Distributing newly created money
- Reduction in the overall tax burden
- Increasing government spending
- Direct payment to citizens
- Paying down the National debt
- Our recommendations
When the Monetary Policy Committee authorises the creation of a certain amount of new money, the Reserve Bank will add that money to the government's Central Government Account. The government is free to use this money however it chooses in order to achieve its democratically-mandated policy objectives. Therefore the government may choose to:
a) reduce the overall tax burden
b) increase government spending
c) make direct payments to citizens
d) pay down the national debt
The exact mix of the above will depend on the priorities and political ideology of the government of the day. Since the newly created money will simply be added to tax revenue, there is no need for a special process to decide how to spend it.
If the public have elected a government that promises to increase public spending, then the government can justifiably use the money for this purpose. Likewise, if the public elected a government that promised to reduce the overall tax take, then the government can use the money to this end (by using this money to cover existing spending and reducing the overall tax take).
We will now look at each of the options above in more detail.
Reduction in the overall tax burden
Rather than increasing government spending, the elected government of the day could choose to reduce the overall tax burden.
The tax burden could be reduced in one of three ways (or a combination of both):
- through maintaining the current tax regime but redistributing the newly-created money back to the public via tax rebates (payments) after the year's taxes have been received
- by actually reducing the rates of tax charged on income, GST, company tax, Kiwisaver etc, therefore collecting less money from taxation. They would then make up the shortfall with the newly-created money.
- by completely canceling particular taxes - GST would be a strong contender for elimination, being both hugely regressive and a distortion to markets.
Tax reform is a huge issue, and one that is outside the scope of this proposal, but any government using the proceeds of the modernised system to reduce taxation should aim to reduce or eliminate some of the worst market-distorting or most regressive taxes.
Increasing government spending
By using the newly-created money to increase government spending, the government can increase the provision or quality of public services such as education, healthcare or public transport, without increasing the tax burden on the public.
Decisions on exactly how the newly-created money is spent would fall to the democratically elected government of the day.
Although the money has not been raised via taxation and therefore doesn't 'cost' anything at this point, it still has a massive 'opportunity cost' - if the government chooses to use the money to buy more frigates, the same money can't be spent to build for example five hospitals or twenty schools.
Consequently the government has a public duty to ensure that the newly-created money is spent on the projects that will bring the greatest benefit to society as a whole, and to ensure that the money is not wasted. In reality, the same issues apply to newly created money as apply to all tax revenue - is it well spent, and do the public get value for money?
Direct payment to citizens
One alternative to both increasing public spending and reducing taxes is to make direct payments to citizens.
If the amount of newly-created money in a particular year was $2 billion, a direct payment of $637 could be made to every eligible voter (regardless of income). $2billion may sound like a lot, but it is less than the banks have created in every year since 2004.
There are some significant advantages to this - the most democratic way of spending newly-created money is to give every single citizen power over how to spend their share. It would also reduce the risk of the newly-created money being spent inefficiently by central government.
Paying down the National debt
We believe that it is in the public interest for the 'national' (i.e. government) debt, to be phased out, or at least reduced to within a small percentage of the nation's GDP. Over time, the government would likely use a proportion of the newly created money to gradually pay off the debt.
These provisions are discussed more comprehensively in the Section 'Clearing the National Debt'.
The current staggering level of household and corporate debt is a consequence of the debt-based monetary system that we have had in place for the last few hundred years.
Once we stop issuing all new money as debt, the first priority should be to reduce our overall debt burden (at a household, corporate and government level) back to a 'healthy', natural level.
Consequently, our personal recommendation is that in the 5-8 years following the implementation of the reform, the newly-created money should not be used to increase government spending. Instead, government spending should remain flat, avoiding the impending cuts to public services but with no major new spending projects. (Of course the public sector should continue to try to reduce waste and provide maximum value for money).
The money should then be used as much as possible to reduce the overall tax burden, ideally by 20-25%, by actually reducing tax rates and allowing the public to keep and spend more of their income.
This will leave people with around 20% more disposable income, which - considering the highly indebted state of the vast majority of households right now - will most likely be used to pay off debts, credit cards, personal loans and mortgages, in the same way that many households are currently taking advantage of low interest rates to over-pay on their mortgages.
In short, we would reduce the tax burden to allow citizens to pay down their own debts. At the same time, if part of the tax reduction falls on employers' Kiwisaver contributions, or on GST, then companies will themselves be able to reduce their debts.
It could be made explicit that this would be a 5-8 year partial 'tax holiday', with taxes to rise at the end of it. It is likely that as the economy stabilises and the debt burden falls, the amount of money that the Monetary Policy Committee decided to create in any year would fall, making it necessary for the government to collect more revenue via taxation.
There is a practical consideration involved in this suggestion too. In the current environment, it is hard to believe that any NZ government will have the capacity to successfully engage in big infrastructure projects over the next few years, whilst simultaneously battling the after-shocks of the financial crisis and also implementing this change.
If they tried to, it is likely that much of the money would be wasted. As a result, the stimulus from using the newly-created money to increase spending would come later, and be less effective, than a direct stimulus from reducing taxes.
When the economy has stabilised, the overall level of debt has fallen significantly, and the banking system has adapted to this new financial regime - in other words, when things are less 'hectic' - the government could then look at using the newly-created money for public infrastructure projects.