Iron discipline or MMT: If austerity is not needed why worry about the deficit

John McDonnell proposed a new ‘fiscal credibility rule’ in 2016. Basically he said that while labour would borrow to fund Investment, it would ensure that spending and tax revenue would balance over a 5-year period.

Surely however this still accepts the neo-liberal dogma that deficits are a bad idea. The reasons for this seem to lie in the advice provided by neo-Keynesian advisors such as Simon Wren-Lewis.

A critique of this position which argues that deficits are not a problem since governments will never run out of money arises from the post-Keynesian ideas contained in Modern Monetary Theory.

Clearly one benefit of this set of ideas is that it demonstrates that austerity was and is totally unnecessary. This view received endorsement from a strange quarter recently when Tory MP John Redwood declared:

“I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills. Mr Osborne, originally a critic of this in opposition, then discovered its charms in office as well. It turned out to have no adverse consequences on shop price inflation, though of course it caused massive price inflation in government bonds, because it was accompanied by severe pressure against bank lending to the private sector to avoid an inflationary blow off. I always adjust the outstanding debt by the £435 bn the state has bought up, as this is in no sense a debt we owe. So our government borrowing level (excluding future state pensions which some here worry about and which have always been pay as you go out of taxation) is modest by world standards at around 65% of GDP, and at current interest rates is affordable.

Most of the state debt we owe to each other anyway. The government owes it to taxpayers who own the debt in their pension funds and insurance policies. The state can always raise enough money to pay the domestic bills backed by the huge powers to tax, and as we have just seen when credit expansion and inflation are low it can also use liquidity created by the monetary authorities.”

Surely we should ask whether our local Tory MP, Philip Dunne, also now acknowledges that there is no need for all the austerity cuts?

Equally since now even Tory MPs are making it clear that state debt is not a problem, why should the Labour Party and John McDonnell tie themselves to so-called fiscal credibility rules that will restrict their ability to use radical monetary and fiscal measures to really radically transform our economy for the better, for the many.

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published this page in Members Blog 2018-03-15 18:21:39 +0000

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