British Chancellor and his Shadow – arm in arm promoting fiscal myths

Last week (June 20, 2019), the British Chancellor (for now) gave his – Mansion House dinner speech 2019 – Philip Hammond – at the Lord Mayor’s residence just across the road from the Bank of England in London, which should have conditioned the content of his speech. The guests at Hammond’s evening were mostly male bankers with the usual cohort of politicians. This event is the UK equivalent of the US President’s State of the Union speech except at the British event, both senior economic officials, the Chancellor and the governor of the Bank of England address the audience. The Chancellor’s speech, aimed mostly at the potential PM candidates tried to claim that the if Britain was to exit the EU without a ‘deal’ then the Government would run out of money. He didn’t use those words but shrouded the message in buzz-terms such as “fiscal space” and “fiscal headroom”, which are among those mainstream macroeconomic terms that mean nothing when coming from a guy like Hammond. Worse, was the response over the weekend by the Shadow Chancellor.

Philip Hammond’s speech came two days after the Conservative contenders for the PM position made all sorts of fiscal pledges (tax cuts and increased spending) during their BBC debate.

The Mansion House speech transcript is not the full record of events given the intervention of Greenpeace activists, which prompted the brutish actions of Conservative MP Mark Field, who physically assaulted a peaceful female climate action protester:

Field is just another buffoon who attended Oxford University.

But the most reported section of the Hammond Speech was this part:

As I said at the Spring Statement, if we leave the EU in a smooth and orderly way, the fiscal headroom I have built up means an incoming Prime Minister will have scope for additional spending or tax cuts.

But there is a caveat: a damaging ‘No Deal’ Brexit would cause short-term disruption to our economy, soaking-up all the fiscal headroom we have built, and more

and while fiscal and monetary policy interventions could help to smooth our path to a post-No Deal Brexit economy, both could only be temporary

and neither could prevent the economy being permanently smaller, than if we leave with a Deal.

So, there is a choice: either we leave with No Deal

or we preserve our future fiscal space – we cannot do both.

And upon making that statement, the Chancellor should have left the room, and handed in his resignation to whoever is relevant (the Queen? Prime Minister – have they still got one?, whatever) and ceased to have public input from thenceforth.

On March 13, 2019, the ridiculously-named British Office for Budget Responsibility published its – Economic and fiscal outlook – March 2019 – which provided the basis for Hammond’s speech at Mansion House.

The outlook was for a downgraded GDP growth forecast and (in their words) “a modest medium-term improvement in the public finances”.

There is no meaning in the concept of an ‘improvement’ or ‘deterioration’ in public finances. That is sound finance language (and framing).

We cannot meaningfully appraise the status of the fiscal situation by looking at whether “tax receipts have performed better than we expected” or whether there has been “downward pressure on debt interest spending from lower market interest rates”.

We can only understand whether the fiscal stance is appropriate by examining whether the material living standards of the people, particularly those at the bottom of the income and wealth distribution that rely heavily on public services are improving.

And, whether the quality and coverage of public infrastructure is improving.

And, whether health and education sectors are delivering high quality outcomes to all.

And, whether the transport systems are operating properly to deliver quality services.

And all the rest of these ‘functional’ outcomes.

We know from various reports and studies that those ‘functional’ outcomes are failing in Britain as a result of the on-going austerity.

The quality of employment has declined.

The quality of public infrastructure has deteriorated.

Local government service capacity is being severely compromised.

The Alston Report on – Poverty in the UK – found that:

14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line … and 1.5 million are destitute, unable to afford basic essentials … For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.

After receiving hostility from the Government upon the release of his report, the UN Special Rapporteur on extreme poverty and human rights, Philip Alston issued a – Statement – on November 18, 2019, where he said that the “Government has remained determinedly in a state of denial … Ministers insisted to me that all is well and running according to plan”.

As an aside, iNews published a story yesterday (June 23, 2019) – Network Rail bosses told to fly to meetings because trains too expensive, internal policy reveals – which told us that fares have escalated on British rail services so much that air travel is now cheaper within Britain.

Remember back to 2018, when – The Office of Rail and Road – which is the “non-ministerial government department responsible for the economic and safety regulation of Britain’s railways, and the economic monitoring of Highways England” published its report on “Network Rail (NR)’s network licence relating to national timetabling processes” and found that it was “failing to deliver to the greatest extent reasonably practicable … [to] … Run an efficient and effective process, reflecting best practice … (Source).

These are the sorts of ‘functional’ areas that one needs to investigate in order to determine whether national government spending and taxation policy choices are improving or deteriorating.

But the OBR discussion was centred on how fast the British government would “balance the budget” and they defined “fiscal headroom” as the £ gap forecasted between the fiscal outcome and the “structural budget deficit” target “below 2 per cent of GDP in 2020-21”.

OBR claimed, at the time, that this “headroom” had risen to “£26.6 billion (1.2 per cent of GDP)” although they subsequently revised that estimate downwards last week (June 21, 2019) in their statement – Commentary on the public sector finances – May 2019 – as a result of:

… a forthcoming improvement in the accounting treatment of student loans will raise the measured deficit by more than £10 billion a year.

So now this ‘fiscal head room’ is estimated to be £15 billion.

It is one of those terms that become the talk of the media and all the insiders but very little scrutiny is ever attached to whether they have any sensible meaning.

We have the Chancellor making statements about policy at an important historical point for Britain – with Brexit, change of Prime Minister, etc – based on these spurious estimates.

First, we have the spurious ‘structural budget’ estimate – which relies on the statisticians trying to net out cyclical impacts on the fiscal outcome – which means it must define some potential GDP (and full employment) which is flaky at best.

Second, then we have some spurious target for that flaky ‘structural budget’ estimate of 2.2 per cent of GDP by 2020-21 – along the road to the equally spurious benchmark of a balanced fiscal state (zero deficit) by 2025-26.

Third, we then come up with some £ estimate of the difference between the flaky spurious target and the actual fiscal state as representing how much the British government has at its disposal in net terms to spend.

Which then goes into his perverted logic that if Britain was to exit the EU with no deal, which I consider to be the best option, then there is no “fiscal space” left – meaning hell on Earth would befall the British people.

Philip Hammond knows full well that the British government has no intrinsic financial constraint.

Remember on October 8, 2008 when the then British Prime Minister Gordon Brown announced its package to rescue the British banking system, which immediately made available £400 billion to eight British banks and building societies.

I am sure many of the bankers in the dinner hall at Mansion House last week will recall that spending initiative very clearly and many would have personally benefitted from it in the form of higher or protected salaries, continuity of their jobs and more.

And when Gordon Brown made that announcement shares in several banks rose significantly – creating extra wealth for the owners.

The fiscal intervention was lauded as staving off “economic Armageddon” and providing banks with “an unlimited source of liquidity” that “certainly should stop the panic in terms of people wondering whether or not the banks are safe” (Source).

But there was no talk at the time of “fiscal headroom”. The Government did what the currency-issuer can always do – inject as many £s into the system as it thought fit.

No-one was bleating about ‘where is the money coming from’ or ‘how are we going to pay for it’ and all the rest of the tripe that is associated with concepts of ‘fiscal space’ and ‘fiscal headroom’.

Everyone knew where the money was coming from – the currency issuer.

Everone knew how the government was going to pay for it – by putting numbers into bank accounts etc.

No-one at the time was talking about printers going crazy, hyperinflation etc.

All the bankers were delighted that their consequences of their past greed and indiscretions had been attenuated by the currency-capacity of the national Government.

Which should put Philip Hammond’s ‘no-deal Brexit and bust’ claim into clear context.

It is a lie. Pure and Simple.

I support Brexit but have never said it would be a picnic. And, certainly, in the transition phase there is likely to be uncertainty (as we have seen) with negative impacts on firm investment decisions, consumption choices, and trade.

But what is obvious – and evidenced from the way Gordon Brown bailed out the banks in 2008 – the British government has all the fiscal tools and capacity at its immediate disposal to redress most of the negative consequences while the British economy adjusts to being free of the corporatist, neoliberal state that the EU has become.

The fiscal capacity of the British government can always make things better by ensuring what real resources are available are fully utilised.

What that doesn’t mean is:

  • That fiscal policy can overcome the real losses to a nation’s standard of living that are associated with a major fall in its currency when there is a significant dependency on real imported goods and services.
  • That fiscal policy can ensure that debts denominated in foreign-currency (public or private) can be honoured at all times.

A nation with heavy import dependencies (that is, real resource shortages) is also likely to suffer if its exchange rate collapses or world export markets for its goods and services slow appreciably. Fiscal policy can help to attenuate the losses but cannot ‘create food out of thin air’.

However, I do not expect a no-deal Brexit would lead to a currency collapse.

Labour Party – neoliberal own goals

The reason I support Brexit is because I believe it gives the British Labour Party the maximum room to pursue its Manifesto (minus the stupid Fiscal Credibility Rule).

In that sense, while Brexit could be a disaster under the Tories, eventually, if Labour gets its act together and takes power then it will be in a much better position to redefine British policy orthodoxy away from the decades of sound finance which began when Dennis Healey lied to the British people about the Government having to borrow from the IMF because it had run out of money.

The problem is that British Labour seems to still be caught up in its embrace of sound finance.

I thought that once John McDonnell had become free of his former advisor who loves the neoliberal Fiscal Credibility Rule that things might change in his office.

It seems that there is more work to do on that front John!

In his Twitter stream over the weekend you get a very concise summary of the confused position the Left has found itself in this neoliberal period.

We covered that confusion in our book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017).

Examining John McDonnell’s tweet time line, we see on the one hand, a retweet from John McDonnell of Greenpeace Tweet about protesters at the Mansion House event, a retweet about “Global financial bodies not fit for purpose” (IMF, WTO, World Bank), tweets about his speech to the Arise event where he said “we must offer a shining example to the world of what socialism can achieve in practice today”, interspersed with this Tweet:

There is so much dissonance in these various Tweets and Retweets – the dissonance that exemplifies the modern Left.

On the one hand, it is the only political force that expresses genuine concern for the environment, for workers’ rights, for eliminating the toxic power held by groups such as the World Bank and the IMF.

But, on the other hand, they seem incapable of breaking free from the equally toxic stuff about fiscal ‘headroom’ and running surpluses and the rest of it.

The criticism of the IMF on the same Tweet page as the promotion of sound finance principles (giving primacy to the central bank for counter-stabilisation policies and restricting the fiscal freedom by neoliberal rules) is crazy stuff.


The Left has a lot of work to do to free itself from the neoliberal economics that it privileges.

An Opposition would be well-served by running a continuous public education campaign to reframe the debate and to inject new language and concepts into the public debate instead of constantly privileging the lies.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

This Post Has 17 Comments

  1. Dear Bill,

    Thanks for an article that critiqued the Mansion House event, beyond the Mark Field assault, appalling though that was. As Jonathan Cook stared in his latest excellent blog post, it provided a perfect media storm to act as a smokescreen as to what the Establishment are really up to, i.e. perpetuating the nonsense you describe.

    “…Philip Alston issued a – Statement – on November 18, 2019…”

    Shouldn’t that be “will issue…”? ; ))

    Best, Mr S

  2. Barring an early general election, which I think very unlikely (turkeys, xmas), we have nearly 3 years to work on John. A strategy is needed?

  3. From the Alston report linked by Bill:

    “The initial [2010] rationales for reform were to reduce overall expenditures and to promote employment as the principal “cure” for poverty. But when large-scale poverty persisted despite a booming economy and very high levels of employment, the Government chose not to adjust course. Instead, it doubled down on a parallel agenda to reduce benefits by every means available, including constant reductions in benefit levels, ever-more-demanding conditions, harsher penalties, depersonalization, stigmatization, and virtually eliminating the option of using the legal system to vindicate rights.”

    Gee, it’s almost as if the cuts themselves were the ends and not the means…

    Then there is the citation of Alston himself by Bill:

    “Government has remained determinedly in a state of denial … Ministers insisted to me that all is well and running according to plan”

    If we are to believe that everything is running according to plan, then we have to conclude that ministers are disturbingly mean spirited or exhibit a concerning detachment from the reality of regular people’s life. My guess is both.

  4. “The Left has a lot of work to do to free itself from the neoliberal economics that it privileges.” Certainly true of the old left, conditioned over a lifetime to think in terms of monetary scarcity–that a federal government, even when currency-sovereign, must claw back private money from taxes, or borrow private money by bond sales, in order to fund projects and programs crucial for social and environmental health. But I sense that the younger left is beginning to pick up on the concept of fiat money, maybe not as fast as they pick up on technology but nevertheless with ever-increasing speed. So how do we reach them so as to broaden and deepen their intuitive understanding of fiat money, acquaint them with the necessary discipline of MMT? Who’s talking to the young in this regard on THEIR media, which has moved beyond traditional blogs, Facebook, etc? Bill’s new MMT foundation and university would seem to be significant steps in this direction, but he’s not alone here, is he?

  5. It’s interesting that at every juncture when punitive cuts affecting the most vulnerable in the UK society have been implemented it was ONLY the UN that intervened (Rachel Rolnik with the bedroom tax and Phillip Alston exploring poverty levels).

    Worth noting that the good ol’ EU was cavernously silent yet the so-called ‘progressives’ think the EU is a source of protection (81% of Labour members are pro-remain). Figures of austerity casualties are now estimated to be 130,000 dead. The EU did ‘diddley squat on steroids’ and yet the Remainers keep pointing out the Working Time directive (with 36% youth unemployment in Spain?) and food safety regulations as our saviour.

    There was a real chance of Leaving, getting a Fiscally expansive Labour Government in and showing Europe what could be done and instead, the Left is painting its faces blue and flying we love EU banners. Incredibly sad because this just extends the life of neo-liberalism.

  6. Bill, you neglected to mention Hammond’s war chest which he claimed he had collected for a Brexit based on a deal but which would be squandered on a no-deal Brexit. He, of course, had amassed his war chest by means of his austerity measures, which he neglected to mention. When he first took the office of the Exchequer, he contended that he knew nothing of national economics but would be guided by experts, in this case, the anti-Keynesian Treasury. MacPherson, on his departure, said that he agreed with everything that Osborne had done. This establishes the anti-progressive bias of the Treasury, a bias they have never really lost.

    Tory politicians and their paid up party members for their part have all lost touch with reality completely. Have a look at this tweeted graph — One could be forgiven for thinking that this group have gone insane. Add to this the moves that appear to be a rolling back of Scottish, and possibly Welsh, devolution — a retrenchment as a kind of action accompanying the disastrously incompetent flailing exhibited by a possibly dying entity, in this case, the Tory party attepting to stave off the inevitable end. For some, this would be a salutary finish for a party that has become dangerous to its own public.

  7. I don’t believe McDonnell will change tack, now or in the future. The opposition simply have too much baggage already to take on more by doing a volte face and repudiating everything he’s been saying since he was appointed Shadow Chancellor. Publicly at least he will never acknowledge MMT.

    Of course the Tories are using all the old tricks in the book about tax bombshells and jibes about Venezuela, but none of it has stuck, he’s managed to largely neutralise their attacks so far with his ‘sound finance’ nonsense. Its short term politics given where the leadership find themselves.

    Medium to long term though this is a disastrous losing strategy for reasons Bill has explained many times.
    I’ve said it before, change will not come from the top down, it will come from the ground up, persuading other members, who persuade CLP’s, who persuade PPC’s, who become MP’s and take the argument forward. I know we now have one MP in the House who gets it, but he’s currently suspended from his own party ! It’s a long road ahead.

  8. While Bill rightly points out the rather absurd position of the Labour party, the issue is not so much the Labour party’s Fiscal (In)Credibility Rule, it’s rather the overarching neoliberal narrative that infects the public and political discourse in the UK, and across much of the western hemisphere.

    The problem for the Labour party, even if they did understand an MMT approach, is that to advance a non-neoliberal discourse would make them unelectable.

    Because absolutely nowhere in public mainstream discourse can you read anything other than “handbag” economics. Even when economists (neoliberal ones of course), declare that Government’s are not like households as they do from time to time, they then go through this extraordinary contortion, where the explanation of why not so closely resembles gibberish, it completely avoids mentioning anything about a Government’s sovereign currency issuing power. This is then as sure as night follows day, an explanation about how Government finances work, which is just a dressed up version of “handbag” economics. The bare-faced cheek of it all is astonishing.

    And the reason why public discourse around this is so dire, is because it is all about serving vested interests. It is not in the interests of newspaper magnates, privately funded think tanks, nor the people who have the politician’s ears, to allow an MMT description to gain traction. It suits them to have Governments described as needing to raise funds from the wealth created by dynamic, perfectly performing markets, in order to spend on priorities in which they have no interest.

    And the people that have the most to lose from a progressive MMT narrative, have a vast array of wealth to buy the narrative that suits them best.

    The question here is not really what the Labour says in it’s manifesto which isunnecessary hoop-jumping absurdity, rather it is more about how do you counter a dominant well-funded neoliberal discourse.

  9. Jeff,

    “….. change will not come from the top down, it will come from the ground up….

    Given the Labour Party believes it cannot gain power without paying lip service to mainstream mantras, perhaps what needs to be done is to forget the Labour Party and build a new party from scratch which promotes the MMT perspective.

    Building a movement from the ground up may be the way to go but it will need focus and coherence and political organization.

    This new party would have nothing to lose in promoting a non-mainstream perspective. It could conduct conversations about fiscal policy in any manner it chooses without fear of the electoral consequences.

    It may be the only way to get traction.

    Leave to Socialists and Blairites to bicker over control over the party.

  10. @Henry

    I apologize up-front for my lengthy response.

    I have also often mused about whether it is better to “rehabilitate” the “socialist” term or simply go with an entirely different “brand”. Quite honestly, as Bill has often pointed out, elections often come down to a “marketing” showdown. I’d say that in the shorter term a rehabilitation is almost unthinkable. Really, media and think tanks have done an excellent work in the demonization fo the term among those older than forty and a heartbreaking amount of younger people, too. When one realizes that according to polls a healthy majority of Americans support universal healthcare, at least moderate state intervention in the economy and the regulation of the banking sector and other industries it becomes evident that the “character assasination” of socialism has been remarkably effective. I won’t even go into the debt-angst and deficit-induced panic attacks.

    On the other hand, I feel way more confident about the younger generations that seem to have a much more restrictive “bullsh*t” filter, that I attribute to their experty in social media. Unluckily, that heightened scepticism of authority makes many more prone to fall for conspiracy theories, but if one of your first memories is the farce around “Saddam’s weapons of mass destruction” then you are entitled to a pass every now and then, I guess.

    I believe this trend has led “the left” in the US, specifically in the form of the Democratic Party, to an impasse we in Europe know all to well: will the younger, considerably more progressive members (AOC, Ilhan Omar, Katie Porter, etc.) out-hustle the corporatist technocrats (Shumer, Pelosi, Feinstein,…) and move the party considerably to the left in accordance to their voters preferences, or will they fall in line and comply with the party-hierarchy that represents their donor’s interests.

    In Germany, we saw similar situations at least twice. First in Weimar, where the communist’s and socialist’s disputes paved the way to electoral success for the NSDAP, and much later when Lafontaine and his entourage parted ways with the SPD in the 90’s to form what would later become “Die Linke” (after fusing with the East German fraction led by Gysi). I think most commenters here have a much better knowledge of the changes that Labour underwent under Blair, so I won’t go much into that subject. However, the two cases are different, because the “british way” ensured Labour retained electability, whereas the fragmentation of the left in Germany meant the SPD would at best become junior partner in a coalition, while “Die Linke” has only achieved some success at a regional level.

    A third option would be for them to leave the party and start a completely new one. I fear a fragmentation of what today passes as “the left” will only end up making the far more “ideologically flexible” republicans stronger.

    After that rather long and convoluted preamble, I finally arrive to where I make my point: despite the resistance by older voters and the centrist party members, it is crucial for the new wave of Democrats to take the party over and engage in the bigger picture programms like the GND, student debt forgivness and stringent Bank regulation. The case of the split into SPD and Linke in Germany shows that their schism ended up rendering both parties almost politically irrelevant, wheras Labour did actually win elections, but only managed to do mild damage control at best with that power.

    I would hope that if neoliberalism loses traction in the US, its global standing would suffer the most.

  11. Herman,

    “…. it becomes evident that the “character assassination” of socialism has been remarkably effective. ”

    Even a cursory look at the history of the 20th century will reveal there was no “assassination of socialism”.

    It was clearly suicide.

  12. @Mark Redwood: “And the people that have the most to lose from a progressive MMT narrative, have a vast array of wealth to buy the narrative that suits them best.”

    Question: could an ALP, which promoted MMT and its JG as its official policy, thereby be indifferent to the Coalition’s stage 3 tax plan?

    Though $200K/yr, or more, is earned by only c. 5% of workers (according to a radio commentator) it is now regarded by Albo et al. as ‘aspirational’ and not the ‘top end of town’ which is true I suppose. Certainly not when compared to Allan Jones who apparently earns $4 million/yr. at radio 2GB.
    Would MMT enable Labor to bypass this current impasse with the Coalition re stage 3?

  13. Neil;

    IMO, the ALP lost the election due to scaremongering that the country couldn’t afford their proposals (whoever came up with “A Bill Australia can’t afford” must have been busting to use that pun for years).

    If the ALP took a firm policy towards MMT and JG, and could successfully deflect the questions about affordability, would understand that the stage 3 tax plan would only matter in as much as what real resources it would deprive the economy of. I think you’d find it’s not very much, so indifference all the way.

  14. @Henry

    I respectfully disagree.

    I think you might hold an unnecessarily negative and simplistic concept of socialism. There is plenty of room between the expropriation of the means of production or the abolition of private property by a single-party dictatorship and a democratically elected government playing a role in the allocation of ressources and regulating industry. By adhering to the first part of that sentence as the definition of socialism you partake in the character assasination I mentioned and unwillingly confirm that it is alive and well today.

    Rest assured, neither Corbyn nor Sanders would bring back the gulags. That is more of a fascist thing. I’m sure even a cursory look into the history of the 20th century reaveals something about those guys, too.


  15. Herman,

    I was referring to the hardline, brutal and totalitarian version of socialism as in the Soviet and maybe East Germany, for instance. I believe it was this form of socialism that demoralized the Left in the mid to late 20th century.

    As for the rest of it, if that’s how you think of socialism, OK.

    But I can’t see how Sweden, for instance, could be called a socialist country – the bulk of big industry is owned private concerns. Of course, it has a highly developed social sector. It is what I would call a mixed economy.

    Perhaps Europeans have a different view of these things (I’m Australian).

  16. @ Henry

    As I thought, our misunderstanding is due to semantics.

    The I geuss if you try “social democracy” I’d hope you have less problems in seeing Sweden assuch a country.

    I hold the belief that almost all economies are mixed economies with different degrees of state intervention/regulation. I definitely believe that we are closer to a corporatist takeover of the state, than the other way around in europe and the anglosphere. Thus, I’d welcome the electoral success those who aim to restore the balance to these economies.


  17. I have seen Chris Williamson’s facebook page. I pray that he becomes the Shadow Chancellor, and you and may be Stephanie Kelton et alia advising!!

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