John Barry: The state does not need to worry about public debt and should give a job guarantee to everyone who wants a job

Sandra Chapman in her Saturday column said that we will face ‘austerity and financial repression’ and that the government debt that has been built up through dealing with the pandemic ‘has to be faced by us all’

The UK government is the only legal authority allowed to issue currency in pounds so it can never run out of pounds. Thus austerity is neither inevitable nor is government debt necessarily a problem because a nation with its own currency can create money
The UK government is the only legal authority allowed to issue currency in pounds so it can never run out of pounds. Thus austerity is neither inevitable nor is government debt necessarily a problem because a nation with its own currency can create money

(Her article can be read here: ‘Orangemen in somberos– Twelfth to remember,’ July 18).

This may very well be the case, and indeed with a Conservative government in charge will probably be the case. However, we need to realise that if austerity is the chosen path, that this is precisely that, a choice, one made on ideology not some immutable law of economics.

Austerity is neither inevitable nor is government debt necessarily a problem.

John Barry is Professor of Green Political Economy at Queen’s University Belfast

The reason for this is that most of us have a completely wrong view of how government finances and money work in the modern economy.

As Sandra rightly points out in her piece ‘Few of us understand how massive debts run up by government are paid off’. And I hope this article goes some way to explaining this, though it seems counterintuitive, since most of us view government debt like household debt.

However, government finances are not like household finances. What I mean by this is that most of us not unreasonably assume that government need to raise taxes to pay for government spending, just as household need to earn income before they can spend.

However, this is wrong. Governments do not need to raise taxes to pay for its spending. Let that sink in.

A government such as the UK or USA that has a sovereign currency can create as much money as it needs.

In this respect it is extremely beneficial that the UK currency, the pound, is outside the eurozone and therefore fully under control of the UK government and central bank. As Alan Greenspan former head of the US Central bank (The Fed) put it, ‘There’s nothing to prevent the federal government creating as much money as it wants’.

And in a 2014 paper the Bank of England confirmed this was also the case in the UK. Think about this: how you ever wondered why there always seems to be government money available at will to be spent on wars, but not on education or the heath system?

A government such as the UK should never have to default on its debt so long as it is sovereign in its currency and issues and controls the kind of money it taxes and spends.

The UK government, for instance, cannot go bankrupt because that would mean it ran out of pounds to pay creditors.

But think about it. Since the UK government is the only legal authority allowed to issue currency in pounds, it logically can never run out of pounds. It would be like a referee at a football match running out of goals or points to give teams.

A consequence of this view is that taxes do not and indeed cannot directly pay for spending. Instead, the government creates money whenever it spends. In fact, government spending can grow the economy to its full capacity; enrich the private sector (since a government deficit means a surplus for that sector); eliminate unemployment; properly finance the NHS; make university education free; and have the financial capacity to embark on the urgent need to make the transition to a low carbon green economy.

And this increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labour.

For those interested in learning more about this economic approach, look up ‘Modern Monetary Theory’ or the excellent book by Stephanie Kelton, The Deficit Myth.

So, government debt is not like household debt (the not unreasonable but mistaken and commonly held view behind Sandra’s Saturday article). If governments choose austerity it is a political not economic choice for a country like the UK.

And since there is no problem I can think of that was solved by more un or underemployment, the way the government should act now is to increase deficit spending and thereby create money, implement a job guaranteed for anyone who wants a job and focus on ensuring any post-pandemic economic recovery is a ‘green and just’ one.

If it chooses not to do this and we have a repeat of the austerity we suffered in the wake of the last financial crisis in 2007-08, this will be based on purely ideological not sound economic reasons.

• John Barry is Professor of Green Political Economy at Queen’s University Belfast

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