The economics behind Zack Polanski's claims

Photo by Carl Court/Getty Images In these pages last week (25 November), Green Party leader Zack Polanski told George Eaton that “The fiscal rule we need to have is to make sure that inflation doesn’t go higher than the skills and resources that we have in our economy.” It sounded a lot like Modern Monetary Theory (MMT), which holds that for a currency-issuing government like the UK, inflation rather than debt is the real constraint. Many mainstream economists and commentators have dismissed MMT as “voodoo economics”. Clips of Rory Stewart and Alastair Campbell challenging Polanski went viral. When Polanski argued the UK doesn’t need to service all of its debt – citing the Bank of England’s holdings where interest payments return to the Treasury – Campbell responded: “One of the reasons why [Labour] do have to be conscious of the market reaction to something like a Budget is because if they get it wrong, the markets lose confidence and the costs of borrowing then go further.” Although Campbell is right to point out that markets do play a significant role in government spending, Polanski is on to something deeper that could help reframe the debate around the UK economy. While Rachel Reeves might be celebrated for scrapping the two-child benefit cap, the latest budget doesn’t go nearly far enough in delivering the change that Britain desperately needs. Austerity has scarred the UK for the last 14 years. If it wants to finally break free, then it’s time for a radical new approach. And that starts with rethinking how government finances work. For most of history, austerity was a rational policy choice . Under the gold standard, accruing debt meant depleting finite gold reserves, putting the government at risk of insolvency. When debt levels would rise too high, austerity made sense: cutting government spending and raising taxes brought the debt back down. Everything changed, however, when the US abandoned gold in 1971. Money was no longer backed by a physical commodity but by government credibility alone. This shift to fiat money fundamentally changed the way government finances work, transforming countries like the UK from currency users into currency issuers , a much more powerful position. Treat yourself or a friend this Christmas to a New Statesman subscription for just £2 Subscribe You and I, along with businesses and local authorities, are currency users. We must earn or borrow pounds before we can spend. However, currency issuers play by a different set of rules. Most notably, they can’t run out of the money they create. Alan Greenspan, the former Chair of The Federal Reserve said it himself: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” While the UK might not enjoy the reserve currency status that gives the US exceptional fiscal flexibility, the same principle still applies – Britain cannot be forced to default on debt denominated in pounds. Whereas governments historically needed to raise...

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