In a post I published here yesterday, I explained that in a country like the UK, which issues its own currency, has an effective tax system, a functioning legal system, and with that currency being acceptable for international trade, government spending always comes before tax.
That is not just a technical insight into how public finance works. It is, in my opinion, a political game-changer. A commentator then challenged me on that and asked how this might assist younger people in particular. I will define those as being under 35, or perhaps under 30. Then my focus is on how this understanding might let us tackle the structural crises that are shaping the lives of people of that age, so that people of my age do not leave them a politics of permanent scarcity, as could happen unless we change our economic narratives.
If we think “tax comes before spending”, that story is necessarily one of limits. That narrative suggests that we can only achieve better housing, jobs, education, or climate action if the money can be “found” through higher taxes, borrowing (which they choose to forbid to eliminate that choice), or cuts in government services elsewhere. The result is a politics of managed decline, where almost nothing ever changes.
If, on the other hand, we understand “spending comes first”, the story changes. The question is no longer “can we afford it?” but is, instead, “do we have the resources, skills, and technology to do it?” If the answer is yes, then, as John Maynard Keynes once noted, whatever it is we want can be done. The government can create the money, direct the work, and use taxation afterwards to keep the economy balanced, and that opens the door to a completely different policy agenda for younger people for all the reasons I note below.
Removing the “there is no money” excuse
The most corrosive political message in the UK over the past fifteen years has been that “there is no money left”. It is the line used to justify cuts to public services, freezes in pay, and neglect of infrastructure.
Once we accept that spending comes first, this argument collapses. This correct narrative makes clear that the state is not dependent on tax revenues to act. It is dependent on the capacity of the economy to deliver what is needed. If there are unemployed or underemployed people, unused capacity or idle resources in the economy - whether in the state or private sector - the government can put them to work.
For younger people, this means public investment is always possible if the political will exists, whether that is in housing, jobs, climate action, or education. The barren landscape they now face can be transformed.
Full employment and skills guarantees
In particular, understanding spending-first economics means the government can guarantee work, training, or education for everyone who wants it.
For those under 30, that could mean:
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Funded apprenticeships linked to the industries of the future and the continuing needs we know we will have.
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Guaranteed graduate placements in public service or climate projects for those who need them.
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Paid vocational retraining for those in insecure or low-paid work so that the economy can enjoy the benefits of people's improved skills, which must become the core of the supposed productivity agenda, which has, in the current government's hands, appeared to be all about eliminating people from the workplace rather than about empowering people within it.
In other words, rather than leaving young people to compete for a shrinking pool of “opportunities”, the state could instead create those opportunities directly, without waiting to “raise the money” first.
Housing as a political choice
Britain's housing crisis is not the result of empty Treasury coffers. It is the consequence of decades of political choices: restricting social housing, treating homes as speculative assets, and refusing to plan for need.
Spending-first economics makes it clear that large-scale investment in social and affordable housing is always possible. The only real limits are the supply of land, skilled labour, and materials — all of which can be planned for, which should then become the focus of government attention. The dependency on private sector house building alone would end: the state could instead begin to drive this sector again, as it did for forty or more years from 1945 onwards.
For younger people, that should mean that secure, affordable rents and the chance to own a home cease to be a pipe dream.
Universal, affordable childcare
Childcare in the UK is currently among the most expensive in the OECD. This cost locks many young parents, and especially women, out of the workforce, limits career progression, and deepens inequality. With a spending-first approach, universal, affordable childcare is entirely possible. The government can hire and train carers, build facilities, and fund provision directly. The benefits, including higher employment, greater gender equality, and better early-years outcomes, would repay the investment many times over, as is seen in the many countries where this cost is capped for this reason.
Education at all levels
Investment in education is not a “cost” in the spending-first framework. It is a choice to develop human capacity. That means:
- Properly funding school education and reimagining its role so that all children and young people can achieve their potential, when its current focus is on producing compliant workers for jobs that very largely no longer exist.
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Restoring university maintenance grants to eliminate inequality in this area.
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Reversing cuts to further education colleges.
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Funding lifelong learning so skills can be updated throughout a career.
If we can afford to waste young people's potential as we do now, we can certainly afford to develop it.
Student debt relief
If the government can create the money it spends, then the argument that student debt must be carried for decades to avoid “costing the taxpayer” is false. That debt is a political choice, not a financial necessity. Student debt has always been a game of government financial engineering from which private sector financiers ultimately gained, and has never been about funding education, which has always, and as a matter of fact, been paid for up-front by the government, without exception.
Correctly understanding government financing and the role of both tax and debt within it enables consideration of either cancelling or radically reducing student debt, which would free up income for housing, family formation, consumer spending (which is key to continuing economic viability) and even pension provision, all of which stimulate the broader economy. Considering how to reduce this debt within a proper understanding of government financing is, then, an investment in future productivity and social stability, not a drain on public resources.
Climate action without delay
Younger generations will live with the effects of climate breakdown for decades, and most certainly long after I am gone. It is a prospect that now haunts me, and continually reminds me of the failure of my generation when I knew this might happen when I was myself a teenager. A “tax first” mindset delays action until the “money can be found”. By then, it may well be too late.
A spending-first approach allows immediate investment in:
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Renewable energy infrastructure.
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Home insulation and retrofitting.
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Low-carbon transport systems.
- Flood defences.
Taxation can then be used to prevent inflation and to steer behaviour towards sustainable choices.
Tax for fairness, not funding
If tax does not exist to “fund” spending, it can be used to shape society. This is tax as an 'economic steering wheel' as I described it in the post to which I linked at the top of this one. This then means that tax can:
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Reducing extreme wealth and income inequality.
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Discouraging harmful economic activity.
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Supporting redistribution between regions and communities.
For younger people, that means a fairer distribution of power and resources so that opportunity is not locked up by those who already have it.
The political choice ahead
If we accept the household analogy, younger people face a lifetime of economic scarcity, under-investment, and deferred promises.
If, instead, we understand that as a matter of fact, spending comes before tax, we open the political space to demand secure homes, good jobs, free education, affordable childcare, and a liveable planet now, and not in some imagined future when the books “balance”.
The truth is that the future younger people inherit will be decided less by the constraints of economics than by the limits of political imagination. That is why understanding “spend before tax” is not an abstract macroeconomic debate. It is the foundation for a politics that can actually deliver for the next generation.
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As well as the ‘where will the money come from?’ argument we also need to deal with the ‘where has this ever worked?’ retort.
As I was reading through your list of prescriptions for treating young people better I was thinking about my daughter’s passage through university here in France. She finished a 5-year course last year. Both her fees and living costs were paid by the state. She could get a 3-course meal at her uni every day for 1€. She could hire a bike for 1€ a YEAR. She could go from home to her uni in Strasbourg by train for 60€ – a journey further than Newcastle-London. She spent a term in Portugal, entirely funded by the state and EU (and she was doing chemistry, not languages), as well as another term in Paris, also paid. I often thought: if France can do this, why can’t the UK?
(The answer, by the way, does not lie in the common UK view that increasing fees have been driven by the expansion of university places. In France anybody that passes their ‘bac’ at the end of school automatically gets a uni place – and more students go, and more get degrees, than in the UK.)
Although, as ever, you won’t find all the best in any one country, I do think the answer to the cynic’s ‘where has this ever worked?’ question is quite often: ‘in Europe, now’.
Noted.
This sounds very like Denmark.
Why is their productivity so much higher than ours?
Thomas Piketty recently noted that productivity per worker hour (as opposed to per capita) in France is not only much higher than the UK, but among the highest in the world. Obviously, there are many factors in this. I think one of the main factors in the UK is the imbalance in its economy – it’s very dominated by services, which are much harder to automate than manufacturing. But I think a big factor in France is (and this is going to surprise many) the renowned strength of organised labour. This has resulted in decent wages, and a lot of employment and environmental protections, which raise the cost of employing people. Bad for profit, right ? Wrong – because high labour costs drive investment in efficiency and automation, and in turn the need for higher skill levels. The UK, since Thatcher really, has chosen a lot of low-investment-low-skill-low-wage options; France went the other way (though the myopic Macron is unfortunately undoing some of that now).
Thanks
We used to have something similar in this country. I benefitted from it, and so did many other young people.
I believe it was Margaret Thatcher (who’d also benefitted from it) who terminated it.
One of the arguments of Acemoglu and Johnson in their book Power and Progress is that strong organised labour helps to ensure that changes designed to enhance productivity do so by enhancing workers’ skills to use technology, rather than just replacing workers with automation which may not actually improve productivity very much.
It seems fair enough to say that believing taxation comes before government spending is the mental equivalent of shooting yourself and your country in the foot!
An enquiring mind, however, reveals behind the screens no country actually does follow this disfunctional belief! It’s class war that erects those screens!
Spot on Richard. May I add my own perspective? I was born and grew up in what would today be called ‘social housing’. My parents rented our house. However, the houses were built by George Cadbury and our landlord was the Bournville Village Trust. The houses were built to a very high quality with large gardens. Incidentally this is wonderfully portrayed in Jonathan Cole’s recent novel ‘Bournville’ which I highly recommend. To my mind, decent quality housing can raise the residents’ hopes, aspirations and ambitions. By contrast, in my professional work I had to visit many of what nowadays passes for social housing and it disgusts me. The conditions are, bluntly, squalid. I recently went through the Druids Heath estate on the outskirts of Birmingham. I can remember when it was being built and how modern it looked at the time. Today, after years of deliberate neglect, it is nothing short of a slum estate. What has happened to it outrages me. But this decline (and the resulting social and health issues it causes) did not happen on its own. It is the result of political decisions. And one of the most significant was the introduction of the so-called Right to Buy and the restrictions placed on local authorities that effectively prevented them from building new council houses to replace those sold off. When, as one consequence of government housing policy, we began to see growing numbers of homeless people sheltering in the doorways of our High Streets (I used to pass them frequently in the Strand in London on my way home from work) the government then rushed out a Planning circular on affordable housing (later to become PPG3 and then PPS3) which promoted the idea that the private sector would undertake the task of providing the new affordable homes. It was a cop out and doomed to fail. I wrote about this in an article in the April 1993 edition of the Journal of Planning and Environment Law. I also repeated this in a number of columns that I used to write for the Estates Gazette. It gives me no pleasure to be proved right. What I had not appreciated at the time was that this was just one of many undesirable consequences of a deliberate political/economic experiment called ‘neoliberalism’. The sooner neoliberalism is cast into the dustbin of political history, the better.
Thank you, and much to agree with.
“WHERE’S THE BEEF?”
Right here!
KUTGW!
Fantastic – so I would sum then is what spend before tax does is encourage us to think about ‘investing to save’ but also investing to earn – because there are taxes to be collected from this investment too. Now if you believe that taxation pays for everything, why would you not support that – the generation of tax/revenue to pay for stuff you are complaining about like the NHS, roads, etc?
Again it shows the paucity and absurdity of what we thing we know or have been told. It’s all wrong.
As for tax, it shows the reality of what tax is about – the using up of money – create – expend – destroy, spending money on stuff in a continuous process but which does not increase money or leave pools of it accumulating and causing inflation. Because the outputs are not just money outputs (which is what capitalism is obsessed with), they are genuinely things that will make out lives better (a proper supply of housing for all needs, good healthcare, education, good roads and transport etc).
But make no mistake – spend and tax is about investment in tangible things – infrastructure, services, sustainability.
Super article, lots of great ideas. We have a government focused on growth and yet it doesn’t invest nearly enough in the young people that would generate that growth. I agree this is a result of a lack of political imagination and boldness. We need politicians with the courage to step forward and make this change.
Where are the limits between the state as a whole and smaller entities for which the household analogy still works? I am German, and we are continuously told that the city doesn’t have enough money for this or that and that many communities are near enough bankrupt. The government of Germany and as far as I know the governments of the federal states have access to the central banks, but what about the level of government below that?
Is the solution funding them from federal or state budget, if their share of the taxes paid by local firms does not cover the expenses? Or is the system in the UK so much different with regard to the budget of cities etc. from the German government?
All levels of government but central government cannot create money. They are akin to households in this regard.
Alexander says: Where are the limits between the state as a whole and smaller entities
The neatest explanation of the division possibly came from Beardsley Ruml, a right wing economist, in 1946
“Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.”
&
“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. ”
Ruml possibly should have written ‘currency issuing central bank’ to be 100% unequivocal in a nit-picking world, but doubtless took that it would issue its own unique currency as implicit in ‘modern’.
Even if a lower level of government has some form of access to the central bank, it could never be really equal to the ”currency issuing’ level of government on whose behalf the currency is issued
Being of a right wing persuasion, Ruml thought a great use of the fact that tax didn’t fund spending would be to dramatically decrease business taxes.
There was a blog article on the Ruml article
https://www.taxresearch.org.uk/Blog/2015/08/18/taxes-for-revenue-are-obsolete/
I think it fair to add that the observation that Ruml made that such a government did not need tax was true in the sense that it did not need to do so prior to spending, but it does necessarily need to tax to control inflation. Without that second point his observation makes little economic sense. That said, he made it quite clear that the equation did not need to be balanced.
Indeed, ‘where’s the money coming from?’ is the constant mantra chanted and wheeled out each time for provision of a functioning NHS, police force, dentists, Drs, care workers, affordable public transport and food, utilities and on and on
yet, HS2, wars, royal palaces, tax breaks, bankers bailouts, CEOs salaries, wage rises for MPs, pandemics, etc etc etc and the money is magically there. Strange hey??
We can indulge the already wealthy but we can’t afford to help those desperately in need?
Perhaps instead of King Charles giving a speech about VE Day or whatever, as head of state he could give a speech about the state of the nation and the dreadful divisions between the rich and poor?
Does the ever increasing national debt (of very many countries) not reflect that the spending investment up front is not effectively recouped in taxes from those that have benefitted?
There is no such thing as national debt in a country like the UK – because it need not borrow. The UK government takes deposits from savers. That is it. It runs a savings institution which was once categorised as the national debt, which can reasonably be argued it was before 1971 and the old end of the gold standard, but which in the current fiat money system is best described as a part of the National Savings and Investment service.
It has no need to borrow because it can create all the money that it desires to make payments that have been approved by Parliament whenever it wishes. The Bank of England can create that money on its behalf.
So, in that case, the national debt is not growing. What is, instead growing is the size of the UK money supply, which is something quite different.
Why is that happening? For three reasons.
Firstly, we have a growing economy.
Secondly, we have a growing population.
Thirdly, we have had inflation.
We do, therefore, need more money in circulation, and so long as we continue to inflate the economy, as we do as a matter of deliberate policy, both by expanding population and by pursuing growth, and so long as we encourage modest inflation, as we, again, do as a matter of policy, we will need to continue to expand the money supply, or at least that part of it that is created by the government, or we will end up with credit squeezes.
There is nothing to worry about in any part of this process, except to express concern about the fact that it is so widely misunderstood, and so inappropriately named that it is incredibly widely misunderstood.
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK. […]