The government could take advantage of Brexit to do things differently. It probably won’t.

Over the course of the last 20 years, the EU has made a series of bad calls about the management of national economies, dominated by neo-liberal thinking on issues such as public spending, state based economic activity and social support.  Once the UK is no longer governed by common regulations, these restrictions no longer need to apply.  I have to accept that it is unlikely that the British government will do much about this, because if we look at where many of the EU’s most ill-judged restrictions have come from, it’s often reflected the free-market ideology  of British governments.  Here, nevertheless, are some of the things that a UK government can do after leaving, which members of the EU cannot.

  1. State enterprise.  Mariana Mazzucato has made out an overwhelming case for state enterprise: many of the  major economic developments of the post-war period have been made, not through the operation of an unrestricted private market, but through state action to identify, build and support new development.
  2. Sales tax.  The structure of tax in this area has been subject to EU rules on VAT.  VAT is not a sales tax, because it is not uniformly levied on sales – the way it works tends to focus on stages in the manufacturing process.  This hasn’t worked for financial or digital sectors, and the current controversy about a digital sales tax is taking place because there’s nothing there.  The US-based digital giants, and their defenders in the US administration, can hardly  reasonably object to ‘local’ sales taxes taken at the point of distribution, because that is just what happens in the states of the USA.
  3. Regionally managed immigration.  The Scottish Government’s proposal to do this has been met with incomprehension.  The approach of successive UK governments has been to focus on border control, whereas the bulk of management relies on different mechanisms entirely – housing, employment, education and public services.  There is no intrinsic reason why immigration cannot be differentiated regionally.
  4. The taxation of UK nationals abroad.  The USA taxes its citizens abroad, and the UK could do the same.  There is a good argument against dual taxation, but that is not an argument for advantaging people who move resources or profits from the UK to more favourable tax regimes.  Moving money off shore or to more favourable tax regimes should have no effect on a tax liability to pay any balance of liabilities within the UK.
  5. Procurement  contracts that meet social objectives.  Public procurement contracts that guarantee employment to locally unemployed people.  The general advice to local government has been than this is incompatible with European law; that should no longer apply.  The same should be true of locally negotiated minimum wages, such as the living wage – that runs directly counter to ECJ judgments.
  6. Moving work to the workers.   The process of regional development in the EU was based on different premises – encouraging market specialisation while cushioning the impact of that specialisation on the regions.   That hasn’t worked.  The UK government needs to return to the policies of the 1960s, moving the jobs rather than moving the people.  There is no hope for many British towns unless it is done.
  7. Freeing public expenditure.  The control of public expenditure is based on a myth, that it is government spending that drives the money supply.  It isn’t – private finance does that.  Local government needs to be able to raise funds through  its own bonds, as it did in the 19th century – along with the capacity to default (as local government can do in the USA).  There is no obvious economic case for setting global limits that apply only to the public sector.

None of this qualifies my disappointment with the deeply unsatisfactory settlement –  I am no less troubled by the disregard for citizen’s rights shown by both the British government and the European Union than I was three years ago.  Tonight, as Britain leaves the EU, I will be in Brussels.

6 thoughts on “The government could take advantage of Brexit to do things differently. It probably won’t.”

  1. I read this with interest.

    However, I didn’t understand what you meant by: “The control of public expenditure is based on a myth, that it is government spending that drives the money supply.”

    Could you elaborate on this statement?

    1. Certainly. The ‘money supply’ is an aggregate of all forms of money. The broadest definition of ‘money’ is recorded as M4. Most money in the UK comes from sources outside government. Try this link: https://www.bankofengland.co.uk/statistics/visual-summaries/money-and-credit-statistics

      If we’re looking only at sterling, the most important source of money comes from the banks – they create money whenever they create credit. (Governments used to try to control this with credit controls, but they largely gave up the attempt in the 1980s. Inconsistently, they didn’t revise controls on public spending that were also supposedly based on attempts to control the money supply.)

      In the UK, however, sterling is not the only source of money. If the link I just gave you is right, as things stand about a half of the currency held in UK banks is foreign.

      1. But the banks’ credit creation also creates a corresponding liability (which necessarily nets to zero) and they charge for the privilege – sometimes exorbitant – interest fees.

        If bank lending nets to zero, how can it drive the money supply?

        Is it not the case that a government running a (modest) budget deficit can also drive it and, on a more salient note, usefully increase the supply left in the economy (household sector) after taxation?

        1. Bank lending doesn’t net to zero, but even if it did, that wouldn’t diminish the effect of creating credit. Credit is money. For example:

          • I pay for a new house with a loan from the building society. The builder banks the payment.
          • You pay for air travel with a credit card. The air firm absorbs the funds into its balances.
          • I get a payday loan so I can afford a loaf of bread and a pint of milk. The local grocer banks the balance at the end of the day.
          • You go to the bank to get a loan to start a business. The bank sets a mortgage against your house as security.

          Banks (and others like banks) have the power to ‘print’ money, if we don’t take that word ‘print’ too literally; and they actually create much more of it than the government does.

          1. If one has a liability which corresponds exactly to an asset, it nets to zero. When one repays the bank loan, it cancels/destroys the money, much like a tax payment cancels money.

            Your example of a Building Society stretches the analogy somewhat since they actually do act as an intermediary between savers and borrowers, unlike other high street banks (another common myth worth trashing).

            I am not disputing that banks create credit, nor that they create a hell of a lot of it.

            What I am suggesting is that government money left in the real economy (by running a deficit) creates a ‘socialized’ liability which, if well managed, can lead to more income and a higher propensity to save for the household sector.

            Budget surpluses combined with practices such as predatory lending can cause unnecessary suffering.

            Bank lending nets to zero, so relying on it solely for prosperity and a balanced economy is a foolish endeavour. Monetary policy is dead. Fiscal policy is the only way out of capitalism’s current malaise.

          2. The first part of this isn’t right – long-term repayment never nets to zero. However, you make a few more important points that are right: bad lending causes suffering, monetary policy doesn’t really work, and government can use the same financial mechanisms as the banks, if it so wishes, to bring about desired social change. For example, that’s how we were able to build six million council houses.

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