The cognitive dissonance is palpable among Tory supporters today. Having spent the last eight weeks spouting the economically illiterate mantra that there is no #magicmoneytree, they have discovered that when it comes to buying the votes of the political wing of the Old Testament there really is a magic money tree; one that can magic up £1.5bn out of thin air.
Nobody with the first clue about money creation seriously believes the nonsense about magic money trees or about government having to balance its books like a business. Indeed, the whole point about sovereignty is that a government has the monopoly (which it also licenses to private banks) on the creation of its currency. This means that it is free to print and spend money as it sees fit. Mrs May did not have to walk across the road to the Treasury to see if there was enough money from taxes to cover the £1.5bn bribe to the DUP. All she had to do was dial up the Bank of England and ask them to deposit £1.5bn of entirely new currency into Arlene Foster’s chosen bank account.
Ah, but doesn’t money printing cause inflation? Well, no, not if government sets tax rates correctly. This is another thing that most people get wrong about money as a result of the ridiculous household analogy. If you or I, or the businesses we work for want to spend money, we must either earn it or we must convince a bank that we have sufficient credible income against which to borrow it. It is easy, therefore, to imagine that the government works the same way. That is, that the government must bring in enough tax revenue either to cover the spending or to convince lenders that they will be able to repay a loan. Only then, we assume, can government spend the money. But the reality is the exact opposite of this. First the government either prints or borrows the money it chooses to spend, then it uses the tax system to ensure that sufficient money comes back to the treasury to avoid runaway inflation. As Professor Emeritus Mary Mellor, from University of Northumbria explains:
“Despite the claim that states ‘printing’ money is automatically inflationary, this is not the case. What matters is the relationship between state income and expenditure and the condition of the wider economy. The skill is to balance the money created with the money recovered via taxation. In any case, public deficits can be a good thing. They put fresh money into the economy that is then free to circulate.”.
And investors are more than happy to lend money to the government precisely because – unlike you, me and the firms we work for – the government simply cannot go bankrupt. As such, government bonds – at least in a developed country like the UK – are about the safest investments on earth. Consider that despite more than doubling the debt they inherited in 2010 – after labour had borrowed heavily to bail out the banks – confidence in the Pound under the Tories remained high until the shock of the Brexit referendum result. Even now, despite losing 10 percent of its value, investors are still queuing up to lend money (i.e. buy government bonds) to the government.
A lot of people today are waking up to the realisation that government really can spend money wherever and whenever it pleases. Some have been quick to raise the obvious question that if the government can conjure up a £1.5bn “cash for votes” bung, how come they couldn’t pay for 10,000 police officers, a decent pay rise for nurses and fire fighters or above the poverty line benefits for sick and disabled people? There is, of course, a blindingly obvious answer to this; but this time it has absolutely nothing to do with the economy.
Look at the people at the heart of the government since 2010 – over privileged and over promoted public schoolboys like David Cameron, George Osborne and Boris Johnson – and you see the answer hiding in plain sight. These were all members of a university club whose initiation rites included setting fire to £50 notes in front of homeless people. The reality is that they never grew up. Politics was always a game for them. Getting into government simply allowed them to play the £50 note game on a massive scale. Austerity was their chosen method. Instead of setting fire to mere currency, forming a government provided them with the means of torching entire industries and trashing public services before the eyes of Britain’s poor and not-so-poor. Tearing up the supposedly National Insurance-funded social security system and forcing hundreds of thousands of households to seek support from food banks is merely the same game but for grown-ups. Trashing the NHS and the emergency services, subjecting the disabled to humiliating pseudo-medical testing, imposing the bedroom tax while depriving councils of the means to provide housing, it was all just more £50 note burning.
As Mrs May has so ably demonstrated, had they chosen to, they could have conjured up the currency to invest in public housing, infrastructure and business development. They could have paid decent wages to teachers and nurses and fire fighters; and that new money would have been spent into the economy where it would have helped businesses and households recover from the 2008 crash and the ensuing recession. Had they have done so, they would also have had to increase taxes on wealthy people like themselves. That, too, explains a lot about why they never did. And if you are, or aspire to be one of the wealthy then you too might object to governments raising money to kick start the economy and to properly fund public services when it requires that you pay your fair share of taxes. And there is nothing wrong with such displays of self-interest. But let us bury once and for good the idea that this has anything to do with managing the economy or with prudence… because Arlene Foster has just been given 1.5 billion reasons to prove you wrong.