A reader of this blog, who I do not think I have met, secured the following Freedom of Information answer from HM Revenue this week:
It would, of course, be possible to say ‘So what?' and leave it at that. HMRC raises money and pays it to the Bank of England.
But that's not a ‘So what?' suggestion, in my opinion. That's a big deal. What this answer says is that tax collected goes to the Bank of England, which is no great surprise. HMRC bank there. Admittedly, it then rather bizarrely says the funds get moved to the Treasury. That, of course, is not true, because the Treasury also bank with the Bank of England. Instead what the answer clearly means is that the funds go from the HMRC account at the Bank of England to the Treasury's account, also at the Bank of England.
This does matter. What, of course, it in effect confirms is that tax revenue does not fund government spending. We know that is true: as I noted a couple of days ago, whenever the government spends it does not use your taxes. Instead it tells the Bank of England to make payments for it. In effect, it borrows. That is why we've had a UK government debt since 1694. Literally, the Bank of England creates the money the government spends, which is a process that doesn't involve a printing press. All the Bank does is some double entry bookkeeping. It debits the government's loan account with the amount to be spent, and it credits the government's current account. And the government then spends the money, just as anyone can when they have a current account in credit. And then what HMRC do is pay whatever they collect into the Treasury loan account at the Bank of England to help clear it. The leftover balance in that loan account is then cleared by the issue of bonds (or gilts) or quantitative easing funding.
In other words (for my second lesson in national income accounting this morning) the relationship can be formally summarised as:
G = T + ∆B + ∆M
Where:
G = Government spending
T = Net tax receipts
B = Borrowing (and so ∆B is the change in borrowing in a period)
M = Government created money (and so ∆M is the change in that sum during a period).
There is then no direct relationship at all between government spending and tax, which is exactly what HMRC have now confirmed. All they do is help clear the Treasury loan account at the Bank of England, just as government borrowing and quantitative easing funding do as well.
But what that means is that the next time the government say they are spending taxpayers' money you know that's not true because there is, quite literally, no way they can say that given the economic reality of what is going on. They're always spending the Bank of England's money, which is then cleared by taxes, borrowing or QE (which is, in effect, an alternative form of Bank of England created money).
That's not to deny that taxpayers fit into the equation: they do, but not in the way the government says. They fit in in the way the modern monetary theory and I say. That's because what tax actually does is clear the government's debt at the Bank of England, as HMRC says. This is done to limit the amount of new money government spending creates. The aim is to control inflation. But that's a very different purpose to taxes funding government spending, which as HMRC has confirmed, is not what they do.
So thanks to Lee Carnihan for a well placed FoI request. The answer was, maybe, more telling than HMRC realise.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
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/2018/04/28/the-government-does-not-spend-taxpayers-money-that-cle… […]
“There is then no direct relationship at all between government spending and tax”
Except for this one, which you have just confirmed:
“G = T + ∆B + ∆M”
And this is not direct, as I have explained
So why waste your time with an incorrect claim?
The equals sign in the equation means there is a direct relationship. It’s sort of the whole point of the equals sign.
“There is then no direct relationship at all between government spending and tax, which is exactly what HMRC have now confirmed”
HMRC have not confirmed this, despite your claims. Quite the contrary – they say money raised by HMRC goes directly to pay for public spending.
But given there are four variables you cannot say there is a direct relationship without fixing something
So your argument that G and T are related directly is not true
You have a basic misunderstanding of maths here.
Equals sign means direct relationship.
That does not mean it has to be 1:1 or indeed a fixed relationship, given the other variables, but there IS a direct relationship given the equation you have provided.
Of course, on your other post today you claim there is a direct relationship between Y and G. Are you saying that two otherwise similar equations can mean totally different things?
Of course there is a relationship
But the point is T can = 0 and the relationshp holds
And therefore the argument I actually make is right
What is your point?
@Sarah I suppose it’s easy to get confused. And I think Richard’s presentation could be improved by replacing the = sign, with a => ( leads to ) sign.
There is definitely a link between spending and tax, as the more spending you do then the more nominal tax will be returned. What there is not is a link between tax and spending, although any tax coming back can be recycled and used again, recycling tax coming back to buy things is not the same as tax being used to pay for public services.
It’s a bit like there being a link between diabetes and insulin use, but there is no link between insulin use and diabetes.
“It’s a bit like there being a link between diabetes and insulin use, but there is no link between insulin use and diabetes.”
Of course there is a link between insulin use and diabetes, it is just that it is different than the link between diabetes and insulin use.
G and T are (according to the formula presented) directly related, that is the purpose of the equals sign.
As Sarah said, the relationship may not be fixed, but there is a direct relationship.
There’s a link
T can cancel the impact of G, it is true
But so too can ∆B and ∆µ
And T need never be involved
So it’s so unfixed it need never be there (although I think that pretty unlikely in practice)
In other words, you really are wasting your time
One wonders why we have the DMO, this being the case. What do they do there all day?
Someone has to manage the current desire to issue debt
Thanks
Richard, you owe your readers better than this:
“Literally, the Bank of England creates the money the government spends, which is a process that doesn’t involve a printing press”
Of course it doesn’t literally involve a printing press! The effect is exactly the same though.
When a government spends, it creates money, full stop. Call it borrowing, printing, anything you like.
When a government taxes, it destroys money. Basic MMT says the point of taxation is merely to prevent price inflation. (Not a point you agree with, I believe, you like tax).
I would add that as the original cost of land/location is zero, the price of land must be ALL inflation, ergo the first thing we should think about taxing.
What are you trying to say Mark, because as far as I can see apart from having a swipe on tax and adding your usual nonsense on LVT you added nothing to my actual argument, with which it seems you agree.
It would be useful to follow a specific line of borrowing (stimulus) and repayment (cancellation of stimulus).
If the government wished to employ 10,000 additional police at £30,000 per annum in the middle of the financial year, and the spend was not in the opening projections, then:-
The full year prima facie cost would be 10,000 times £30,000 divided by two which is £150 million. So £150 million would be credited to Government Spend Control Account and the police authorities would pay the new police employees.
At the end of the year the control account would have been debited with the tax and NIC receipts sent from HMRC, say £150 million times 95% times 40% that’s £57 million.
Then the account would be debited again with additional vat receipts as net pays were spent, let’s say, £12 million. So the control account balance is now £81 million — this should be further reduced as the impact of the additional spend works it’s way through the local and national economies and reduces out of work benefits and local authority rebates.
Do we need to borrow to cover the resulting deficit (and in this instance how would that defict be calculated)? Only if inflation requires that we need to reduce the public spend stimulus; but in such cases the economy would be experiencing high demand levels and tax receipts should also be higher.
The control account is therefore a key account – measuring as it does the governments actual performance against it’s planned outcomes. Why is it not front and centre of any reporting system
Good question
Thank you Richard. Could I ask a follow up question?
I’ve been trying to get my head around this for some time, to make sense of how the basic accounting of govt spending works and how that fits with the MMT description. You’d think it would be very easy to find a simple description of how the govt spends through its various accounts but I’ve found it difficult to find.
The government’s Consolidated Fund, to which the note presumably refers, is described as per the link. This is described as the account to which tax is paid and from which govt spending takes place. My question is, if that is the case then is the tax money really destroyed, or can it to some extent be thought of as a standard bank transfer? Perhaps the answer may be that reserves are destroyed and then recreated at the point of spending?
To be clear, I’m fully convinced that tax is not required for spending, but I’m trying to resolve the different descriptions of the mechanism for my own understanding. Thanks!
https://en.m.wikipedia.org/wiki/Consolidated_Fund
I accept that this concept is as hard to get one’s head around as cash being destroyed when loans are repaid, especially when the loan is an overdraft (as it would appear to be in the consolidated fund). But think of it like this. Would the spend stop if no cash from tax came in next week? No, it would not. So the spend (i.e. the loan) comes first. And then tax, borrowing or QE clear it. And because it clears, at least in principle, then the process begins again. It’s only complicated by the messy way it actually runs and because this creates a chicken and egg scenario. So you have to ask which came first, and it’s always the spend, meaning tax has to cancel the money created.
One method I use to better understand these monetary machinations is to replace “credit” and “debt” with “right to increase promises of money” and “right to reduce promises of money”. So the request to the BoE by Gov is serviced by allowing the creation of promises and distributing them as further promises – perhaps as coloured paper – i.e. “spending” them. The subsequent tax revenue is used to reduce the promises. The BoE is uniquely authorised to manage said promises and thus provide the necessary decoupling of promise increases and decreases as work typically precedes reward.
In a fiat system, in the end there are nothing but promises and so the system ultimately depends on people’s “trust” that their promises are accepted by others. Happy now to be shot down in flames as I readily admit this is not my area of expertise -:)
If it works for you that’s ok
It doesn’t for me
But, so what?
[…] Read here […]