Suppose that the United Kingdom
– Had elected an Anti-Austerity Alliance Coalition on 7 May 2015 and
– That Coalition practised Shimomuran-Wernerian no-cost investment credit creation economics
What might its first budget look like?
The purpose of this article is to calculate some of the government budget effects of the implementation of some of the measures suggested in the nine articles coauthored with Bryan Gould which set out an anti-austerity agenda at http://londonprogressivejournal.com/user/view/6214.
3 Four Selected Key Measures
This article illustrates some of the budgetary effects of implementing the following major measures:
3.1 Reversing the £20bn austerity cuts
3.2 Transferring an additional £20bn pa to the NHS
3.3 Reducing English University student fees to zero through a £30bn plus annual transfer to fund free university education for English, Welsh and NI students as well as for EU nationals resident or seeking an education in the rUK
3.4 Creating Bank of England (BoE) investment credit of £75bn a year for long-term low-cost SME loans.
4 A No-Cost Budget for British Economic Recovery The Coalition Government have produced an economic disaster and a downturn in Britain’s fortunes equivalent to the destruction caused by a small war. These policies have no possible future. See https://medium.com/@georgetaitedwards/osborne-s-dream-of-the-continuation-of-neoclassical-economics-is-a-boot-stamping-on-human-face-c3d0b97a94f4 The alternative proposals set out in paras 3.1 to 3.4 above are the incomplete starting point for a much better future for the British people.
The source of funding for each of these measures and their effect on the Government budget is calculated in the sections below, and briefly discussed in the following four sections and explained in section 5. The first three items are no-cost consumer or consumption creation (“deficit funding without the borrowing”) items while the fourth item is growth-creating BoE no-cost investment credit creation earmarked for final use by UK SMEs.
4.1 Reversing the £20 bn a year austerity cuts These social funds can be completely provided by credit creation of £20bn pa at the BoE for four years. There would be neither borrowing nor cost in that provision for the Government, although if one wished to follow established Tokyo Consensus conventions, the BoE could write down “savings of the people” and take out a loan counterparted against itself. Alternatively it could write down “Treasury Request” as it did when it created £375bn of credit to finance Clearing Bank survival. In either case, it should write off this theoretical “charge” it owes to itself through that consumer credit creation, as China usually does. (See https://medium.com/@georgetaitedwards/the-public-debt-of-japan-and-china-e82292595d7a The Public Bank of China creates loans to fulfil government and growth objectives, and the Chinese Government does not record all, and often writes off many, “non-performing loans”. Since there is no intention of UK Government repayment of these funds, they should be immediately written off). The need for the unemployment and income support aspects of these social fund transfers would reduce as the economy blossomed but new needs might be created, for example, by the pensions required by an aging population. The average tax take in the UK is usually about 42% but the realistic revenue funds arising from the restoration of support provision would probably result in much less than that, because much of the extra income of the poor and disadvantaged would be used to buy food and other zero-rated essentials (such as children’s clothes and shoes) on which no tax is raised, so I have assumed a low 21% tax take.
If an additional £40bn of benefit lost in 2013-14 and 2014-15 is also paid in 2015/16″Š-“Šas in my opinion it should be, to restore the previous status quo of the poor and underprivileged in our society”Š-“Šthen the government might receive, on my estimates, £12.6bn of additional revenue in 2015/16 and £4.2bn a year from benefit restoration thereafter. Not a bad return for no cost whatsoever.
4.2 Transferring an additional £20bn pa to the NHS Similarly an appropriate injection of NHS funding amounting to £20bn a year should be created and maintained. That would produce through the usual 42% tax take, an extra £8.4 bn each year at no cost to Government revenues.
4.3 Reducing English University student fees to zero through a £30bn plus annual transfer to fund university education. Persons resident in England, Northern Ireland and Wales deserve the same free access to higher education as the Scots or as (say) the Germans. A no-cost £30bn transfer is likely to add about £12.6bn to Government revenues at no cost through taxation on the expenditure of the funds released by this change.
4.4 Creating BoE investment credit of £75bn a year for long-term low-cost SME loans This is the major investment credit creation proposed in this article. The proposal is that the BoE should create £75bn a year of investment credit, earmarked for final use as long-term lending to SMEs at local level via a cooperative banking system. The provision of local banks committed to the success of local industry is a prerequisite for this activity. See para 3.2 of https://medium.com/@georgetaitedwards/how-to-create-an-economic-miracle-d2ffa95e6c73.
5 The costs and benefits of these anti-austerity measures The cost of all of the above measures is zero and the gains to British prosperity through economic growth are substantial. A large part of that gain is the revenue benefits which accrue to the British Government through the expenditure of the above indicated funds.
The pre-June 2015 Coalition Government does not, of course, understand the process of wealth creation at all, and their only focus has been on the side-issue of making economies in the budgeted cost of government. Their obsession with the objective of achieving a balanced budget blinds them to the fact that there is a much better way to govern Britain”Š-“Ša way that increases the wealth and welfare of all, as proposed here.
5.1 Estimated Increased Budgets For a 2015 UK Government from Credit Creation The restoration of all benefits at £20bn a year, assuming 21%( half of usual average UK tax take of 42%) gives government income from this source of £4.2bn, and the one-of payment of benefits lost in the two previous gives rise to a total of c£40bn, which might produce a tax income of 8.4bn.
The transfers of £20bn NHS funds plus the £30bn funding of university fees in England, Wales and NI would produce extra £21bn total tax receipts.
Taking both the above together, these items would add about £33.6bn to government income in 2015/16 and £25.2bn in subsequent years.
The £75 billion a year of new investment credit creation provided by the Bank of England (“Window Guidance” rediscounting long-term SME loans, just as the Bank of Japan did from 1945 to 1974). [Note that this initial investment credit creation of credit is at the level of about 5% of GDP, that is at about half the £150 bn a year proposed in Part 5 of the nine articles co-authored with Bryan Gould”Š-“Šsee http://londonprogressivejournal.com/article/view/2127/economic-policies-for-an-incoming-labour-government-part-of“Š-“Šbecause this article deals only with providing growth funds for SMEs and not for the other half of UK industrial and commercial companies]. I have assumed the additional annual SME funding would be used as £25bn additional liquidity, £25bn for raw materials and WIP, and £25bn for new fixed plant and equipment investment. So SME money in the bank would increase by £25bn and there would be an extra £50bn of expenditure.
Assuming a multiplier of 2, the SME expenditure stimulation of £50bn might create another £50bn of demand. Government income from all that would be £42bn”Š-“Šthe average tax take of 42% of £100bn. Assuming a capital output ratio of about four, there would be a permanent increase in real output of about an extra £12.5 bn a year.
Assuming BoE loans were provided to the secondary banks at an interest rate of 2%, there would be an line of interest payments increasing at £1.5bn a year.
The total effect on Government revenues from these activities would lie between £77bn in 2015/16 and £73bn in 2018/19. The UK Government current account deficit of c£80bn would be reduced by over 90% by these policies, and possibly completely reversed because these assumptions are all on the low side (and no allowance has been made welfare cost reductions due to increased prosperity).
As Bryan Gould and I say in Section 5 of the above-referenced article: “The experience of other countries shows that investment credit economics works by creating wealth in the productive sector of the economy. The loans made are almost completely repaid (the failure rate is typically about 2.5%) out of the growth of the economy resulting from the additional investment. The failure rate of these loans matters little in any case because the loans cost nothing to create; their consequences matter, however, because they produce their targeted effect in reducing poverty, stabilising the banking system, and creating widespread prosperity through many flourishing private industries in all the areas of the country.”
And “Unemployment will fall to a low level. Social security payments will automatically reduce as fuller employment becomes the norm and Government income will cease to be disappointing, ending the need for austerity in government expenditure and bringing to an end all of its ill effects for our people. “
The effect on UK GDP”Š-“Šadding the additional consumer demand, investment and WIP, multiplier effects and real growth together, indicates an annual growth in the UK economy of about 8% a year. The practice of the Tokyo Consensus Simomuran-Wernerian economics in the UK leads to an estimated growth rate similar to that of the China Sea economies, as might be expected. From 1945 to 1952 Japan zoomed from war devastation beyond its highest level of pre-war prosperity, at an average growth rate of 10.2%, using precisely these techniques. See https://medium.com/@georgetaitedwards/how-japan-zoomed-from-war-devastation-into-prosperity-1945-52-92cad27eea81 The no-cost creation of investment credit is the secret of the high economic growth of China, South Korea and Taiwan. EU leaders and others please note this illustration of the credit creation system.
6.1 The Importance of adequate SME funding All large enterprises started as small SMEs and grew to greatness through effective funding mechanisms. The savings made available for investment by SMEs”Š-“Šthe domestic and foreign funds which could be used for productive investment”Š-“Šare woefully inadequate to enable to enable the full flowering of local SME invention. This is valid not just for the UK but everywhere in the Anglosphere and even in Germany. Only investment credit creation can produce an economic explosion by funding the conversion of nearly all local individual invention via a local entrepreneur into factory floor production.
The most cursory look at highly developed final products confirms the role of SMEs in their production. A Boeing 747 has over five million parts, over half of them fasteners”Š-“Šscrews, bolts, rivets, glues”Š-“Šand the vast majority of these parts are made by specialist SME producers. Werner von Braun used to say of the Apollo 11 rockets “There it goes”Š-“Šover 100,000 moving parts”Š-“Šall of them provided by the lowest bidder”Š-“Šand it all works!” Of course he did not repeat that remark after the Challenger disaster.
The Japanese car industry in the UK is not a net advantage to the British economy because these car plants are assembly factories for imported Japanese car parts. All of the company and car components”Š-“Šthe initial capital, the automated production machinery, the metal sheets, the paints, wires, windows, electrical items and engines”Š-“Šare sourced from Japan. Local labour is the only item in the production process. Britain needs a domestically-owned car industry which buys the local SME outputs as part of its future economy. It needs to focus on domestic high value products which its highly educated workforce could provide, given an equal chance.
6.2 Shimomuran-Wernerian Economics This essay is a worked example of the application of the observations in “How to create an economic miracle in the UK or elsewhere” which is at https://medium.com/@georgetaitedwards/how-to-create-an-economic-miracle-d2ffa95e6c73.
The current vogue for sadistic neoclassical macroeconomics cannot prevail because it offers no hope and no adequate development rate for the Anglosphere economies. The mistaken economic beliefs of neo-classical economics needs to be replaced by the mindset of Shimomuran-Wernerian economics.
6.3 BoE credit creation is not new There is nothing new about the creation of credit by the Bank of England, for £375 bn of credit creation was used to stabilise the liquidity and preserve the operation of five British Clearing Banks and £80 bn of such credit was created to support Vince Cable’s incomplete proposal to extend business loans to industry. Previous attempts to improve the investment funding of SMEs have foundered on Clearing Bank opposition to any changes to improve the existing situation. The current concentration of 84% of UK bank savings in six banks, which drain local UK savings but provide no taps or local investment is largely responsible for current failings. There are about 5 million SMEs in the UK which receive virtually no support from the branches of the UK banking system except for the standard retail service of a money transfer system. Germany has seven regional banks, 431 Sparkassen (or local savings banks) and a network of 15,600 branches to provide SME loans from German savings. Each Sparkassen”Š-“Šall 431 of then”Š-“Šconcentrate on providing business loans to SMEs in the area where it is located, and each has an interest in, and commitment to, ensuring the economic success of its native village, city or region.
Britain has nothing remotely similar and needs such a system. Bank reform as set out in part 8 and improvements in the machinery of government as set out in part 9 of the Gould-Edwards articles are essential handmaidens to improve British economic development. The fresh aspect of the calculations in this article is the use of BoE credit creation for positive social purposes to improve living standards, prosperity and economic growth, and not just use it use as a financial crutch for an inadequate banking system.
6.4 The control of inflation The underlying rate of inflation will not be much affected by these measures. At most an extra 1% pa might possibly arise, but inflation does not occur when the goods in demand (eg foodstuffs and clothing) are available in plenty in the supermarkets and shops of a nation and when adequate spare capacity due to higher investment makes the provision of goods more profitable and price increases more risky. Additions to credit in the banking system by SMEs and wage and salary earner do not give rise to additional inflation, as Shimomura has remarked in the work which earned him his doctorate.
6.5 Shimomuran-Wernerian economics rebalances the economy One major advantage of these proposals is to give financial help to the poor and underprivileged, and investment help to the millions of SMEs in the regions of the United Kingdom. Collapsing Anglosphere economies tend to shrink back into what some have described as “capital cities masquerading as national states” as centrally-based politicians maintained major investments in the capital and its surroundings but neglected required investments in the country’s regions. This is as obvious in Russia and it is in the UK. The practice of this fresh-to-the-Anglosphere economics improves the lot of the poor and the regions and once again enables the roots of invention to scale up into innovation in all the towns and villages of a country. There is no other available economic option which does that. There is no need for a revolution in income distribution, for this economics permits the rich to keep their wealth while enabling a widespreead, broadly based economic recovery of the previously declining industrial areas of a nation.
6.7 A partial illustration This article does not cover most of the bases mentioned in the more wide-ranging nine articles co-authored with Bryan Gould but it does provide a basic budget demonstrating how four of the major factors might affect the British Budget from 2016 to 2019. Of course much more should and could be done as argued elsewhere.
7 Overarching Conclusion An anti-austerity UK budget could reverse much of the Coalition damage done to family incomes and SME prospects and could set Britain on a path to continuing future prosperity with a widely distributed locally based economic recovery. The numbers indicate that even the limited measures quoted above solve the deficit problem within a year, restore social fairness and help the quality of the NHS, as well as setting the UK on a higher trend of economic growth. For further information see
http://www.gresham.ac.uk/lectures-and-events/lessons-we-can-learn-from-the-success-of-the-japanese-growth-system and http://www.gresham.ac.uk/lectures-and-events/the-curious-case-of-the-economist-the-west-forgot-the-life-and-times-of-dr-osamu and https://medium.com/@georgetaitedwards/the-rough-guide-to-shimomuran-economics-e9dca42c6808
The malign prescriptions of neoclassical economics and its continual depression-producing results cannot continue forever. Shimomuran-Wernerian macroeconomics is the best available path to prosperity once the politicians of the West understand the effectiveness of that option, as this article illustrates.
© George Tait Edwards 2015
The author has written a book about ‘How David Cameron Fixed The 2010 Election And Other Issues’ which also deals with the above topic. See:Tags: Domestic (UK)
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This post was written by George Tait Edwards