Gordon Campbell | Parliament TV | Parliament Today | News Video | Crime | Employers | Housing | Immigration | Legal | Local Govt. | Maori | Welfare | Unions | Youth | Search

 

Where does the money come from?

Where does the money come from?

Keith Rankin, 2 February 2011

On a number of occasions since his state of the nation speech promising to make the first $5,000 of earnings tax free, Phil Goff has been asked "Where will the money come from?", and as always it's a hard question for a politician to answer, and an easy score for a TV or radio journalist (eg TVNZ Breakfast, 1 February 2011). [see Bill English press release on Scoop]

For young children there are two difficult questions: "How are babies made?" and "Where does money come from?" We've become relatively comfortable about talking with children about sex, but have made very little progress on the money front.

Money is simply a circulating medium; a lubricant for market transactions. It circulates through buying/selling, and through lending/borrowing. Transactions are subject to taxation, enabling governments to buy goods and services with from money revenue.

If increasing numbers of people choose to park all or some of their savings as money, then the circulation of money becomes compromised (a kind of financial arteriosclerosis) and we need an increased supply of money to compensate. Fortunately modern money is very elastic; it can be created and destroyed at the will of the appropriate authorities, through processes of double-entry bookkeeping. Yes we do have pixies in the back garden; they are called central bankers. Unfortunately, if newly created money is parked - rather than spent - then the market economy remains congested. Money is only meaningful as money when it is circulating freely.

By suggesting we should remove income tax from the first $5,000 of each person's earnings, Phil Goff is suggesting a policy that will facilitate the circulation of money. Money is easy for central bankers to create, but can be hard to shift. Our incomes - and the government's revenue in particular - depend on the circulation of money.

The question "Where will the money come from?" is, in this case, code for: "How can you reduce taxes when your current tax revenue is insufficient to meet your present spending commitments"?

The answer for the present is, for every lender there must be a borrower. People cannot save more - ie lend more - in the absence of accommodating borrowers. When households and firms are borrowing less and lending more, then governments are required to borrow more. For every lender, there must be a borrower; for every party who sells more than they buy (creditor party), there must be another party (debtor party) who buys more than they sell.

Economic growth takes place, in large part, when business firms borrow and invest. (Note that it is borrowers, not lenders, who 'invest'. True investors are spenders, not savers; commonly they spend the savings of others). As a result of their investments, firms take risks with the expectation of increasing their future revenues, servicing their debts and making more profits.

Good governments also borrow and invest. To recover from a recession, they invest by implementing policies that facilitate the circulation of money. As a result of the success of such policies, tax revenues (which are determined in large part by the rate of circulation of money) increase.

If governments cut spending (or raise tax rates) at a time when the private sector is not increasing its spending (even worse if the private sector is reducing its spending), then less money circulates, economies contract, and government revenues end up falling; the exact opposite of what the governments intended when they cut their spending.

Conversely, when economies have substantial unemployed resources (as they do when in recession), if governments raise their own spending (or reduce bottom tax rates), then more money circulates, economies recover and eventually expand. Government revenues end up rising; the exact opposite of what the pundits said would happen when governments reduced bottom tax rates. When, in a recession, governments increasingly borrow and circulate money, then, as that policy takes effect, rising government revenues lead to deficits that are smaller than they otherwise would be.

It's a paradox. In a recession, increased government deficits lead, in a year or so, to reduced government deficits. Government retrenchment, on the other hand, leads to increased government deficits.

The loudest voices in our financial and economic debates are too often ill-informed, espousing mantra rather than logic. The mantra that people should save more and borrow less makes no logical sense. Likewise it makes no sense to claim that governments should spend less at times when private households and firms are also spending less.

ENDS

© Scoop Media

 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

Crowdsale And Crowdfunding Campaign: Help Create The Future Of Independent News

Two weeks to go! The Scoop 3.0 plan aims to create NZ’s first community-owned, distributed news and media intelligence ecosystem in 2019. We believe this ScoopPro media monetisation approach can be scaled and spread globally to support local and independent news efforts in regional New Zealand and around the world.

Scoop is an ecosystem, it would not exist without those who contribute to it, read it and rely on it for professional media purposes. Generous past support from this ecosystem has enabled us to come this far in developing our business model. Support our PledgeMe Campaign>>

 

14/11: Two Years’ Progress Since The Kaikoura Earthquake

Mayor John Leggett said it was a day for reflection, but also a time to recognise the work by many people to support progress towards recovery made across Marlborough since November 2016. More>>

ALSO:

Pike River: Mine Drift Re-Entry Plan To Proceed

“I’ve decided the Te Kāhui Whakamana Rua Tekau Mā Iwa - Pike River Recovery Agency, recommended course of action to enter the drift, using the existing access tunnel, is by far the safest option,” said Andrew Little. More>>

ALSO:

Appointments: New High Commissioner To Australia Announced

“Dame Annette King needs no introduction given her long running career as a parliamentarian where she has previously held a number senior Cabinet portfolios, including Justice, Police and Health. She also was Parliament’s longest serving female MP with 30 years’ service,” said Mr Peters. More>>

ALSO:

Two Years Since Kaikoura: Silvia Cartwright To Lead Inquiry Into EQC

“The inquiry will be the first of its kind under the Public Inquiries Act 2013 and will have all the powers of a Royal Commission, be independent of Government and make its report directly to the Governor-General. More>>

ALSO:

Gordon Campbell: On The Royal Commission Into Child Abuse

Obviously, it is good news that the coalition government has broadened the scope of its Royal Commission into the abuse of children, beyond its previous focus on children in state care. More>>

ALSO:

Cases Delayed: Court Staff Refuse To Handle Sentencing Papers

Dozens of court cases have reportedly been delayed, as court staff escalate industrial action at two Auckland courts by enforcing a ban on handling sentencing papers. More>>

ALSO:

Education: Primary Teachers Rolling Strikes

RNZ Report: More than 100,000 primary school students in Auckland will be home from school today as teachers and principals walk off the job for the second time this year. It's the start of a week of rolling one-day strikes around the country, after the collapse of contract negotiations last Thursday. More>>

ALSO:

"Process Was Sound": Inquiry Into Haumaha Appointment Released

The Inquiry’s purpose was to examine, identify, and report on the adequacy of the process that led to the appointment. It found the process was sound and no available relevant information was omitted. More>>

ALSO:

 
 
 
 
 

LATEST HEADLINES

  • PARLIAMENT
  • POLITICS
  • REGIONAL
 
 

InfoPages News Channels