This week, 163 leading academics and economists including Thomas Pikkety wrote a letter to Financial Times to support Labour’s radical economic plan for the country. The lamented the poor state of Britain’s economy, the injustice of austerity and called for an ‘a serious injection of public investment’.
As we cycle through election time, Labours spending plans will be used to attack the most. The Tories main campaigning pledge is to not push a bold (or true or credible) manifesto of their own but to run ‘project fear’ over ‘The Cost of Corbyn’. The Tory party “estimate” that Corbyn will cost the UK £1.2tril in public spending. Given that the national debt stands at £1.8tril — this is huge if true (it isn’t).
The reason why Corbyn’s opponents are tackling his economic policy so ferociously is twofold. On the one hand, the Tories represent the interest of capital — those who make money out of owning existing assets (property, stock, funds etc). Corbyn’s tax policies lie heavily on taxing and reigning in the financial sector and capital, as well as the top earners that work on their boards. Not hard to work out why they don’t like him. Also, since the 80s, there has been a systematic approach to replace the post-war economic system with a finance-led system. This requires changing the economic narrative from one of shared prosperity and growth (what’s good for me is good for you) to one of a ‘household on a budget’. We saw the latter reach it’s peak when the Tories gained power in 2010 with a destructive austerity policy citing ‘the financial mess left by the Last Labour Governement™. When in reality the financial economy, that profited from property speculation and CDS, plummeted and forced the Brown government into a billion-pound bailout to save the economy.
But, what about the ‘Magical Money Tree’? We can’t just get money from nowhere! How can we fund things without taking my hard-earned cash? Well, I too believed this. I thought the only way we were going to improve public services, invest in the economy and create an equal society is through huge taxation. That’s until I started reading more about economics and how money actually works. I’m not a professional academic but I realized that the basics of economics are really quite simple.
It is obviously true that taxation is used to spend on public services. The more tax you collect, the more you can spend on things like schools and hospitals. But the government can run a ‘deficit’. They can spend more or less than they get in revenue (taxes). In theory, there’s no end to how big a deficit they can run. In practice, of course, there is. In this way, the country is like a household, although one with an unlimited credit card and an infinite income. It entirely possible to run a ‘deficit’ when you need to spend a lot (when the economy isn’t growing) and increase taxes and reduce spending to pay it back when times are good. In fact, this was common fiscal policy after the war. But nevertheless, basic bookkeeping means our interest and debts will pile up if we run too high a deficit.
But there’s this other part of the government’s bank account, and it’s not one like you or I can possess. The government essentially an issue ‘shares’ in itself, which are called ‘bonds’ or ‘gilts’. These bonds are slightly different to shares in a company. Those who buy them don’t have any ‘control’ over the government. They also ‘mature’ (get their money back) after a fixed amount of time. They are more like a loan in this sense. But instead of giving cash away to be repaid like a personal loan, whoever buys the bond has an asset worth how much they paid.
When the government issues ‘bonds’, investors buy them. This gives the government cold, hard cash to spend on new schools, hospitals, infrastructure. The ‘bonds’ payout interest every year until they mature, in which the investor gets back what they put in. This is what is meant by ‘government borrowing’. For example, if a pension fund buys £100mil worth of bonds, the can sell those bonds for £100mil in shares or cash. Bonds are tradable assets like shares, Mars bars or Pokemon cards. It can get more complicated than that, but the analogy is good enough for now.
As with all investments, investing money can be risky. A company could go bust, the market could crash or perhaps the share price is affected by a country’s economy going tits up. Hedge fund investors spend millions on nanosecond share price trading to maximize when and where to sell their shares. The flunaction is share prices, on the FTSE 100, is around ~13%. However, bonds are clunky things that are extremely safe, slow and boring. They don’t change is yield much, if at all. The government isn’t going to ‘go bust’ anytime soon. As long as there are people in the country with money, we’re fine. For a lot of investments such as pension funds, that won’t mature for years, bonds are extremely safe and sought after investment.
The biggest cost to the government, when sellings bonds, is the interest payments and that end principal payment. So, if we were being shrewd we would want to borrow money when interest rates are low (less money to pay over years) and also for projects that we know we’ll need to buy and that will definitely generate more money. Projects that would be a good return on that investment (ROI).
Well, wouldn’t ya know. That’s exactly the situation we’re in now. As of 2014, real interest rates are set around -1.1%. Meaning that inflation outpaces interest. This means, any government that ‘borrows’ money, is making a profit even if they just had the money sat in the bank, so to speak.
The principal payment, if the money is invested wisely, should be easy to pay off. For example, If a government borrows £100bil to build a new power plant — the tax revenue and extra growth from the building contracts, jobs, energy consumption etc will more than pay that back. (Un)luckily for us, we are facing a huge social care crisis, a huge health funding crisis, a huge climate crisis. Huge problems that will require huge sums of money.
From investing in care for our aging population to building the green energy the country desperately needs — our government is being irresponsible by not investing now and leaving us to pay for this later, as the crises worsens. Auesterity has also bought insecurity, poverty and disparity across the regions outside London in the UK. If we want to see growth in high-skilled, well-paid jobs — money needs to be spent.
The irony that borrowing to invest would be problematic and ‘burden us with debt’ by paying for services and infrastructure we will need is staggering. We need healthcare. We need social care. We need green energy. These aren’t consumer choices — these are the services we need if we want a functioning society. If we don’t invest now, the governments costs will rise and rise, and without the early investment to yield returns — something will have to go. It will be our public services. It will be our NHS. It will be our schools. It will be our energy.
This election will lay the groundwork for the next decade. Do we want another lost decade of no growth, stagnant wages & ‘tightening our belts’, whilst the financial sector and top 1% of earners get ever richer? Or do we want to face our challenges head-on? Believing in ourselves. Beliving in our country. Beliving in each other.
December 12th — make your choice. Barbarism or decency.
