The idea that government surpluses are good because they create piles of cash waiting to be spent in the event of a national emergency is absurd. All money paid in tax is cancelled on receipt by the government. So, all government surpluses actually do is reduce the amount of cash in the private sector economy.
Quite so. That then increases the amount of cash govt can pump into the economy – without generating inflation – if there’s a crisis and it needs to. It doesn’t save money, true. But it does save the ability to issue money, which is good.
In practice wouldn’t the a govt surplus be used to pay down debt, freeing up more cash and creating a bit of a virtuous circle and provide the bandwidth to borrow when needed?
Yes, but that’s second order, which we know Spud doesn;t do. He’s on first order only here..
Wouldn’t taxes used to pay down debt re-enter the economy? Admittedly maybe someone else’s economy if the lender was overseas, but nevertheless its not cancelled. Surely only a budget surplus at times of zero debt would result in tax monies being cancelled?
I hate to tell this to people who think that is the case, but it’s simply not true.
And why am I saying this, anyway, because government surpluses are things that, in the UK, we are completely unfamiliar with? Well, that’s because, just over the Irish Sea, the Irish government is, at present, running a significant government surplus.
You don’t hate to tell people anything as you’re an arrogant idiot who thinks he has gained insight that has eluded generations of economists who actually have some legitimate expertise in the subject.
Now, partly that’s because there are a very large number of multinational corporations who headquarter their operations in Europe, in that country and record their income there, and as a consequence pay a considerable amount of tax in that country which is not really earned there. So, the Irish economy is totally distorted by the presence of these companies who are essentially tax avoiding in the Irish tax haven, which I’ve criticised for a very long time.
So tax rates do have an influence on Corporate Activity then?
But, there’s more to it than that. The consequence is that Ireland is actually in something of a mess. There is obvious massive poverty, whilst there is also obvious massive surplus income amongst those who are fuelling the needs of these multinational corporations who are locating their activities in Ireland, and there is hyperactivity around the Irish Financial Services Centre in Dublin, yet across the country as a whole, young people can’t find homes.
Once again the massive elephants in the room, which are:
– excessive immigration of people with no right to be there and
– significant levels of tax on assets other than property (both of which Murphy approves of) are ignored.
The cost of renting has gone through the roof. There are many people who are simply and straightforwardly homeless as a consequence. Poverty is growing, inequality is rising, social stress is significant, the political system is under enormous pressure because of the desperate attempts of the current coalition government to keep Sinn Fein out of power, and onwards and onwards. Ireland is not an example that we would really like to copy, from being a tax haven and everything else.
I agree – we need to reduce immigration and clamp down very hard on the Hard Left and people preaching that money can be created without limit and that MMT is a valid theory. That’s certainly a lesson we need to absorb.
But let’s go back to that point about the surplus. People in Ireland seem to think that this means that there is a pile of cash for the government to spend. And certainly, when we hear people talking about the need to cut the government deficit and the government’s debt in the UK, the impression given is that this would result in the UK government sitting on a significant pile of cash which it could use as the proverbial rainy day fund to cover for any other future unforeseen eventuality like Covid all over again, which is a complete possibility. And that’s not true.
This is from a professor who is employed by a UK university – why is OFQUAL not investigating that institution?
The problem with the claim that people are making about government surpluses is that they assume that governments are like households and companies. And they’re not. They’re nothing like households and companies because for a household and for a company, money is something external to them.
In other words, they have to earn it.
They can’t create it.
They don’t have their own bank.
They can spend it only if they’ve got it or they have an agreed overdraft limit with their bank.
But for governments, that is not the case.
Venezuela and Zimbabwe aren’t real I am telling you!!
Governments, including, by the way, that in Ireland, can create their own money. After all, every government inside the Eurozone does create its own money, within agreed limits with the European Central Bank. And so, the Irish government can create the money that it is now overtaxing out of the Irish economy. And if it doesn’t create it, someone else in the Eurozone will have done, which also permits this over-taxation to take place.
And the point is that they can create tax bills that people have to legally pay even if they have got no direct exchange of goods and services with the government as a consequence.
A rather convoluted of saying monopoly power of taxation sits with government.
A tax bill, after all, is not a charge for services rendered, which is what we do to get our income, whether it is to ask our employer to pay us, or whether it is, for the self-employed, to send out a bill for something that we have done. Companies do the same thing. They send out invoices for services they’ve supplied and goods they’ve sold.
But that isn’t true of tax. Tax is imposed by law, and is collected by governments not to fund their expenditure, because that’s already been paid for by government money creation, but is instead used to cancel the consequences of that money creation to prevent inflation.
That’s what the Irish government is doing. It’s charging tax to cancel the consequences of the creation of money that it has spent into the economy over time. But it’s now running a surplus. It’s taking more money out of the economy than it alone has created at this point in time.
Now, that doesn’t mean to say it didn’t make it in the past. Let’s ignore that point for the moment but also bear it in mind.
My point is, they are taking money out of the economy. And that’s all that tax does. If you run a government surplus, you’re taking more money out of the economy. So, the government is not creating a pile of cash that it sits on.
Vital at a time when there’s massive inflation and more planned both by the likes of Murphy and others with ulterior motives.
It is reducing the pile of cash that the private sector sits on because whenever the government collects tax revenue, it cancels the money paid. It doesn’t then recycle it because banks don’t do that. Banks do not take money in and then lend it out again. That’s nonsense. That isn’t how banking works.
Banking always works on the basis of creating debts and repaying them. And so do governments. They create tax debts and they’re repaid in money. And when they’re repaid in money, the transaction is complete. There’s nothing left. There is no pile of cash. Because the government is not like us, we can run a surplus and see a balance in our bank account. But the government doesn’t. The money’s gone.
I refer back to the OFQUAL point – how is this obvious bullshit allowed to be taught?
And the point then is that the Irish government is not sitting on a pile of cash as a consequence of running a surplus. What it is doing is reducing the cash pile of the private sector of the Irish economy. And that’s exactly what would happen in the UK if we did the same thing and ran the surplus that so many on the right wing of politics would like us to do so that government debt is reduced.
Do we really need to see the cash in the private sector of the UK economy reduced in this way? Well, there’s an argument that for the sake of redistribution of income and wealth, then maybe that should happen. But my argument would be that would be wrong. If we did tax the wealthy and those on high incomes more, we should redistribute it to those on low incomes so that they could spend it. In other words, I do not think it would be wise to simply withdraw that cash from use in the economy.
And why is that? There are two good reasons. One, we have a growing country. Quite literally, the number of people in the UK is rising. I know partly from migration, and some people don’t like that. But as a matter of fact, we have got a growing economy in terms of number of people, and indeed in terms of economic activity. Modest, but growing nonetheless.
The growth in the UK economy is caused by a load of Hamas footsoldiers finding their way over on boats and this is a Good thing – as Steve would say in jest – ‘stick that in your pipe and smoke it you bigot’
And we’ve also got small levels of inflation, which is the second reason why we need more money because if we have inflation, The amount of cash we need to make the transactions within the economy work does, of course, grow. And taking excess private sector money out of the economy, in that case, is bound to cause stress, bound to reduce liquidity, and eventually bound to cause recession, because there won’t be enough cash to go around.
That’s what running a surplus means for a government. It means squeezing the private sector’s access to cash, which will inevitably lead to recession, and will reduce private wealth.
So why is it that so many right-wing economists and so many right-wing politicians want to do that? I wish I knew because it literally makes no economic sense at all.
And yet he advocates near unlimited taxation of private resources – increase in every conceivable tax? Does he even read what he posts in the previous hour??
Using MMT to model one half of the transaction stream but not the other half seems a standard lefty trick.
Somewhat along the lines of:
“Can you lend me £20?”
“Actually just give me £10 now and owe me the rest”
“Now you owe me £10 and I owe you £10 so we are quits”
The Scottish government cnnot cancel the money that it receives in £ notes as they are either issued by the BoE or by a private sector bank resident in Scotland.
Is there no limit to Murphy’s ignorance?
“they assume that governments are like households and companies”: and indeed they are similar except that the time scales are different. It took the Weimar Republic longer to go bust than an ordinary household, equally badly managed, would have taken.
Slightly related:
In the Speccie lunchtime email:
They’re not even pretending now. They’d have been more than happy to screw private sector workers.
At the start of his post, Spud says “ partly that’s because there are a very large number of multinational corporations who headquarter their operations in Europe,”, yet by the end of the post it’s “ It means squeezing the private sector’s access to cash, which will inevitably lead to recession, and will reduce private wealth.”.
If the Irish govern ent is getting a large part of their corporation tax receipts from foreign companies, it’s not necessarily squeezing the local Irish businesses as much.
So this week he’s demanding that tax be paid in the country that generated the income? So, Mrs Sunak was in the right paying her Indian taxes in India.
Hang on, Ireland’s in the Eurozone. It doesn’t issue or control its own currency. What’s he wobbling on about?
@Bloke in North Dorset
If you look at Norway as an example they have a debt of about 40% GDP but still choose to have a $177 billion sovereign wealth fund that could pay off the debt if they wanted. Clearly they think it’s prudent to have reserves in case of a national emergency.
@andyf,
Isn’t Norway’s SWF a defence against the resource curse? I presume having a small amount of debt relative to GDP is in some way also part of that strategy?
(They’ve got some very disciplined politicians!)
@Andyf
Norway’s sovereign wealth fund was to buy assets in foreign denominations to stop the NOK getting too strong. To the point that at one stage they were borrowing in NOK (nearly if not all their debt is domestic) in order to buy dollar assets and keep the NOK down.
But Matt, that presumably has several NOK on effects.
I’ll get me coat.