Prime Minister Keir Starmer has warned the British people that the October budget is going to be “painful.” He has once again blamed the Conservative Party for reckless economic mismanagement, which has left a £22 billion black hole in the nation’s finances.
It is undoubtedly true that successive Conservative governments managed the UK economy particularly poorly, with consequences for productivity, output, and equity. But the idea that the UK government is facing some sort of fiscal black hole that will be impossible to fill without drastic cuts to public spending is simply absurd.
As economists from across the political spectrum have been pointing out for decades, government spending in a wealthy economy like the UK is not constrained over the short term by tax revenues.
First, the government is capable of issuing new debt to cover expenditure. As long as that debt is used for productive purposes — like educating the workforce, expanding physical and social infrastructure, and promoting decarbonization — it will be recouped over the medium- to long-term.
This debt-financed productive investment is precisely how the UK successfully reduced its debts following World War II. Higher taxes on the wealthy and big businesses also meant that the wealth accrued from economic growth was shared much more equally than it is today.
Second, the British state controls the UK’s monetary system. After the banks nearly crashed the economy in 2008, the Bank of England pulled out all the stops to protect the interests of asset owners. Interest rates were slashed and vast sums of money were pumped into the financial system.
Now, higher interest rates mean government borrowing is much more expensive, and taxpayers have to foot the bill. But it doesn’t have to be this way. The government could manage inflation in much more targeted and effective ways through, for example, taxing the big corporations that have been profiteering through the…
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Auteur: Grace Blakeley
