I published this video in the Economic Truths series this morning. In it, I suggest that it's an economic truth that every time a government spends, it creates new money to do so. It does not spend what is commonly called taxpayers' money, nor does it spend funds borrowed from the City. It simply asks the Bank of England to make a payment—and that's what that Bank does, extending an overdraft to the government to let it do so.
The audio version of this video is here:
The transcript is:
Governments create money when they spend. This is an economic truth.
I've been talking about other economic truths in a whole series about money, which are linked below. But in those videos, I was talking about the money that is created by our commercial banks when it lends and how that functions within our economy. But the fact is that we have two sources of money in our economy. One is the money created by commercial banks, and the other is the money created by the government.
The fact is that every time the government spends money - and remember, it spends a trillion or so pounds a year - it does not go to the Bank of England and say, “Hey, is there any money in the account? Can I spend it today? Or should I actually hold back for a day or two until some more tax is paid?” That is not what goes on.
Instead, Parliament authorises the Government to spend by the passing of a budget. Once the budget has been passed, the spending is legal and it can therefore take place. And the government then goes along to the Bank of England, which it owns, and says, “We now want to spend this money, which Parliament has approved, therefore please extend the credit to us to let us do so.”
And so, the Bank of England, quite literally, marks up an overdraft for the government every morning, as it starts to spend, and lets it go spending on whatever it wishes because it is a bank and it can extend credit because the government has made a promise to repay it, at least technically. Now, that's what happens, therefore. Every time the government spends, it creates new money.
Just like a bank does not lend out depositors' money, the government does not use taxpayers' money to spend. This idea that taxpayers' money is used to pay for government services is wrong. It is complete and utter nonsense. It is untrue, a fiction, a falsehood. I don't mind what else you want to call it. It is simply not correct.
The government creates every single penny that it spends by asking the Bank of England to extend it an overdraft.
Now it is entirely true that every day, tax will come into the government. That is a fact.
And therefore, as a matter of fact, every day, part of that overdraft, or even all of it, will be cleared by the tax receipts received during the course of that day.
But that's not the point. When the government spends, it creates new money, and the receipt of the tax clears the overdraft. It doesn't fund the expenditure.
Now, unless this is understood, you don't understand how government finances work. Because anybody who thinks that the government is funded by taxpayer money is wrong. There is no such thing as taxpayer money. There is simply a bill that a taxpayer owes to the government for the tax that has been demanded by them, again authorised by Parliament, which is what makes it legal. Without an authorisation from Parliament, taxation is most definitely not legal.
So, you have to remember this fact. The government spends money. And then it taxes. The tax that is charged to cancel the overdraft that is created by the government at the Bank of England as a result of its spending, is charged quite deliberately to cancel that overdraft. It literally takes the money created by government spending out of circulation again.
This is. therefore, exactly akin to the way in which a commercial bank works. A commercial bank lends money to somebody, and then the loan it has made is repaid, and the new money that was created by the loan is cancelled, destroyed, it's gone forever.
The government creates a loan with the Bank of England by its spending, and then it taxes, and when the tax comes in, that tax cancels, destroys, in the same process, that money that was created to fund the government spending.
So, the government always creates new money by its spending and tax never funds government spending.
Instead, what tax does is cancel the impact of the money creation by the government. And of course it has to, because If you spent a trillion pounds a year and didn't tax, we would have inflation that would go through the roof.
But the reality is that we don't have inflation that goes through the roof. We never have had in this country. We've had some sort of high inflation every now and again, but nothing very serious. And the truth is that is because we have an extremely effective operating tax system which claws money back from the economy, which is what its job is.
That is the primary role of taxation. Unless you understand this cycle, which is that the government creates money to spend and then taxes it to cancel the impact of that spending, of new money, on inflation you don't get how the government's finances work. It is the most fundamental thing you have to understand.
And it's difficult because it's the other way round, like so many economic truths, from what you usually think, because it's the opposite of what a household does. And this is vital, because understand that and everything else about the government makes sense. And you also understand that most of what is said about the government is complete nonsense.
There is no taxpayer money.
The government does not run like a household. It does not have the sorts of constraints that households have.
And that's because it has its own bank, by the way.
And the government never, ever spends taxpayers' money. Because it can't. Because the taxpayers' money has been used to cancel the government's overdraft at the Bank of England.
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Excellent.
Is it worth spelling out more that the BoE can never sanction the Government for having debt and does not demand that the ‘debt’ be repaid? Like a bank might do to a household? Because the BoE is part of the Government apparatus? It’s just recording Govt money going out.
Or do I have that wrong?
I’m just thinking how the concept of debt is used to create fear by politicians that is then used to curb spending the money we need.
You are right
All true…….
…. but the main thing I hate about that phrase is the implication that only those that pay income tax should get a say in how money is spent.
First, ALL citizens should get a say – it is a democracy.
Second, you would be hard pressed to find anyone that is NOT a tax payer – VAT??
Agreed
I agree, and would add, the fact that someone is subject to the law, rather than immune to it, means that they should have a role in saying what those laws are. This is more fundamental than paying tax as the basis for “having a say”. I’d argue that the idea that “I pay my taxes…” is deliberate, one part of the frame that creates consumers, turns social relationships into transactional ones, and forms the basis for so much that’s repellent in this country. Being governed without consent is sufficient to demand parity of voice in that governance. The lack of that parity (and the consequential inequality) for the overwhelming majority shows how little actual democracy there is in the UK (or anywhere in the world).
The problem is you have “deathwatch beetle capitalism” where the rich want to minimise their taxation so political shills like Rachel Reeves constantly tell us there’s a “blackhole” in the “overdraft account”!
Despite her Oxford PPE, LSE Msc in economics, and job stint at the BSE the last thing she’ll admit (maybe even know) is there can be no net saving unless the government runs a deficit or “blackhole” or runs an export surplus.
With “deathwatch beetle capitalism” the country is being undermined socially and economically. Keynes made this clear in the 1930’s with his statement “Anything we can actually do we can afford.” but it’s flown right over the heads of our “blackhole” or “deathwatch beetle” politicians deliberately or not!
https://www.theguardian.com/commentisfree/article/2024/aug/01/george-osborne-osbornomics-labour-party-public-sector-cuts-rachel-reeves
Hmm… ‘Despite’ or ‘Because of’ “her Oxford PPE, LSE Msc in economics, and job stint at the BSE”?
Thank you, both.
You forgot her couple of years as economist at and lobbyist for soon to fail HBOS.
Bill Mitchell nicely dissects and fumigates the “deathwatch beetle capitalism” shill Rachel Reeves’s address to Parliament on the state of the economy this week:-
https://billmitchell.org/blog/?p=61904
I have a couple of questions, that you may have answered elsewhere. The government creates money when it spends, and destroys it when it taxes. There’s obviously a rate at which money comes back and is destroyed, leaving that new money available for a time. There’s obviously also a lot of money that is more or less permanently left available for economic activity. How do governments decide the rate of return of that new money (through tax) and hence how much to leave in the economy? Also, am I right in thinking that deciding what to tax and at what level, is fiscal policy and creates incentives, and also influences levels of inequality? Also, does this mean that the purpose of taxation is really wildly different – for these reasons, than the media ever seem to be even remotely aware of – than the myth of funding spending? And I’m thinking this means that both tax and spending policy create the society we see all around us, and how degraded it has become, how unequal it is, and that it has a much more powerfully determining influence over people’s lives than is ever really stated in the media (I’m thinking here of the neoliberal rubbish that the outcomes we see are the result of a natural sorting of winners and losers)?
I will cover all these issues in due course
There are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
Jusdgement is required to balamce all these objectives. Sometimes governments get the decisions right. Other times they don’t. But as youn say, tax moulds society. That was what I called the Joy of Tax
I’ve learned a lot from reading this blog, and I get the central point that you are making here (at least I think I do!). Genuine question, Richard – if the government spending with money that it has created significantly exceeds the amount recouped/cancelled through taxation, is this not inflationary according to your explanation? And if so, does the amount ‘raised’ in taxes need to roughly balance the amount spent/created, so the question of being able to ‘afford’ public spending doesn’t disappear, even if it happens in a different order from that which is usually given as the narrative.
You are broadly right
There are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
To control infaltion it isn usually that up to 97% of money spent be reclaimed. During crises that varies. But we know the control of inflation requires significant taxation of ony a little less than spending in normal times.
You keep seeing the phrase “taxpayers’ money” in the national press, even on the business pages of the broadsheets. Perhaps a letter to The Times, Richard, might educate some of the journalists and the public?
On the subject of national debt I came across this on the Taxpayers’ Alliance website. Is it correct or are they just trying to frighten people?
https://debt-clock.org/
It it drivel…
Thank you, Robert.
Do you know the who / what is behind the Taxpayers’ Alliance? Hint: The TPA is not worried about us, little people, and our tax burden.
ROBERT DAWKINS
It’s not the writing of a letter, it’s the getting it published.
Professor Murphy has a certain cachet, admittedly, but even citing the Exchequer and Audit Departments Act 1866 to the Guardian letters editor fails to work (by me); to the BBC (by me as a complaint about veracity) or similar letters to the FT (by others) meet the same fate.
Even Jacob Rees Mogg stating that the Bank of England owes itself most of the “National Debt”, on national lunchtime news, went missing pdq.
I get published, very occasionally at best
It is the only time when being a Prof might help that I know of
I’ve been sending regular complaints to the BBC about their election coverage, their last reply even claimed they would show their journalists my points for them to consider. I’ve linked to Richard’s blog posts in some of the complaints.
The Breakfast presenters seem to have switched from asking “how would you fund that?” to “how would you balance the books?”, which is slightly better.
Will this Government try to retrieve the billions lost to fraud during Covid or is it easier for them to go for the pensioners?
They are hoping to recover £2.5 bn
A question that occurs to me – would spending the £20 billion ‘black hole’ generate any significant inflation under the existing tax regime, given the trillion pound budget?
No
Thank you for your explanations on monetary theory Richard.
Previously you have sensibly suggested how taxing the very rich can bring in billions of pounds by taxing.
Doesn’t this though reinforce the (mistaken) belief that taxing funds spending?
And if such billions were obtained through taxation would they just be used ‘to cancel the impact of that spending, ‘ as explained above. ? Or could they go into some separate fund?
I trying to marshall my arguments to try to explain this to others.
There are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
We do clearly need to redistribute.
Taxing the rich reduces asset price infaltion, which has been serious.
And it actually resuces some aspects of consumer inflation – although the resistributed funds might increaase it.
Bit vitally, social justcie demands this tax. Revenue is not the goal. And it does nt fund spending, but it might assist redistribution.
This piece, and the others in the series, should be in an MP’s information pack. Then one can hope for a little sanity in decision making perhaps.
Thanks
What I am still wondering (not so far in my studies yet): Is inflation worse for the rich or for the poor? It seems that especially the rich try to push for politics that prevent inflation.
The rich have the resources to survive it
> This idea that taxpayers’ money is used to pay for government services is wrong
Thank you so much for saying this, it really blows a hole in the “there isn’t money” argument.
Personally I think for a Government to say to the people that their taxes pay for this that and the other is one of the most powerful political weapons in their arsenal
Except it’s not true and you can build nothing of value on lies
Agreed
Yes I understand. My point being that whilst the vast majority of the population believe and accept that their taxes do pay for stuff it is not in the interest of politicians to explain to the nation how money is created as it would restrict their ability to sell their agendas (lies)
The government is as much like a household as a gorilla is like a spider monkey
Too many words in your ‘truths’, Richard. Too much repetition.
That is my opinion for what it’s worth. I haven’t got to the end of one yet.
You’ll never get it down to three word slogans but that should be your aim. Always in the back of your mind: can I say this in three words preferably with rhyme or alliteration? (I exaggerate, but……. even Margaret Thatcher needed seven words to say there is no such thing as society, and eight to say there is no such thing as government money.
Sometimes less is more.
I have to distress.
If you’re saying that are not as good as they could be as yet, I agree. I have not mastered this art yet. Technically we have made massive progress. I am working more on style and content now.
But teaching is about repetition and very short videos really do not work. L9ng seems to work better for us.
So, offer better scripts, please. But really short shorts really did not work.
As a retired teacher and scuba diver instructor I’d say your videos/scripts are just about right. Simplification of counterintuitive concepts and repetition of new information works, especially when those of us on the receiving end may have a rather fossilised mindset as a result of a lifetime of economic and sociopolitical conditioning
Thanks. Appreciated.
If we don’t think they work, even when in edit, we remake them
That will be happening to one 9n Monday
There’s also a delicate balance between over preparation / over scripting and lacking fluidity on screen.