As I have noted this morning, Northamptonshire county council has effectively declared itself on the brink of bankruptcy. This raises an important issues. Councils can go bust. A national government with its own currency and central bank cannot. This requires brief explanation.
The essence is simple. Central governments with their own currencies and central banks do not have to tax to spend. I explained this fact in detail recently here, so I will not repeat it. Suffice to say that it is a fact that all central government spending in this situation is new money created for the government by the central bank and tax cancels the money that is created as a consequence to prevent excessive inflation. For central government in this scenario spend always precedes tax. Indeed it has to: unless the government had spent the money that it requires be used to pay the tax owing into existence in the first place then it follows that no tax could be paid.
The exact opposite is true for local authorities. They cannot create money. That is forbidden in law. So they can only spend what they can collect and what is allocated to them by central government. For them money receipt has to precede payment. The result is that if there is demand in excess of their capacity to collect funds or grant funding and they have no borrowing capacity they can go bust, which is exactly the risk is Northamptonshire. In essence, local councils do behave like households and businesses because they cannot create their own money.
Central government on the other hand works in the exact opposite way.
What must not be thought is that because Northamptonshire can go bust it is possible that central government might. That is completely untrue, but right now that will have to be said loud and often because the austerity brigade will milk this situation for all it is worth.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
[…] http://www.taxresearch.org.uk/Blog/2018/02/03/why-local-authorities-can-go-bust-and-the-uks-central-… […]
“[Local Government] cannot create money. That is forbidden in law.
Would it be illegal for an LG to establish a LETS economy running alongside the mainstream economy ?
I don’t think so. That they don’t do so is ‘TINA’ entrapment.
LETS schemes are not moeny creating in any meaningful macroeconomic sense
Does Northampton have a MACROeconomic crisis ?
I think it has a funding crisis because it doesn’t have enough Sterling to meet its objectives. The chances of the Government supplying the funding it needs are about zilch. So it needs to address the problem on different terms.
If it has a LETS currency it can print and circulate its own currency. It will still require all its Sterling income to meet Sterling bills but it could at least some of its services could be funded within the local economy.
You above all people know this is possible.
LETS is not currency
Sorry: I gave up on NEF in the 90s when this is all it was about and i’ll Do so here too
You can gave a micro swap if you want
You can’t solve issues in a modern economy with a LETS scheme
“You can’t solve issues in a modern economy with a LETS scheme”
I don’t argue with that, Richard.
I think I’m arguing that you could alleviaite the symptoms within the realms you control. Even if it had the will to do so, no local council can address the wider problems because they are well beyong its remit and control.
If central government doesn’t allow enough Sterling to allow a council to do it’s job what options are available to it ?
OK – this I accept: if they made this political and explained why I would buy it
If they were Bristol for example, where the council accepts payment of council tax in Bristol pounds, they could create more Bristol pounds out of thin air and spend it on things they would otherwise have insufficient sterling to purchase. As they are (Conservative controlled!) Northamptonshire they should have pursued a Northamptonshire pound a year or two ago…..
But it’s not a solution Peter: the impact is tiny and that’s why I can’t see it as a solution to the real issues
Let’s not expend sweat on the small stuff when there are big issues to address
I wonder how many people listened to ‘shaking the magic money tree’ on radio 4 earlier this week? I thought it explained well exactly how the government does indeed create money out of thin air, and that of the £500billion + of QE created since the financial crash only 8p in the £ has actually boosted the real economy. The rest has gone into the coffers of the banks and the hands of the already wealthy.
They didn’t actually call Mrs May a liar (it is the BBC after all) but it came pretty close. Which begs the question ‘why aren’t people rioting on the streets???’
I fear you are right about the austerity brigade.
Now blogged…
dunno but they are rioting in Venezuela..
http://www.telegraph.co.uk/news/2017/05/21/venezuela-protests-200000-march-against-president-maduro-riots/
So?
Might I suggest that trolling here does not endear you to anyone?
Just like the situation in Greece has been used erroneously to justify the crimes of austerity since 2015…
Greece (within the Euro) has far more in common in economic terms with Northampton council than either do with a sovereign currency issuing economy like the UK.
True
[…] http://www.taxresearch.org.uk/Blog/2018/02/03/why-local-authorities-can-go-bust-and-the-uks-central-… […]