At first sight,
it sounded
on Monday as though the Chancellor of the Exchequer and the Prime Minister were
directly contradicting each other. The
former was saying that a ‘no-deal’ Brexit could mean effectively tearing up his
budget and starting again, whilst the latter said all the spending commitments
in the budget would be fully protected, despite the certainty that Brexit will,
overall, reduce government income, especially if it’s of the ‘no-deal’ variety. But they’re not really in conflict at all –
protecting the spending commitments in the light of changed circumstances
merely means that they must be funded in different ways. The total of the spending commitments, in
itself, hardly represents a radical departure from previous policy; more
fiddling at the fringes. But the real
news here, for me, was that the promise that the spending commitments will be
honoured come what may is an open admission that the basis on which they’ve
been telling us that public finances work is the big lie that many of us have
long believed.
It is fundamental
to much of what they have been saying that the government can only spend what
it either raises in tax or is prepared to borrow; that the government’s income,
in effect, determines what it can spend.
What the Prime Minister’s statement this week says is that the reality
is exactly the opposite; the government can start by deciding what it wants to
spend, and then decide later – even if circumstances change totally – how that
will be financed. Not so much ‘tax and
spend’ as ‘spend and tax’. It recognises
the key fact that the government always spends money before it receives it back
in taxes. Effectively it creates money
when it spends and cancels it when it collects taxes; any difference between revenue
and expenditure represents either an increase in the amount of money in the
economy or else is funded by ‘borrowing’ (or ‘saving’ as those of us who lend
our money to the government through pensions etc prefer to call it). If it weren’t so, where does the money to pay
tax come from?
They’ve known
this all along, of course, but have preferred to pretend otherwise for
ideological reasons. Pretending that
they can only spend what they first collect in taxes is their excuse for not
spending, justifying their desire to reduce the size of the state sector. I think it’s good news that they’re
recognising that the truth is rather different.
It would be a good thing if the opposition parties did likewise and
dropped their own commitments to austerity.
The way things are going, the Labour Party is in danger of being caught
out being more supportive of the ‘tax first’ mantra than the Tories, with their
obsession with demonstrating how they will pay for their commitments and their
demand that others do likewise.