Politicians tell us the UK is “borrowing too much” and faces a “debt crisis.” That's wrong. The government creates the pounds it spends, and what's called “borrowing” is really just it accepting deposits — or savings — from the public and financial markets. It's time to stop the scare stories and understand the truth.
This is the audio version:
This is the transcript:
The UK government cannot borrow.
As a matter of fact, I think that is true. And the vast majority of people will not understand what I've just said because they will say, "But the UK government says we have a debt crisis. We are borrowing too much. We may not be able to afford to repay it. So, what the heck am I saying by suggesting that the UK cannot borrow?"
And I'm saying it can't borrow because the UK government makes all the money that is deposited with it, and the amount of money that is deposited with it is even chosen by it. As a consequence, it isn't really borrowing at all. It's just offering people a savings facility, and we don't say that banks are borrowing when people deposit money with them, so why are we suggesting that the government borrows when people deposit money with the government?
Now, let me explain this.
The government creates the pound in the UK.
Nobody else can do so. The pound is our currency, and we only have one, and that is the one that the government creates.
It also creates all the UK's base currency. That is, the money that the government puts into circulation, including our notes and coins, that is the underpinning of the entire banking system of the UK.
Now, I know that on top of that base money that the government creates, UK banks do then make their own loans to people and businesses and that those loans also form part of the UK money supply.
But they can only do that because they're licensed by the Bank of England to do it, and in other words, every single pound of money created in the UK is directly or indirectly created under the control of the Bank of England, and so by the UK government, which owns the Bank of England and has done, outright, since 1946.
So, in other words, in this sense, the government is nothing like a household. It has its own bank, and it makes its own money, and it spends it into existence, and the issue is what happens then?
The convention, dating from the gold standard era, which ended in 1971, is that the government should not run an overdraft with the Bank of England.
Now, there were all sorts of technical reasons for that in the gold standard era that frankly do not need to worry us anymore because they're deepest, darkest history and absolutely irrelevant. And in fact, the convention that the government shouldn't borrow
from the Bank of England was ignored until 2006, because until that time, such overdrafts were run. But since then, overdrafts haven't been run between the Bank of England and the government. So for the last 20-odd years, we've been in this new era where the government insists that every day it must borrow whatever sum is required so that the government can clear its overdraft with the Bank of England, even though the overdraft in question is utterly meaningless because the government owns the Bank of England and therefore the fact it runs an overdraft with it is inconsequential. It's merely an accounting entry because the two balances net out with each other.
So we shouldn't be worrying about this, but we are. And as a consequence, the government deliberately plans to take in savings from the financial markets.
I stress the point, it takes in savings from the financial markets to ensure that it clears its overdraft with the Bank of England, and it then pays interest on the deposits that it takes, and they are labelled as government borrowing, which may have been technically true in the gold standard era, but isn't now, because this isn't borrowing out of a restricted money supply; this is borrowing out of the money that the government has created.
And to make that clear, the total amount of base money which the government has created and injected into our financial economy is the net total of its spending over all time, less the tax that it has reclaimed out of that total over all time, and the difference is what is left over, and that is fundamentally what we call the national debt, but it's actually the government money supply.
So, what we actually have is the government taking back by way of deposit the amount that it has already injected into the economy, which eventually ends up through the impact of the multiplier effect with those who can afford to save and want somewhere safe to deposit it.
That's how the system works, and they provide a banking facility to do that.
Now, quite explicitly, they already have one banking facility called National Savings and Investments, in which well over £200 billion is held at any point of time by people like you and me.
But for those who've got a lot more money to deposit, banks, pension funds, insurance companies, overseas governments, and overseas lenders who want to have a safe place to deposit money in sterling that they have available to them, then there is the government bond market.
But it's the same as National Savings and Investments, it's just inside this bond wrapper: that's the only difference.
So, in other words, for everybody, the government is running a savings facility, and it is not begging for funds.
It doesn't need to do that because it made the money in the first place, and it can't borrow back what it created because that money was created by it.
So what we should celebrate is the fact that people trust the government to hold their money, and they do, because it is the safest place to deposit it.
We shouldn't be talking about borrowing as a burden. We should be talking about the fact that the government is providing this incredibly effective financial mechanism to ensure that our economy works, and we should be celebrating it.
Bar one thing, and, of course, that is that the interest on these deposits goes to those with the most wealth in the UK because they are the people who can save. So there is implicit in the operation of this market, a redistribution of the national income from those with the least to those with the most, facilitated by the government, and policy would suggest that interest payment should be minimised to the greatest possible degree for the reasons of social justice and not because of government affordability.
What we are looking for is a system where it is sufficient for people to get safety for their deposit as an exchange for depositing funds with the government, and that rates do not need to exceed the inflation rate in the UK because people aren't making money by saving with the government, they're simply looking for and getting a safe place to deposit their funds.
So, there are serious policy implications of this fact. If the government doesn't borrow and it doesn't and it can't and it never will because it takes deposits instead, then we need to talk about gilts as state savings products.
We need to look at them as part of a whole range of mechanisms for saving with the state, which might actually improve the use of savings in this country.
We need to manage them so that they, first of all, become a source of productive capital in the UK, and secondly, to reduce inequality by reducing the interest rate paid on them.
But we shouldn't be using them as an excuse to create a fake borrowing limit for the government, which is used to scare people in the country to believe that austerity is necessary, because none of that is true.
The UK government cannot borrow. It creates the pounds that are saved.
What is labelled as debt is savings, put on deposit with the state, and let's stop the pretence and stop the austerity logic.
We should use state capacity for economic and tax justice, and that's what we could do if only we described government borrowing correctly and called it what it really is, which is savings with the government.
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Richard,
Thanks for this. I will admit I have struggled with the basic tenet that the government cannot borrow, but this morning’s blog is helpful and it is at last beginning to go in. I am also interested in your policy prescription that the government should do more to create state savings products and would like to know your view on National Savings index linked bonds, which I have held for some years. I regret that they have discontinued new issues of these products and have made the terms and conditions of the existing ones increasingly less favourable. I have never understood why. I’d be grateful if you could comment on what role revamped NS index linked bonds could/should play in a national savings strategy and why they have been run down?
This policy change is inexplicable. They still issue such bonds in the financial markets. Individuals are precluded. I cannot explain that.
I suspect that this is indeed true because in local authority where I work, a local council cannot go into (say) section agreements for highways with itself, because it is the local body with ultimate responsibility for highways. Similarly, it cannot serve notices etc., on itself. Locally, it is sovereign on a lot of issues. There are of course ways around this in local government in law, and they must be used, otherwise we’d be breaking it! All this is – in my view – is a product of sovereignty, ultimate responsibility.
All the same then, central UK government holds sovereignty on the money supply in the country (and much else). So why would a government borrow and then apply interest to itself if it can make it itself? In fact, was applying interest to the government funded CBRA legal at all, Mr Sunak?
So I for one am with you Richard on this.
Sovereignty of government is something that the rich vested interests in this country can’t stand but they love it in individuals, where apparently it is not a problem.
And whilst personal liberty is important, to pretend we exist independent of each other and are not intimately and inextricably entangled is quite absurd.
Thank you for this so significant clarification of the essential nature of the “National Debt”.
Might you have any thoughts, preferably after a well deserved spell of relaxation, as to why, and by whom, this “ misapprehension” has been and is still promoted?
It seems to be reported that H. M. G. plans to reduce the “National Debt” and use the “savings” to reduce/remove poverty, including chronic child hunger.
What might be your opinion of the feasibility and wisdom of such an approach?
Ditto the amount of money involved?
Reducing the national debt is about three things.
1) Reducing the mioney supply
2) Reducing orivate wealth
3) Incerasing private sector risk
How have any of those things got anything to do with chilod hunger?
What is the linkage?
Why make it then if they are not seeking an excuse for leaving children in need?
In reality no such policy can exist because the necessary relationships do not exist. And interest is not the missing link in the equation, in case of doubt.
Thanks Richard for an excellent explanation. I am going to use your commentary whenever I get involved in my next “discussion” with mates and family about UK “borrowing” and tax.
If we all start spreading the news hopefully we can successfully challenge the orthodoxy.
I hope so….
The act of creating money by government and licenced banks creates the medium we ought to think of as liabilities. The public then takes advantage of this medium by constantly creating its own liabilities, mortgages, bank loans, shares, corporate bonds, derivatives, etc. The potential for the public (which includes the licenced banks) to create too many liabilities or too few requires a regulator. This can only be a democratically elected government which has sufficient monetary literacy to be able to distinguish whether its actions in regard to regulating liabilities (including its own) are sociocidal or not.
I would look upon an uncleared debit on the Consolidated Fund as an asset, I don’t see how it can be considered a loss or expense for the reasons you give.
The corresponding credit lies within the social infrastructure, the provision of the oxygen of commerce and our daily life. I would say the fund is a misrepresentation since, as you say, it fails to cover the licensed activity that it essentially controls.
I admit I do not follow your opening sentences. Sorry.
I like to think of gilt issuance as an extension of Central Bank money market operations. Yes, the “Debt Management Office” is responsible for gilt issuance but the BoE, HMT, DMO are all under the same ownership – us, the people.
Central Bank open market operations are all about ensuring the correct level of reserves and interest rates in the banking system for smooth running but gilt issuance (in effect, longer term open market operations) should be all about the smooth running of the economy. Gilt sales (by government) drains money from the system and is an important complement to taxation that also drains money from the system. Why use one or another?
Well, tax can do a lot more to alter behaviour (eg tobacco taxes) and is a “permanent” drain of money… with implications for economic behaviour. It is however, slow – you can’t play aggressively with tax rates – people have lives to plan.
Gilt sales do drain money but it is not “permanent” – the owners of gilts behave differently than if they were taxed even if the money is still drained from the system. You can also ramp up or turn down gilt issuance much more frequently than taxes. It also transfers money to gilt owners.
Some MMT theorists often talk about there being no need for gilts but in the real world they are important – without them where would savers put their money? Well, they would buy other assets and deliver asset price inflation or convert to another currency and, although this is just a “pass the parcel” game the currency would devalue with uncertain outcomes for inflation, real investment etc..
As you know, I think government savings facilities are vital. I just wish to reframe what they mean.
I absolutely agree with your reframing of the government bond market but it is confusing for many folk.
When I deposit with a bank I am lending to it…. and they are borrowing. When I buy a (newly issued) gilt I am lending to the government (I pay money today and get it back when the gilt matures…. which looks exactly like a loan to me) – but is the government borrowing? Well, if I borrow I take the money and spend it, when a government borrows the money is destroyed… so it does not look like borrowing. Paradoxically, we seem to have a lender but not a borrower….. but the paradox is resolved by remembering that all transactions with government either create or destroy money.
I have noted the need for a blog or video on the duality of money whilst out walking this morning.
We do light- hearted birdwatching
CLIVE PARRY says: When I deposit with a bank I am lending to it…. and they are borrowing.
It is extremely rare for that process to be framed in that way, it’s something that really only would be done be someone trying to make a point.
When “borrowing” is used then the frame that is naturally invoked is of a person going to some entity and borrowing money, on terms set by the lender, where the money has to be repaid, usually with interest, with penalties for the borrower if it is not repaid in accordance with the lenders terms, it also invokes a secondary frame of the person not ‘living within their means’
Those frames are not accurate for depositing money in a bank or a government issuing bonds
That the standard “borrowing” frame is invoked when bond issuance is discussed is a problem, if a “depositing money with a bank” frame were invoked then it wouldn’t have the same connotations but trying to redefine “borrowing” in peoples minds, which is a highly ingrained, and at the personal level not inaccurate, frame, would be far harder than simply stopping using “borrowing” to refer to governments issuing bonds.
You are exactly right.
we use completely opposite narratives for deposits in banks and with the government. It makes no sesne at all.
I understood that government OMOs were sometimes used to combat short term induced inflation to soak up big unused savings? Is my understanding correct?
There’s a conflict though between further removing demand from the economy through gilts issuing and reducing base rate because the economy’s deflating. The rich want safe savings but the economy needs boosting. How do you resolve that? Well a good way would be to get the rich to invest in economy boosting assets wouldn’t it and obviously government deficit spending aids that if the resources are available.
The government coild create the link to do that, of course
What could the call it?
How about, UK plc?
UK Growth PLC. The opposite is the Reeves’s approach trying to achieve more UK growth by seeking to balance the government’s books by issuing more government debt! This really is Rachel from Customer Services who clearly has never understood or probably heard of the work of John Maynard Keynes!
I am alraedy drafting something on this…
There’s a challenge to both yours and Gary’s economics arguments by ‘The Artist Economist’. It’s on YouTube where he is claiming you are both right. From the MMT perspective and from the Neoliberal perspective that currently determined the rules.
The video is titled “Why Richard Murphy is Wrong to Say Gary Stevenson Is Wrong”. Sorry, I am unable to share it.
I watched it.
I disagree with him.
He also talked utter nonsense about my motivation. He could not have been more wrong on that.
So do many of the comments on it, which seem to agree with me in the main.
Yes, completely agree with you.
That a currency issuing government cannot be insolvent in the currency it issues (provided it is not being pegged to another currency or commodity)
is a fact, not an opinion, and ultimately is accepted within the economic mainstream.
“That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the one we have today, can produce such claims without limit.” Alan Greenspan, 1997
It’s acceptance is also shown by the fact that sovereign debt was traditionally referred to as “risk Free” in the markets, though it was also understood that convertibility is not guaranteed.
That a government maintaining its solvency could have economic consequences is not seriously disputed by anyone, either.
If someone wants to claim that issuing more money would have unacceptable consequences then that’s an argument they can reasonably try to make but to claim a currency issuer has, or is about to, “run out of money” is plain wrong and a deception.
Correct
Agreed
Thank you
Conventional economists say the government’s borrowing constrains its spending.
If instead we shouldn’t be worrying about notional overdrafts with the Bank of England, but see “borrowing” as the government offering savings opportunities, are there any positive and negative consequences to reducing the value or interest of these savings opportunities?
Richard, great blog.
Can you please try and get a column in the Guardian to counter the current twaddle espoused by it. I read with mounting horror the same old household analogy, need for austerity, led by the finance industry, etc. Today it had an analysis (?) ‘A UK headline wealth tax? It may be simpler to put up existing taxes’ by Anna Isaac which also linked to an article ‘ Lloyds boss warns Reeves against hiking taxes on banks as profits rise 17%’. Same old misunderstanding of money, borrowing, national debt leading to austerity and increased taxes but not necessarily on the already wealthy.
Thanks Richard for restoring some faith in humanity and the possibility that the government might do the right thing.
The Guardian does not take offered columns anymore.
Larry Elliott told me not to bother long before he retired.
Another Richard strawman fallacy – we certainly do say that banks are borrowing when they accept deposits. That’s why deposits are liabilities.
No person does so
No bank does so
No financial, commentator does so
They all say the bank has improved its position and strength
Why are you lying?
“Capital can be considered as bank’s owns fund rather than borrowed funds such as deposits”
Source: Bank of England “Bank Capital and Liquidity”.
Central banks, and those who work in banks are perfectly clear that deposits are borrowed funds.
They also know, directly from this, that this is why deposits have no loss absorbing capacity and therefore cannot and are not (ever) considered as capital.
Will be interesting to see if this makes it past moderation…
Please do not be an idiot.
If bank deposits have no loss absorbing capacity why do governments need to guatanteee deposits? That could not be required unless that was the case.
You people really are very stupid. I am being kind by saying so. Of course they are captial: the bank can lose them. So can depositors. What is it about that you do not understand? Or, what is it that prevents you from doing so – unless it is stupidity? Any accountant would: deposits are, after all, just loans of money to banks – and we have a much deeper understanding of capital than you who claim to be bankers (but probably aren’t) have, and recognise all loans are eventually capital to be lost.
When Richard or I insure our houses, we pay a premium to the Insurance Company. It seems to me that a bank takes out the equivalent of insurance with the Government against its potential liabilities. However, the Government pays the premium to the bank. If only we could find an insurance company that would do the same.
🙂
You are wrong. Not only CAN the UK government borrow, it DOES borrow frequently – to the tune of hundreds of billions of pounds every year.
This undeniable basic economics. Why on earth would you pretend otherwise.
It’s also clear that there is a broad concern about the risks of that government, which is why long-dated yields actually went up recently, despite the recent interest rate cut.
Politekly, why not enghage with what I said?
Even engage your brain instead of talking nonsense?
The great columnist Cassandra used to proclaim:
In the land of the blind, a one eyed man is king.
I think he was being modest, pointing out that some genuine knowledge, even if incomplete, is preferable to ignorance
We are in the land of the blind and your blogs have 20/20 vision. It must be very frustrating for you.
By the way, in Greek mythology, Cassandra was blessed with a gift of prophecy, but also cursed with the fact that no-one would ever believe the prophecies. Sound familiar?
Yes…
I saw someone say on a video on You Tube that the reason that Rachel from accounts (not their words) could not borrow to fill the ‘gap’ was that the last time this was done the markets had a ‘wobble’ and so, this time, the ‘gap’ has to be filled by reduced spending elsewhere. I may not have repeated it accurately word-for-word but I think is roughly what was being said. They certainly didn’t say it was savings.
Now, why is this comment being made and why is what are actually savings being called borrowing by the Govt?
Craig
Let’s suppose it is not true.
The last wobble was because the BoE announced QT.
‘Any accountant would: deposits are, after all, just loans of money to banks – and we have a much deeper understanding of capital than you who claim to be bankers (but probably aren’t) have, and recognise all loans are eventually capital to be lost.”
Wow, we’ve now moved on from bank deposits are capital (in direct contradiction to the Bank of England – I wonder who we think are the experts here…), to loans are now also capital.
lol
Incredible. This just gets better and better.
And the ongoing abuse of those pointing out this nonsense so continues – what sort of ego must you have if you’re first response to someone pointing out your mistakes is to resort to direct and blatant abuse?
I don’t see any other (credible) economists repeatedly abusing people just because they have
If you don’t know the live between loans and capital is decidedly fluid you really know nothing about finance at all.
You are, in fact, just trolling.
Abuse – idiot, stupid, troll – are all simply signs of embarrassment and an argument lost, @neil parry.
To fail to distinguish between deposits (borrowed funds) and capital (internal funds) and between loans (an assets) and capital (on the other side of the balance sheets) is indeed embarrassing especially for a qualified accountant.
But nothing new here, this (immediate abuse of anyone spotting an error) is a feature of this site.
Which is a shame because the points on money creation by both banks and government are valid and important. But mixing them up with factual errors that contravene facts presented by central banks and the BIS (see capital and loss absorbing capacity) merely weakens the rest of the argument.
If I was a professor with self respect and integrity I would post direct links from either Central Banks or the BIS to support my point and if that was not possible (clearly not in this case) I would admit that I was wrong…there is nothing to fear in being wrong, it’s part of how we learn.
Ah, now I see what my problem is.
I do not support the status quo that is creating the new regulation that will bring the next global financial crisis, in which yhou will no doubt expect to be bailed out again.
I won’t do that – because I can see the con-trick you and your ilk are seeking to foist on society again.
And why the abuse? Because some people never learn and you are clearly one of them. So, it’s not abuse. It’s observation.
Don’t call again.
If I understand correctly, the argument is that the inflationary effects of money printing would be dealt with by higher taxation. OK, so the govt prints more money and spends it on current spending and investment. Inflation increases domestically, and a balance is reached where inflation is held at an acceptable level, but with higher levels of taxation (so say, a higher rate of corporation tax, VAT etc.) to dampen down the inflation by reducing purchasing power. Why would anyone start a business if they were going to end up paying 50% corporation tax?
The ULK had rates when growth was much higher than now.
Business is much more vibrant in the EU here and in most comparable states tax rates are much higher.
But why are you assuming the rates you suggest? Increases will be finely graduated. You are assuming massive changes. Why? Just to support false narratrives, or is there some other agenda?
Please explain, because it’s very hard to argue with claims that have no foundation.
Well, no one knows what the rates would be; that’s part of the problem with the proposed change, it’s a huge step into the unknown. I’m not aware of any econometric work on just letting taxes control inflation.
Many commentators on here seem to want to increase spending “massively”, both for current spending and investment, and as we might agree on, the UK suffers quite badly from imported inflation when the pound falls in value. So, yes, tax rates might only increase by 1 or 2%, but they might also increase by a lot more than that.
As a practical point, unless you were planning to change tax rates multiple times per year, you’d probably want to set your rates slightly higher than you otherwise might lest you overestimates their effect on controlling inflation.
Let me suggest you why I think that you are wasting my time, and probably deliberately so.
As a matter of fact, the tax system we have is remarkably effective at keeping inflation under control in this country. Interest rate policy has not. It is the tax system that has achieved this outcome. We do, therefore, know that the current levels of spending matched with current levels of taxation deliver, broadly speaking, the control we need. So what are you talking about when you suggest we have no idea what tax rates will be required? That is very obvious nonsense and it shows that you have put no thought into what you have to say.
Then let me address tour, to be blunt, cross comment that people on this blog want “massive increases” in both current government spending and investment. You mean that because we want £2.5 billion to be spent to take well over half a million children out of poverty as a result of ending the two child benefit cap we are reckless. Does that spend really worry you? Do you really think that that will destroy your well-being? Do you really have no concern for the well-being of those children, or that of their parents, at all? Are you so blind as to the consequences of leaving children in poverty that you cannot work out that many of those who are left in this state will be under educated, underachievers, possibly being in custodial sentences, have significant health problems, and as a consequence massively increase future costs for the state? Is all that really beyond your imagination? Are those “massive” (amd actually utterly inconsequential) increases that I call for of this type so wild then, or are they all actually the reasoned suggestion of somebody who can think about the consequences of current behaviours?
And, when it comes to investment, do you want our planet to fail? Do you want children to live in a country where flooding, fires, failed transport systems, energy that doesn’t work, and much more is normal? Do you also want to live in a country where a great deal of currently fertile land will become unavailable because it will have been polluted by saline water? Is that your wish? Is that why you are terrified of massive investment to prevent these things happening?
WILL CONTINUE IN SECOND COMMENT
CONTINUED
If that is your thinking, then my description of people who come here with opinion like yours as crass, stupid, ignorant or foolish, is entirely justified, and I make no apology for saying so.
You can, of course, put me right, but frankly, if you try to do so, never come up with such crass comments again, because that is what they are.
The BoE article ‘Bank capital and liquidity’ uses phrases such as “can be considered as”, this immediately tells you the authors are presenting a framing, “can be considered as” is not the same as “it is”, the difference between the two could be said to be the essence of framing.
Along the way they acknowledge alternative framings exist as in “While it is common usage to refer to banks ‘holding’ capital”, an alternative frame they reject.
Most people have no interest in the framing banking uses internally. They have a simple frame for borrowing, as explained in an earlier comment, with a notion of “living beyond means” = bad, not a frame bankers are keen on. People have a separate frame for deposits as storing their money in the bank which they can take out whenever they feel like it, a frame ‘Bank capital and liquidity’ recognises in
“Retail depositors generally withdraw deposits as and when needed, to pay for the goods and services they want to buy.
People have a separate frame for bank lending which includes a false notion that they lend deposits to other retail customers, this appears logically inconsistent with their ‘deposits frame’ but it’s not unusual for people to use inconsistent frames.
Richard’s article was about the topic of framing of the Government Issuance of bonds, so how does ‘Bank capital and liquidity’ frame government bonds:
“Liquid assets (such as cash, central bank reserves or government bonds) appear on the other side of the balance sheet as a use of funding and a bank holds a buffer of liquid assets to mitigate against the risk of liquidity crises”
and
“if a bank relies on a high proportion of unstable or ‘flighty’ sources of funding for its activities, such as short-term wholesale funding, to avoid the risk of a liquidity crisis, then it will need to hold more liquid assets.”
It also discusses a regulatory requirement for “liquid assets”
So its framing of government bonds is as a stable, safe, “use of funding” which banks require to maintain liquidity and balance “unstable activities”
not a frame that sits well with the conservative frame of them being ‘government borrowing dependent on the goodwill of investors who could choose not to buy them’.
Thanks.
Could we make a complaint to the BBC every time it refers to government borrowing, as factually wrong and misleading. It would at least raise awareness of the issue? And if the BBC received enough complaints they might have to change their language, with knock on effects elsewhere.