Legal Forgery Chapter 9: Cutting government expenditure

Chapter 9
Savage Cuts: a sad necessity, or a terrible mistake?
Cutting government expenditure or raising taxation seems essential in order to reduce the amount the government borrows. The shortfall is about £170 billion a year at present (early 2010).
Unfortunately, cutting government expenditure means cutting jobs and even though a very large number of government jobs are unproductive and some are clearly a hindrance to the private sector, the loss of these jobs would raise the level of unemployment. Any increase in unemployment changes people paying taxes into people drawing unemployment benefit. Higher unemployment also reduces demand for goods and services which further increases unemployment in the private sector.
Raising tax levels also reduces demand for goods and services which causes a drop in private sector employment, but does not directly cause a loss of government jobs.
You might conclude that raising taxes is less harmful than cutting government expenditure but higher taxes are very damaging to private sector business and it is only the private sector that really supports the whole economy.
If only the government understood that if private banks were prevented from creating new money the State could create it instead. In 2007, the last year before the banking system imploded it created (forged) about £177 Billion of new money as deposits and considerably more as loans. A lot of this new money went towards raising house prices and even more unproductive speculative activities, but if the private creation of new money was stopped a large part of it could be replaced by government created money.
The amount of new money the government could create in the next year without causing overheating would be at least equal to the £200 Billion created by the Bank of England as “Quantitative Easing” in 2009, but would not be used simply for buying existing gilt edged securities, it should be used to maximise the growth of private industry by making low interest loans and for spending on infrastructure. The best way of increasing demand would be to raise the basic income tax allowance to about £20,000 a year.
All of this completely depends on stopping the private banks from lending more money than they take in as deposits. The method used for preventing the private banks from doing this is open to debate but it is surely possible and the benefits that would flow from it are enormous.
The government created money would circulate through the economy and when deposited by savers in deposit accounts could be loaned by the banks to business and individuals in exactly the same way as usual.
The amount of new money created by the government would be limited by targets set for wage and asset price inflation. The banks would no longer have to find homes for the enormous amounts of new money they have been creating. They would no longer need to persuade people to get ever deeper in debt or back over-leveraged business buyouts or private equity gambling.
So much for the short term. In the long term we must reduce the proportion of State expenditure as a proportion of Gross Domestic Product (GDP) and that will take some time. It will mean lower taxes and far less interference in industry from the Government. We will have to encourage working and discourage living on benefit. It will not be easy and will take some time. A great deal can be done by reducing taxes on earnings. There will be a later chapter in this book with more detail on this subject.