Why I did not sign the Observer letter for ‘Plan B’

I thought long and hard before refusing to sign the letter calling for a Plan B. Not because I do not think it is urgently required. But because the letter called for “clamping down on tax avoidance and evasion, as well as by raising taxes on those best able to pay.”

It goes without saying, I hope, that of course I support ‘clamping down on tax avoidance and evasion’ – but do not support ‘raising taxes’. I had asked the originators of the letter if we could debate this point, and later the words “those best able to pay” was added, without informing me. Even then, I may not have signed it. The fact is that with the UK’s rate of unemployment; with businesses facing a very hard time because of the rise in VAT and the cuts in government spending, and with banks effectively refusing to lend to SMEs and others (except at very high rates of interest)….this would not be the moment to raise taxes.

But I want to make a bigger point. By calling for taxes to be raised, the letter implicitly suggests that the deficit can be financed through increased taxation. In this sense, it echoes the orthodox line: that government expenditure is like a personal or corporate budget and that ‘savings’ (i.e.cuts or increased taxes on e.g. VAT) have to be found to finance it. That ‘we cannot afford to spend’. That the ‘money has run out’ and we need to find more – from somewhere, preferably taxation.

I strongly disagree. First, to reiterate: the government’s budget is not at all like individual, household or corporate budgets. Individuals cannot engage in ‘quantitative easing’. The Bank of England, on behalf of government, can, and indeed has done so, in order to support the financing of the UK government’s deficit. Individuals and corporates do not necessarily generate income from spending. The government can generate income from investment in public works. It’s a form of income called tax revenues. Third, individuals and corporates can go bankrupt. The government cannot – not even Zimbabwe.

Given these facts, the best way to finance the govermemt’s budget is by increasing, not cutting, the government’s  income – from increased economic activity. In this sense we can make a comparison between governments and individuals: as Prof Chick and I note in our latest update of “The economic consequences of Mr O”

“Just as work makes things affordable for an individual, so too for society. A nation’s prosperity follows from its employment, not the other way around.”

What the VAT rise and cuts in government spending  do, is to cut economic activity – and therefore employment – and with it income from economic activity for the government.

And this, I fear,  is what raising taxes would do too. And I do not want to be party to that.

8 thoughts on “Why I did not sign the Observer letter for ‘Plan B’”

  1. Martyn Cutcher

    Hello Ann, I’d also like to draw peoples attention to the various youtubes by Richard Koo who explains very clearly why the Japanese government needed to increase their spending in the face of a failure of businesses and individuals to borrow.

    One of the many elephants in the room is that our money supply is debt-based and that in the UK both business and individuals are far more indebted than other countries, yet the government requires them to borrow more. It is mind numbing that the government asks for understanding as it reduces its debts while demanding others take on more.

    – Martyn Cutcher

  2. I’d raise your taxes for a start. I’m sure you could manage on an income a little bit closer to mine as a teacher for a start.

    There are PLENTY of very rich people in this country who should certainly pay more.

  3. You’ve missed the point. Taxes don’t fund anything. The government doesn’t need taxes to fund its spending. It owns the Bank of England. It can get whatever money it requires to spend on public goods on its unlimited overdraft facility at effectively 0% interest. (Whatever interest the BoE charges would come back to the government as profit via dividends).

    Once you understand that, you need to look for another reason why taxes exist. And that is to reduce the overall demand in the economy so that we don’t get demand-pull inflation.

    Also once you understand that, the notion of the government borrowing from third parties is similarly nonsensical. What it is actually doing is offering savings accounts. In other words it is using government spending to pay people not to spend their Sterling in the UK economy.

    Clever commentators are using a psychological technique known as ‘anchoring’ to get people to misunderstand what a government’s financial capacity actually is. The question is why – ideology or self-interest?

  4. Whilst I completely understand your line of reasoning, I disagree about raising taxes. I think taxes need to be raised in certain areas – not just because of the deficit, or not because of ideological reasons, but as part of the fundamental reform that our economy needs to go through.

    Land taxes, carbon taxes and a higher top rate could pave the way for the abolition of NI (e.g. shifting the tax burden of labour and industry, and onto land and rent) and help to close the deficit gap at the same time. I think opponents of the cuts should be more vocal about tax changes like this.

    1. Thank you to all for comments. Cahal, you are right about the need for fundamental reform of our economy….and for taxes to be shifted on to land and rent. But there is no sign that the Coalition is planning that…instead, their obsession with the deficit, and with the antiquated theory that the deficit can only be funded by raising taxes, and not by increasing tax revenues…by putting more people into jobs so that they can pay taxes….is the ideological fix we face. I am arguing for the latter – increased employment – but also for the burden to be shifted on to land and rent; and on to the rich, Red Jelly – of course. My worry is that the Left’s preoccupation with tax evasion etc. fits neatly into the ‘framing’ of the problem by orthodox economists – in other words, the Left will find themselves endorsing the raising of taxes, instead of arguing for increased tax revenue from job creation.

  5. But following the logic of your argument there’s no reason why many other non-state actors could spend their way out of difficulty.

    Companies, for instance, could simply invest more in income-generating activities and so create earnings. Peculiarly (according to Ann’s logic), not all firms forever grow and some even fail. Why did they not just borrow more, invest and generate more earnings?

    Because in reality, things are a little more complex than the theories inferred in Ann’s writings. Issues such as cash flow, as well as the inherent uncertainty of investment, mean that A does not always magically lead to B.

    Indeed, few people trust governments to wisely invest on a large scale, certainly not liberals. Weak democracy, over-centralisation and a generally financially illiterate population conspire to make government decision-making poor, whether that be the present one, which is mildly sceptical of the state, and the last, which was mildly enthusiastic for the state as an active agent in the economy.

    It baffles me that after years of writing and studying this area, someone of Ann’s seniority still pumps out such basic level stuff.

  6. Tom, I think you are the one pumping out basic level stuff. Even if I put aside the fundamental issue that an economy does not function in the same way as a company, there are numerous flaws with what you said.

    Your borrowing example is odd. If a company is in real trouble then it cannot borrow at low rates. Conversely, UK borrowing rates are at an all time low (and were before Osborne’s announcements). The markets are signalling for fiscal expansion; if any business could borrow at these rates, they would.

    Furthermore, governments can always issue their own currency if they are truly revenue constrained. It is impossible for a government to go bankrupt in the sense that a company can – yes they are inflation constrained, but even Zimbabwe is not bankrupt.

    Yes governments are not perfect. But you are presenting government investment as if it is never successful. Look at the end of WW2 – we built the NHS, a lot of public housing, founded the welfare state and much more. Following this, the country prospered and the debt incurred was paid off. There is no reason we can’t do something similar now.

  7. It is bizarre that the one conclusion drawn by the pseudo-Keynesian left is that after the biggest debt blow up in history the solution should be more borrowing, as is suggested above by Cahal.

    Cahal’s analogy is poor and misleads, presumably for intention. My example was used to show that borrowing for growth is inherently risky, and that these risks are being downplayed by state fetishists.

    Moreover, Cahal asserts that UK borrowing costs are low hence everything is rosy. A quick google of the phrase “European sovereign crisis” indicates anything but. The UK, like a number of other UK governments, is hugely indebted and dependent on the continuing confidence of bond investors. They have confidence now, partly for ‘technical’ reasons about the structure of investment today (including low yields and a paucity of long-dated sterling debt).

    It is richly ironic that the anti-finance-sector left want to underwrite further state expansion using high-risk financial borrowing.

    More here http://www.cashandburn.com/2011/04/puke-point.html


    And with regards to the “success” of governments to invest at a time of economic weakness, what I am doing is to inject a note of scepticism. Just as during the credit boom, the statist left is asserting that there are no risks at borrowing large amounts because everything will work out for the best.

    Maybe you remember the financial crisis? When borrowing large amounts based on optimistic expectations did not work out for the best.

    The problem is ignoring the means because of the focus on the desirability of the ends. But in the end, the means will often define the end. If your means is high-risk borrowing from nervous bond investors, guess what the end is?

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