Money spent by government doesn't generally simply disappear

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One of the arguments against the Nation of Sanctuary policy which the Tories and Reform Ltd advance is that they want the money spent on the project diverted instead into local communities. The Reform Ltd candidate for the Caerffili by-election probably put it most clearly saying that we should “bring that money back to communities”, but the same point has been expressed in different words by others. It’s economically illiterate (or should that be innumerate?). Where do they think the money used for the project goes? It doesn’t simply pass from the government into a big black hole labelled ‘refugees’ pockets’; it gets spent. On accommodation, on food, on language lessons, on venues, on helping people to integrate and find work – and all that expenditure goes ‘back into the communities’. Much of the spending leads to payment of VAT, and the money which becomes other peoples’ income (as most of it does, eventually) leads to payment of Income Tax and National Insurance. It might not be a big project where the sponsors can put up a giant billboard declaring that it was funded by the Welsh Government, but the cash mostly ends up in local communities, circulating and providing income to people.

There’s a more general point there as well. The above doesn’t only relate to the Nation of Sanctuary. When the government pays out benefits and pensions, that money doesn’t just disappear either. It, too, gets spent in communities and ends up as income for other people, generating tax receipts as it does so. Looking at all government expenditure as though the money spent has gone and disappeared for ever is looking only at a single part of the flow of money: the economic effect of that expenditure is much wider. When it comes to this variety of economic innumeracy around benefits, Labour are as guilty as the Tories and Reform Ltd. There’s something else that we know for certain as well: the less well-off people are, the more likely it is that none of the money they receive will be saved, and all of it will be spent, mostly in the communities where they live.

Having said that, there is one important way in which spending by the government can make money disappear from our communities, and that is when it ends up in the pockets of the richest. As, for instance, when benefits are cut to enable tax cuts, something which always benefits those who pay most tax. Those who can afford to save often do. And money saved is money no longer circulating, no longer providing an income to someone else. Worse, some of those savings end up in offshore accounts – disappearing not only from local communities but from the whole country. Yet that, in effect, is the economic policy supported by Labour, Tory and Reform Ltd alike.

There is scope for debate about what the most effective method is for a government – any government – to put money into local communities. Is it through large, highly-visible projects which feed through into incomes, or is it by making sure more directly that all citizens – yes, and guests, whether temporary or permanent – have sufficient income and/or publicly-funded services to be able to meet their needs and live a decent life? Which approach has the greatest effect in the shortest timescale is a legitimate subject for debate. We should remember though that the two aren’t even mutually exclusive: the constraint on what we can do isn’t the availability of money, it’s the availability of resources, an economic truth which has been known for decades. Claiming that one way of spending money simply makes that money disappear is a dishonest way of avoiding that truth, while blaming the poorest for their own plight and facilitating the accumulation of wealth in fewer and fewer hands.