Monday, 15 May 2017

Where will the money come from, minister?


Simon Wren-Lewis (Oxford economics prof) asks whether politicians should have to explain where they’ll get £X from if they propose spending £X extra.

A popular answer to that question is that since a proportion of the money in most years for government spending comes from the deficit (i.e. the money comes from thin air, so to speak), a politician does not need to explain where ALL OF the money will come from for the above £X of public spending.

My answer to that is that the fact of increasing the proportion of GDP devoted to public spending DOES NOT mean that the deficit should increase. I.e. if a politician, speaking just on behalf of his own government department or speaking for government as a whole proposes an £X increase in public spending, then he or she needs to explain where they’ll get £X extra tax from.

Of course I’m glossing over the fact that the stimulatory effect of £X public spending exactly counteracts the deflationary effect of £X of extra tax. But for the purposes of this argument, that bit of “glossing” can perhaps be overlooked.

Hopefully I’ve answered SW-L’s question, but I’m not 100% confident I’ve done so..:-)

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