Rachel Reeves says she needs to raise taxes to “balance the books.” But that's not how government finance works.
In this video, I explain why that tax doesn't fund spending, why raising taxes on most people now would kill demand, and why idle wealth, and not workers, should be taxed if anything has to be at this moment.
The government's job is to sustain spending power, not drain it.
This is the audio version:
This is the transcript:
A lot of nonsense is being talked right now about the fact that Rachel Reeves is going to need to increase taxes in the UK because she has to balance her budget. And the truth is, we really do not need tax increases at this point of time because the sole purpose of taxation in this situation is to take money out of the economy that the government has already spent into it, and as a consequence, tax reduces spending power.
And as almost everybody in the UK right now knows, Britain needs more spending power and not less, and so we don't need tax rises, with one exception, and that is, of course, for the wealthy who hoard cash and assets that do nothing for growth. They should be taxed more. Everybody else should, if possible, be taxed less right now, and I bet you Rachel Reeves will get everything wrong.
Let's just stand back and talk about this. I'll remind you yet again that most politicians in this country still pretend that tax funds public spending.
And they still pretend that a government must balance its books as if there's a magic formula that guarantees economic success, which is defined as tax in equals spending out, even though no government in the UK has done this for 25 years, and in essence, for 330 years.
The fact is that all of this is nonsense because in truth spending always comes before taxation, and that's been true since time immemorial when Kings spent their gold into the economy to induce soldiers to fight for them and then taxed those very same people who had received the gold from those soldiers who had gone on and spent it to make sure that the state coffers were replenished with that gold once more.
The system, of course, doesn't work on the basis of gold now, and coins don't matter inside the taxation system, but the fact is, government spending has to come first, or we wouldn't have the cash that we need to pay our taxes. And this is part of the whole cycle of economic management that the government must undertake, but which, unfortunately, neither the UK Treasury or any Chancellor of the Exchequer has ever seemed to understand.
What is more, neither of them seems to understand that there is no sane organisation of size or value in the economy that seeks to balance its cash flow, which is what they make to be their sole priority. They will try to keep customers satisfied. They will try to keep staff satisfied. They will try to comply with environmental constraints. They will try to ensure that customers are kept happy by not being pursued too fast to pay their debts, or suppliers are kept happy by not being delayed with regard to payment. All of these things will matter to them, as will investment, but balancing the cash flow? They know they have bankers to manage that process for them, with whom they keep good relationships as a consequence, and the government can do exactly the same by being on friendly terms with the Bank of England.
So raising taxes right now would just remove the fuel from the economy that it needs to grow, which is what Rachel Reeves says she wants to happen, and yet what she's doing is setting out to destroy demand created by government spending in excess of tax raised. You couldn't be more stupid than that if you were Chancellor of the Exchequer, if you set out to be that daft as a matter of policy.
Tax rises now would make things worse. I can't put it any other way. Ordinary households are already struggling with real-term pay cuts at present, and taking more from them will kill demand, in particular in local economies, and demand will keep people in jobs. Austerity thinking is economic self-harm dressed up as responsibility, but it's nothing of the sort.
The exception to all of this is taxing idle wealth. Idle wealth needs to be taxed, partly because the amount of inequality in the UK is rising considerably, and that is because there has been asset price inflation, when there has not been inflation in real earnings in the economy.
And the wealth that the wealthiest put aside is idle capacity within the economy. It's potential unrealised. It's money sitting out of circulation. It's opportunity lost. It's money that's stagnant. It is money withdrawn from participation. It's as if the wealthy don't want us to get their hands on the money because we might benefit from it, even if, coincidentally, they do as well, which, as a matter of fact, they would.
So, because they refuse to use their money for public purpose, which is what they should do, it's down to a fair tax system to do that for them, by force if necessary, because, of course, a tax system does have that threat implicit within it.
A fair tax system would recycle idle wealth into productive use.
It would create investment.
It would generate new opportunities for people to earn and work.
And it would deliver greater public services.
And the consequence of all of them would be that there would be more healthy, wealthy people lower down the economy, who would, as a consequence, spend more and therefore create more value within the economy, with the result being that the wealthy would then get wealthier because the companies that they own would see the benefit, but they don't understand that.
So the result is, and the consequence is, that we don't need to talk about draining money from working people, which is what Rachel Reeves is going to do. If we want to grow the economy, we have to keep spending power with those people. Instead tax should be used to curb inequality and not crush demand, and the idle wealthy must be made to pay their shares so that everybody else can thrive.
That's how we fund the future.
That's how we rebuild hope. That's what Rachel Reeves needs to do.
And that I'm afraid is what almost certainly she won't do.
So, what do you think? At this coming budget, should Rachel Reeves be taxing ordinary people more? Should she be taxing the wealthy more? Should she be taxing no one more? Or maybe you don't know.
Let us know. There's a poll down below, and we do take note of your answers. Thanks a lot.
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With core inflation running at 3.8% and living in an MMT world whether or not it’s acknowledged, how does government tax that excess inflation away without also raising the amount collected?
You have to accept the premise that inflation needs to be restrained and come down a little of course.
Cut VAT
Job done.
Or base interest rates?
There are three downsides to seeing cutting VAT as a tool in the MMT toolbox to reduce inflation. You increase the money supply at both the consumer end and also the government end as they’ll be printing money to make up the difference in receipts. Thirdly the VAT effect on inflation will come out of the figure after 1 year. On the upside there is that year one effect.
I wonder if there is any good analysis from the MMT view that reducing consumption taxes really does have the effect claimed. Especially when MMT in this parish at least you control inflation by taxing it back.
Oh dear. You really do not understand multiplier effects, do you? If you can’t do the most basic macro thinking there really is no point in engaging with you.
I would tax the wealthy and aim to tax what they consume – certain classes of goods and services – plus also curb the reward card system of tax breaks in the tax system for these people who have – from what I can see, had a field day for some time at everyone else’s expense for some time.
Dear Rachel, Tax idle wealth not productive work. Put idle wealth to productive use.
Agreed
Sorry Richard!
Song didn’t copy in properly
Is this better?
Sing Truth to Westminster
LAND OF HOPE AND GLORY
We sang patriotically
On “BBC Last Night of The Proms”
SO WHY HAS ALL HOPE GONE?
Wider still and Wider Inequality grows
100 BILLION POUND BENEFITS FOR THE RICH R
Benefit cuts, Tax Rises for the rest.
21 MILLION ARE IN POVERTY! P
BENEFIT CUTS, TAX RISES FOR THE RICH! M
R https://taxingwealth.uk/2023/09/13/the-taxing-wealth-report-2024-recommendations-to-date-and-their-suggested-value/
P https://commonslibrary.parliament.uk/research-briefings/sn07096/
M https://www.taxresearch.org.uk/Blog/2025/10/21/why-most-tax-rises-now-would-be-economic-madness/
Sorry Richard
Still didn’t work.
It is an 8 line song
The single capital letters (R P M) at the end of the lines contain the hyperlnks to the sources.
Please forget it.
Probably no use anyway.
Bill
I thought it still worth sharing
Thank you for correcting my formatting Richard.
I have read your posts daily for many years, so now have a better understanding of Tax, Debt, Money – and Neolib Politicians. It is a lot to remember, and now I’m 80, I am having trouble remembering points when trying to explain to others.
So I write easily remembered verses to remind me of the important points, and add hyperlinks to the sources so I can go back to the source to refresh my memory of the details, and sometimes pass the verses to others to help their understanding.
This morning’s post was the perfect hyperlink for the last line of the verse, which is why I (tried) to post it!
Your Quantum articles are very helpful, giving a coherent structure that I think I will be able to fit verses to, again to help me explain the relationships between them
Many Thanks for all you and your family are doing
Bill
Thanks, Bill. Go well.
I’ve never understood why the NI is not payable at the same rate for the whole income above the threshold. And to be honest NI seems a very regressive tax hitting employers and lower paid workers much harder than those best able to afford it. Other than for benefit entitlement and state pension contributions it would seem fairer to combine income tax and NI. Yes this would then hit wealthy pensioners who currently don’t pay NI, but with the rising pension age many workers are paying far more contributions than needed for a full state pension, so 8 don’t really see the difference.
The need for a separate NI is, I admit, becoming increasingly unclear.
When something becomes morally inexcusable (like upper thresholds for NI, like higher rate pension contribution relief, like 20% VAT, like low rates of corporation tax cf income tax etc etc) then those in charge tend to just not talk about it.
That way, the public can be kept ignorant, while they are encouraged to worry about “the Boats, the Boats!” by Fa***e, the Fantom of the Beaches.
The upper tax rate relief for pensions needs to go. Something Richard has stated many times. Tax relief is supposed to encourage people to save, not reward those who can already afford to do so. There should be a flat rate for pension contributions tax relief and dare I say a maximum amount that is subject to tax relief each year. If you can afford to contribute more than this why you do you need government help?
Could this be an attempt to discredit taxation, and therefore government, or is it just a case of politics forcing the bad decisions on those least able to complain? Reeve and Starmer won’t be invited to the best parties if they tax their mates.
Might the raising of taxes which have less consequence for the wealthy than for the regular ditizenry not be madness but part of a consistant, if hidden policy?
Might it be a facet of semi-international/international “war” to prmote Thatcherism, privatiszation and financialisation to enable the rentier class to gain wealth by domination of labour?
Might its component policies include the “capture” of governments to reduce/obstruct public social spending which does, and could further, impoverish the regular population. [From the article below]
https://michael-hudson.com/2025/10/managed-democracy/
I am confused. I agree that the UK is too unequal and is becoming more so, and a rise in equality would be good. But then I pass rows of ticky-tacky semis, and I think how much I value past architecture, cathedrals, stately homes, amazing enormous gardens, castles — enormous diversity. Paintings, music in the past were commissioned by the wealthy — we’d have none of these in an equal society. And, for example, rewilding as at Knepp couldn’t happen in an equal society. Past inequality has, I think, given rise to present psychological wealth. Is this still operating, or are today’s rich simply acquiring, collecting existing objects, in a parallel to the financial world’s trading not investing?
The evidence is that the world’s wealthy are now just selfish.
They were less so in some (not all) eras – building for the future, even if onoly to perpetuate family power. Now they don’t build at all.
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