A Prime Minister has arrived at No 10 with, for the first time in living memory, a promise not to cut government borrowing – but to rapidly expand its size and scope, to the tune of 100 billion of pounds sterling. Liz Truss’ indifference to the sacred cows of public debt and deficit follows the path blazed by Boris Johnson, whose antipathy to austerity was allowed to run free during his tenure as prime minister. Post-Brexit, after the terrible 2017 election scare, the Tories realized the game was up for spending cuts: even the relatively well-off might, by 2016-17, have started to detect some inadequacy in the provision of public services, from schools to local authorities. Johnson immediately increased spending in real terms, even before the pandemic, and won an election with the promise of further increases.
The pandemic has seen borrowing reach extraordinary new levels, unprecedented outside of wartime; and yet the sky has not collapsed, except for some alarming swings in government debt markets in early March 2020. Borrowing has increased, and the ever-ready supply of quantitative easing (QE) Bank of England has grown alongside it: every increase in the scope of its e-money printing almost exactly matches every increase in the scope of government borrowing during 12 months of lockdowns and emergencies.
The cynics among us might well think it’s little more than monetizing debt, and, but for the detour new QE funds take as they enter the wider economy, the difference between the pandemic funding exercise and the government simply running a big old National Mint printing press is not as big as we like to make it out to be. Admittedly, thinking along these lines seems to have captured the imagination of conservatives: it is surprising to see Jacob Rees-Mogg, a recidivist former hedge fund manager, casually informing a television interviewer that since government debt bought as the other side of the QE operation is owned by the Bank of England, and since the Bank of England is owned by the government, the government really only owes itself money – i.e. say that the government doesn’t really owe anyone that money. He’s right, but it’s a strange new world for those of us who are more used to the Conservatives’ itch to cut spending and balance the books.
Likewise, talk of major tax cuts, apparently without corresponding spending cuts, presents a radical revision of the insistence that one must follow the other. Finally, to find the future chancellor, Kwasi Kwarteng, who pays lip service to the idea of central bank independence, then, almost in the same breath, undermines independence by noting that “coordination between policy monetary and fiscal policy is crucial”.
This is a decidedly different new style of conservative macroeconomics. It looks like nothing more than an edition of “Modern Monetary Theory” (MMT), a variant of old-school Keynesianism that briefly became popular during pre-pandemic austerity. MMT points to the absence of any need for governments to raise taxes before spending money, the indifference between different sources of government revenue – whether taxes, borrowing or issuing money matter little in MMT-land – and, therefore, provides what appear to be attractive and counter-intuitive arguments against spending cuts.
Generally tacit, but crucial to the exercise, there is a firm belief in the absolute authority of the monetary sovereign: if a country can issue its own currency, like the UK, it never has to fear a default of payment and therefore never has to worry about running out of public money. spend money. Admittedly, this theory tends to conceal the relations Between countries, where the currency of one country can become a little less, compared to all the others.
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Borrow what you want, treat monetary policy as secondary to taxation, cut taxes on the rich if you wish: to those watching the new macro conservative doves in action, this all sounds familiar. Trusonomics is unlikely to reach full MMT any time soon. But if its proponents ever feel they need theoretical support for their catch-all of Keynesianism and supply-side economics, Tory MMT is ready and waiting.
[See also: Liz Truss has no moral right to be Prime Minister]