint as a new tax: higher revenues and a better budget. That doesn't necessarily mean that inflation is itself a tax. Taxes have a degree of intentionality. They get implemented through a political process that has a certain set of goals in mind. By contrast, the extra revenue that an inflation shock raises is often (though not always) accidental, the result of external forces rather than political decision making.
So while it may not fall under the dictionary definition of a tax, the tax implications of a modern inflation shock resemble that of a new tax.
Everything I've written above applies to an inflation shock, say a rise from a 2-3% to 8-9%. Next I want to show that even constant 2-3% inflation can have the same revenue implication as a tax. Here's how.
Banknotes and seigniorage
Governments usually have a monopoly over the issuance of two key financial instruments: banknotes and settlement balances (also known as reserves). We all know what banknotes are, but what are settlement balances? Commercial banks find it useful to keep a stock of settlement balances on hand to make crucial large-value payments to other banks. The central bank, which the government controls, is the monopoly provider of these balances. (Sometimes banks are required by law to keep a a fixed number of settlement balances on hand, often above and beyond their day-to-day needs, a policy referred to as required reserves.)
Historically, interest rate on both types of central bank-issued money have been set at 0%. At the same time, the rates on short-term credit instruments (Treasury bills, commercial paper, bankers acceptances, etc) are determined by the market, typically hovering at a positive rate ranging between 0.25% to 5% over the last thirty years. These yields are priced to compensate investors for inflation.
The interest rate gap this gives rise to allows central banks to earn a steady stream of revenues, borrowing at an artificially cheap rate of 0% from both the banknote-using public and banks, and reinvesting at, say, 3%. Most of the revenues that the central bank collects from this interest margin flows back to the government. Economists usually refer to these revenue stream as seigniorage.
So seigniorage performs the same function as a consumption tax or an income tax: it takes resources from the public and gives it to the state. Likewise, a reduction in seigniorage would be very much like a tax cut.
If politicians wanted to, they could do away entirely with this form of raising government revenues. They have two ways of going about this. One way would be to have the central bank reduce price inflation to zero. By doing so, the interest rate on short-term credit instruments like Treasury bills would also fall to 0%, or thereabouts, since these instruments no longer need to compensate investors for inflation. And so the gap between the 0% rate at which central bank fund themselves and the rate at which they reinvest would cease to exist, seigniorage effectively shrinking to zero.
Over the last few decades, governments have taken a second route to removing seigniorage: they have begun to pay a market-linked yield on settlement balances. Canada, for instance, adopted this policy in 1999, and the Bank of England did so in 2006. By paying a market-based return, central banks no longer extract seigniorage from banks by forcing them to hold 0% assets.
However, that still leaves banknotes as a significant source of seigniorage. We can calculate how much the UK government roughly earns from banknote seigniorage. With £95 billion in banknotes outstanding in October, and interest rates at 5.1%, the Bank of England's banknote-related seigniorage comes out to around £5 billion per year, much of which flows back to the government. That sounds like a lot, but it's only a small chunk of the £790 billion in taxes the UK government collected last year.
Banknote seigniorage isn't set in stone. It's a policy choice. If governments wanted to, they could reduce this form of seigniorage by paying interest on banknotes. One way to go about this would be to introduce a banknote serial number lottery. This lottery would offer around £5 billion in cash prizes to holders of winning banknote serial numbers, equating to a 5% interest rate on banknotes. Doing so would be akin to enacting a tax cut on British citizens.
To sum up, the fact that both an inflation shock and steady 2-3% inflation have implications for government revenues suggests that while inflation may not quite qualify as a tax, it is certainly tax-like.
Ten things to know about the 2023-24 Alberta budget
On 28 February 2023, the Danielle Smith government tabled Alberta’s 2023-2024 budget. Projecting a $2.4 billion surplus for the coming fiscal year, the budget announced some spending increases; but many are effectively cuts when one accounts for both inflation and population growth.
Here are 10 things to know:
- The budget itself contains projections pertaining to inflation and population change. In the upcoming fiscal year, the budget projects 3.3% inflation (using the Consumer Price Index) and a 2.9% population increase. When you add those figures together, you get 6.2%. That means any increase in nominal spending needs to be at least 6.2% in order to keep up with current spending.
- Operating expenses in general will see an effective cut of 3.2%. For the 2022-23 fiscal year, they’re forecast to be $55,384,000,000. For 2023-24, they’re expected to be $57,038,000,000. In nominal terms, that’s a 3% increase. But after one accounts for this government’s own projections with respect to both inflation and population growth, that’s effectively a 3.2% cut.
- Compensation for Alberta’s public service will see an effective cut of 2.9%. For 2022-23, it is forecast to be $28,522,000,000. Its estimate for 2023-24 is $29,580,000,000. In nominal terms, that’s a 3.7% increase. However, when one accounts for both inflation and population growth, it’s effectively a 2.9% reduction.
- In spite of an aging population, health operating expenses will see an effective cut of 2.1%. According to the budget document: “Budget 2023 provides $24.5 billion for Health operating expense in 2023-24, an increase of 4.1 per cent or $965 million from the 2022-23 forecast.” After one accounts for inflation and population growth, that translates to a 2.1% cut.
- Operating expenses in the K-12 education sector will see an effective decrease of 2.0%. Total operating expenses for the Ministry of Education are forecast at $8,477,000,000 for the current fiscal year. In 2023-24, they’re estimated to be $8,836,000,000. In nominal terms, that’s a 4.2% increase. But after taking inflation and population growth into account, that’s effectively a 2.0% cut.
- The provincial government will give post-secondary institutions less operating funding. Provincial operating funding for post-secondary institutions is forecast at $2,431,000,000 for 2022-23. For 2023-24, its estimated at $2,446,000,000. In nominal terms, that’s a 0.6% increase. After accounting for inflation and population growth, that’s a 5.6% decrease. The budget also announced that post-secondary institutions won’t be able to increase tuition fees by more than 2% annually, beginning in 2024-25. And according to the budget speech, “the student loan interest rate will be reduced and the no-interest, no-payment grace period will be extended to one year after graduation.”
- There will be important enhancements to income assistance programs for low-income households. The Alberta Child and Family Benefit (ACFB), Income Support,Assured Income for the Severely Handicapped (AISH) and the Alberta SeniorsBenefit will all be indexed to inflation. What is more, according to the budget document: “Seniors with an adjusted householdincome below $180,000 are [now] eligible for six monthly payments of $100.Similarly, parents or guardians are also eligible for monthly payments of $100for six months for each child under 18 if their adjusted household income isbelow $180,000. Albertans on these core programs were automatically enrolledto receive affordability payments.” The ACFB, AISH, Income Support and Seniors benefits will also see a one-time 6% increase. And with the ACFB: “Families will also benefit from the increase to phase-out thresholds, as the maximum benefit begins to be reduced at a higher income level.”
- Funding was announced for affordable housing and homelessness. In terms of housing, the budget announced nearly $198 million in new capital funding (over three years) for affordable housing, with the breakdown as follows: $137.7 million for the Affordable Housing Partnership Program; $16.8 million for the Indigenous Housing Capital Program; $9 million for Capital Maintenance and Renewal Funding; and $34.3 million for “Stronger Foundations strategy implementation capital funding.” As for homelessness, the Homeless and Outreach Support Services program provides funding to municipalities for homelessness. For 2022-23, the forecast amount is $224 million. For 2023-24, it will be $244 million. In nominal terms, that’s an 8.9% increase, which means new homelessness funding for communities overpowers both inflation and population growth for the upcoming fiscal year.
- Several initiatives were announced with respect to substance use. According to the budget document, $155 million has been committed over three years for “recovery communities” in several communities. And according to post-budget analysis in the Edmonton Journal: “The province is also spending $30.4 million on ‘initiatives that reduce harm,’ such as supervised consumption services, Naloxone kits and other outreach supports. This is an increase of $410,000 from the 2022-23 forecast, but down from $35.5 million in 2021-22.” A lengthy Twitter feed from Anna Junker provides further disaggregation of these figures here.
- Alberta remains Canada’s lowest-taxed province, and by a considerable margin. According to the budget document itself: “In 2023-24, Albertans and Alberta businesses would pay at least $19.7 billion more in taxes if Alberta had the same tax system as any other province.” Alberta continues to be the only Canadian province without a provincial sales tax.
In sum. When one accounts for both inflation and population growth, this budget announced several cuts, all of which would be unnecessary if provincial taxes were even modestly higher. Measures pertaining to both income assistance programs for low-income households and affordable housing will help address both poverty and a lack of affordable housing.
I wish to thank the following persons for assistance with this blog post: Jacqueline Alderton, Yale Belanger, Ron Kneebone, Heather Morley, Meaghon Reid, Sylvia Regnier and several persons whose identity is being protected.
The 2022 Alberta budget
I’ve written a ‘top 10’ overview of the recent Alberta budget.
My overview can be found here: https://monitormag.ca/articles/ten-things-to-know-about-the-recent-alber...
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The newest edition of the "Taxcast" podcast takes on two big environmental topics this month. First, John Christensen of the Tax Justice Network discusses with host Naomi Fowler how high levels of financialization of an economy degrades the environment.
Second, an even more challenging question is whether growth itself is now threatening the environment and, if so, what to do about it. Anthropologist Jason Hickel tackles this issue in his segment of the Taxcast.
Both segments are well worth your time. If you, like me, prefer to spend less time and read the transcript, see the link below.
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With a federal election taking place in Canada in fewer than three weeks, I’ve written a 950-word overview of the Liberal Party’s housing platform.
It’s available here: https://nickfalvo.ca/ten-things-to-know-about-the-liberal-partys-housing-platform/
the federal Conservatives’ housing platform
With a federal election taking place in Canada on September 20, I’ve written an 800-word overview of the Conservatives’ housing platform.
It’s available here:
https://nickfalvo.ca/ten-things-to-know-about-the-federal-conservatives-housing-platform
the federal NDP’s housing platform
With a federal election taking place in Canada on September 20, the NDP has released its platform, which includes important housing-related measures.
I’ve written a ‘top 10’ overview of the housing components of the platform. My overview is available here: https://nickfalvo.ca/ten-things-to-know-about-the-federal-ndps-housing-platform/.