1. How to spend and finance?
To borrow or not to borrow?
Economics for Campaigners
Greenwich Political Economy Centre, University of Greenwich
Özlem Onaran

2. Key challenges of 21st century defines the priorities of economic policy
full employment with decent jobs, equality, ecological sustainability
Multiple targets requires mobilizing all the tools of policy
a comprehensive mix of
fiscal policy and public investment at the core
monetary policy
labour market policy for equality-led development
industrial policy

3. Public investment priorities
Physical infrastructure: green investment
Public transport, renewable energy, housing (building and insulation)
Ecological deficit
Social infrastructure: Purple investment
education, health and social care, child care
care deficit
Both direct and indirect impact on productivity
Educated, creative and healthy workforce
socializing the invisible, unpaid domestic care work
More options for women: Female labour force participation↑
Recognize, reduce, redistribute
Social security →more innovative and productive workers
improve pay and working conditions in these industries
Purple is green: More jobs with lower Carbon emissions
labour intensive services with low carbon intesity

4. How to finance? Taxation Borrowing National Investment Bank
Monetary policy

5. Progressive tax policy on income and wealth
Higher income tax on high income
UK : the top income tax rate was 83% above £90,500 in today’s prices!; top 1%
Higher corporate tax rate; UK lowest in G7
Higher tax on wealth
median linked taxation of high incomes and wealth holdings
Higher marginal top income tax rates
e.g. 10/70 income tax rule:
rate of 70% for income above 10 times the median income
Wealth tax
100/10 wealth tax rule:
10% wealth tax on personal net wealth that is above 100 times the median wealth (excluding primary residence and own businesses)
Higher inheritance tax rates
100/90 inheritance tax rule:
highest marginal tax rate of 90% for inheritance above 100 times the median wealth

6. Borrowing
Fiscal credibility rule: borrow only for public infrastructure investment
Impact on public budget –partly self-financing; there is money!
Increases national income in the short run (“multiplier”)
Increases productivity in the long run
Leads to higher tax revenues
Critical question: What is infrastructure?
Define spending in social infrastructure as investment (Women’s Budget Group)
Currently, public spending in education, childcare, health and social care are considered as current spending as opposed to capital spending in public infrastructure investment
Implications for the fiscal credibility rule:
borrow to invest in both social and physical public social infrastructure

7. National Investment Bank
National Investment Bank and associated Regional Development Banks
an on-lending strategy: e.g. the German KfW funding the Mittelstand
Eg. initial equity financing by the Government
issue an equity of £20 bn in year 1, purchased by the Government
a low cost strategy given the current low interest rates
about1% of the public debt
funded via its own bond issuance with the backing of government guarantee in the long run
annual bond issues
→£250 billion of long-term on-lending via private banks in 10 years
Macroeconomic impact: Crowd in private investment↑
→demand (multiplier effects)↑→productivity↑
→ Regional convergence, financial stability
not an alternative to public spending but complements it

8. Monetary policy
Bank of England can use ‘Quantitative Easing (QE)’ to buy NIB bonds or government bonds to finance public investment
versions of Peoples’ QE
Questions regarding the remit and independence of the BoE
Should be independent from financial markets and vested interests
Should be accountable to deliver policy consistent with the targets of elected governments
Going beyond inflation target and financial stability
Employment, equality and ecological sustainability

9. Tackling 3 myths of the budget surplus ideology
1. compares public sector budget to households: doubly wrong
Households borrow: Buying a House, education, job loss...
Different from households, a government can obtain funding from
self-financing: Spending creates income and tax revenues;
bond sales to the private sector
borrowing directly from the Bank of England (“monetization”).
2. crowding out of private investment?
interest rates are currently low; public sector deficits do not always put upward pressure on interest rates
Private investment is encouraged by public infrastructure
3. inflationary pressures?
inflation in the UK is about import dependency and low productivity; public investment improves productivity
no empirical or theoretical basis, budget cuts are ideological

10. Empirical analysis: Alternative Policy mix
public investment, progressive taxation, Increasing equality
increase public investment by 1% of GDP+ wage share by 1% + more progressive taxation (1% higher tax on capital and 1% lower tax on labour)
Obst, Onaran, Nikolaidi 2017
→3.4% more growth per year
Private investment increases by 0.7% as a ratio to GDP
Public spending crowds in private investment, it does not crowd out
>Demand
>improved business environment
>Increased profitability due to increased productivity NOT lower wages and lower taxes
Budget balance improves by 0.1% as a ratio to GDP
public investment self-finances part (15%) of itself

11. Conclusion
Equitable and sustainable development needs green and purple public investment and pay rise for both women and men!
Advice to the Chancellor of the 21st Century:
Take care of full employment, decent pay for women and men, equality, and ecological sustainability, and the budget will take care of itself.

12. References:
Onaran, 2018, Public investment in social infrastructure for a caring, sustainable and productive economy, in Economics for the Many, ed. Labour Party, forthcoming September 2018
Onaran, Ö., Nikolaidi, M and Obst, T. (2017) "The role of public spending and incomes policies for investment and equality-led development in the UK", GPERC Policy Briefs, University of Greenwich, #PB
Onaran, Ö. and Tori, D. (2017) "Productivity puzzle? Financialization, inequality, investment in the UK", GPERC Policy Briefs, University of Greenwich, #PB
Onaran, Ö., Nikolaidi, M. and Obst, T. (2017) "A coordinated mix of public investment and incomes policies for sustainable development in Europe", GPERC Policy Briefs, University of Greenwich, #PB  ​
Onaran, Ö., Goda, T., and Stockhammer, E. (2014) "A Case for Redistribution? Income Inequality and Wealth Concentration in the Recent Crisis", forthcoming in Development and Change
Onaran 2015 "State and the economy: A strategy for wage-led development"
Onaran 2016 "The role of gender equality in an equality-led sustainable development strategy", forthcoming
Onaran, Ö. (2016), "Secular stagnation and progressive economic policy alternatives", Greenwich Papers in Political Economy, University of Greenwich, #GPERC39
Technical references
Obst, T., Onaran, Ö. and Nikolaidi, M. (2017), " The effect of income distribution and fiscal policy on growth, investment, and budget balance: the case of Europe", Greenwich Papers in Political Economy, University of Greenwich, #GPERC43  
Onaran and Obst 2016 "Wage-led growth in the EU15 Member States:The effects of income distribution on growth, investment, trade balance, and inflation" forthcoming in CJE
Onaran, Ö. and Galanis, G. “Income distribution and aggregate demand: National and global effects” Environment and Planning A, 46 (10) , 2014
Tori, D., and Onaran, O "The effects of financialization on investment: Evidence from firm-level data for the UK",
Onaran 2016 "Wage- versus profit- led growth in the context of international interactions and the political aspects of wage-led recovery" forthcoming in ROPE

13. Appendix

14. Outline What is the government budget, public spending and revenues?
What are taxes, who pays taxes?
What is fiscal policy and what is its aim?
What do/should governments spend on?
What is green and purple public investment?
How can it be financed?
How much can/should the government borrow?
Is there a role for a National Investment Bank?
Is there a role for the Bank of England and monetary policy? What is “People’s Quantitative Easing (QE)”?

15. What is the government budget? What is fiscal policy
Public spending:
Public investment: conventionally only physical public infrastructure,
Railways, roads, social housing, public buildings but also defense
Current public spending
in public education, childcare, health, social care, public security, culture, recreation
salaries of public sector employees
Transfers: eg job seekers’ allowance
Public Revenues: taxes on income of labour and capital, consumption, wealth
Eg personal income tax on wage income, corporate tax rate on profits, value added tax, inheritance tax
Progressive taxation: higher tax rate on higher income
Government budget balance=tax revenues-public spending
If negative, budget deficit → public borrowing
UK budget deficit /gross domestic product (GDP), 2017: 2.4%
Public debt: stock of debt via accumulation of annual deficits
2017 UK public debt/GDP: 86.7)
Fiscal policy: Government decisions about public spending or tax rates

16. Austerity: Cuts in Public spending/GDP
since the 2008 Great Recession public spending/GDP fell from 45% in 2009 to 38.9% in 2017; plans to cut to 37.6% by 2022
negative effects on demand due to
Cuts in public investment
the squeeze in earnings due to cuts to public sector wages
A vicious circle of chronically low demand
= low investment, low growth and bad quality jobs
=Stagnation in productivity
self-defeating; the fall in budget deficit has been slow
The recovery in Britain is built once again on the shaky ground of household debt instead of investment, productivity and a healthy wage growth
and will remain fragile to any increase in interest rates
public budget surplus in the macro sense means that some one else, eg households, need to run a deficit,
destabilizing in the medium run.

17. What is the aim of economic policy?
The budget deficit is the wrong policy target to begin with
The main deficit is the deficit in investment, care, and equality.
take care of full employment, decent jobs and pay for women and men, equality, and ecological sustainability, and the budget will take care of itself.

18. Public investment priorities
Public Investment should prioritize social, ecological and economic needs:
Infrastructure where benefits do not just accrue to individual users, but have a public good character and accrue to society as a whole: education, health and social care, clean energy
Where Large scale investment requirements create natural monopolies -> public/collective ownership: railways
goods and services, access to which is seen as human right -> private supply/profit motive leads to undersupply /privilleged access-> public/collective ownership: education, health, social care
->public investment in social and physical infrastructure

19. Alternative Funding of the NIB
1 make loans directly to borrowers, obtain funding from the Bank of England
“Peoples’ Quantitative Easing”
repo with the BoE as an extension of the Term Funding Scheme
2 make loans directly to borrowers, obtain retail deposits from households and enterprises.
lessen the reliance on borrowing from capital markets, lessen the reliance on repo funding from the BoE, and would not rely on existing banks for loan creation.
Disadvantages
The potential need for a large number of physical branches, and a considerably greater workforce