The most important political battle in British politics is currently taking place in the Conservative party. There is, of course, also a political battle taking place in the Labour Party, but it is of a different kind. In the Labour Party, the party machine is being used to suppress the discussion of any radical ideas. In contrast, in the Conservative Party, the political battle is very much a discussion on what type of society is wanted. The leaders of the two opposing views are Boris Johnson and Rishi Sunak.
It is important that the Labour movement understand this battle in the Conservative party if they are to affect the outcome. Sunak claims that a large state is morally objectionable.
“Government should have limits. If this seems a controversial statement to make, then I am all the more glad for saying it because that means it needed saying. And it is what we believe. There is a reason we talk about the importance of family, community and personal responsibility. We do so not because these are an alternative to the market or the state, but because they are more important than the market or the state.”
Johnson is less ideological and more pragmatic on this issue. Johnson believes that sometimes a big state is necessary and today is one of those times. He believes that a big state is necessary to level up and, more importantly, to win the next general election.
This difference between Sunak and Johnson could have been more divisive in the October budget. However, a significant improvement in the flow of future government revenue (predicted by the Office for Budget Responsibility) meant that Johnson could get his larger state while Sunak could also get a smaller ratio of national debt to GDP. But the truce that reigned in Parliament as Sunak delivered his budget was an uneasy one. Sunak signaled numerous times to the Conservative Party back benches that he would have preferred to use the increased government revenues to reduce the national debt rather than increase spending:
“There is a different moral dimension to the economic challenge we face now. Last year, the state grew to be over half the size of the total economy, and taxes are rising to their highest level as a percentage of GDP since the 1950s. I do not like it, but I cannot apologise for it: it is the result of the unprecedented crisis we faced and the extraordinary action we took in response. But now we have a choice: do we want to live in a country where the response to every question is ‘What are the Government going to do about it?’”
In Sunak’s first full fiscal year as Chancellor, he spent some £300 billion more than he levied in taxation and so national debt increased by that amount. Sunak effectively created £300 billion in new money to pay for the pandemic. This was a good thing. It meant that some 20% of the workforce, who had to stop working to protect the health of the nation, could continue to enjoy a reasonable standard of living while on Furlough.
The ability of the government to just create £300 billion has taken many politicians and media commentators by surprise. Since Thatcher came to power in 1979, the sacrosanct mantra was that governments can only pay with money that they raise in taxation or borrow from the private sector. The pandemic revealed the falsehood of the “taxpayers’ money” mantra. Sunak did not increase taxation or borrow from the private sector. He simply created the money by ordering the Bank of England (BoE) to mark up the accounts of those he wanted to pay.
The vast majority of MPs and media commentators still see no difference between a household budget and the budget of a currency creating state like the UK, despite the fact that the pandemic made it evident that the UK government, as the monopoly issuer of the currency, had limitless funds at its disposal.
The Treasury elite understand completely that the UK state is not financially constrained. Sunak will also have grasped the fact and one suspects that it will be dawning on Johnson too, that national debt is an irrelevant statistic. For Sunak this is a source of regret since it makes a big state, which he finds morally repugnant, more feasible. For Johnson it’s a source of relief, since it makes retaining those red wall seats more feasible.
Labour should exploit this division in the Tory ranks to demand even higher spending in the interests of working people. But here, unfortunately, Labour meets its own demons. The Labour Party believes that a Labour government can only spend what it has levied in taxation or what it has borrowed from the private sector. But it also wants to be a party of low taxation and low national debt. The result is incoherence. The Labour Party needs to develop a much more coherent story around government spending, taxation and borrowing.
The story is not that hard to put together. If there is unemployment in an economy then a currency creating government can spend into the economy without increasing taxation or borrowing. Once a position of full employment is reached then a government wishing to increase spending will be competing with the private sector for resources. This would likely have inflationary consequences. When there is full employment, the government must create unemployment before spending into the economy. The typical tool for creating unemployment is taxation. People often, mistakenly, think that the purpose of taxation is to raise revenue. It’s not. Its main purpose is to reduce private sector demand and thereby to create unemployed resources which the government can then buy.
Sunak knows that most MPs, Conservative and Labour, do not understand these kind of things. He therefore deliberately introduced a Charter of Budget Responsibility to lock MPs into a set of rules that would favour his agenda of a small state.
“Today I am publishing a new charter for budget responsibility. The charter sets out two fiscal rules that will keep this Government on the path of discipline and responsibility. First, underlying public sector net debt, excluding the impact of the Bank of England, must, as a percentage of GDP, be falling. Secondly, in normal times the state should only borrow to invest in our future growth and prosperity. Everyday spending must be paid for through taxation.”
Sunak’s first rule would, for the most part, guarantee increased unemployment because if the private sector is a net saver, i.e. if the private sector is saving more than it is spending in investment, then the government, if it does not want to see increased unemployment, must match the private sector’s net saving with an equal fiscal deficit. Labour should boldly state that it will match any private sector surplus with an equal fiscal deficit and that issues like the size of the national debt will not be considered of any relevance.
The UK government has no need to borrow from the private sector to do this. It is a currency creating government and can simply spend an amount equal the increased private sector net saving. However, governments do traditionally issue bonds that match the difference between what they spend and levy in taxation. The government determines the interest on these bonds not the market. The Japanese private sector has been a net saver for decades and the Japanese government has been consequently running a matching deficit for decades. Japanese public sector net debt, as a percentage of GDP, is 2.5 times UK public sector net debt and there is no inflation and very low unemployment and the interest paid on 10 year government bonds is less than .1%.
Sunak’s 2nd rule that “everyday spending must be paid for through taxation”, makes little sense if there is unemployment and the purpose of the current spending is to support the unemployed. Government spending would reduce unemployment but if it is matched by extra taxation then that extra taxation would increase unemployment. Sunak should be reminded of Keynes advice to print money, bury it in disused coalmines and let the private sector dig it up again as a way of ending unemployment.
Sunak’s rules are a sop to his small state backbenchers. They are a sign of his weakness in the Conservative Party at present. They may well be an indication that Sunak’s moment in the sun has passed. Will Johnson want to retain a Chancellor with such a small state bias. But the rules also represent a trap for Labour. Labour wishes to appear fiscally responsible and may feel tempted to sign up to these rules. It should not. These are the rules that led to 10 years of austerity.
The only rules of budget responsibility that Labour should support are that they will spend when it makes sense to spend, will tax when it makes sense to tax and will borrow when it makes sense to borrow. The constraints on spending are the existence of resources, not money; government spending is possible and does not harm the economy; the objection to this spending is political: it creates a big state and gives power to the working class. Spending or austerity is a political choice, not one governed by economic and financial necessity.
Labour must hang the millstone of George Osborne’s austerity around Sunak’s neck by pointing out that his proposed rules were also Osborne’s rules and they did great damage to British society as Osborne pursued his dream of a small state.
On the same theme, read our April editorial https://labouraffairs.com/2021/04/02/national-debt-is-an-irrelevant-statistic/