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January 04, 2020


Ralph Musgrave

I’m baffled as to what the purpose of government borrowing is. One ostensible purpose is to deflate demand stemming from some sections of the population so that demand can be increased in the form of more government spending.

But the rich (from who government borrows) won’t cut their weekly spending much just because they’ve loaned to government: indeed they may actually INCREASE their weekly spending, since government affords them a more profitable use of their savings than previously obtained.

That means the main cut in household spending must come via the increase in interest rates that stem from increased government borrowing. So in effect, the increase in government spending is funded via a tax on one particular section of the population, i.e. people in debt, of whom mortgagors clearly form a sizeable proportion.

The logic of all that eludes me. But I’m sure I’ve missed something…:-)

Kevin Carson

Borrowing shouldn't even be necessary. Where is it written in stone that government spending in excess of tax revenue must be funded by the sale of interest-bearing securities, rather than simply spent into existence? Likewise, why must new money be lent into existence at interest rather than deposited as credits in citizens' bank accounts?


This dilemma applies to a large range of policy areas. Should Labour say that Freedom of Movement lowers the pay of the lower-pay to win votes, even though it is untrue?

Another aspect of this dilemma for Labour is that many people who vote for it recognise that this kind of thing is bullshit and are less lkely to vote Labour if it does accept these myths.

"What voters say on the doorstep" might be interesting or it might be just a regurgitation of tabloid myths.


"When the government borrows, it raises other people’s incomes and so increases its own tax revenues."

Odd then that 45 years of almost entirely deficit spending has resulted in a National Debt of £1.8tn, a sum now approaching the entire annual GDP. Surely all that debt should have paid for itself by now, right? Or is it only ever future debt spending that has the magical self financing characteristic, while debt that already been spent somehow hasn't got the same power? Weird that........


While money can be spent from thin air, it's harder to see where Labour might have got all the extra builders needed to build the new houses, nurses to staff the hospitals or trained telephone engineers to install fibre broadband.


Jim and Ralph, how dare you expose the lack of intellect behind macro-economic thought!


The "credibility" challenge for Labour was not the level of borrowing they were suggesting, but that (some of) the spending they were suggesting was a mixture of frivolous, ill thought out and petty electoral bribery.

"Free broadband for all" and the on-the-hoof Waspi policy are what cut through about Labour's fiscal responsiblity, not increased spending on the NHS.



There is no point in spending money if it provides no good return.

If you suddenly increase the budget of a dept, some of that money will not be well spent.

A gradual rise over 2 parliaments might have had credibility.

Free bannanas for all (pace eric morecambe) does not gain votes.

Ahmed Fares

What fiscal policy giveth, monetary policy taketh away.

We tax rich people and give the money to poor people. Because of the differing marginal propensities to consume, the rise in aggregate demand causes inflation. The central bank steps in with higher interest rates, which increases the flow of interest from the poor to the rich. Once again, and because of the differing marginal propensities to consume, aggregate demand falls.

In this way, the money flows from the rich to the poor and back to the rich again, as it must so as not to exceed the economy's capacity.

Tax dollars are not fungible. The dollars you get from taxing Warren Buffett are as useless as the dollars you get from the government's printing presses. Because that doesn't free up real resources.

Everyone says "tax the rich". I say "tax the poor". That's how you get real resources, and without having to raise interest rates.

Either way, any increase in government spending is borne by the poor. It can't be otherwise.

Ralph Musgrave

Ahmed Fares, I think you are too pessimistic. Certainly taxing the poor is more effective in that $X of extra tax imposed on the poor will cut demand by more than $X of extra tax imposed on middle income earners or the rich.

But that's not a good reason to totally give up on taxing the rich.


Jim comments that consistent deficit financing has resulted in growing ratio of debt to GDP.
If he reads the article carefully though he will notice Chris remarks on negative real interest rates. This is not a normal feature of gilt markets so goes some way to explaining why now is different to then. Portugal has engaged in just such an exercise in recent years and has seen its economy turn around whilst it's deficit to GDP ratio has fallen.


Ralph Musgrave in his opening post notes that one purpose of gov' borrowing is to reduce demand of one sector (rich) and increase it in another (poor).
However this misses the point. If the bulk of the increased borrowing is for investment purposes and the 'rich' are seeking savings because they do not want to invest (returns for risk not favourable or demand not evident) and the economy has spare capacity the resultant rise in interest rates might be rather less and rather later than supposed. Furthermore during this fiscal expansion income increases so reducing the debt to income ratio as stated in the article.
See Portugal example:



Rich, Dan, Andrew, Agreed. I remember thinking as each spending 'bid' came out. What the fuck! The would be Labour Chancellor, was already finished before the results came in. Expect the same hurried stuff next time too.

My thinking at the moment is basically questioning like Ralphs. I assume Guv bonds are a giant iceburg/fatburg, freezing in the money of the wealthy - stopping them chasing the current goods and services available in the economy. However, an individual's 'assets' in Guv bonds serves the more important social function of keeping the middle class buggers loyal to the state, in hope of future gains. So a Win Win for Guv. Later 'explained' in a neat Macro model that MMTers have shown to be an absurd problem for a Sovereign currency issuer?

'Everyone says "tax the rich". I say "tax the poor". That's how you get real resources, and without having to raise interest rates.
Either way, any increase in government spending is borne by the poor. It can't be otherwise.'

I like your model sir, but it made me think of Multhus and TINA all in one go.

How about if we say, tax not the working poor or the working rich, but tax the rentier via say, LVT. Then simply target near full employment - if necessary of course - and worry about interest rates to fine tune bank lending later. How would that affect your 'Grim Science' depression?


Mike W says "However, an individual's 'assets' in Guv bonds serves the more important social function of keeping the middle class buggers loyal to the state, in hope of future gains"

What gains? If you lend the gov at current low rates of interest the only way your gilts are worth more than what you paid is if interest rates go down further.
So which is it. Are interest rates going to rise after the fiscal expansion, or fall?

Ahmed Fares

Ralph Musgrave,

As regards taxing the rich, I was being extreme to illustrate a point which is why I used Warren Buffett as an example. This is because he lives a frugal life. I suspect his marginal propensity to consume is zero. Which is why his tax dollars are useless to us.

If we tax a very rich person who has high consumption, then we free up resources that would have gone into building yachts and use that for things like health care, education, etc.

This is why I stated that tax dollars are not fungible. This is also why I favor a consumption tax. Let Buffet keep his billions and invest them for the good of society, and put a high tax on yachts, for example.

Taxing the rich is a blunt instrument. A consumption tax works better in that regard.


Ahmed Fares.
Would be a lot simpler and a lot harder to avoid if you just taxed land than yachts or so called luxury goods. Worst comes to worst you can seize the former. I imagine any tax accountant would make short work of nullifying tax liabilities due on any yachts!

Ahmed Fares


The purpose of taxes on the rich is to free up resources, which you don't get in the case of a land tax, because land, unlike yachts, doesn't use up capital and labor.

Taxing large houses on the other hand would do that.

As an aside, money has diminishing marginal utility. Which is why you need to pay rich people a lot of money to induce them to keep working. If you tax rich people too hard, then they begin to trade leisure for work. That means less output and the aggregate supply curve shifts leftward. That means higher taxes and higher interest rates on the remaining workers in society, to move the aggregate demand curve leftward also.

There's no free lunch here.



The government estimates that the point at which someone becomes a net fiscal benefit to the exchequer is when they earn around £40,000 per year.

Obviously there will be variation. If you have five kids, all delivered in NHS hospitals, all educated in state schools, your break even point might be higher. And if you are a fit adult who has no dependents but who suddenly drops dead at 65, having never experienced any previous illness, it might be lower.

Bear in mind that immigration will incur externalities, such as loss of social cohesion. Diversity may actually turn out to be our weakness, not our strength.

Economics isn’t the only consideration. If our immigration policy only admits billionaires, but all the billionaires share the beliefs of Osama Bin Laden or Mao Zedong, we’d be better off with a policy which only admits penniless Indian Dalits.

Penury is preferable to well-funded fanaticism.

Paul Chernanko

Ahmed Gates. A well constituted land tax would have little to no net effect on most homeowners. ie;if LVT introduction is balanced by reduction or elimination of income taxes, VAT etc. Most of the burden would fall on those with the most valuable homes. Still obvious that any more general wealth taxes like that on yachts for example, would be easily avoided.

Your point about rich people needing rich incentives to keep working is more theoretical than empirical.It ain't necessarily so! See E.Saez and Zuchman for example:

Ralph Musgrave

Paulc156 (above), in answer to my opening comment above, says that if an economy has “spare capacity” then there’s no need to raise interest rates consequent to government deciding to fund more spending via borrowing. That’s true.

But the purpose of my comment was to querie the logic of government borrowing AS COMPARED TO funding government spending via tax. If there’s spare capacity, then the latter tax is pointless: government and central bank just need to create new money and spend it.

Assuming the extra government spending goes to investment, that MIGHT seem to justify borrowing. But the fact of making an investment does not actually justify borrowing: e.g. a taxi driver who wants a new taxi, and who happens to have enough cash to buy the new taxi will probably not borrow so as to purchase the taxi. So what justifies borrowing is shortage of cash, not the fact of making an investment. But governments are never short of cash in that they can grab limitless amounts of it off taxpayers, or print the stuff.

derrida derider

"One of Labour’s few advantages over the Tories is its mass membership."

Exactly wrong. Like every other party, its membership is composed of people deeply unrepresentative of the views of those it needs to appeal to win elections. Having such a large, highly motivated and extremely powerful membership is a drawback, not an advantage. The Blairites are and were right - that membership currently needs "demotivation by a more centrist program".

None of which is denies that Labour's macroeconomic policy is correct. But then macroeconomics was never the Corbynite's electoral problem. It was MICROeconomics - the equivocation over Brexit, the nostalgic renationalisations, etc - that was the problem.


The trouble is with not punching into your manifesto your spending plans is that you give the house of lords reason to block your plans, so you can't really lie to the wider public - but perhaps you can be vague. The House of Lords, with its multi-aristocrat and cronie membership is unlikely to be friendly in the future.

How then you let people know that you are right on the macroeconomics point without being wrongly criticized for spending money?

I don't know the answer to that, especially with the media wing of the Tory party calling the shots.


Criticism of Labour's economic plans can be split into two buckets.

First, will a spending splurge deliver value for money? There didn't seem to be credible cost benefit analysis 'in the round' rather than for specific pledges. Chucking money at individually worthy projects doesn't mean getting value for money, especially if they compete for same resources (a surge in infrastructure spending will drive up pay for engineers and trades, it won't help the unskilled 'left behind').

Second, how realistic is extracting sums needed from taxation and borrowing. All but the truly dim know 'the rich will pay' is easier said than done, and whilst borrowing to deficit spend may be cheap right now, will those conditions hold especially given the lack of thought given to value for money?

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