Budgets and the ‘magic money tree’

Phillip Hammond’s budget remains firmly located within Neo-liberal economics. The principle aim is to reduce and finally eliminate the budget deficit and so lower the size of the National Debt.  For the Neo-liberals public debt is a drag on the ‘real’  economy  as it suffocates  the private sector.

But under pressure from Labour,  some of his own back bench  MPs, but mainly  because Theresa May announced  ‘austerity’ was ending ,  Hammond has taken  advantage of higher than average tax revenues and slowed down the deficit reduction  plan. Now the books won’t be balanced until the middle of the next decade, even later  if the UK crashes out of the EU.

In contrast,  John McDonnell and Labour (now  joined  rather belatedly by Gordon Brown) apply a ‘Keynesian’ critique of austerity,   arguing that the economy can only return to prosperity by increasing government spending,  In response to Hammond and May, McDonnell now says Labour will inject an extra £108 billion to reverse all the cuts  austerity  has inflicted.

McDonnell,  anxious to appear ‘responsible’ in the eyes of international financiers and city bankers, capable of sabotaging  Labour  policies,  still promises that current expenditure will be balanced against government income by the end of a 5 year parliament and that the only  long term borrowing will be for investment.  But if Labour is able to win the next general election  the economy it inherits will likely be in dire straits,  whatever  agreement the Tories reach over Brexit. Unless extra taxation can be generated from the  better off –  at the moment Labour is planning to implement relatively  modest increases  –  then if it’s going to keep to its own fiscal rules,   may not be able to deliver.

It doesn’t have to be like this. As a previous post on the ‘magic money tree’ has argued:  https://education-economy-society.com/2018/10/08/a-magic-money-tree/ governments can spend much greater amounts of money  than Neo-liberal economic thinking allows.

To begin with,  the Treasury can  finance new spending by borrowing from the Bank of England, creating a situation where one part of government would simply be in debt to another, with tax payer  or private sector liabilities not arising. The government already owns over a quarter  of the national debt.  If you owe money to yourself, it’s not really debt at all!