Conversation with Marc Robinson on Bigger Covernment

[Napodano]

After a lull, the PFM Board comes back with the hot topic 'Bigger Government' welcoming to our regular conversation events Marc Robinson, a professor of economics and senior consultant. He has just published the book 'Bigger Government, the future of Government expenditures in advanced economies'

His experience is especially important for us PFM Boarders, who are always in search of sound economic and social policies in a fiscal sustainability context.

If you are a registered member of the Board (go to the top right of the page), you have the possibility to ask a question to Marc by making a post (REPLY button) to this topic. The time allotted for questions is Saturday 18th to  Wednesday 29th July 2020. After this period the interview will be closed and remain in the archive for future reference.

At the end a PFM Board member who asked a question will be selected to get a copy of Marc's book for free.

[Marc Robinson]

Thanks Mauro. It's great to have the opportunity to discuss the future of public finances with members of the PFM community.

We are now moving into an era of markedly bigger government. Government expenditure will – other things being equal – increase in most advanced countries by 7 percent or more of GDP in the period till the middle of this century. This is the conclusion of my new book, "Bigger Government: The Future of Government Expenditure in Advanced Countries", published on 15 July.

Government spending has dramatically increased everywhere in response to the coronavirus pandemic and the savage recession which it has triggered. In the wake of the pandemic, the debate about the size of the state has gained new urgency. However, nearly all of the spending concerned is – and should be – purely temporary. What is much more important are powerful long-term trends in government spending which have little or nothing to do with the coronavirus pandemic.

"Bigger Government" shows that government expenditure will be forced upwards over coming decades by powerful external pressures and forces which are independent of the philosophical orientations of political leaders and parties. These pressures will be felt most strongly and universally with respect to spending on health care, climate change and long-term care for the very elderly.

Although everyone is conscious of the need for additional spending to strengthen national health systems – in the light of the weaknesses revealed by the response to the coronavirus pandemic – this is not the main reason why government health spending will increase enormously over the long term. The really big driver of spending will be the rapid expansion of the “capabilities of medicine.” Technology-driven increases in health expenditure are accelerating because the bioscience revolution is generating an increasing flood of costly precision and customized treatments. These treatment technologies are increasingly entering the mainstream of medical practice, and it will be impossible for national health systems to deny access to them to citizens. While politicians and budget officials understandably worry about how to pay for increasing health expenditure, containing spending is not and should never be the primary focus of public policy. The main concern should be to ensure citizen access to the great benefits which medical advances offer. Doing so will cost governments more, and they will be unable to resist the pressure to spend.

Climate change is the second area where governments will not be able to avoid spending significantly more. Achieving “net zero” and making necessary adaptation investments can be expected to cost governments up to 1 percent of GDP annually over the coming three decades. But governments are likely to spend considerably more than this, and more than they need to spend. This is because popular resistance to higher carbon taxes is leading to increasing reliance on subsidies to households and businesses. Bad policy, but with a clear political logic.

The political wind is changing rapidly on global warming. Even in countries where the political influence of climate change deniers is at present greatest, such as the United States, the tide of public opinion is changing. With the consequences of rising temperatures becoming more obvious by the day, only a shrinking minority of voters will in future be prepared to deny reality. Governments everywhere will respond to the increasing citizen clamor for action – in the way that is already happening in Europe.

Every advanced nation can also expect to see large long-term increases in government spending on the provision of long-term care for severely-disabled elderly and other citizens. The main reason for this is the intense political pressure on governments to support those who are unfortunate enough to face the catastrophic scenario of dementia or other severe disability. Governments have shirked their responsibilities in this area in many advanced countries, but will not be able to continue doing so for much longer. One only has to look at the steps which governments in countries like France and the United Kingdom are currently making towards expanded long-term care to see what the future holds for advanced countries generally.

In the many advanced countries where there are severe infrastructure deficits – e.g. crumbling roads and closed bridges – infrastructure spending will be another source of pressure.

The expenditure pressures which governments face are heavily front-loaded, so it is unrealistic to expect that spending will increase only gradually over the coming decades. Why? Firstly because of the immediacy of the need to address the challenge of global warming, as well as the weaknesses in health systems revealed by the pandemic. Secondly, because most governments face significant continuing spending pressure on age pensions over the next decade or two.

The key point made in my book is that long-term trends in government expenditure are not just the reflection of changes in the political ideologies of politicians and governments. External forces and pressures play a crucial role, and in many cases oblige governments to spend irrespective of their ideological inclinations.

A key question will be to what extent it is possible to offset these powerful upward spending pressures through compensatory spending reductions. One aspect of this is the scope for efficiency savings to create additional fiscal space to accommodate these pressures. In my book I look closely at this question and suggest that it is naïve to believe that efficiency savings can make more than a marginal contribution. Indeed, it is more realistic to look at efficiency savings as a way of partially offsetting the spending pressures in technologically-stagnant labor-intensive areas of government services due to the so-called Baumol cost disease.

This leaves us with the possibility of policy-driven compensatory expenditure cuts: that is, making major cuts to government benefits and services elsewhere so as to make additional fiscal space. The pressure to make such compensatory cuts will be intense everywhere. In Europe, this pressure almost certainly means that there will be further cuts made to welfare benefits – continuing a trend which has already been evident over recent decades. In the United States, by contrast, the scope for compensatory cuts is more limited. The US welfare state is, for example, so inadequate that it is impossible to cut welfare spending significantly without causing enormous additional suffering.

All this points to the conclusion that, notwithstanding compensatory cuts that governments make in coming decades, it is overwhelmingly likely that government will get bigger everywhere. Forget about smaller government. The only question is how much bigger government will get.

***********************************************************************************************************************************************************************************
"Bigger Government" is available in e-book, paperback and hardcover editions from most online booksellers. Further information on the book, including where it may be purchased, is available at the book’s website (biggergovernment.com). The site has podcasts and blogs with more information about the book themes.

[Napodano]

The conversation with Marc on Bigger Government is offocially open.

I start with a first question

QUESTION 1

Hi, Marc;

When I read that Government expenditure will increase in most advanced countries by 7 percent or more of GDP in the period till the middle of this century, I jolted. I live in Italy and Government is already big, at least for my liking. I went straight to read the chapter in your book 'Trimming the Fat' and I was confirmed that fiscal space is limited. Hence my question:

What is the trend  for spending reviews in the last years? Is this still a tool that can be effectively used to  obtain compensatory expenditure cuts? In such an extraordinary circumstance due to Covid-19, does it make sense to talk about zero budgeting for a few budgetary cycles?

[Marc Robinson]

REPLY TO MAURO, TO QUESTION 1
You've raised an absolutely critical issue here. The 7 percent plus spending growth which we talking about over the next three decades is, as you note, other things being equal – i.e. if nothing else changes in policy terms. But other things will not be equal and, in particular, there will be huge pressure for compensatory spending cuts – i.e. cuts in other areas of spending which will at least partially offset spending pressure. In this context, spending review will, as I see it, be important.

What is the role of spending review going to be, and what type of spending review do we need? For me, starting point here is that it would be an illusion to think that we can get all that far by making "efficiency" savings alone – i.e. savings which are achieved by delivering the same services, or achieving the same outcomes, at lower cost. Pursuing these is very important but, I argue in the book, their contribution can only be expected to be marginal and incremental over time.

This means, for me, that compensatory cuts will need in coming years to be found mainly in "policy-driven" expenditure reductions – i.e. scaling back or even in some cases eliminating programs, services or transfers. So spending review would need to be focused mainly on identifying savings options from policy changes, and not wholly or primarily on efficiency savings.

Now I guess the thing is that many governments, and in particular many ministry of finance officials, already know where the main cuts for significant savings are to be found. The extent this is the case, the need for spending review is not mainly for its function in the technical process of searching for savings options. But we arguably do very much need spending review to play a significant role here in the political "selling" of compensatory cuts. Public spending reviews which make the case for significant cuts to help find fiscal space can in my view play a very important role in the post-pandemic era. In other words, they can help explain to the public why compensatory savings need to be made, and in doing so make the politics of expenditure cuts somewhat less difficult. In talking about expenditure cuts we are talking, of course, not about now or next month – but rather, about once economies have made a full recovery from the current crisis. It seems to me that in this context governments could use spending review with a careful narrative built around it. For governments which are most committed to aggressive fiscal consolidation, the story could be the same sort of story as used in spending review after the global financial crisis – that we need to get debt down quickly or we will be ruined. But for governments which don't see it that way (and I don't personally see it that way), and which believe that fiscal consolidation should be much more gradual and that the main challenge will be finding additional fiscal space for increased spending on healthcare, fighting global warming, infrastructure etc. – for such governments, the narrative around which the spending review process is constructed could be a much more positive one about the need to make savings in order to help finance this positive agenda.

Although spending review is likely to have this big political role, the technical role will continue also to be important. By this I mean the role of identifying savings options which are not necessarily obvious. I also mean the task of precisely defining a range of savings options and preparing reliable estimates of potential savings from implementing them – including in relation to those options which are already in broad terms obvious to politicians and senior bureaucrats.

Finally, it seems to me that many countries have dropped the ball on spending review a bit over recent years. There was a big flurry of spending review effort in the immediate wake of the global financial crisis, and after that things petered out a bit. Many countries either stop doing spending review, or allowed it to drift into general management and policy improvement review – as opposed to what it should be, which is review targeted at delivering political leaders with concrete savings options. I think this is going to need to change in the medium term as we emerge from the pandemic-induced crisis.

[John Short]

QUESTION 2

Marc,

I have to confess I have not read the book so my comments are based on what you have posted here and the supporting material on the book.  I cannot disagree with your thesis on the increased demand for public expenditure either from changing demographics and better (more costly) standards.  Spending reviews (neglected for some time in the UK) may point to altered allocations and savings but are unlikely to reduce overall level of spending as a proportion of GDP needed to meet the demand that you have identified.  As well costs are being pushed up due to the rejection of multilateral collaboration.

There is little scope for borrowing given the COVID-19 response that has moved existing borrowing beyond “normal” levels.  However the political reality also poses a constraint – 4 or 5 year election cycles may mean that the only option to solve the equation – increased taxation – may well be half-hearted and the need for tax reform domestically and internationally (notwithstanding the efforts of the OECD and EU) may well be rejected for the usual tinkering at the edges approach. (The UK announced a few days that it would look at capital gains tax.)  Tax reform may allow efficiency gains as a precondition to have a universal basic income as I have posted elsewhere which would build on the universal credit system – a negative income tax that I was taught as an undergraduate some 50 years ago!

My question then is how can the demand for greater public expenditure be met without addressing taxation?

[Marc Robinson]

ANSWER TO JOHN, TO QUESTION 2

Thanks for this observation John. You are, of course, quite right. Pressure of higher expenditure does absolutely raise the question of taxation.

It seems to me that the level of taxation is first and foremost a political choice, and the most important constraints to higher taxes are political. There is no "technical" reason why the US or, say, the UK could not levy significantly higher taxes than they do today. But the political obstacles are nevertheless very real, and arguably particularly major in countries such as France and Denmark which already tax at very high rates. The main point of my book is to point out just how powerful the long-term pressures for higher spending are, and that this means that there will be fierce political battles around the choice between raising taxes or making major "compensatory" expenditure cuts elsewhere. I would personally hope that in, say, the US, the battle is resolved in favor of relying mainly on tax increases. But time will tell.

The other point I make about taxes is, even if raising taxes on the rich and (within limits) on companies may be a good idea, it is unrealistic to think that these alone could finance the levels of extra spending which are in prospect. The US may be a plutocrats' paradise, but the country needs not only to raise taxes on the rich, but also to raise taxes more broadly (including via a VAT).

Just as an aside, I argue in the book that there is no case for a universal basic income and that, in addition, governments won't be able to afford it given the large spending pressures in areas which really matter including health and global warming. It is a puzzle to me why the UBI is so much in vogue right now. The main arguments for it -- the supposed threat of technological unemployment, and rising "precarity" -- don't stand up to careful analysis, as my book argues. But this is, of course, an area where opinions differ greatly, and it is good to be able to discuss it.

[Napodano]

QUESTION 3

Marc and John,

Allow me to chip in on the issue of taxation. If taxation is going to be the main source, although not the only one,  to cover those additional Government expenditures, I have the following question:

Which type of taxation should be preferred?  Pre-Covid-19, if my reading was correct, there was a favoring towards a shift from direct taxation to VAT. Do you see that shift more difficult now that consumer spending may be necessary to relaunch the economy post Covid-19?

[John Short]

The balance will depend on the administrative capacities re the different taxes, but balance could be an objective as well as the way a country sees the tax structure. My point really is that tax reform is a necessity which means simplification of the system and eliminating tax expenditures.  This then put these tax expenditures alongside actual expenditures in a clear decision making process rather than hiding the expenditure equivalent of tax breaks and ignoring and not treating them as expenditures within a potentially constrained fiscal table.

 I was aware of the opposition to UBI and was only using this as an example for the need to address tax policy with respect to the simplification of treatment of taxable income. I will let the UBI zealots  defend their position!

[Marc Robinson]

TAXES: REPLY TO MAURO AND JOHN (TO QUESTION 3)

A couple of thoughts. Firstly, we absolutely do not need tax increases now -- or spending cuts either. One of the lessons which we should have learned from the global financial crisis was that it is an error to initiate fiscal consolidation before the recovery is assured. So Mauro's point about the adverse impact of higher taxes on consumer demand is spot on in the immediate wake of the pandemic.

Secondly, John has drawn our attention to the further crucial point that the spotlight needs to be put on tax expenditures. Future spending review will need to focus explicitly on tax expenditure as well as ordinary expenditures. This was often not the case with spending review in the past.

Thirdly, with respect to LT tax increases, I defer to the tax experts. I guess one point is that it is not true here that "one size fits all". The tax systems of some countries are much more redistributive than others, and countries also differ greatly in the structure of their taxes (e.g. degree of reliance on indirect taxes vs direct taxes) and it would be quite wrong to prescribe the same changes everywhere. The case for a radical overall of the distribution of the tax burden is particularly strong in countries like the US, where the oligarchy have rigged the tax system in their favor by buying the political system (as so well demonstrated by, e.g., Robert Reich).

[Napodano]

QUESTION 4

Marc,

In your book there is a chapter titled 'the Impact of Aging'. Can you elaborate here on this cost driver that is expected to significantly impact Government spending?

I am interested, in particular, to know whether there is a possible strategy to balance entitlements with more discretionary spending?

[Marc Robinson]

REPLY TO MAURO (TO QUESTION 4)

1. There are, of course, three areas of spending which are typically considered to be particularly sensitive to population aging – health expenditure, pension spending and long-term care.

2. The sensitivity of health expenditure to population aging is widely exaggerated, with many thinking that it is the main factor pushing spending upwards. In fact it is distinctly secondary. Technology is the most important force.

3. Increase pension spending due to population aging has been a huge problem over the last three decades for many advanced countries. However, if one looks forward to the middle of this century, the situation is different. Quite a few OECD countries are projected to have pension spending/GDP which is about the same or lower in 2050 than it is today. This is largely because of the gradual implementation of many pension reforms.

4. A key theme of my book is that spending on long-term care is likely to be the largest uniform source of spending pressure arising from population aging. This is primarily because of the large increase which will occur in the numbers of very elderly persons suffering from dementia or other forms of grave disability. Governments which currently don't do much to provide care for such people will find that they have little political choice but to do a lot more in future. This pressure is already evident in countries like France and United Kingdom (more specifically England – Scotland already has a system which is quite good I international standards).

5. I guess we have to be a bit careful about the term discretionary spending. Seems to me that health spending, like welfare benefit spending, is to a large degree demand-driven – irrespective of how it is approved in the budget. The growth of demand-driven spending is clearly going to be very substantial over the longer-term, which – other things being equal – would squeeze the scope for other spending. This is in fact exactly what is happened over past decades. But then there is the question of what might be done in some countries to change policy so as, in particular, to cut welfare benefits in some areas.

[Napodano]

QUESTION 5

Marc,

There is an excellent piece in the Economist that fits perfectly in our conversation.
Available for free at https://www.economist.com/briefing/2020/07/25/the-covid-19-pandemic-is-forcing-a-rethink-in-macroeconomics?fsrc=newsletter&utm_campaign=the-economist-today&utm_medium=newsletter&utm_source=salesforce-marketing-cloud&utm_term=2020-07-23&utm_content=article-link-1

'Economists and policymakers can be divided into three schools of thought, from least to most radical: one which calls merely for greater courage; one which looks to fiscal policy; and one which says the solution is negative interest rates'.

Can you please give your opinion on the options indicated in the article?

[Gord Evans]

QUESTION 6

The composition and dynamics of the private sector and stock market have changed significantly over the last 20 years.  The largest companies by far in the S&P 500 are Microsoft, Apple, Amazon, Alphabet (Google) and Facebook.  Companies like Netflix, Uber or more recently Tesla and Shopify become multi-billion dollar firms in just a few years.  These firms accumulate massive cash hoards, much of which goes towards stock buybacks, which increase their value even further.  Via the internet, they can grow exponentially on a global basis in a matter of months rather than through decades of methodoical factory expansion.  Their major stockholders (Bezos, Musk, Zuckerburg et al) find themselves among the richest people in the world.  And yet, the stocks they hold are not taxed while they hold them and, even if sold, only 50% of those capital gains would be taxed.

The types of inevitable government expenditures you have cited will be massive and require equally massive additional revenues or reduced expenditures.  Regarding increased revenues, there have been increasing discussions about the way in which mega-companies are taxed (e.g., France's digital tax - resisted by US; Ireland's low tax regime - resisted by EU) as well as discussions (e.g., by Elizabeth Warren) about wealth/capital gains. 

Do you feel that, given the potential amount of revenue involved, these are potential high-impact areas of future government revenue that could, at least in part, address expenditure pressures?  Are there other taxation ideas related to the booming digital economy?

[Marc Robinson]

REPLY TO GORD EVANS (TO QUESTION 6)

My book focuses in detail on the expenditure-side pressure. But in the last chapter, it does address precisely the issue that you are raising: what extent do tax increases on companies (and the rich) offer a means of financing the very large spending increases which are in the offing? To answer this question, I look at expert estimates of the revenue potential involved. For companies, the IMF estimates that lost revenue from corporate profits shifting of the type you're talking about is probably around 1 percent of GDP for advanced countries as a whole. Whether all of that would be recouped from tax reforms is an open question. So attacking the abuses of the big tech corporations is necessary and useful, but is hardly the answer to spending pressures which are much larger. There is some potential possibly to raise average corporate tax levels generally, but international tax competition constrains these. In addition, the widespread popular perception that company tax has declined is largely wrong – headline company tax rates rates have declined, but the corporate tax base has widened and company tax revenue as a percentage of GDP has been broadly stable for some time across advanced countries generally.

As for more progressive income taxes and taxes on wealth, it may be possible to raise up to a couple of percent of GDP from these – although it needs to be remembered that the scope for additional revenue here varies enormously between countries. The distribution of the tax burden is vastly less redistributive in, say, United States than it is in many European countries – meaning that the additional scope for revenue from hitting the rich is less in, say, France, than it is in the United States.

What all this suggests is that there is no way that hitting companies and the rich alone will be sufficient to fund all of the additional spending pressures. To the extent that the spending pressures are not offset by compensatory cuts elsewhere, they will demand that tax rates for the population in general – i.e. the so-called middle classes – would need to be higher.

[Marc Robinson]

REPLY TO MAURO (TO QUESTION 5)

Thanks for drawing this article to my attention.

With respect to the themes of my book, firstly, I want to make it clear that I totally reject the suggestions made by advocates of so-called modern monetary theory that it is possible to safely run ongoing massive budget deficits. I devote a chapter to this question, the essence of which is to suggest that very large continual budget deficits funded by money creation or borrowing are indeed extremely dangerous – as we should know from the experience of countries like Argentina which have been chronically unable to discipline their public finances.

On the broader themes of the article, I have always been a rather old-fashioned Keynesian. I never accepted the notion that the counter-cyclical policy tool should be monetary policy, and that fiscal policy should be passive (confined to the operation of the automatic stabilizers at most). One of Keynes' most important points was the limited efficacy of monetary policy (changes in interest rates) as a mechanism for managing aggregate demand and keeping the economy and balance. I think the shift away from the neoclassical synthesis towards a restored belief in the importance of active fiscal policy in a recession happened a decade ago at the time of the global financial crisis. A large part of the community of economists today believes that during a serious recession it is important to engage in aggressive discretionary spending to stimulate the economy, which is exactly what governments in many advanced countries are doing now and plan to do over the next couple of years to restore recovery.

From this perspective, the notion that massive quantitative easing or other monetary stimulus by central banks is capable of restoring depressed economies is totally unconvincing. QE has been better at pushing up asset values and provoking another round of financial speculation than it has been at restoring economic health. I would, like many economists, have preferred to of seen more aggressive fiscal policy after the global financial crisis and much more restrained monetary policy. Of course, the issue is more complex than this – some of what goes under the label of QE amounted, particularly in the early stages of the response to the global financial crisis, to much-needed measures to stop financial markets from seizing up. But this is very different from the notion that the best way to stimulate activity is for the central banks to buy up huge quantities of privately-held financial assets.

The article in the Economist isn't all that good on a few of the key points. In terms of debt sustainability, the question is not future inflation. The question is the future rate between interest rates and the growth rate of the economy. Blanchard's point (and he was not the first to make it) is that interest rates on government debt have very often over history in advanced countries been below the rate of growth. This has big implications for the budget balance required to stabilize or reduce the ratio of debt/GDP. Under these circumstances, it is even possible to run continuing primary budget deficits (i.e. borrow to pay interest plus some) while still keeping the debt burden stable. This is a matter which I explain in the book. But even apart from this point, it is never been the case that it is essential to run a budget surplus in order to reduce the debt burden. A balanced budget, by simple arithmetic, means that the nominal (dollar) amount of debt remains constant, so that if there is any GDP growth the ratio of debt/GDP will automatically fall – in other words, without a budget surplus. From this it follows that it is even possible to run chronic small budget deficits while (very) gradually reducing the debt burden.

Despite all of this, I consider that the high debt/GDP levels of many advanced countries are dangerous in the longer run. Even though interest rates are not going to jump anytime soon, there is no reason that they will remain super-low for ever. Blanchard and Lawrence Summers make precisely this point in their recent book, saying that we don't really know enough about the determinants of the relationship between interest rates and the growth rate to rely on the current relationship enduring forever.

Governments should therefore be working to gradually reduce debt/GDP – although they should not start this until economic recovery from the pandemic is assured. In other words, we do need "fiscal consolidation", even if it is quite gradual. The point I make (my blog discusses this in a lot more detail) is that this task is made a lot more difficult by the big spending pressures which we face over coming decades. Even if it is very gradual, fiscal consolidation is going to be an enormous challenge.

There's a lot more we could discuss on all of this. For example, I don't quite understand what the so-called third school of thought which the Economist refers to is supposedly about. Negative interest rates are definitely a phenomenon of QE and of the artificial central bank intervention that we've seen over recent years which cannot be sustained indefinitely.

One final point. This is the question of whether there is secular stagnation – under consumption as it used to be referred to – with deficient demand in the economy and excessive savings as a result of the degree of income inequality. This is pretty controversial, and I'm not sure whether it's true. One thing which is clear is that there are other powerful forces which have contributed to ongoing low interest rates (leaving aside central-bank policies). These include demographics and international savings imbalances.

Lots of interesting issues here!

[John Short]

REPLY TO GORD EVANS
My book focuses in detail on the expenditure-side pressure. But in the last chapter, it does address precisely the issue that you are raising: what extent do tax increases on companies (and the rich) offer a means of financing the very large spending increases which are in the offing? To answer this question, I look at expert estimates of the revenue potential involved. For companies, the IMF estimates that lost revenue from corporate profits shifting of the type you're talking about is probably around 1 percent of GDP for advanced countries as a whole. Whether all of that would be recouped from tax reforms is an open question. So attacking the abuses of the big tech corporations is necessary and useful, but is hardly the answer to spending pressures which are much larger. There is some potential possibly to raise average corporate tax levels generally, but international tax competition constrains these. In addition, the widespread popular perception that company tax has declined is largely wrong – headline company tax tax rates rates have declined, but the corporate tax base has widened and company tax revenue as a percentage of GDP has been broadly stable for some time across advanced countries generally.

As for more progressive income taxes and taxes on wealth, it may be possible to raise up to a couple of percent of GDP from these – although it needs to be remembered that the scope for additional revenue here varies enormously between countries. The distribution of the tax burden is vastly less redistributive in, say, United States vanities in many European countries – meaning that the additional scope for revenue from hitting the rich is less in, say France, and it is in the United States.

What all this suggests is that there is no way that hitting companies and the rich alone will be sufficient to fund all of the additional spending pressures. To the extent that the spending pressures are not offset by compensatory cuts elsewhere, they will demand that tax rates for the population in general – i.e. the so-called middle classes – would need to be higher.

Interesting debate on https://www.bbc.co.uk/sounds/play/w3cszcn5 The Real story relating to this topic.

Should tax havens help pay for coronavirus?

While the coronavirus pandemic is raging around the world, discussions over rebuilding the global economy are already underway. Globally, the recovery will cost trillions of dollars. Governments and finance ministries are working around the clock to design financial packages at a time when income from tax has hit rock bottom. There's concern that many governments will have to raise taxes to cope with the shortfall in revenue. But what if they could tap a different source of funding? According to the Tax Justice Network, there are trillions of dollars' worth of cash and other assets tucked away in offshore tax havens belonging to both private individuals and large corporations. Some people are now saying that with the coronavirus crisis, governments can no longer afford to go without the vast amount of tax revenue they lose each year. So, could a small tax on that money fund the global recovery? What challenges need to be overcome to bring together governments and multiple jurisdictions to agree on a framework? Will it be possible to sift through layers of obfuscation to establish the exact amount of money that is held in tax havens – and how will diminishing their prominence change the world? Join Ritula Shah and guests as they discuss whether tax havens should help pay for the pandemic recovery.

[Marc Robinson]

REPLY TO JOHN
Interesting point, John. Of course, in the same vein there is always the possibility of a one-off wealth levy at relatively high rates to pay off the pandemic debt.

[Marc Robinson]

PODCAST
For those who are interested, a two-episode podcast on "Bigger Government" is available on all the main podcast directories (Apple Podcasts, Google Podcasts and most of the others).

For more on the book, including where to buy it: https://biggergovernment.com

[Napodano]

QUESTION 7

Hi, Marc;

I went to your blog page https://blog.pfmresults.com/post-pandemic-fiscal-consolidation/ and read

QUOTE
The increase in debt won’t cause budgetary difficulties as long as interest rates remain low. Many economists think that structural forces will keep rates low for a long time to come, even after central banks stop flooding their economies with money
UNQUOTE

1. Can you elaborate further on that? From the standpoint of Italy, how can the Government keep interest rates low for future bond issuance after the tapering off of QE, which has to come sooner or later?

2 . In the same blog entry, you mention the need for gradualism in post-Covid fiscal consolidation, which is the way to go. My second question is how? If you were a  finance minister in an European country, which would be the sequence of fiscal policy interventions that you would implement for a gradual fiscal consolidation?

[Marc Robinson]

REPLY TO MAURO (TO QUESTION 7)

When you are talking about debt/GDP ratios of 100 percent or above – which is where so many OECD countries stand today – there is really no alternative but gradualism in reducing the debt burden if it is to be achieved through budget balance settings. By gradualism, I'm talking about reducing the debt burden significantly over a period of, say, three decades. The maths is pretty simple – even if interest rates stay pretty low for all that time, it is necessary to have significant primary surpluses for a long time in order to bring debt/GDP down appreciably.

What this means is that, even if we think that interest rates are going to remain sufficiently low for quite a long time and that there is little other than in the long term of current debt levels leading to a big blowout in interest payments/GDP, the importance of bringing debt/GDP down over the longer-term implies a big and sustained effort of budget discipline. Whether all advanced countries are capable of this is very unclear, and there is a huge danger that debt levels will not be brought down sufficiently and that at some point in the future when interest rates do move up this will cause huge problems. I am rather pessimistic about the prospects in this respect. The danger is increased by complacency due to current low interest rates. It is further aggravated by the growing influence of quack economics – such as modern monetary theory – which pushes the line that deficits and debt don't matter much. This is very wrong. You can be 100 percent Keynesian (as I am) without signing on to the foolish proposition that the dangers of big deficits are simply a myth.

The structural forces keeping rates low, to which I made reference, include demographic aging and the global savings imbalances. Some also consider, as we touched on before, that inequality has been an important factor.

This raises the prospect that ultimately recourse will be had in at least some advanced countries to other methods of bringing the debt burden down – long-term deliberate financial repression by the government (i.e. regulatory action to ensure that rates remain very low), a major one-off wealth tax to pay off some part of the debt (within limits, not a bad idea), debt repudiation and the central bank writing off debt (or even buying it back and then canceling it). In France, there is already a lively push on the left for debt repudiation. The notion of a country like France taking the Argentine route is really depressing. Advocates of repudiation don't seem to realize that this is simply a type of discriminatory wealth tax which hits not just the rich, but many pension funds and others. As for the idea of having the central bank write-off debt, economists have explained time and time again that no country is better off by doing this. The apparent advantage of writing off debt now is, for a given monetary policy, simply offset by an equivalent reduction in future earning streams of the central bank which are passed on to government. The qualification of this in Europe is that if higher-deck countries were to succeed in getting the ECB to write off a lot of debt, they might succeed yet again in effectively passing on some of their debt burden to less indebted EU countries.

Italy, of course, has been one of the most extreme cases of high debt for some time. Because of this, the country has been obliged to run one of the larger primary surpluses among OECD countries, and the pressure to keep on doing this will remain. Italy's problem in keeping its interest rates relatively low is, first and foremost, one of market confidence. As we saw in the wake of the GFC, when the financial markets lose confidence rates can shoot up very fast. To maintain confidence – and not have to rely on the ECB to keep on buying its debt to prevent a debt crisis – Italy has to maintain budget settings which imply a downward trajectory of debt/GDP. (Incidentally, one question which always springs to mind in the case of Italy is why the country does not levy a significant one-off wealth tax to repay a significant chunk of its debt. The Germans get understandably irritated by the fact that the ratio of private wealth/GDP is much higher in Italy (and Spain, for that matter) than it is in Germany.)

I guess the big point that my book is making is that these challenges would be tough enough if government spending were set to remain at around present levels. The problem I identify is the very powerful forces pushing spending up substantially over the long-term. My analysis of these forces differs significantly from the conventional wisdom in budgeting and fiscal circles. In particular, with respect to health spending, I do not see population aging as the key force. What is most important is the impact of technology – the way in which the bioscience revolution is delivering new and expensive treatments which will become increasingly mainstream. The curious thing is that, although fiscal policy specialists so often assume that it is population aging which is driving health spending, this is not a view which is generally held by health economists who really know the field. Health economists have always seen the expanding "capabilities of medicine" as the most important driver of health spending. Even here, however, few have grasped the way in which technological change which is currently underway threatens to significantly increase the rate of growth of health spending.

In addition to health spending, there are the other key areas of spending to fight climate change, long-term care and (in some countries) pensions and infrastructure. Climate change is pretty obvious, and I'm sure everyone understands that the spending effort will have to last for some decades. I don't think there's enough general awareness in the budgeting/fiscal policy community of the importance of long-term care as a source of long-term spending pressure. Yet if you follow the newspapers in many countries (e.g. the UK and France) it rapidly becomes clear just how much pressure many governments are under to step up the public sector role in care provision, particularly for those unfortunate enough to suffer dementia or other enduring disability.

[Napodano]

Time to close our conversation with Marc Robinson based on his just-published book Bigger Government.
The topic  will be locked and archived for reading only, as of tomorrow.

Dear Marc,

On behalf of all PFM Boarders let me thank you for your insight on the future to come for Government spending.
Access to knowledge is the main objective of the PFM Board and our conversation achieved exactly that!

All the best, Mauro

[Marc Robinson]

Thanks very much Mauro, and thank you to those who participated in the discussion and to the large numbers of people who -- I am advised -- have been reading the to-and-fro.

For more information on the book, please go to https://biggergovernment.com

(PS, we promised to give a copy of the book away to a participant. There being no logical way to choose who gets it, Mauro and I have flipped a coin. It goes to Gordon)