Papers are filled with talk of the Theresa May’s NHS Brexit dividend this morning.
Thankfully, it appears that no one buys the story. Not one serious media outlet believes there is a Brexit dividend. The UK will still be paying the EU after Brexit. And because Brexit will shrink the economy there will be less tax paid.
But because the economy will be smaller the NHS will cost less money. Baumol’s Cost Disease, recall? Wages are set by the economy as a whole? Thus in a poorer country wages will be lower for all. Including those in the NHS.
I patiently explained that there are three ways in which government spending impacts the economy. First, I said that the government could simply create the money in question. I pointed out that over the last decade the government has created £435 billion to, in effect, bail out our banks. That is more than £40 billion of new money a year and there has been no inflation as a result: any inflation we have had is because of changes in oil prices or because we have left the EU.
QE wasn’t to save the banks. It was, as the BoE has repeatedly explained, to lower long term interest rates. Which it has done. And no inflation? Looked at asset prices recently?
Alternatively, we can let more people save with the government. That, after all, is all that government bond issues are: they are the creation of new savings accounts managed by the government for people who want to save with it. And, as I explained, as more and more people come to retirement age, more and more of them want more and more government debt to underpin their pension payments and as a consequence the demand for government savings accounts is growing exponentially. So, I argue, why not let them have what they want, especially when it has the benefit of having almost no net interest cost and providing funding for the NHS at the same time?
That low interest cost possibly having something to do with QE?