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Honest Conversations

The government has enough money to end poverty in Sheffield – it just chooses not to

Honest Conversations is a new series of articles that aims to unravel some of the myths and falsehoods that prevent us tackling the most urgent problems facing Sheffield and the wider world.

The government has enough money to end absolute poverty in Sheffield if it wanted to. They could also end poverty in every other part of the UK in a matter of months, if the political will was there. They can afford it.

They don’t want you to know this. They fear the public would then understandably start asking why they weren’t using their enormous spending powers to transform the NHS, insulate our homes, and transition away from fossil fuels at speed and at scale, as well as meeting dozens of other policy goals that could profoundly transform day-to-day life in this country and help us avert climate catastrophe.

Acknowledging that the government has the money to do whatever it wants to do would undermine the broad political consensus since the Thatcher era that says the state is ineffective and incompetent, and that its main job is to get out of the way of private enterprise.

The last decade has seen increasing public anger about the chronic structural problems in this country: from crumbling infrastructure and unbuilt railways to collapsing schools, shit-filled rivers and a health service stretched to breaking point. The harms caused by this catalogue of failures have disproportionately fallen on people who were already the least well-off, as well as disabled people, older people and people of colour. But regardless of background and political allegiance, polls consistently show that the majority of the public want these problems fixed.

Politicians from the three main parties know they can’t deny that any of these problems exist, or say that they don’t think they should be addressed. No elected politician regardless of ideology would stand up and say they think our rivers should be filled with sewage, or that NHS waiting lists should go up. So they have to find another excuse for not doing anything about them.

There is a magic money tree

Fortunately, they have a get-out clause. They tell us that they would like to fix these problems, but that it is “unaffordable” to do so. They may lob a few hundred million (pocket change for the government) at addressing the worst effects of some of them. But they refuse to address all of them at the same time, at speed and at scale – even though they could. Since the late 1970s, there has been cross-party consensus that major interventions by government to solve systemic problems are not viable.

One of the most common methods of shaping the narrative and limiting the scope of what is considered possible in the UK is to compare government finances to household finances. Politicians do this so frequently that we barely notice it. In November, Chancellor Jeremy Hunt said that he would not “max the country’s credit card” by borrowing more money. In September 2022, during his failed leadership campaign against Liz Truss, Rishi Sunak said that “maxing out the country’s credit card is not right”. Almost every recent Prime Minister and Chancellor has made similar statements.

The point of this analogy is to suggest that it is prudent for the government to manage its finances like we would manage our own finances – to only spend money that we have already saved up, to not spend more than we earn, and to rack up as little debt as possible (or ideally no debt). This sounds like common sense, but it’s so misleading that it borders on an outright lie.

In reality, the government’s finances are nothing like a household’s finances. This comparison would only begin to make sense if, in your household, you also owned a major bank and could print your own currency. The government does own a bank, the Bank of England, and they can and do create new money.

Robert bye je F vyxytb4 unsplash

Unlike most households in the UK, the government own their own bank – the Bank of England.

Robert Bye on Unsplash.

Tax break

Politicians also try and create the false impression that the government needs to collect money through tax before they can then spend that same money on public services or infrastructure projects – hence the use of the universal cliche “taxpayers’ money” to imply that money spent on public services has somehow been robbed from us.

This is not true. In reality, the government simply creates the money that they spend because they own the bank. They then draw money back out of the economy via tax to stop there being too much money in the economy, which could cause runaway inflation (they also use tax to achieve other policy goals, like stopping us drinking and smoking too much). But the money that the government spends on public services is not the same money that we send to HMRC in our monthly payslips. The government has set self-imposed “rules” to limit how much it can borrow – but it is of course within its power to change these at any time.

We know this because of furlough. The furlough scheme, which cost £70 billion in total, opened only a few weeks after the government and the wider public had even heard of Covid-19 for the first time. The government could only start covering 80% of peoples’ incomes so quickly because they have the ability to create new money out of thin air. In this case, the money was largely replacing what was lost in the economy as a result of the economic shutdown, so it didn’t need to be claimed back in tax. Last month, the government ‘found’ £450m to compensate the victims of the Post Office Horizon scandal after it suddenly rocketed up the political agenda due to an ITV drama.

If government finances worked the way politicians tell you they do, ministers would have needed to have had that £70bn saved up in a bank account before they could spend it on furlough. But they didn’t – because that’s not how it works. They own the bank.

If our national media, including the BBC, did their jobs properly and explained to us how the world actually works, they would have told us all this during the pandemic. They didn’t, because it didn’t fit the simple, easily digestible but entirely misleading narrative of the UK being like a massive household. But the furlough scheme let the cat out of the bag: government has the financial power to do massively ambitious and expensive things extremely quickly, despite what politicians of all stripes suggest.

Anything we can do, we can afford

If the government can assemble a furlough scheme in a matter of weeks, they can also do other things.

They could respond to the climate crisis at speed and at scale, insulating every home in Britain. They could purchase and retrofit empty offices and department stores, creating hundreds of thousands of new homes and jobs without exceeding our carbon budgets. They could abolish absolute poverty in this country by paying everyone a Basic Income, or by establishing a Minimum Income Guarantee.

Keir starmer

Keir Starmer has misleadingly talked about the Tories "maxing out the UK credit card".

Rwendland on Wikimedia Commons.

All of this is possible. John Maynard Keynes, the greatest economist of the last century, knew this. In 1942, in the middle of a hugely expensive war, he told a BBC radio audience that “anything we can actually do, we can afford.” His ambitious ideas were enthusiastically taken up by the postwar Labour government who, despite having huge war debts, somehow ‘found’ the money to set up the NHS, establish the modern welfare state and create the secondary school system.

Our current Labour politicians seem unwilling to match this ambition. They have done nothing to counter the lie that the economy is like a household. Labour frontbenchers like Shadow Chancellor Rachel Reeves know enough about economics to know this isn’t true. They’ve studied Economics – they know that the government can create money to do whatever it wants to do. But they have made a political calculation that being honest with the public about this is politically unfeasible (the Tories never miss an opportunity to accuse Labour of being fiscally irresponsible, or the party of “tax and spend” – a phrase which is itself a lie in only three words).

True responsibility

Instead, to the delight of the Tories, Labour are going along with the rhetoric of thrift and austerity because they think telling the truth is too much of a risk to their brand. This virtually guarantees that they will be able to do little in government other than make minor cosmetic changes. Perhaps the greatest achievement of 14 years of Tory government is the Labour Party’s “fiscal rules”.

Reeves has said that “for me, fiscal responsibility will always come first,” even going so far as to ditch the party’s already underwhelming £28bn green investment pledge because of this baseless idea founded in bad economics.

Here, Reeves is not having an honest conversation with you. With the scale of change needed to avert runaway climate breakdown, real responsibility would be to increase this investment ten-fold and create the money to fund a just transition. This would allow millions of workers in the UK to transition from low-wage, carbon intensive jobs to cleaner, greener and better paid jobs, while at the same time seeing improvements in both their living standards and their health and wellbeing.

Privately, Reeves and her advisors will know that only massive public investment on a scale not seen since President Roosevelt’s New Deal will be enough to combat climate breakdown. But they have calculated that it is politically impossible to say so out loud – and that it is better to get into power and rearrange the deckchairs on the Titanic than to try and stop the ship sinking in the first place.

City centre panorama

The government could end absolute poverty in Sheffield forever, if it wanted to.

Rachel Rae Photography

We need to collectively and courageously reimagine our idea of what ‘responsible’ politics is. This would see us transition away from discredited ideas like balanced budgets and the “national debt”, and towards true responsibility – taking action at the scale required to tackle the systemic problems that we face.

We could end poverty tomorrow

What does this mean for Sheffield?

It means that, if it wanted to, the UK government could transform this city for the better. It could end child poverty. It could make every foodbank in the city redundant. It could give the city a fighting chance of reaching our commitment to reach net-zero by 2030.

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Bryony Finnigan for Now Then.

But it’s important to distinguish between what government ministers and local leaders can do. The reality of how government finances work that I’ve outlined above only applies to the UK government – because they’re the only body in the country that owns a bank, and has the power to create new money.

It doesn’t apply to local councils, whose setup is in fact closer to that of a household. Local councils really do have to raise money through Council Tax before they can spend it (apart from the money they receive from the government as a block grant, and any that they borrow). Local councils will go bust if they can’t balance their books, as Nottingham and Birmingham have recently done (it’s illegal for a council not to set a balanced budget). The UK government can never go bust, because if needed they can just create new money to pay off their debts.

So although the UK government can create the money to do anything it wants, Sheffield City Council cannot.

Since the start of austerity in 2010, cuts to government-run services like Universal Credit have seen more and more of the responsibility for dealing with social problems passed on to local government. But they have also had their own funding cut dramatically. If you walk around Fargate and Castlegate, you can see how the burden of responding to poverty and destitution has been shifted to cash-strapped councils – and the devastating effect this has on peoples’ lives in one of the richest countries in the world. Millions of people in the UK have effectively been abandoned by the state, and this human tragedy has become visible to us every day.

Rishi sunak

Rishi Sunak knows how government finances really work – but he's not going to tell you.

Lauren Hurley / No 10 Downing Street / Open Government Licence v3.0

We need an honest conversation

This offloading of responsibility on an industrial scale is not a coincidence. Through a decade-long programme of spending cuts, ministers have passed the burden to tackle systemic problems from the one organisation that has the power to do something about it on to those that don’t.

When your bus to work gets axed or violent crime in your neighbourhood goes up, government ministers would rather see the organisations that are powerless to do anything about it take the blame. It gets them off the hook.

Our local leaders are unwilling to have an honest conversation with you about this. This could be because they don’t want to undermine their parties at a national level, who have signed up to falsehoods and bogus economics around government spending and fiscal “responsibility”. But perhaps councillors are also reluctant to reveal how little power they really have to change anything – especially if they feel they were voted into office with a mandate to change things for the better.

As a city, we need to have these honest conversations about what we can really afford to do if we’re to start tackling the systemic and intersecting problems that are driving us past our planetary boundaries while at the same time failing to meet the needs of all of us. These include runaway inequality, widespread poverty, hunger, the democratic deficit and the need for an energy transition.

Tens of thousands of people in Sheffield, including children, live in poverty through no fault of their own. They were just born in the wrong place at the wrong time. But it doesn’t have to be this way. We could refurbish and insulate every home in the city, ensuring everyone has a safe and warm place to live. We could kickstart renewable energy projects in every neighbourhood, providing clean energy for everyone, free at the point of use. We could give everyone a generous basic income, not only ending absolute poverty overnight but also giving people a foundation on which to build the rest of their lives.

We can afford to do all of that and more, right away. Let’s be honest about that.

Learn more

With thanks to Stephanie Kelton and Richard Murphy, whose books 'The Deficit Myth' and 'The Joy of Tax' inspired this article.

by Sam Gregory (he/him)

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