Robert Halfon says voters will “go bananas” if the government pays the EU a £40bn “divorce bill”. There might be a simple solution here.
Mr Halfon is right to think it unacceptable to fund the (say) £40bn payment by raising taxes or cutting spending. It is vanishingly unlikely that a fiscal tightening of 2% of GDP will be justified in the next couple of years.
Nor is it right that the bill be paid by borrowing, even though the government can borrow at negative real interest rates. Borrowing is deferred taxation. Even if we set aside considerations of Ricardian equivalence, as perhaps we should, it’s unacceptable that young people today will face higher taxes in future to pay for a decision taken by their elders. And it would be astoundingly hypocritical of a government that has justified austerity on the grounds that public debt imposes a burden on future generations to demand that they do so.
But there is, of course, a trivially simple alternative here. Quite simply, the bill could be paid by printing money. The Bank of England can print £40bn and hand it over to the government; in effect, we’d have another £40bn of quantitative easing.
This would not be inflationary, except to the extent that converting £40bn into euros would tend to weaken sterling: this would be a neat test of just how liquid the FX market is. This is because the £40bn is not being spent on domestic goods and services, and so will not raise aggregate demand. If you want to see this in MV=PT terms, the increase in M will be offset by a fall in V – so there’s no inflation.
There’s no reason therefore to get het up about handing over £40bn. Because we can print our own money, giving £40bn to the EU does not mean we have to sacrifice real resources. The analogy with a divorce bill is misleading. When a man pays to divorce his wife, he suffers a loss of real wealth – some of record collection and DVDs and so on. This need not be the case with leaving the EU.
Of course, I believe Brexit will make us genuinely poorer. But this is because we’ll have less favourable trading terms with the EU and tougher immigration restrictions. The “divorce bill” is (barring the impact on sterling) neither here nor there.
Which poses the question: why are the Tories making such a big issue of it?
Simple. It’s because creating £40bn in this way would raise the question: if the government can easily find £40bn for the EU, why couldn’t it find £40bn for the NHS?
In principle, there is a good reason. Spending an extra £40bn in the domestic economy could be inflationary, whereas giving it to the EU is not. The constraint upon government spending is inflation.
The Tories, however, cannot use this argument. For years, they have claimed that austerity was necessary because the constraint upon spending was the state of public finances. That was false. If they were to pay off the EU in a rational way, they therefore have to admit that austerity was largely unnecessary.
In this sense, the Tories’ past stupidity compels them into making even more mistakes.