Public spending and finance: How to spend? To borrow or not to borrow? Özlem Onaran Greenwich Political Economy Centre,
Outline What is the government budget, public spending and revenues? What are taxes, who pays taxes? What is fiscal policy and what is its aim? What do/should governments spend on? What is green and purple public investment? How can it be financed? How much can/should the government borrow? Is there a role for a National Investment Bank? Is there a role for the Bank of England and monetary policy? What is People s Quantitative Easing (QE)?
What is the government budget? What is fiscal policy Public spending: Public investment: conventionally only physical public infrastructure, Railways, roads, social housing, public buildings but also defense Current public spending in public education, childcare, health, social care, public security, culture, recreation salaries of public sector employees Transfers: eg job seekers allowance Public Revenues: taxes on income of labour and capital, consumption, wealth Eg personal income tax on wage income, corporate tax rate on profits, value added tax, inheritance tax Progressive taxation: higher tax rate on higher income Government budget balance=tax revenues-public spending If negative, budget deficit public borrowing UK budget deficit /gross domestic product (GDP), 2017: 2.4% Public debt: stock of debt via accumulation of annual deficits 2017 UK public debt/gdp: 86.7) Fiscal policy: Government decisions about public spending or tax rates
Austerity: Cuts in Public spending/gdp since the 2008 Great Recession public spending/gdp fell from 45% in 2009 to 38.9% in 2017; plans to cut to 37.6% by 2022 negative effects on demand due to Cuts in public investment the squeeze in earnings due to cuts to public sector wages A vicious circle of chronically low demand = low investment, low growth and bad quality jobs =Stagnation in productivity self-defeating; the fall in budget deficit has been slow The recovery in Britain is built once again on the shaky ground of household debt instead of investment, productivity and a healthy wage growth and will remain fragile to any increase in interest rates public budget surplus in the macro sense means that some one else, eg households, need to run a deficit, destabilizing in the medium run.
What is the aim of economic policy? The budget deficit is the wrong policy target to begin with The main deficit is the deficit in investment, care, and equality. take care of full employment, decent jobs and pay for women and men, equality, and ecological sustainability, and the budget will take care of itself.
Key challenges of 21 st century defines the priorities of economic policy full employment, equality, ecological sustainability Consistency among targets Restructuring our economy Multiple crises requires to mobilize all the tools of policy a comprehensive mix of fiscal policy and public investment in social and physical infrastructure is at the core Physical infrastructure: green jobs Social infrastructure: Purple jobs for both men and women Care crisis and ecological crisis monetary policy labour market policy for equality-led development industrial policy
Public investment priorities Public Investment should prioritize social, ecological and economic needs: Infrastructure where benefits do not just accrue to individual users, but have a public good character and accrue to society as a whole: education, health and social care, clean energy Where Large scale investment requirements create natural monopolies -> public/collective ownership: railways goods and services, access to which is seen as human right -> private supply/profit motive leads to undersupply /privilleged access-> public/collective ownership: education, health, social care ->public investment in social and physical infrastructure
Public investment priorities Physical infrastructure: green investment Public transport, renewable energy, housing (building and insulation) Wind, tidal, solar, bio NOT carbon capture, nuclear, fracking Ecological deficit Social infrastructure: Purple investment education, health and social care, child care care deficit Both direct and indirect impact on productivity Educated and healthy workforce Female labour force participation» socializing the invisible, unpaid domestic care work Social security more innovative and productive workers improve pay and working conditions in these industries More jobs with lower Carbon emissions labour intensive services Purple and green are complementary
How to finance? Taxation Borrowing National Investment Bank Monetary policy 9
Progressive tax policy on income and wealth Higher income tax on high income UK1974-79: the top income tax rate was 83% above 90,500 in today s prices!; top 1% Higher corporate tax rate; UK lowest in G7 Higher tax on wealth median linked taxation of high incomes and wealth holdings Higher marginal top income tax rates e.g. 10/70 income tax rule: rate of 70% for income above 10 times the median income Wealth tax 100/10 wealth tax rule: 10% wealth tax on personal net wealth that is above 100 times the median wealth (excluding primary residence and own businesses) Higher inheritance tax rates 100/90 inheritance tax rule: highest marginal tax rate of 90% for inheritance above 100 times the median wealth
Borrowing Fiscal credibility rule: borrow only for public infrastructure investment Impact on public budget partly self-financing; there is money! Increases national income in the short run ( multiplier ) Increases productivity in the long run Leads to higher tax revenues Critical question: What is infrastructure Redefine social infrastructure as investment (Women s Budget Group) Currently, public spending in education, childcare, health and social care are considered as current spending as opposed to public infrastructure investment redefine fiscal policy rule: borrow to invest in both social and physical public social infrastructure
National Investment Bank: Overview The existing financial system in the UK has proven inadequate for the economy and society investment disappointing by international comparisons Failed to fund long term productive investment, in particular SMEs Disparities between regions: in particular outside of London worsened sharply since the 2008 crash Existing schemes have not changed lending character e.g. Funding for Lending or Term Funding Scheme National Investment Bank and associated Regional Development Banks to reshape priorities Macroeconomic impact: Crowd in private investment demand (multiplier effects) productivity Regional convergence, financial stability not designed to be an alternative to public spending 12
Funding of the NIB an on-lending strategy: similar to the German KfW funding the Mittelstand Eg. initial equity financing by the Government issue an equity tranche of 20 billion in year 1, purchased by the Government a low cost strategy given the current low interest rates about1% of the public debt funded via its own bond issuance with the backing of government guarantee in the long run annual bond issues build up a satisfactory credit rating yields on NIB bonds expand the NIB balance sheet to about 250 billion in 10 years 250 billion of long-term on-lending to private banks leverage ratio (equity-debt ratio) 8% in year 10 still relatively high compared to commercial banks.
Relationship of the NIB with the financial sector not a competitor to private commercial banks on-lending from low interest rate bond finance work through selected existing banks to deliver loans enable discounted long-term loans to appropriate companies via other smaller private, savings and cooperative banks partners to be chosen for their understanding of NIB aims, performance, and standards of corporate governance. The target markets based on regional investment gap and opportunity rather than maximising net present value that tends to favour the South East. Freeing the banks from constraints of conventional banking preferring lending against a marketable physical asset (eg mortgage) Creating the conditions to give non-asset backed large long-term business loans University. of Greenwich
Alternative Funding of the NIB 1 make loans directly to borrowers, obtain funding from the Bank of England Peoples Quantitative Easing repo with the BoE as an extension of the Term Funding Scheme 2 make loans directly to borrowers, obtain retail deposits from households and enterprises. lessen the reliance on borrowing from capital markets, lessen the reliance on repo funding from the BoE, and would not rely on existing banks for loan creation. Disadvantages The potential need for a large number of physical branches, and a considerably greater workforce
Monetary policy Bank of England can use Quantitative Easing (QE) to buy government bonds to finance public investment A version of Peoples QE Questions regarding the remit and independence of the BoE Should be independent from financial markets and vested interest Should be accountable to deliver policy consistent with the targets of elected governments Going beyond inflation target and financial stability Employment, equality and ecological sustainability
Summary: Tackling 3 wrong justifications for the budget surplus dogma 1. compares public sector budgeting to households doubly wrong Households borrow: Buying a House, education, job loss... UK government can borrow from itself and a household cannot The government of a country that has a national currency is not constrained in its spending by revenue flow alone. obtains its funding from not only taxation, but also bonds sales to the private sector, and/or borrowing directly from the country s central bank ( monetization ). Spending creates income and productive capacity and partially self finances itself in the long run 2. the argument that public sector deficits put upward pressure on market interest rates crowding out of private investment interest rates are currently low Private investment is encouraged by public social and physical infrtastructure Alternative: borrowing directly from the Bank of England ( monetizing the deficit). 3. inflationary pressures Currently rate of inflation in the UK is about import dependency and low productivity no empirical or theoretical basis for the dangers of deficits, further budget cuts would qualify as ideological. 17
Empirical analysis: Alternative Policy mix public investment, progressive taxation, Increasing equality increase public investment by 1% of GDP+ wage share by 1% + more progressive taxation (1% higher tax on capital and 1% lower tax on labour) Obst, Onaran, Nikolaidi 2017 3.4% more growth per year Private investment increases by 0.7% as a ratio to GDP Public spending crowds in private investment, it does not crowd out >Demand >improved business environment >Increased profitability due to increased productivity NOT lower wages and lower taxes Budget balance improves by 0.1% as a ratio to GDP public investment self-finances part (15%) of itself
Conclusion Equitable and sustainable development needs green and purple public investment and pay rise for both women and men! Advice: Take care of full employment, decent pay for women and men, equality, and ecological sustainability, and the budget will take care of itself.
References: Onaran, Ö., Nikolaidi, M and Obst, T. (2017) "The role of public spending and incomes policies for investment and equality-led development in the UK", GPERC Policy Briefs,, #PB17-2017. Onaran, Ö. and Tori, D. (2017) "Productivity puzzle? Financialization, inequality, investment in the UK", GPERC Policy Briefs,, #PB16-2017. Onaran, Ö., Nikolaidi, M. and Obst, T. (2017) "A coordinated mix of public investment and incomes policies for sustainable development in Europe", GPERC Policy Briefs,, #PB15-2017. Onaran, Ö., Goda, T., and Stockhammer, E. (2014) "A Case for Redistribution? Income Inequality and Wealth Concentration in the Recent Crisis", forthcoming in Development and Change http://gala.gre.ac.uk/14056/1/gperc05_onaran_goda_stockhammerf.pdf Onaran 2015 "State and the economy: A strategy for wage-led development" http://gala.gre.ac.uk/14075/1/gperc24_onaranf.pdf Onaran 2016 "The role of gender equality in an equality-led sustainable development strategy", forthcoming http://gala.gre.ac.uk/14077/1/gperc26_onaranf.pdf Onaran, Ö. (2016), "Secular stagnation and progressive economic policy alternatives", Greenwich Papers in Political Economy,, #GPERC39 Technical references Obst, T., Onaran, Ö. and Nikolaidi, M. (2017), " The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe", Greenwich Papers in Political Economy, University of Greenwich, #GPERC43 Onaran and Obst 2016 "Wage-led growth in the EU15 Member States:The effects of income distribution on growth, investment, trade balance, and inflation" forthcoming in CJE http://gala.gre.ac.uk/14079/1/gperc28_onaran_obstf.pdf Onaran, Ö. and Galanis, G. Income distribution and aggregate demand: National and global effects Environment and Planning A, 46 (10). 2489-2513, 2014 Tori, D., and Onaran, O. 2015 "The effects of financialization on investment: Evidence from firm-level data for the UK", http://gala.gre.ac.uk/14068/1/gperc17_tori_onaranf.pdf Onaran 2016 "Wage- versus profit- led growth in the context of international interactions and the political aspects of wage-led recovery" forthcoming in ROPE http://gala.gre.ac.uk/14076/1/gperc25_onaranf.pdf 20
Appendix
Aims and mandate of the NIB and RDBs In line with the long-term industrial strategy and social goals a sustainable, regionally-balanced and equitable economy defined in cooperation with stakeholders Addressing the long term funding gap for Businesses, in particular the SMEs, non-profit, third sector organisations both physical and social infrastructure technological progress and innovation high-value local projects, in particular in regions outside of London/the South-East
Regulatory framework of the NIB The government is the sole equity holder and under-write the NIB bonds, to be treated in the same manner as the KfW in Germany a separate object for the purposes of public sector accounting, according to the European System of National and Regional Accounts NIB will not be a systemically important institution: ca.10% of GDP finally
Regional development banks and the NIB The regional branches of the NIB The annual resources of regional branches should take advantage of local opportunities and needs to close the extreme disparities in infrastructure investment, employment and productivity significant manufacturing in the Midlands and North of England, Scotland, Wales, and Northern Ireland implicitly sectoral rebalancing of the UK economy