Wednesday 31 October 2018

Spend and tax, not tax and spend

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.

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