Twitter is full of comments around MMT being something you do – rather than something that is, We have articles like ‘Don’t let the Reserve Bank just give the Government money’ and articles that the leader of the opposition tells shadow cabinet to find cuts and spending offsets ahead of campaign.
The foundations of MMT are quite simple. Currency issuing governments spend via appropriation bills, the spending is authorised and the relevant account at the central bank is marked up. That bank then credits the appropriate customer. Irrespective of past fiscal positions or the balance the government runs or the bonds they choose to issue, this process doesn’t change. There should be nothing controversial about that. That is the way government spending operates.
The idea that somehow our treasury departments are at the mercy of central bankers or bond market traders is ridiculous. We have seen the Australian government spend some $200bn over covid and central banks around the world have been purchasing debt on what is called the secondary market. (referred to as Quantitative Easing)
I won’t walk through the whole process here you can read this post and this post. The crux of it is the Australian government creates the dollars via appropriation bills. The finance.gov.au website says there are two types of appropriations:
annual appropriations—a provision within an annual appropriation Act or a supply Act, that provides annual funding to entities and Commonwealth companies to undertake ongoing government activities and programs
special appropriations—a provision within an Act (that is not an annual appropriation Act or a supply Act) that provides authority to spend money for particular purposes (e.g. to finance a particular project or to make social security payments). Special accounts are a subset of special appropriations.
And continues with ‘While appropriation Acts authorise the drawing of money from the CRF [consolidated revenue fund]*, they do not authorise the spending of that money. Legislative authority is required for the Commonwealth to enter into arrangements to spend relevant money for a particular purpose.’
*The CRF is a ‘conceptual’ account created under the Australian constitution. All ‘money’ irrespective of where it is, exists within the CRF. A group of accounts the Australian government holds at the Reserve Bank are known as the offical public accounts (OPA) The numbers in these accounts do not form part of the money supply.
Think of the CRF as a transactional account that records what has been spent and what has been taxed. The numbers in it aren’t what can be spent. The authorisation of spending that comes after the appropriation is found in the Public Governance, Performance and Accountability Act 2013. It has its genesis in the Audit Act 1901. I am working through understanding and detailing the changes. Today the PGPA Act of 2013 under section 51 says
(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2) However, the Finance Minister must make an amount available if:
(a) a law requires the payment of the amount; and
(b) the Finance Minister is satisfied that there is an available appropriation.
The UK for example has its origins in the Exchequer and Audit Departments Act 1866 where the first three subsections state:
(1) This section applies in respect of sums which Parliament has authorised, by Act or resolution of the House of Commons, to be issued out of the Consolidated Fund.
(2) The Comptroller and Auditor General shall, on receipt of a requisition from the Treasury, grant the Treasury a credit on the Exchequer account at the Bank of England (or on its growing balance).
(3)Where a credit has been granted under subsection (2) issues shall be made to principal accountants from time to time on orders given to the Bank by the Treasury.
If you want further evidence that bond issuance or taxes are irrelevant to government spending the UK Government used what they call the Ways and Means facility. They describe it ‘as the government’s overdraft account with the Bank of England (the Bank), i.e. the facility which enables sterling cash advances from the Bank to the government.’
The UK Treasury scrapped the issuance of bonds entirely.
“HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.”
“As a temporary measure, this will provide a short-term source of additional liquidity to the government if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption from Covid-19.“
It is coaxed in language to give readers the idea bonds are used to fund spending in ‘normal’ circumstances.
‘The government will continue to use the markets as its primary source of financing, and its response to Covid-19 will be fully funded by additional borrowing through normal debt management operations.’
The markets never ‘fund’ treasury operations. The appropriation bills do that. The authorisation of the spending marks up an account at the central bank and this is what gives the banks the ability to purchase bonds. It doesn’t matter what the past fiscal positions are. What matters is spending today and whether there are available real resources.
What has been happening with QE is that the debt management departments of treasury have been issuing bonds, having financial institutes buy them and the central banks have been buying them a week or so later. The UK stopped with this whole charade for a while on April 9 2020
So when stuff.co.nz writes
“Purchasing debt (issued in the form of bonds) on the primary market means that instead of purchasing bonds from third parties like banks and investors, the Reserve Bank would buy the bonds directly from Treasury itself. One part of the Government would buy bonds issued by another part of the Government, cutting out the middleman. It’s a big move.“
They have no clue what they’re talking about. Bond issuance funds nothing. Bond issuance switches currency in reserves to securities accounts. The latter is interest bearing. Though now the interest is paid from the treasury arm to the central banking arm of the government and the central banking arm then credits the treasury. Apparently ending this will be a great cause of concern.
“But Treasury’s biggest concern was that skipping the secondary market would give New Zealand a bad reputation as it would look like the Reserve Bank was simply printing money for the Government to spend.“
What is so difficult for financial journalist Thomas Coughlan to grasp. Financial institutes in New Zealand obtain NZD in their reserve accounts at the Bank of New Zealand via the NZ Treasury marking up the account. The dollars come from the appropriation bills. There are no printers, just keystrokes.
All this reminds me of when the Australian Government introduced its own notes.
In 1910 when the Australian Government banned private bank note issuance and issued its own via treasury there were objections. The hansards record the member for Wentworth, Mr Kelly ‘We ought further to be informed what guarantees the public will have that this particular method is not being adopted for the purpose of raising money without paying interest thereon by a Government which refuses to borrow. (House of Representative Hansard No.30, p.690, 1910)
There you have it, the same old arguments because some capitalist lose their free lunch. They’d rather keep the way spending works in the dark to demonise public expenditure, collect their interest bearing assets (bonds), watch governments cut public expenditure, privatise public assets, and maintain a desperate pool of workers that work for desperate wages.
And Australia’s opposition party plays into the narrative. The second article quotes that “Two shadow cabinet members, speaking on the condition of anonymity, told The Age and the Herald emphasising budget repair at a time when the Coalition government was prepared to spend billions sent “mixed messages” and “lacked imagination”.“
And whoever those mysterious shadow ministers are, are correct. We have witnessed the largest government spending since World War Two and much of the arguments that demonise public spending are the same now as they were for the last century. It is getting tiresome.
But the status quo in the ALP remains. Richard Marles writes
“As Anthony has made clear, all policy proposals should consider options to minimise the fiscal impact and/or be fully offset by savings within respective portfolios,”
That is all from me!