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Why “tax and spend” is a big lie

Why “tax and spend” is a big lie

Politicians assure us that their plans are “fully funded” not because of economic constraints, but to satisfy the rich

As the general election approaches, all the political parties are keen to reassure voters and the news media that their spending plans are “fully funded and costed”. By this they mean to match government spending with tax income, just as a household must do to avoid incurring debt. So as the economy falters and lurches and tax incomes fall so will government spending on public services, no matter the pledges made. The fiscal rules are iron-clad and must be obeyed lest financial ruin await the country, or so we are told. To plug the gaps the government will turn to corporations to provide the “necessary” financial support, selling off public assets like the family silver, privatising services in the name of “efficiency”.

These destructive neoliberal policies are justified by a fiction. Government spending is not funded by taxation. There is no “bank account”, no balance, no stocks at all.

“Taxation”, wrote Kropotkin in 1913, ” is the most convenient form for the rich to keep the people in misery. It is […] the most convenient instrument for making government the eternal monopoly of the rich”. That was still true when he first serialised The Modern State in the pages of Freedom: government spending had to be matched by taxation or borrowing because it was backed by material wealth. This changed when the Bretton Woods system was abandoned in 1971 and countries switched to fiat monetary systems. This dramatically altered the options available to currency-issuing governments and removed the compulsion to offset government spending with taxation and/or borrowing. Such governments were able to buy any goods and services for sale in its currency including all idle labour. The only meaningful constraint on spending became the “inflationary ceiling” that is reached when all productive resources are fully employed. Any notion that such a government could “run out of money” became inapplicable. Following from this, the government no longer needed to issue debt, given it is the issuer of its own currency. The continued practice of issuing debt became an ideological practice rather than a financial necessity. The only practical purpose of government debt now is to offer safe investments for the stock market.

The paradigm shift changes the perspective on taxation. The rich people who run this country are so desperate for government money to be directed away from poor people who need it and towards the companies and corporations they run precisely because they believe it is their money, the righteous indignant anger in their voices gives proof of this. The Left are also caught in this ideological trap. “Tax the rich” buys into the exact same fiction used by neoliberal politicians to impoverish the country. It would be useful for reducing inequality but useless in respect of “funding”.

The problems described here are all due to the dominance of orthodox economic theory and groupthink in the economics profession. The battle was fought and lost in this field and no progress will be made unless and until heterodox theories are also entertained by economists and politicians. The orthodox status quo is maintained by one simple principle: There Is No Alternative. This narrative is presented and validated by international organisations such as the IMF, the World Bank, the OECD, backed by the credit ratings agencies. In the UK monetary policy has been depoliticised and placed in the hands of the “independent” Bank of England so that unpopular choices can be made without the voters being able to hold the government to account. The Global Financial Crisis in 2008 and COVID-19 were only manageable because of massive fiscal stimulus but the orthodox elites refuse to acknowledge the reality and instead use this to further their nonsensical argument of “unsustainable” debt. The economies of Russia and the US are now growing because of the large increases in government spending in those countries. Of course in those cases the money is being spent on weapons and ammunition in preparation for the upcoming shooting phase of World War III. War is always good for business.

~ Matthew T. Hoare

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