WEEKLY COMMENT 31-08-2017
By Barry Edwards
A new concept has been put forward by Richard Murphy of the Tax Research blog about establishing equity capital for countries to be invested in infrastructure and other important requirements to develop and support the nation as a whole. The basis of the idea is that the central bank creates money similar to the quantitative easing policy but instead of issuing bonds which the central bank buys, an equity fund is established and is used on behalf of the nation as described above.
Clearly, this plan would be controversial and some people would liken it to the South American economic policy of the past which caused serious inflation eventually destroying the currencies. However, the UK is not a developing country and a well-planned approach would probably be accepted if it was not over utilised. The important point about this concept is that the investment generates tax revenue which, as we have discussed in the weekly comment recently, eventually repays most of the funds used as the money works its way through the economy.
If you click on the link below you can read Richard Murphy’s paper which was written for another project about tax management for an independent Scotland; it is only one page so well worth reading;
While the UK is still a member of the EU, it would not be allowed. It would only be possible when Brexit has happened and the Bank of England was totally independent from any EU restrictions. As many nations are suffering from slow growth and most have serious government debt problems, the acceptance of a plan such as this would probably have little resistance. The most likely course for considering its implementation would be agreement by something like the G20 meetings where all countries agree that it can be used probably restricted to a maximum percentage of gross domestic product (GDP). This would calm market concerns and prevent massive selling of government debt which could happen if one country went ahead without common agreement.
All countries issue currency and it is usually referred to as ‘Seigniorage’ which is the difference between the cost of printing money (banknotes) and the revenue received for issuing it into the economy, normally via the banks and, of course, it does not have to be repaid. Depending on the demand for a currency this can generate substantial revenue for a government. This is definitely the case for the US Dollar which is in demand worldwide. These days, most of the Seignorage is done electronically at the press of a computer key and instantly credited to a bank.
Printing money is something that has been around for centuries and the concept of utilising it for national equity is not too far removed from Seigniorage. Therefore, it should not be a big shock to most people who understand how the financial system operates. How the proposal is handled clearly makes a big difference to how it is accepted and implemented to satisfy the concerns of the sceptics. All countries would benefit substantially which should make any proposal put forward attractive to the politicians, at least you would imagine that would be the case.
Unfortunately, when it comes to change it is not easy to persuade people and politicians to go for something as progressive as national equity. There would need to be much discussion prior to any decisions and it may have to be part of a political party’s manifesto to get accepted by the UK electorate. The nearest policy we have currently is the Labour Party manifesto for the last general election which has plans for substantial investment in infrastructure funded by national debt. Incorporating national equity as part of the method of financing their plans would obviously make sense. That would mean the Labour party would have to be voted into power for it to happen unless the other parties chose to adopt the same policy. That may be difficult for the Conservatives who believe in a more traditional approach.
Whether something like this gets adopted is never easy to predict but the concept does solve a lot of problems for managing a modern economy which needs enormous investment in infrastructure and research and development to compete effectively with other developed countries and the many developing nations that are growing much faster. It will take bold politicians to put their weight behind something as revolutionary as national equity and that may be a step to far for the moment.
That’s all for this week, more observations next week.