From time to time, every chancellor insists that the Treasury’s coffers are empty. Rishi Sunak is only the latest to rebuff calls for more public expenditure by claiming there is no money left, or that he can only spend what he raises in taxes.
However, the surge in Government borrowing during the pandemic, largely financed by money printing, has encouraged others to argue that the amount of spending is always just a political choice.
Which is right? Or could both sides have a point?
Fans of a new economic paradigm known as “Modern Monetary Theory” (MMT) would argue that the Government should spend whatever it takes to guarantee everyone a decent income, excellent public services, and a secure job if they want one, without worrying about deficits or debt.
After all, Japan has defied predictions of soaring bond yields and runaway inflation for decades, even though it has accumulated public debt which is now equivalent to 170pc of national income. This already far exceeds the current level of around 100pc in the UK.
Similarly, many economists would now agree that Governments were too quick to cap spending in the wake of the global financial crisis, and that this had significant economic and social costs.
The central pitch of MMT is that the government, unlike a household, creates its own currency and can therefore never “run out of money”. The only constraint on public spending is therefore the amount of goods and services, and other productive resources, that money can buy.
Of course, if the economy is already running close to capacity, even MMT supporters accept that creating money without limit would result in higher inflation. This is where taxation comes in.
Rather than being used to fund public spending, MMTers see taxes as a means to reduce spending by the private sector, and thus keep inflation in check.
In the meantime, they argue, central banks can always control bond yields (and hence the government’s cost of borrowing) by additional bond purchases.
Or put at its simplest, the government ultimately spends its own money. It does not spend money that taxpayers have given to it. The mainstream focus on “balancing the budget” is therefore needlessly damaging.
If you are already thinking that this sounds too good to be true, you are not alone. However, in my view, there are four problems with MMT.
First, most of it is nothing new. The idea that governments can always print more money is hardly revolutionary. It has only become more relevant today because so much of what we regard as money is “fiat” currency, conjured by government, rather than money backed by a physical commodity such as gold.
If what MMTers are saying is that governments should be willing to run bigger deficits to stimulate demand during recessions, and especially when interest rates are already close to zero, that is not controversial either.
Nor do you have to be an MMTer to recognise what Keynes called the “paradox of thrift”, which is that if everyone tries to repair their finances at the same time the result is likely to be an even longer depression.
Second, even if you accept the principles of MMT, the policy outcomes may not be much different. In particular, higher government spending would still have to be matched by higher taxation, even if the rationale for a bigger tax burden is to prevent overheating rather than to balance the books.
Put another way, it does not matter whether spending comes first, then tax, or the other way around, if the result is the same.
Third, MMT creates unrealistic expectations. Money itself may not be a “scarce resource”, but the same cannot be said of the goods and services that it is expected to buy. Otherwise, any country with its own currency could print its way to world-leading healthcare, education, and so on.
Fourth, and perhaps most importantly, central bank independence and credible fiscal rules are more than just convenient fictions. They are important constraints on profligate spending. Just because the government can always spend more money, does not mean that it should.
MMTers like to say their model is a more accurate description of how the government finances actually work. But the real world has also taught us over and over again that excessive public spending and money printing are the road to ruin, and that market economies usually perform better than those dominated by the state.
In short, MMT is simply a repackaging of some old ideas to appeal to a new audience. There really is no such thing as a free lunch – even from a “magic money tree”.
None the less, MMTers do have one good point. It does not make a lot of sense for the Chancellor to insist that there is no money left for, say, more free school meals, or higher NHS pay. These are indeed political choices.
But this does not mean that they are bad choices. There are surely better ways to address food poverty than nationalising children.
There is also not enough evidence that NHS staff are underpaid, at least compared with those who will pick up the bill.
It may well be harder to make these arguments than simply saying “we cannot afford this”. However, politicians should not shy away from owning their decisions.
Julian Jessop is an independent economist. He tweets @julianhjessop