An imaginary interview between the BBC and a progressive Labour Party

by Michal Lerner

BBC:  Labour says that it will eliminate the cap on child benefit.  That will cost some £1.3 billion.  How will Labour pay for it?

LP: A Labour government will pay for it the way British governments pay for everything that has been approved by parliament.  It will transfer funds to the commercial banks (NatWest, Lloyds, etc)  and instruct them to mark up the deposit accounts of those entitled to the payment.

BBC: But what happens if there is not sufficient money in the government’s account?

LP: There will always be sufficient money in the government’s account.  The Bank of England will simply expand its balance sheet and loan the government whatever funds have been approved by Parliament.  

BBC: But the Bank of England is an independent institution.  It might decide not to do that.

LP: It is exactly the job of the Bank of England to finance whatever debts the government issues which have been approved by Parliament.  By law it has to do so.  As Andrew Berkeley et al make clear in their detailed account of the UK Exchequer:

“Once Parliament has authorised Supply there is no mechanism within the UK monetary system to stop that spending happening. The Bank has no power to refuse and there is no legal mechanism by which a balance has to be checked for available funds. The Bank accommodates the expenditure by balance sheet expansion … Parliament effectively legislates money into existence.”  An Accounting Model of the UK Exchequer, Andrew Berkeley, Richard Tye & Neil Wilson p116.

BBC: So the government is printing money?

LP: Printing money is a rather outdated phrase.  The government, for the most part, just increases the balance in people’s bank accounts.  Creating money might be a more appropriate description.

BBC: Either way, printing or creating money, it is increasing the national debt.  That cannot be a good thing.

LP: Why is it not a good thing?  It will take a lot of stress off many families with more than two children who are struggling to cover their costs of living.

BBC: But it’s increasing the national debt which our children will have to pay off.

LP: It’s important that we understand the sequence here.

1. Parliament approves child benefit payments for all children.
2. The BoE marks up the government’s account with the required funds.
3. The government instructs the commercial banks to mark up the deposit accounts of those entitled to the payments and puts the required funds into the deposit accounts which the commercial banks hold at the BoE.  (These deposit accounts have the special name of reserve accounts.) 
4. The private sector is now wealthier by the amount of child benefit that has been paid to it by the government.
5. National debt is just the cumulative difference between what the state has created and spent into the economy and what it has taxed out.  Assuming there has been no increase in taxation then national debt will have increased.  Private sector wealth will also have increased by exactly the same amount.  

BBC: Won’t this debt have to be paid back?

LP:  No. National debt should be reduced when it makes sense to reduce it.  And please note that national debt can only be reduced by reducing private sector wealth.

BBC: But why then does the government issue bonds on which interest rate payments have recently greatly increased?

LP: Issuing bonds and deciding what interest should be paid on these bonds is a political choice, not an economic choice.  The purpose of the bonds is not to raise money.  Rather it to is give savers a riskless, interest earning asset

BBC: But what if the private sector does not buy the bonds?

LP:  That’s fine.  The purpose of the bonds is not to raise money.  Indeed, it would be more appropriate to call them savings certificates.  It’s up to the private sector what to do with their savings.  The government does not need them.  It issues bonds because they are useful for institutions like pension funds.

BBC: But, if the government can spend without limit, why does it not just do that?

LP: The government could indeed spend without limit.  The government is not financially constrained.  The BoE must, by law, create money to pay for anything approved by Parliament.  But the government is resource constrained.  Before spending a government should always consider whether the resources are there to be bought.  During the pandemic, Sunak had limitless funds but they could not magic up Personal Protection Equipment.  

BBC: How would this apply to the issue of ending the cap on child benefit?

LP:  If Parliament has approved the ending of the cap on child benefit, the BoE will create the required funds and make them available to the government.  The government will then use the commercial banks to mark up the accounts of those who would be entitled to the payment.  What are the recipients of this money likely to spend it on?  Probably on food and clothes.  This would require that some extra food and clothes were available to be purchased.  Since some 4% of working age people are unemployed or underemployed, it would seem that the extra demand for food and clothes could be easily met with no inflationary consequences and could possibly lead to a small reduction in unemployment.

BBC:  So we would have better fed and clothed children, possibly lower unemployment and a higher national debt.

LP:  That’s right.  But the national debt is just the difference between what the government has spent into the economy and what it has taxed out.  No one should worry about its size.  The only concern should be whether the spending and taxing has good effects on society.  We have argued above that spending to end the cap on child benefits would appear to have good effects on society: happier and healthier children and even a small reduction in employment.  There would appear to be no inflationary consequences.  So let’s do it.  The increased size of the national debt is a matter of no importance.