HOW a government funds its expenditure is a question that all countries face. It is not confined to capitalist economies. It applies to Cuba as well as to Britain and the US.  

Government expenditure invariably exceeds its income whether by design as a result of investment decisions, or due to natural disasters or war. Governments with a sovereign currency (and Britain is such a country, unlike those who are inside the EU) can simply print money to fund expenditure. However, that will lead to inflationary pressures on prices, at least in the short term, as general demand for resources increases.  

Traditionally, governments have borrowed money from the private financial market through the issuance of bonds. Money is thus taken away from private finance into the hands of the government to spend.  

The risk of inflation is avoided since what could have been spent by private finance is now being spent by the government keeping the aggregate demand for resources unchanged. However, this lands the government with a debt that has to be paid back, something that invariably means further borrowing or cuts in public expenditure.  

A new publication by Rebuild Britain entitled Government Spending and Debt: A New Approach acknowledges these realities, but turns the tables round. It argues that rather than the government cutting down its expenditure to avoid inflation, the same effect can be obtained if the private sector is made to curtail its activities. Regulations already exists for that purpose. These can be strengthened to include restrictions on the amount and purpose of private lending and investment.  

It was Engels who noted the “holy awe with which [the Paris Communards] viewed finance” and “how they remained standing respectfully outside the gates of the Bank of France.” This attitude to finance continues today.  

Public finances have for a long time been regarded by workers as mysterious, with an aura of magic. The operations of the great institutions of finance are seen as alien, unfathomable and complex.  

The pamphlet’s aim is to expel these notions of self-doubt and place public finances at the centre of political dialogue and debate: “In truth, there is no mystery, just mystification; no complexity, just confusion.”

Things changed dramatically with Covid and the breakdown of globalisation, the 6,000-word pamphlet argues. Almost overnight economic activity came to a virtual halt as lockdown was introduced. The market was paralysed; it had no answers.  

If anything, far from being a solution, market forces became the problem. Capitalism lost its raison d’etre; it could not even pay the wages of the workers it exploits.  

With globalisation stretching beyond its inherent limitations, the government had to intervene to save capitalism by adopting socialist measures. Workers who the market would have laid off had 90 per cent of their wages paid by the government under a furlough scheme put together by the Treasury, the Confederation of British Industry and the TUC.  

Failing public services such as Network Rail and other rail franchises as well as assorted energy firms slipped into public ownership without much fuss or debate, in what seemed like the most natural process, as natural as a butterfly slipping out of its chrysalis.  

Written in an accessible style, the pamphlet provides an educational tool for trade unionists and community activists setting out the straightforward solutions that are needed and urges readers to translate them into new policies in their organisations.  

The pamphlet calls for six crucial steps towards a socially responsible public finance.

1. Direct funding by the Bank of England of government expenditure balanced by a simultaneous and equal reduction in private lending. This is not Modern Monetary Theory which promotes money printing to bankroll government spending regardless of the risk of inflation. Socially responsible public spending avoids inflation by restricting private sector ability to invest. For example, if the government wants to spend £500 million on say a state of the art facility for designing and manufacturing microchips, then it would instruct the Bank of England to create £500 million in new money and at the same time use its regulatory powers to cut down private lending by £500 million. To start with, a hybrid system may be used in which not the whole amount of direct funding is offset by reduced private investment, but say 40, 50 or 60 per cent is. The rest is financed through traditional borrowing.  

2. The reintroduction of exchange controls. One basic and effective control on private finance is exchange controls, something that Margaret Thatcher abolished soon after entering Downing Street. The control of the capital flow across national borders is essential to any country’s financial and economic security. Exchange controls ensures the country’s scarce resources are deployed in the country of its birth. In the same way as it is not in our interest to have our industrial and manufacturing base and public utilities owned by foreign investors, it is not in our interest to have our financial wealth sent abroad to exploit other workers. Exchange controls provide the underpinnings of self-reliance. The need for self-reliance was starkly illustrated when Covid struck.  

3. The creation of a national investment bank. The idea of a national investment bank is not a new one. It formed part of Labour manifestos including those of the 1983 and 2017 general elections. The private financial system has proven inadequate for the purposes of much of the British economy.  

4. Setting up public banks. Public or public-sector banks were prominent in the 19th and early 20th century, helping economies in various parts of the world to industrialise. Today they are needed as private finance has become more and more unreliable and unstable, forever requiring help and support to survive. It defies common sense that financial institutions that rely on the state of their existence should be allowed to function independently of the state. With a social responsibility remit, public banks could play a major role in implementing the government’s strategy for economic and industrial advance.  

5. Regulate private lending. A change in the regulations governing the financial and banking sectors is needed to bring private finance in from the cold, back from whence it originated for private financial wealth belongs to workers directly or indirectly. The last time regulations were changed was in the 1980s with Thatcher’s deregulation. At that time, privatisation and individualism were the main trend. Today, it is state intervention and public service ethos that are making the running, as was evident when Covid struck.

6. End inflation targeting and give the Bank of England a public interest remit. Instead of the current business interest remit, that of an inflation target, the Bank of England should be given a clear public interest remit: full employment, the promotion of British industry and the promotion of carbon efficiency. The Bank of England should go back to being an integral part of the government by ending its independence to set interest rates. 

Download the full pamphlet or request a hard copy from www.rebuildbritain.org.uk.