Do not read the Guardian article entitled, UK tax burden will soar to highest level for 30 years, warns IFS, unless you want blood to shoot out of your ears. You know, if my brothers and sisters in the U.K. were not affected by this madness, the article would be funny. That’s right – funny. Hilarious. The level of sheer, immeasurable stupidity displayed in this article by these idiots at the Institute for Fiscal Studies and Philip Inman of the Guardian is so profound, so utterly staggering, that after reading it, one begins to ponder just how people such as these manage to breathe and walk at the same time without assistance. There is one thing I’ll have you note: the article is glaring evidence of what I’ve been saying now for years on end: When it comes to the profession of economics, credentials literally mean jack squat – they’re irrelevant. From this point onward, the appropriate response to any journalist who asks a Post-Keynesian MMT economist for their credentials should be, “No.”
I’ve decided to nearly go paragraph by paragraph and utterly decimate this trash. Let’s get to it.
“The government is on course to impose steep cuts in public spending from April and increase taxes by the end of the decade to their highest level as a share of national income since 1986-87 to combat the UK’s persistent budget deficit.
But slower economic growth following the Brexit vote will still leave the UK with one of the largest black holes in public spending in the developed world, meaning the next government must find £34bn to eliminate the budget deficit in the next parliament, according to the Institute for Fiscal Studies.”
The whole of the above two paragraphs came from a person with a disordered mind, and who should be fired.
“That’s brutal, Ellis!”
Is it? Is it really? Is it as brutal as austerity? Is it as brutal as this persistent deficit reduction nonsense that has misled my brothers and sisters into unwittingly voting for their own death and suffering in the U.K.?
I think not!
“’For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne’, said Paul Johnson, the IFS director.”
Here we have a reference to stupid – “Paul Johnson”: “Oi! Don’t go all Paul Johnson on me, mate!” Delicious. I love it. Factually, Paul Johnson should be another phrase for “prison”, because that is where he belongs. Why?
Let me tell you why.
What Exactly is a U.K. Government Budget Deficit?
A budget deficit is errantly defined by the mainstream as when the government spends more than its income. This is simply not true, because, at no point in time, does the UK Government have an income. Factually, a budget deficit is the difference between the number of pounds manufactured and spent by the UK Government and the number of pounds destroyed afterwards through taxation in any given fiscal year. Mathematically, we can express a budget deficit as (G – T > 0), where government spending (G) minus taxation (T) is greater than zero.
On a daily basis, the UK Government is crediting bank accounts with newly manufactured pounds (spending), and it is also removing pounds from reserve accounts (taxation) that the UK Government previously manufactured and spent. All government spending comes before taxation; not the other way around. If the number of pounds manufactured and then disbursed into the economy are greater than the number taxed out of the economy, then a budget deficit exists. Operationally, the reality is that a budget deficit is income for the private sector.
In order to demonstrate this reality, we must clarify sectors within the economy and familiarize you with the difference between the UK private sector and the rest of the world. The point of what follows is not to inundate you with math, but to demonstrate to you that we aren’t dealing in guesswork and thus, we can clarify the reasons why the monetary system works in the opposite way than that which the mainstream tells you. Do not panic. You won’t be asked to calculate anything.
There are three major sectors to the UK economy:
(G – T) = the government sector
(S – I) = the UK domestic private sector (you, me, Barclays, Asda)
(X – M) = the external, or foreign sector (the rest of the world)
that when assembled, take a form of what is known as the Sectoral Balances equation:
(G – T) = (S – I) – (X – M)
What is extremely important here for you to understand, is that the Sectoral Balances equation and what I am about to say to you is not subject to opinion. It is the reality of the national accounts.
Government spending is the depositing of pounds into the economy and taxation is the withdrawal of pounds from the economy. If the UK Government runs a budget deficit, depositing more pounds into the economy than it withdraws, then what remains is a net savings for the non-government sector. A way of looking at this concept is to consider deposits and withdrawals from your personal bank account. When you deposit and then withdraw money from your savings account, if the total amount deposited is greater than total withdrawals, then the remainder is a savings, or (D – W > 0), where deposits (D) minus withdrawals (W) are greater than zero. If less than zero, (D – W < 0) the result is a deficit. Similarly, the UK Government makes deposits and withdrawals into/out of the UK economy, except, in this case, the government is the income source for the entire UK economy, as demonstrated by the reality that the UK Government issues all pounds and by sectoral balances equation.[(S – I) – (X – M)], or the non-government sector, is 100% financially supported by (G – T) and, thus, entirely dependent upon (G – T) manufacturing pounds, and then giving it those new pounds.
So, when we discuss budget deficits, what we are actually discussing is a stream of income (flows) into the UK private sector that will result in UK private sector savings (stocks). The UK Government itself cannot have an actual deficit in terms of pounds, because it never has an income in pounds. It manufactures all of the pounds.
When we discuss budget surpluses, what we are actually discussing is the withdrawal of pounds from the non-government sector that will result in UK private sector deficit. The foreign sector (X – M) plays a crucial role here.
Because international trade exists, the UK both exports its own goods and imports foreign goods. When the UK Government manufactures pounds and spends them, some of those pounds flow out of the UK and into the rest of the world (X – M) through imports. Imports means that the UK is buying foreign-made goods and paying for them with pounds, because the rest of the world is selling its goods to the UK. If imports (M) exceed exports (X), then there exists what we call a “current account deficit” for the UK. So, if China has £1 billion , then the UK has £1 billion worth of Chinese goods. Since £1 billion flowed into Chinese hands, that is exactly £1 billion that the UK domestic private sector cannot spend in order to decrease unemployment. If there is a current account deficit, more pounds are flowing out into the hands of the rest of the world than are flowing back into the UK, and so, the UK Government simply cannot run a budget surplus without causing a recession in the UK domestic private sector.
As budget deficits are income for the UK domestic private sector, then if there is a current account deficit in conjunction with a budget surplus, pounds are flowing out of the UK domestic private sector in two directions:
1.) into the rest of the world through imports
2.) back to the UK Government through taxation
The result, then, is that the total amount of pounds circulating in the UK domestic economy is shrinking and the UK Government would be forcing the UK domestic private sector to run a deficit in order to prop up the economy. What this means, is that the domestic private sector must rely on bank credit to continue spending, which will result in the increasing indebtedness of the domestic private sector. When the UK domestic private sector can no longer take on more private debt, consumers will reduce their spending. When this occurs, businesses will begin losing income. As businesses lose income, they will lay off workers, unemployment will rise and a recession will occur. When the unemployed seek assistance from welfare and unemployment insurance because few jobs are available, the budget surplus will automatically become a budget deficit.
In very simple terms, the reality is that the government’s deficit is not the UK private sector’s deficit and a budget surplus is not the UK private sector’s surplus. Since there exists a current account deficit, then at all times, to ensure persistent full employment and a stable economy, the UK Government must run budget deficits targeted at full employment. Expanding budget deficits are necessary up to the point of full employment, which is the point of maximum production capability; a condition we call “macroeconomic efficiency”.
Now that you know the reality, here’s what I’d like all those who doubt what I’ve said to do: Just assume for a moment that I’m right and read the rest of the article. If you do so, then the article should become a mountain of ridiculous stupid and madness. Try it.
“Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise.”
Here, the author is saying that voluntary, pointless and deliberate cuts to day-to-day public service spending, while the tax burden also needlessly and deliberately rises by choice, will destroy much needed pounds. Therefore, deliberate cuts in spending and tax rises in combination will reducing the amount of pounds in circulation, which is necessary for the UK Government to induce a much desired recession.
“Even so the new chancellor may not find it all that easy to meet his target of eliminating the budget deficit in the next parliament.”
Here, the author is actually saying that the new chancellor may not find it all that easy to meet his target of creating a recession and decimating the UK economy in the next parliament.
“Even on central forecasts that is going to require extending austerity towards the mid-2020s.”
This statement is sheer, bloody madness! Put simply, it is saying that central forecasts will require the continued destruction of jobs, savings, impoverishment and misery of UK citizens towards the mid-2020s – literally. This statement is reason enough that any and all persons of influence who’ve advocated austerity in the past and still do today, should be prosecuted and sent to prison.
“If the economy does less well than hoped then we may see yet another set of fiscal rules consigned to the dustbin.”
I’ve said it before, and I’ll say it again: Fiscal rules should be abandoned. The only legitimate “fiscal rule” is one that targets prosperity and nothing else. Now, what do I mean? I mean that when it comes to fiscal policy and deficit spending, the rule should be for the UK Government to expand its deficit to achieve and then maintain full employment in perpetuity, and for the public purpose – nothing else – and yes, by “public purpose” I do mean a fully-funded, fully-staffed, fully-supplied NHS – full stop!
The Utter Folly of Fiscal Rules
Fiscal rules are totally unnecessary voluntary constraints created by mystics called “mainstream economists” and placed on the fiscal policy of governments that experience no hard financial constraint and have flexible policy options, as well as on those with financial constraints and inflexible options. For nations with real financial constraints and inflexible options, such as those within the seething cauldron of inhumanity called the European Monetary Union, fiscal rules are a noose around the neck of the government which work to ensure that deflation, high unemployment and poverty will run rampant into eternity. But why impose artificial restraints on governments that possess an infinite capacity to issue currency and flexible options? Those in the mainstream who propose fiscal rules must be unaware that certain governments such as the U.K. Government experience no hard financial constraint and have flexible policy options. Perhaps orthodoxy does not actually realize the implications of such a reality. Then again, perhaps they do and choose to ignore the implications. I cannot say.
Fiscal rules come in many shapes and sizes, from the unnecessary type like John McDonnell’s recent proposal that the government can borrow now, but within 5 years, taxes must cover current spending, to the outright insane, such as Germany’s proposal to make deficits illegal.
The silliness of fiscal rules can be traced back to neo-liberalism’s fearmongering about accelerating inflation. Inflation was and still is a priority for macroeconomic policy. In plain English and not econobabble, it means that around forty years ago, economists who represent mainstream “thought” today, convinced policymakers to worship the market god and also his brother NAIRU, the god of accelerating inflation. According to the Church of Orthodoxy, NAIRU is a wrathful god who stands ready to inflict accelerating inflation on nations whose governments use fiscal policy to interfere with will of the market. As neo-liberal church dogma teaches, in the post-World War II era, governments embraced heresy by deficit spending to attain and maintain policies of full employment. In the late 1960’s, NAIRU’s patience had finally run out and he declared that man must surely pay for this sin of government-induced prosperity. So, NAIRU said, “Behold! I shall punish man for this sin. Therefore, let accelerating inflation afflict many nations. The weeping and gnashing of teeth shall be exceedingly great.” Throughout the 1970’s, the Great Inflation plagued nations and there was indeed weeping and gnashing of teeth. NAIRU struck policymakers dumb in order that they would choose the incorrect response to the Great Inflation, which they did, making the situation worse. Of course, governments weren’t aware of the existence of NAIRU, so the new religion and their sin had to be explained to them.
After extensive efforts on the part of certain mystics to evangelize policymakers, governments wished to repent in dust and ashes for the “artificial”, man-made prosperity they achieved. The mystics told governments there was but one way to repent: Governments everywhere had to shun the use of fiscal policy and instead, rely on monetary policy. But to be in the market god’s continued favor, NAIRU demanded human sacrifice in the form of involuntary unemployment. If governments maintained a pool of unemployed workers at all times, then NAIRU would be appeased and the market god would grace everyone with true prosperity. Governments were told that there was a “certain number” out there which was the “natural” rate of unemployment and should they ever try to lower that rate using fiscal policy, NAIRU would have a conniption fit and destroy the world with accelerating inflation.
And so, it came to pass that a great question mark appeared over the heads of rational, scientifically-minded people while governments listened to the delusional sermons of these mystics. Thus, for the last forty years, national governments world-wide have promoted the religion of neo-liberalism; maintaining unemployment to avoid accelerating inflation being the core doctrine. Wage suppression, union busting and deregulation also became essential doctrines. Fiscal rules were enacted to discipline fiscal policy, starving domestic economies of much needed currency while we were told that inept monetary policy’s tinkering and adjustments would lead us to the promised land.
Forty years later, because of orthodoxy’s total failure to understand, or the outright rejection of how a modern monetary economy functions, the results manifest as stagnation, vast income inequality, deflation, mountainous private debt levels, high unemployment and social collapse.
“The leading tax and spending thinktank said downgrades in GDP growth over the next four years will strain the public finances, which are already on course to be £13bn worse off in this financial year than forecast, after weak growth in tax receipts.”
So, £13bn will still be spent by the government? Good. Then that means that 13 billion more pounds, though it be a meager amount, will still be available for someone to spend, which becomes business income, which means that some poor guy or gal at Asda gets to keep their job a little while longer.
Furthermore, the so-called “leading tax and spending thinktank” is so utterly stupid that it doesn’t know what causes GDP to increase, and yet, here it is forecasting! Brilliant! Fact: UK Government deficits are income for the UK private sector. A massive increase in the budget deficit will translate directly into an increase of the national income, which is what GDP is.
“Highlighting the pressure on the chancellor, Philip Hammond, the IFS’s annual assessment of the public finances found that Britain’s ageing population and increasing demands on the NHS will blow a large hole in the government budget over the next two parliaments.”
And Ellis says, “Go, old people, go! Blow a huge, massive hole in the government budget! We are depending on you to make it happen.” Why am I saying this?
Because the government’s budget doesn’t matter; the real resources of the UK are what matter at all times.
“Affordability” for national governments like the US, UK, Canada, Japan, Australia is always in terms of real resources (iron ore, agricultural capacity, water supply, labor supply, etc.) and never “money”. Forty years of neoliberalism and nonsensical mainstream economic policy errantly focused on the finances of these governments, which do not possess hard financial constraints, while ignoring their real productive capacities, leaving vast resources idle. Persistent recessions, high unemployment rates, expanding income inequality, high private debt levels and financial instability have been the end results of these policies and so, political unrest is rising as world populaces are no longer willing to tolerate these deplorable conditions. At the root of the problem is the erroneous belief that these governments can run out of “money”. That incorrect viewpoint causes you to miss the reality: Pounds are infinite. Real resources are finite.
Consider: If you have £1,000, you can only buy so many goods with it. When you’ve completely spent the £1,000, you cannot buy any more goods. Now let’s assume that you can create pounds at will anytime you so desire. How many goods can you buy? You can buy anything for sale that is priced in pounds, both in the short run and the long run. Money is no longer of any concern to you. And that applies to the UK Government. Money is not a concern to the UK Government because it alone has the authority to create pounds. Its finances are of no concern. Its budget does not need to be balanced. It does not tax to fund its spending. It does not borrow to fund its spending. When it spends, it simply creates a pound and spends it. The only concern of the UK Government is the real resources available that its pounds access. In other words, a pound is just a voucher that we use to obtain goods and services.
Since the UK Government can issue an infinite amount of pounds, getting enough “money” into everyone’s hands so they can access goods isn’t the problem. The problem and the real question is,
“Is the economy capable of producing enough goods and services to meet everyone’s needs?”
The problem with the NHS is not money. The problem is making sure that there are enough doctors, nurses, ambulances, medicines, surgical equipment, hospitals, etc., to meet the healthcare needs of the entire population.
So, affordability for you personally might be in terms of pounds. That is precisely because you do not issue pounds. You use pounds. Therefore, you need to quickly come to terms with the fact that your situation does not apply to the UK Government and when you persistently vote for candidates who propose to “find cuts to pay for” spending or slash the deficit, you are actually voting to cut your own income, to reduce your quality of life and to shorten your lifespan.
“It said: ‘Demographic and non-demographic pressures are projected to put upward pressure of 1% of national income on health, social care and pension spending by 2025.’”
It is certainly better than pushing the 1%’s income upward, as the government is doing now, and as the IFS is advocating, right? Because that is all that the IFS is trying to do – move GDP; your share of the national income, to the bloody rich by attacking the budget deficit.
Because the UK Government alone determines the unemployment rate through deficit spending. The 1% have spent years purchasing politicians to break the neck of full employment and keep it broken in order to allow the business leader to threaten his employees with unemployment, to break trade unions, and to suppress wages. And wage suppression is a major factor in driving the national income to the 1% and away from you.
The fundamental rule in macroeconomics, which is ignored by the mainstream, is that somebody’s spending is somebody’s income. If you give me £30,000 for my car, you get my car and I get your £30,000. That £30,000 is my income. That £30,000 was your spending. If Asda pays a worker £500, that £500 is Asda’s spending and it is the employee’s income. If the employee then spends £5 of his income at Asda on some apples, that £5 is the employee’s spending and it is Asda’s income. So, when business pays wages, that is the worker’s income and the workers, in turn, spend their income, thus providing business with an income. Wages are both a cost for business and a source of demand.
Believe it or not, there was a time when business understood that good wages were a stable means to ensure that what we produced as a nation got sold to consumers. Today, partly because of the mantra “wages are a cost”, wages are now low and lowered even further with a reliance on part-time work. Suppressing wages causes a redistribution of GDP to profits, away from worker’s share. And no, this is not a political statement by any means. It is macroeconomic reality and it should concern all of you Joe and Jane Citizens, both conservative and labour alike.
GDP is the Gross Domestic Product, which, as we’ve discussed, is also known as the National Income. Workers and capital share in GDP.
When growth in productivity rises faster than real wages, national income, or GDP, most often moves away from workers, redistributing to capital. In other words, all of our national income moves away from you, both labour and conservative alike and into the pockets of the 1%. This redistribution of GDP, if left unchecked by government policy, results in vast income inequality.
Look, I’m not going on any further. What is the point? I’ve said all there is to be said.
Oh, wait – almost forgot. There is this little notice that the Guardian inserted at the end of the article:
“This article was amended on 7 February 2017 to correct the figure needed to eliminate the budget deficit from £40bn to £34bn”
There’s absolutely no point in notifying the reader that a correction has been made, precisely because the entire article is still errant garbage. The notice should read:
“Feel free to toss the whole of this ridiculous article into the wheelie bin.”