The framing question for this reflection is whether addressing the national debt from the response to Covid-19 will require cutbacks in expenditure or increased taxation or both
Dr Patrick Riordan SJ
Senior Fellow in Political Philosophy and Catholic Social Thought, Campion Hall, University of Oxford.
Any discussion of taxation at present will have to consider the context of economic recovery from the pandemic. The framing question for this reflection is whether addressing the national debt from the response to Covid-19 will require cutbacks in expenditure or increased taxation or both. Is another ‘Austerity Decade’ as followed the 2008 credit crisis to be expected, whether led by expenditure cuts affecting social welfare recipients, healthcare and education, or led by increased taxation draining
demand from the economy? This question is as relevant today as it was in the immediate wake of the pandemic.
Current political commentary assumes that austerity will be necessary to address the national debt created by government borrowing that was undertaken to deal with the pandemic, and that this will require both reducing spending and increasing taxation. A Catholic reflection on taxation must take care not to rely uncritically on the same assumptions about the need for and inevitability of increased taxation.
There are three elements in the reflection that follows: first, a confrontation with the politics of fear; secondly, a reflection on the nature of debt in the economy; and thirdly, an exploration of an alternative economic pathway within which policy on taxation might be situated.
Anxiety about inflation triggered by rising commodity prices provokes the expectation that economic recovery after the pandemic will have its downsides.81 The journalistic highlighting of such anxiety is familiar, and while warnings serve a useful purpose, they also serve the interests of those who consider fear to be a valid instrument of social control. Fear can be hijacked by vested interests, political and economic, that are quite capable of manipulating people to advance and achieve the former’s own ends. From recent histories, we can note how often a ‘project fear’ has been instigated to mobilise populations in support of one policy or another. Fear of communism was successfully managed to advance the interests of what President Eisenhower called the ‘military industrial complex’; following the OPEC generated oil crises of the 1970s, fear of ‘peak oil’ was a convenient distraction; the possibility of a technological meltdown at the arrival of the 2000s fostered a millenarian anxiety worthy of the Middle Ages; fear of terrorism has enabled civil authorities to achieve a level of intrusion into privacy that would not otherwise be possible: the surveillance state has arrived, but now we are to be anxious about surveillance capitalism and its powers to manipulate our wants and desires.
After the banking and credit crisis of 2007, the principal political message was not that we should be fearful of the power of banks and financial markets to undermine our prosperity, but that we should fear the consequences of letting the deficit get out of control. Policy was implemented to address not the failings of bankers but the reduction of the national deficit, the impact of which was a decade of austerity in the UK, affecting the wellbeing of millions. Now, as the measures to deal with the impact of the Covid-19 pandemic are being assessed, we are led to fear the scale of debt.
For a household or an individual, debt can be a terrible burden since a negative judgment on creditworthiness can limit the scope for action. To be trapped by credit card debt or an unpayable mortgage due to negative equity is frightening. But it is not wise to consider the national debt as analogous to that of a household. David Graeber’s study of debt attempts to persuade readers that not all debts need to be repaid, or even in some cases that they can be repaid at all.82
‘Debt’ can be used in various metaphorical senses, meaning obligation or duty or what is owed to others. But, as it is used today, its core essence refers to something that can be measured and can be paid off in principle, as, for instance, the repayment of a loan from a bank. Metaphorical meanings such as a ‘debt of gratitude’, often invoked in honouring significant contributions to public life or to the common good, refer to obligations that persist and cannot be exhaustively ‘paid’.
From the anthropological evidence, Graeber argues that the most common form of money in early societies was credit. It is a fundamental mistake to identify primitive money as similar to what we now know as money. Primitive money arose in the context of what was owed to the gods, to ancestors, to parents, or to society. Such tokens were a means of acknowledging debts that could never be repaid. How does one repay a mother for the gift of life? Similarly, phenomena such as ‘bridewealth’ or ‘bloodwealth’ were ways of acknowledging obligations that never could be fully satisfied (Ibid, p. 179).
The creation of money in the form of cash bearing the stamp of a ruler was associated with the development of administration: it emerged from the need to provision armies. Requiring subject populations to pay tax in the designated coinage motivated them to sell provisions to soldiers, who had been paid in the currency (Ibid, p. 248).
The exchange associated with markets eventually colonised and dominated all forms of human relationships. In social forms of sharing based on gifts, the exchange of gifts became the dominant language with expectations of equality in gift-giving. Dowry (bride price) came to be seen as purchase. Social hierarchy was also reinterpreted as exchange: security and protection offered by the aristocracy in exchange for peasants’ labour or its fruits.
Not all debts can be or have to be repaid. Even in the commercial form of economy, in which exchange, debt and debt repayment with interest are standard, there are some instances of debt that do not have to be repaid. Among the debts that cannot be repaid, we can note those to God, to ancestors, parents, society, spouses and to nature. Debts that do not have to be repaid include government bonds issued in a government’s own currency. Such debts must be serviced, however (Ibid p. 358). In addition, those part of debts incurred under conditions of limited liability and debts cancelled in instances of amnesty, such as biblical jubilee years, do not have to be repaid.
The limited liability form of corporation was introduced to restrict the exposure of merchants to debts incurred in the course of doing business. With limited liability, investors are only liable to the extent of their own contribution to the venture; formerly, partnerships had bound each partner to liability for the full extent of losses incurred. A declaration of bankruptcy could also release one from debt obligations while creditors ended up carrying the loss (typically, suppliers to and employees of bankrupt businesses).
So, it is a mistake to hold that all debts must be paid or that there is a moral obligation to pay all debts. And, as discussed above, there is a danger of being manipulated by a manufactured anxiety about debt. We will now consider the argument that the increase of national debt does not necessarily require an increase of taxation or a reduction in state services to pay off the debt. Countries with currency sovereignty have other possibilities for managing their deficits.
Are we being deluded when the national debt is represented to us as something to inspire fear? Some professional voices from the fields of economics and public finance warn against such a fearful stance. A recent article in a specialist journal, Public Budgeting & Finance, asks the very pertinent question: ‘Who is Afraid of the Big Bad Debt?’.83 It presents the analysis of a group of theorists subscribing to ‘Modern Money Theory’ (MMT). They challenge the standard approach that expects states to balance their budgets and rein in deficits. At the very least, they dissipate the fear that some wish to awaken with a focus on the national debt. They achieve this by challenging certain myths that operate within our political culture. A recent book by the American economist Stephanie Kelton delivers the challenge in a very readable format.84
This theory is not only applicable to the USA but is also applicable to the United Kingdom, since both the USA and the UK exemplify the fundamental condition for the applicability of the theory: they are both sovereign currency issuers not currency users. They issue the currency and denominate it as the currency in which taxes are to be paid. No individual state in the USA is a currency issuer, and no single member state in the euro zone is a currency issuer.
Claire Jones, ‘No, ‘hyperinflation’ is not here’, FinanThe dollar and the pound are ‘fiat’ currencies: they are not tied to a gold standard or to a fixed rate of exchange with any other currency. Sovereign currency issuers do not face a ‘budget constraint’ as conventionally defined: they cannot ‘run out of money’ as they can always meet their obligations by paying in their own currency. Furthermore, they can set the interest rate on any obligations such as bonds that they issue.85 Fiat currencies depend on trust, and the required trust is sustained by the reliability of the institutions of regulation and control but also profoundly on the basic health of the economy when it is deemed to have sufficient resources capable of producing the goods and services that are needed.
Spending beyond one’s means is not the same for a household as for a country. Margaret Thatcher’s approach assumed their similarity, thinking that the government could only spend money it already had, either by earning, taxing, saving or borrowing. MMT points to our common experience that our states spend and put money into circulation, some of which it then recoups through taxation, in pursuit of various policies. But government is not dependent on tax revenue to be in a position to spend. Unlike a household, the US or UK government issues the currency it spends. This is the reverse of Thatcher’s approach. Kelton formulates it thus: S(TAB), not (TAB)S; Government Spends first, then Taxes And Borrows.
Mervyn King, the former Governor of the Bank of England, acknowledged in the book published after his retirement that there is something magical about the production of money. He called it alchemy.86 The central bank enters a number into the accounts of its clients, the commercial and investment banks, and they in turn enter numbers into the accounts of their clients. But the sum of those latter numbers, which represent loans, is a multiple of the first number. The banks thereby simply create money, no longer by the stroke of a pen in a ledger but by keystrokes on a computer. Money is a symbolic reality, because at its heart is a promise. As can be read on any £20 note, it is a promise to pay the bearer on demand the sum of twenty pounds sterling. We credit that promise; we accept it and use it because we know others are prepared to do so also. This reveals a truth about the nature of money as essentially credit. The MMT explores the implications of this fact for those sovereign issuers of currency to understand what the real possibilities and true limits for their actions are.
The actual limit to government spending is not the size of its surplus of revenue over expenditure but the availability of real productive resources in the economy. The challenge a government faces is not the mobilisation of finance to achieve some desirable goal but the mobilisation of real resources, of people and their skills, of raw materials, machinery and factories, that are underemployed or unemployed. Why is the risk of inflation an issue for government expenditure? Inflation occurs when there are not enough goods and services to meet the demand represented by the supply of money in circulation. When there is too much money and insufficient goods and services, then the value of the currency falls relative to what it can buy. But the quantity of goods and services is malleable if fallow resources can be brought into production. This is definitely the situation of our economies following the pandemic – so many productive resources are waiting to be brought back into action. Appealing to what it calls ‘functional finance’, MMT stresses that policy should focus on delivering balanced conditions in the economy of full employment and price stability. If that can be done by reliance on government deficits, then there is nothing to be concerned about.
In the USA, the Congress is obliged by its own self-regulation to monitor the deficit, but MMT demonstrates how misguided this policy is. In fact, they point to the depressing effect of the Clinton Administration’s policy of a surplus budget in the last years of the 20th century. Kelton challenges the myth that deficit is a burden on the whole society. She argues: “The congressional budget is limited only by Congress. To avoid cutting back on programs that people value, Congress can simply authorize a larger budget to fund its other priorities. There’s no fixed pot of money. There is, however, only so much room in the economy to safely absorb higher spending. That’s the constraint Congress needs to worry about.”
There are many qualifications needed for this theory. Its usefulness is confined in the first place to sovereign currency issuers. Currency users and emergent and dependent economies are not directly helped by it. The USA has advantages that none other has at present, since the US dollar is a reserve currency for many international purposes. The UK is a sovereign currency issuer like the USA. But, because of the openness and size of its economy, it is more exposed to the state of world trade for the valuation of the pound. The need to hold reserves in other currencies including the dollar constrains the freedom of action to some extent. And yet, being monetarily sovereign, the UK government may not simply appeal to financial affordability as a valid argument for failing to pursue its social policy agenda. MMT helps us to see that the existence and size of the national debt as such is never a reason on its own to cut back on its provision for health care, for social welfare, and indeed, for international development aid.
The experience of austerity in the UK following the credit crisis contrasts with the US experience. The USA implemented a much more expansive spending programme to recover from the credit crisis, and succeeded, where the British policy of austerity extended the length of the crisis. The quantitative easing measures in the UK benefited primarily the commercial banks and finance markets, and not the real economy. Since the UK also enjoys the benefits of monetary sovereignty, it is to be hoped that we will see the UK follow the US example in using the opportunities of a currency issuer in responding to the present challenges.
In any consideration of the morality and justifiability of a taxation regime, Catholic reflection should situate analysis of the role to be played by taxation within a broader consideration of the economy and the functioning of credit. The principles of Catholic social teaching that the economy should serve the common good and that the claims of property are not absolute but limited by a social mortgage need to be elaborated in the details of discussion of taxation policy. At the very least, consideration of the arguments from MMT should help to free the discussion from any supposed categorical imperative that debts must be repaid, or that balanced budgets are an essential feature of virtuous government.
When we bring Catholic social teaching to bear on the question of deficit spending and taxation, we can see that themes such as the social mortgage on property, and the conditionality of contractual obligations, point beyond operative structures to situate them in the context of serving the common good. Property holders have duties as well as rights: duties to use their wealth to benefit all especially those most in need. And contracts are to be fulfilled, but such contracts that are exploitative of the needs of the poor are immoral and should be renounced not enforced. Regulation is needed to deliver on these values commensurate with the strong security given to property rights and the enforcement of contracts, not least in the case of debt.87 MMT may lend a new impetus to devising regulation, since it offers a fresh perspective on how our economic activity reliant on credit is to be understood and how it might be improved to better serve the common good. The MMT is a controversial theory, and it has opponents and supporters. One critic asks, ‘is it a school of economic thought, or a political project?’ From the perspective of Catholic social thought, which sees the political management of the economy in terms of care for the common good, it is not desirable that economic rationality would dominate the political consideration of policy options. Whatever its limitations, MMT has the advantage of situating economic policy at the heart of politics.
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82. David Graeber, Debt: The First 5,000 Years (2014).
83. J. W. Douglas and R. Raudla, ‘Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt’, Public Budgeting and Finance, 40(3) (2020) pp. 6-25.
84. Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (2020).
85. L. R. Wray, ‘Alternative Paths to Modern Money Theory’, in E. Fullbrook and J. Morgan, editors, Modern Monetary Theory and its Critics (2019) pp. 8-46.
86. Mervyn King, The End of Alchemy: Money, Banking, and the Future of the Global Economy (2016).
87. P. Riordan SJ, ‘Who is going to pay for it all?’, Thinking Faith (10/7/2020).
All individuals, families, civil society organisations and corporations, as well as the state, are responsible for promoting the common good and solidarity.
A logical starting point is the work of St Thomas Aquinas.
The calls on tax revenues to finance welfare would be diminished if people received a just wage as is called for in Catholic social teaching.
