I was asked this on Twitter last night:
This was my reply:
That's the wrong question. The government creates all the money it spends. It's a promise to pay.
How is it recovered from the economy? By the people who receive it being taxed on it, and those who receive their spending being taxed, and so on.
And that way the spend is recovered.
In other words, a government doesn't go and look in the piggy bank before it promises to pay. It can pay because its promises are always good. And that's because it makes our money. And we accept that fact, because fact it is.
And when it has paid - which payment will accept because it will be in our, state made money - then the question can be asked as to whether or not that new payment needs to be reclaimed by the government from the economy.
There are three ways to reclaim it.
One is quantitative easing, but that's rare.
The second is to promote new borrowing. But let's also be clear that the reason why new borrowing will be possible is because there will be more money in the economy. And the reason why there is more money in the economy is because the government spent it into existence. And so the so-called borrowing will in fact be the redepositing of the money the government spent back with the government, but now it will have become private wealth. So the spending has to precede the borrowing.
And third, the money could be cancelled by way of tax if it is necessary to do so to control inflation. But this is possible because the spend will become someone's income. And they will be taxed on it. And when they spend the net proceeds after tax the recipient of that spending will also be taxed, and so on, until the tax is recovered. So the spend pays for itself, eventually. But along the way it will create economic growth, redistribute income and wealth in society and reduce hardship. And all by simply letting money flow from the government and back to it, in due course.
That's the miracle of government spending. It transforms lives, the economy and well being. And all because the government simply promises to pay. And we accept its promise because we know it is good for it.
Which is precisely how it pays for everything.
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Great blog. I will quote it when others ask the same question
Thanks
Could you imagine if Corbyn tried to explain this last night on prime time TV…would have been a disaster. Surely you would agree that printing money for this, the NHS, Education etc etc the list of beneficiaries is literally endless is going to end in a significant rise in taxes and not for the top 5%?
No it won’t
You miss the fact that this creates more income
And so it des not require more tax
Is that deliberate on your part?
Or are you deliberately not trying to understand what I said?
I am not saying tax is needed to fund WASPI because it will be funded by borrowing or printing (both much the same) but there will be an increase in the money supply, not least because WASPI will be the thin end of the wedge..the pressure on Corbyn to spend will be immense in so many areas not least by the Unions…at some point a Labour Govt causes domestic inflation through the increase in money supply..in addition Sterling will weaken against our major trading partners, i know this is down to opinion but a socialist spending government increasing the money supply will cause a sterling to weaken (inflationary expectations) and we will import inflation in a heartbeat..this will become a more entrenched problem…of course some people like the idea of inflation others who remember the 70s understand it is a wrecking ball..i doubt international business will be rushing to invest under a Corbyn government so the new generations might get a taste of stagflation..and then we are in trouble
You can’t compare with the 70s, we were just off the gold standard
And why on earth should an investing government weaken trade balances?
I’m sorry, but that claim shows you have not thought this through
You’re simply offering Tory dogma, and not argument
“You miss the fact that this creates more income. And so it does not require more tax”
There’s scope here for misunderstanding isn’t there. ?
‘Higher tax rates’ and ‘more tax’are two different things.
If there is more income there will be more tax revenue. It doesn’t need increased tax rates to achieve that, it happens naturally because there is more money flowing through the economy. (?)
Precisely
Higher tax revenues…from a bigger tax base
2 weeks before an election, is not the time to educate the public on economic realities!
BUT, labour have had years. Their economic advisers have arrogantly turned their backs on the truth, in order to push the neoliberal line that people already know, because they are frightened that people are not ready for the truth. And also, MMT (so some of them say), gives a reason for the rich not to be taxed – “If the government can spend money into existence, then the rich can be taxed less” – so they say.
I wanted to scream at the TV last night 🙁
I did not see it because of other commitments
I suspect you were not alone
@Pearl, how do you think the government pays for all the wars over the past 30 years? They didn’t raise taxes then go and bomb Baghdad/Belgrade/Tripoli, it happened the other way round, do some bombing then collect the taxes from all that money spent on munitions by the people who manufactured them.
I could say the same thing about the ‘Royal Family’ but that is for another day.
Pearl, if printing money for the productive mobilisation of resources produced inflation, why is it not evident in Japan where they already do this?
The obvious question, when we have such low inflation, and gov spending creates jobs, economic growth, and aids wealth redistribution, is why stop at £58 billion ? Why not £100 billion or 1 trillion ?
There are physical capacity limits – and when we reach them do we have inflation
How far are we from the limits now?
By much more than the Treasury says because if underemployment
I think we can spend £100bn a year on the GND
But £1 trillion – clearly not
True or not – it doesn’t wash with the voters.
I think Labour should concentrate on the green industrial revolution – talk up building/investing in more renewables – clean energy and the like. They can talk about public ownership rather than nationalisation, highlight that e.g. public transport needs more investment to become more affordable and more readily available, and that all of this will create good quality jobs.
One of our friends who is a WASPI immediately checked out what she might receive and said that it wouldn’t change her mind to vote Labour, even though she is normally/naturally at home with Labour.
I suspect that most voters trust the Micawber principle – regardless of whether that is economically literate.
It is clear that your troller Pauline H does not understand the multiplier effect that the well deserved/entitled pension increase and spending for women would result in. Perhaps she should read your excellent book The Joy of Tax?
Thank you for you blog Richard. I am learning from it. I understand your points about recovering the money once spent. Can I ask if the initial spending in any way falls foul of EU laws (i.e. the Lisbon Treaty)?
No! That’s actually how spending happens now
@ Pearl – https://www.theguardian.com/environment/2011/mar/03/1970s-oil-price-shock
Surely the printing of more money is why the pound has fallen in values from £1 – $4 to todays rate over the last 50 years ( or from £1 – 40 Deutschmarks to £1- 2.48DM before the Euro). Under both Labour and Tory we have had neglect of investment in industry in favour of the service sector. This is all Alice in Wonderland economics isn’t it? Isn’t it in stark contrast with Germany where they have structured companies so takeovers are very difficult protecting them from financial asset strippers who come to acquisition straight from the Mad Hatters Tea party?
Printing money is not in the slightest the issue
The relative value of the currencies reflects differing productivity
Labour’s plans would increase that and the Tories would harm it
Yoy are confusing issues
Thanks Richard. I asked (on 8th Nov) if we could fund the GND by the government creating the money (spending). You replied that technically we could but EU law says we must borrow the funds. There is clearly a difference regarding the two kinds of spending (GND and WASPIs). I am not sure what it is, but I am not an economist and certainly do not doubt you. It would help me if you could explain this a bit more though? Again thanks for your patience.
Note what I am saying here that if borrowing is to be used then in effect gilts have to be issued
That is all I said earlier
The borrowing cannot be left on Bank of England overdraft, although in a very real sense that is qhat quantitative easing does
Whatever you might think of Corbyn, it’s his advisors I worry about the most.
In my view, the answer you give above reminds me that he should really have maintained his links with you.
Oh well……………….
Indeed….
But one of them says I am unforgivable
I am quite generous in the circumstances
If one cannot speak truth to power, then we really are in a very bad situation indeed.
This problem is rife in public life.
Come on, tell the truth, what did you do that cannot be forgiven? Did you take the name of Milne in vain? Surely even that could be sorted with a few Hail Corbyns for penance.
Sorry, feeling a bit impatient with the Labourer-in-Chief and his groupies right now after his interview performance. Just comparing with Sturgeon…I shouldn’t.
If Johnson gets in, Waspi can forget their compensation. He’s made it very clear. And for once, I believe him, appeal or no appeal, we’ve had it.
And if Corbyn keeps messing up, that Johnson government will happen, even if it doesn’t last long.
Not feeling sorry for myself, I’m alright Jack, but for the hundreds of women we have been helping with their complaints letters, their paperwork to get any available bridging benefit they can, so they can at least pay their bills.
We have seen appalling situations in deprived rural Wales. These women will not be ‘splurging’ on new mobile phones or whatever I can assure you. If there is inflation it won’t be created by their new Louis Vuitton handbags.
Some will be able to stop their cleaning jobs, their evening or night shifts stacking supermarket shelves, while trying to look after their old parents and help their kids with childcare so they can in turn keep up with the rent. This is what I see. And I really could have thrown something’s at the TV when I saw how completely dismissive and condescending Johnson was when that Scottish woman challenged him about his previous promise to ‘do something about Waspi’.
I did not believe him then. But his tone and body language were incredibly insensitive and offensive. What a nasty fraud.
I am not a true believer in the Milne way…
And that is the new definition of sin in some parts
Ok, but if you are comfortable that inflation can be controlled through taxation, why is there a limit on the amount a government can spend ?
Are we saying that the limit on the control of inflation is the amount of taxation individuals will bear ?
No, the limit is the amount that full employment can sustain
“…. the limit is the amount that full employment can sustain”
And the parlous state of the real economy at present, and the non-appearance of inflation indicates that the unemployment figures that currently tell us that unemployment is close to historic lows must therefore be mince.
Yes
About 1/4 of all those in employment are part-time workers, who average about 16 hours per week. The unemployment rate is about 4%. Hard to quantify, but a lot of the employment (part-time or not) is low quality employment, and we have about 21% of workers below the real living wage.
A lot of the low quality, low pay, employment is because of the loss of manufacturing jobs.
At some point lack of education and training becomes an issue, but I’m sure that many more higher quality, higher pay, jobs would exist if a sensible investment strategy was adopted and less favour given to the overpaid financial sector.
The investment strategy would of course include investment in education and training.
A Job Guarantee programme, in some form, could also play a role in helping the unemployed back into the workplace.
Cornell University Law School and others have recently developed the US Private Sector Job Quality Index, which measures the ratio of what the researchers call “high-quality” versus “low-quality” jobs, based on whether the work offers more or less than the average income –
https://qz.com/1752676/the-job-quality-index-is-the-economic-indicator-weve-been-missing/
The index may not be perfect, but it would be worth calculating for the UK. Perhaps someone has already done so?
I have not seen it….
We need to shift the argument away from terms like “printing” money. It conjures up images of a mad Chancellor at the controls of a wayward printing press churning out valueless Zimbabwe dollars. Government spends by accessing the BCF at the BoE for distribution to the various government departments through the Comptroller General. This is done by a few keystrokes on a PC. It has happened like this for decades.
A more mature (and sensible) narrative is to stop talking about government “spending” and start talking in terms of government “buying”. Goods and services are purchased from the DPS for the government to provision itself. If taxes were required to fund this spending, then a budget deficit would be an impossibility. The purchasing is done and then taxes are levied at the initial and subsequent transactions in the normal way. What isn’t taxed back (revenue – French for ‘return’) is held as savings in the private sector. Some of those savings are used to (unnecessarily) purchase gilts as a risk-free investment vehicle.
The WASPI compensation of £58bn (if borrowed) would breach the third plank of Labour’s useless Fiscal Credibility Rule as designed by James Meadway and Simon Wren-Lewis, namely “Labour will borrow only to invest.” If JMD doesn’t wish to raise taxes to cover this spend directly, he must breach his own rule. If the money is spent by the recipients en masse, there may be inflationary pressures, depending on how rapidly the money hits the economy and in what sectors. I suspect most pensioners won’t splurge, however – and as Richard says, the more they splurge, the more tax they pay.
The problem with government buying is that it does not buy pensioners but it does pay them
And I am not even sure you buy teachers…..
But I agree, the language is difficult and we have not resolved it
Government buys teachers in the sense they are buying their labour.
As they are using their buying power in this case (being the monopoly issuer of the currency) for public purpose I can’t really see why that’s an issue unless it is the word ‘buy’ people might not like ?
I have never sold myself
What does BCF stand for here?
British Consolidated Fund – the account at the BoE that handles UK Treasury balances.
A GREAT REASON FOR REFUNDING WASPI’s ?
Women in 50’s and 60’s are the sandwich carers — caring for parents and young people who are unable to move out.
Enabling WASPI women to manage financially whilst caring has the potential to save millions?
Janet
……………………….
Caring predominantly falls on Women.
A report from charity Carers UK says that two-thirds of UK adults can expect to provide unpaid care for a loved one who is older, disabled or seriously ill in their lifetime.
The research also reveals that the average person has a 50:50 chance of becoming an unpaid carer by the age of 50.
It finds that, on average, women can expect to take on caring responsibilities more than a decade earlier than men.
Half of women will be carers by the age of 46, whereas half of men can expect to be carers at 57.
http://www.carersuk.org/images/News__campaigns/CarersRightsDay_Nov19_FINAL.pdf
Interesting.. let’s not forget we have already contributed this money to the exchequer..we need it back so govt can then collect the tax on it!
No
We can never pay tax until the government has spent
There is no money to pay with otherwise
I’ve been interviewed by Neil (sic)
He is tough
He can also be thrown off guard if you have done your preparation”
Not much evidence of it, try watching it back..You were slaughtered at your tax gap calculation and then your attempt at MMT / printing hypothesis was thrown in the bin whilst your blustered away. Performance was on a par with Corbyn.
It’s an odd claim you make
After their interview to which you refer the producer came to see me to congratulate me in handling him quite so well
I suggest his view might be more reliable than yours
Tough or not, Neil to me is just an establishment lackey.
I’m curious to understand how Teresa May would be entitled to a pension of £21k – and then an MP’s pension on top of that.
All other public sector workers who had a pension related to their employment are only entitled to the basic pension – which is £129.20 per week or £67184 pa, so how on earth does St Thersa get £21k as quoted on the Today programme this morning.? Surely as a public sector worker MPs are not entitled to additional pension in addition to the “gold plated” MPs pension. If they are this is yet another scandal – along with their subsidised meals and drink. How about some bloody austerity at Westminster?
I do not have answers
Richard
I think that your understanding of how government spending is done is slightly outdated. The UK no longer banks through the BoE, but through using the DMO and commercial banks. It can no longer simply spend money into existence in the form of reserves, instead it prefunds spending by issuing gilts through the DMO for which it receives deposits in commercial banks.
It is simple to check this, merely have a look at the BoE balance sheet and there is no sign of any liability to the UK government or any overdraft as you put it.
That is not to say that your view that under current interest rates and inflation the government could take on more debt for spending is wrong, just it does need to be pre funded.
With respect, you entirely miss the point
I know the mechanics. Let’s call them the current form of this.
I am discussing the substance and that is as I describe – the government decides to suspend and it does, and can, and will, literally at will
And there is no pre-funding required
But we seem to agree on that
How is the interest paid on these gilts? The mechanics are very interesting to me and I haven’t been able to find any info on this.
Hi Richard,
Are you aware of this?
If successive governments had kept their part of the bargain the money would be there not only for the WASPI payout, but probably also the equalise the entitlement to all state benefits that was put forward in Council Directive 79/7/EEC. The directive specifically required Member States to ensure that there was no direct or indirect discrimination whatsoever on grounds of sex by the end of 1984. As the UK had not at that point implemented national provisions relating to equal treatment in statutory social security schemes, the directive directly shaped the nature and scope of gender equality laws surrounding pensions.
It’s not just the Tories at fault here but all successive Governments since the Labour government of 1978.
https://davidhencke.com/2018/07/19/revealed-the-271-billion-rape-of-the-national-insurance-fund-that-deprived-50s-women-of-their-state-pension/