Labour’s Universal Free School Meals policy: an economic not an educational policy

7 min read

Labour’s Universal Free School Meals Policy, for primary schools, funded by adding VAT on private school fees was generally well received. Those that opposed it, generally, did not see it as an economic policy and it perhaps reveals a limited understanding of how a nation’s economy work. So in this blog, I want to outline how our economy works. It is brief, so it may be a little crude in places. On the whole, though, I feel I offer a succinct explanation of the model.

No, don’t go anywhere! It’s worth reading. Really it is.

The recipe for happiness, according to Dickens’ Mr Micawber, is through fiscal prudence:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery (Dickens, David Copperfield, 1850).

It’s simple isn’t it? And if you follow these rules then you will be happy.

It follows then that the same rules apply to a national economy. Income £721 billion (from national and local taxation for 2017), annual expenditure £720 billion result happiness, annual expenditure £784 billion (all government spending for 2017), result misery.

Oh dear! No wonder there is so much misery about. We are in deficit to the tune of £63 billion. Surely, it follows then, that we have to make savings and cut back or increase taxation.

While this is the narrative that is perpetuated in the media and by government, it is not the way the national economy works.

A national economy is not like a household with incomes and expenditure. A household has money going in and going out again. A national economy does not have money going in and out of it, in the same way. The national economy includes all the money that is in its own currency. Some may get saved up, some my go abroad. But the only place that money is going to be spent is in the national economy, even if that activity is overseas.

The national currency is introduced into the economy through government spending. There is no other way of creating currency. The way in which currency is introduced by the treasury is by spending on health, education, defence and welfare, for example. The government either credits the accounts of public-sector organisations or gives contracts to private companies to provide goods and services.

A government’s currency is an IOU. The reason these IOUs have value is that the government expects us to pay taxes in the national currency. The government will not accept anything other than its national currency. We accept it as salaries and shops accept it because, essentially, we have to pay our taxes in the national currency.

Before a government can raise any tax it has to spend. It has to introduce IOUs into the economy. This year, in the UK, it will be £784 billion.

If we apply the Micawber principle and cut spending to try and get it down to £721 billion, you would expect tax revenue to reduce. The reason it doesn’t is because people and organisations increase their borrowing. Much growth in the economy in the last few years has been a result of consumer spending funded by private debt. Individuals and businesses (the private sector) have to borrow from commercial banks to help fund a reduction in public spending. Or they have to use up their savings. The government’s cuts in spending mean that public sector deficit is transferred to private sector debt.

Cutting public spending leads to a reduction in spending on things like health, education and welfare. We have to make decisions about what to spend limited resources on. We have to prioritise spending. This is austerity.

Austerity increases the amount of private debt, with households and businesses borrowing from commercial banks and lenders who profit from the process. Currency entering the system as a result of government spending becomes unevenly distributed. With the lenders and those with capital accumulating further, while the rest become poorer and indebted. It trickles up rather than down.

The accumulation of currency at the wealthier end of the private sector ends up in the banks. The treasury and Bank of England have to create bonds in order to buy back this currency to maintain interest rates. This is what the national debt is, it is not what we think it is. It is private sector-accumulation of currency.

A regressive taxation, one where the more wealthy pay a smaller proportion of their income and wealth in tax, than the less wealthy, adds to inequality. It also increases accumulation at the top end and adds to the national debt.

We need a progressive taxation, one that increases the proportion of tax paid by those at the top end and gives more income to those on lower incomes. I am not going to go through the benefits of universal welfare here. Abi Wilkinson offers an excellent explanation here in The Guardian. Kevan Bartle’s blog about Universal Free School Meals argues the benefits of this policy excellently, too. The important point is that this policy should be seen as an economic policy and not an educational policy.

The austerity programme (it has actually been with us since the mid 1970s, to a lesser or greater degree) is system that allows finance unrestrained access to our economy. Politically, by drawing on Mr Micawber, a consensus has been established amongst the electorate. Consequently, we find our public services starved of funding. But the Mr Micawber doesn’t work on a national scale and if applied, like it has been done,  it leads to growing inequality.

The government can increase public spending. Additional spending, more currency entering our economy, increased pay, better working conditions for teachers, more investment in research and development. And the currency that enters the economy does not just remain in schools, it is spent in the private sector. More wages, more spending in the economy, more tax revenues. It will not increase the deficit, but it will mean more money going to the less well off (including most public-sector workers e.g. teachers).

That national debt will come down if we have a more progressive taxation system, discouraging the accumulation of currency, and so the treasury does not have to issue bonds to maintain  interest rates.

We, like the US and many countries in Europe, need an end to austerity, an end to deficit reduction. We need to increase public spending and we need progressive taxation. Labour’s simple policy is the latter. It is a very good policy proposal. More of this please.

Further reading and information

You can read previous blog posts:

Taxation and government spending: which comes first?

There is plenty of money to spend on schools: a Modern Money Theory Perspective

More information about Modern Monetary Theory on this page:

Modern Money Theory

The following books are useful background and all readable:

 

5 thoughts on “Labour’s Universal Free School Meals policy: an economic not an educational policy

  1. Patrick Amon

    Enjoyed this. Thanks. Only one quibble. Do you really think that UK teachers, whose salary is far above an average UK worker’s salary, should be included amongst ‘the less well off’?

    Reply
    1. Steven Watson Post author

      Thank you Patrick. Interesting point. The median salary in the UK is something like £26,000 pa. For secondary teaching professionals (according to the ONS) this is about £36 k. So it is clearly above the median. However, a teacher on that salary, with a partner and and children could be in receipt of in-work benefits of up to £2000 (I checked this on a benefit calculator and I know it to be true from my own experience). Additionally, in areas where housing is expensive, teachers can struggle with rents or mortgages. Cambridge is a case in point. So on the whole, compared with other professions, teaching is quite low (http://www.thisismoney.co.uk/money/news/article-4059594/Best-paid-jobs-2016-job-compares-UK-s-high-earners.html). And I accept that it is difficult when teachers’ salaries are much higher than say the average salary in the community it serves. There are wider economic issues here though. So on balance, I stand by my assertion that most teachers are in the less well off category. They are not poor by any means, but many, I imagine find it quite tough. I know I did in a cheap area with three children.

      Reply
  2. Steve

    “We need to increase public spending and we need progressive taxation. Labour’s simple policy is the latter”

    Labour’s free primary school meals policy is a regressive tax, not a progressive one. The beneficiaries are everyone who is not currently entitled to free school meals, i.e. middle class and rich people. Poor people already receive free school meals so they don’t benefit at all.

    Similarly, abolishing tuition fees and subsidising rail fares are also regressive, because the large majority of beneficiaries, i.e. the users of these services, are middle class and rich people.

    Also, you shouldn’t use MMT arguments to justify this, because John McDonnell has said that Labour will only borrow to invest in infrastructure spending, i.e. on everything else they plan to balance the budget. So Labour aren’t using MMT, and the relevant issue is how the available HMRC revenue should best be allocated, and if you want to improve the lives of poorer people then money should not be squandered on providing free school meals, free university tuition fees or heavily subsidised rail fares for commuters for middle class and rich people.

    The crux of Abi Wilkinson’s argument is that “Children who receive free school meals report being bullied and stigmatised”, but I doubt this is a significant problem, and I think this is just another example of paternalism and effectively an extension of PC which has become so damaging.

    I think this policy and that of abolishing tuition fees and subsidising all rail fares are right wing policies, which is ironic given that Corbyn supporters’ favourite hobby is to accuse New Labour of being Tory Lite.

    Reply
  3. Robert Wilkinson

    “Labour’s free primary school meals policy is a regressive tax, not a progressive one. The beneficiaries are everyone who is not currently entitled to free school meals, i.e. middle class and rich people. Poor people already receive free school meals so they don’t benefit at all.”

    I think that the beneficiaries are the whole cohort of school pupils, who are well few. It does not really matter where the money comes from to pay for the food, much more important is the fact that they are all well-fed and able to learn as well as possible.

    “The crux of Abi Wilkinson’s argument is that “Children who receive free school meals report being bullied and stigmatised”, but I doubt this is a significant problem”

    That is your opinion, but that does not make it necessarily true.

    To my mind, if even one child is going hungry at school and unable to learn to their full potential, then it is one child too many. Investment in education of a child is never wasted, and providing them with food so that they can concentrate on learning is a public good.

    “I think this policy and that of abolishing tuition fees and subsidising all rail fares are right wing policies”

    I take it that you prefer the status quo, which, the author quite admirably shows, serves to concentrate wealth in the hands of those who currently have most? Or do you have a better suggestion?

    Reply

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