I offer this video on MMT this morning without apology.
I know I have tackled this issue before now, but this, I think, is my best yet.
This is not, in fact, one video. There are up to 16 short videos that might be made from this.
People keep asking: “When are we going to do MMT?”
That question is built on a misunderstanding.
Modern monetary theory is not a manifesto, and it's not a magic “print money” promise. It is an explanation of how the monetary system already works, in the UK and elsewhere. It describes what government spending really is, why taxation does not fund spending, and what “borrowing” really means in a sovereign currency system.
In this video, I explain:
That the UK government creates the pound.
Why government spending must come before tax.
What tax is actually for (inflation control, demand management, and resource shifting).
Why government bonds are a savings product, not borrowing.
Why deficits create private sector net financial assets.
What the real constraints on the economy are.
Why austerity is always a political choice
MMT doesn't tell you what to do; it tells you what's true. And once we understand that truth, we can finally have an honest debate about policy, democracy, and the society we want.
The audio version is available via this link. For some reason best known to itself, it will not embed in this post.
This is the transcript:
People keep saying to me, "When are we going to do MMT?" - or, modern monetary theory, which is what those initials stand for - but that's the wrong question to ask. MMT is not a policy. It's an explanation of how money works, and in that case, the claim that we are waiting to do MMT is a misunderstanding.
It's not a manifesto; MMT is an explanation. It describes the real monetary system we already live in.
When are we going to do MMT? Now. We are doing it today is my answer to that question, but the point is, most people don't understand that, and I want to clear up this basic confusion in this video.
MMT does not tell us what we want to do or what we should do. MMT tells us what is true about money and about how government spending actually happens; that's its purpose. The big error that people make is that they think that MMT is a programme, or a set of promises, or a "print money and spend initiative", but MMT is not a policy proposal; it's a framework for understanding the monetary reality of the world we live in.
Let me make a simple comparison. Think of physics. Gravity explains what happens. It's called a theory, by the way, and it does not then tell you whether to jump off a cliff. MMT is like that. It's also a theory, but just like gravity, modern monetary theory explains how the economy works, but it doesn't write your budget for you or tell you what your politics should be, and this is really important. MMT describes what money is, how government spending occurs, what taxation does, why borrowing is different for states and households, and what constrains government in reality, and this is important because most people don't understand any of those things.
So, let's start off with the fact that MMT makes clear that the government creates our currency. In a sovereign currency system, the state is the issuer of our money, and that's true in the UK. Our government creates the pound. It does not get its money from anywhere else; it makes it. It creates the money that we get when it spends, and unless the government spends and creates deficits, there is no government-created money in our economy. And that's really important because government-created money is the bedrock on which everything runs.
Then, and this is also important, when the government has created money, it has to control that money supply because in the UK, each year the government spends well over £1 trillion. And of course, we cannot have an increase in the money supply of that amount in the UK economy each year, or we would have hyperinflation. And so the government has to create a tool that controls that risk of inflation, and it has got that tool, it's called tax. That's it; that's what tax does. Tax does not fund government spending. It can't, because the spending has already been paid for by creating an overdraft between the government and the Bank of England. Instead, tax is used to reclaim the money that the government has spent to bring it back into the Bank of England, to cancel that overdraft and to therefore control inflation. Everything else flows from that fact.
There are lots of interpretations that flow from this, and they're really important. The mainstream media story is that the government spends the taxpayers' money, and that the government borrows money from the financial markets, and that deficits are irresponsible and that the state must balance its books, and the state is like a household. The fact is that every single one of those stories is wrong. Households use currencies, governments issue currencies; they are, therefore, fundamentally different. Households can, as we all know, run out of money. Governments can always make payments in their own currency because they can always create the currency in question. The consequence is that managing a household and managing a government are utterly different things, and this is not a political claim. It is a simple observational operational fact. These are different activities, and the sooner our politicians, the sooner our economists, and the sooner our commentators realise this, the better off we will all be because we'll get better economic policy as a consequence.
So, how does state spending actually happen? Let's just run through the details because they are important, because this is a system which is heavily controlled, despite all the claims that are made about MMT. First of all, there is an absolute legal requirement that before the government spends money, Parliament must approve it. That is what budgets are about, by the way. They aren't about changing tax. They aren't about making announcements about changes in economic policy. Those get the headlines, but the truth is the budget is there to authorise the government's spending to make it legal, to authorise the Bank of England to therefore make payments when the government gives it instructions to do so. That is what the budget is about, and when the government issues an instruction to the Bank of England to make a payment of whatever it might be - it could be my old age pension, it could be your teacher's salary, it could be to pay for a school, it could be for whatever - the point is, when the government issues that instruction, so long as it is legal, the Bank of England is legally required to make the payment and has been incidentally since 1866, which makes the term modern in modern monetary theory a bit of a misnomer. There's nothing actually very modern about this at all.
What happens
then? When the Bank of England issues a payment, a bank account is credited, and new money is created in the process. What that means is, then, that spend always comes before tax. Because tax has to be paid in government money the government has to spend the money into existence before the government can reclaim it by way of tax, otherwise, we'd have that proverbial chicken and egg problem, which came first, the tax or the spend? Well, you couldn't tax if there was no money, and the money only exists because of the spending; therefore, the spending has to come before the tax. Let's be clear about it. There is no debate to be had here. This isn't a statement of ideology. It's a simple, logical statement of fact which central banks agree with around the world. The Bank of England, the Bank of Canada, the Bank of Norway, Germany's Central Bank, the European Union's Central Bank - all have agreed that this is right.
What does tax do then? First of all, it creates demand for the currency. By that, I mean you have to use the pound if the government insists that you pay your tax using the pound that the government has created. It won't accept dollars. It will let you pay using euros, but they will be translated into pounds before the balance is settled, so that's just a money exchange system. You will always eventually have to use pounds, and they will always insist on that because if you must pay your tax in pounds, you are then basically always going to use the pound to undertake your transactions in the economy, and that means the government, by controlling the money supply, can control the economy and that is one of its goals as a government.
So, tax achieves that goal for the government, but it also delivers economic stability for you. And it does that by removing money from circulation. Tax takes money out of circulation, which the government has already spent, and the consequence is that it reduces inflationary pressure. In fact, most of the time, and for most purposes, this is the best tool a government has got to control inflation, and it can control almost all inflation this way, except that inflation, which comes from external shocks to the system, from activities taking place outside the UK, which are usually, let's be candid about this, beyond our control.
But, tax does some other things as well. It does, for example, shift resources from private use into government use by reducing demand for private consumption. And it can be used to change economic behaviour. It can favour some types of consumption over others. So, for example, healthcare and education are favoured by the VAT system over the consumption of other products and services. Foodstuffs are favoured over alcohol and so on, and tax can also redistribute income and wealth. So tax is a powerful instrument for government, social, and economic policy; let's never forget it, but it doesn't fund government spending.
So what about borrowing? Does the government have to borrow to spend? No, it doesn't. Households might need to do so when they buy large ticket items like houses, or cars, or whatever else, they go out and borrow. And that's a normal part of life; most of us have done that. I know, I have, so I suspect you have too. But governments do not need to borrow to get money. Why? Because they make the stuff. So why would they borrow it? And they don't, as a matter of fact, need to ever borrow money from the City or anyone else.
Bond issuance, the things called Treasury bonds or the national debt, or gilts - the terms are interchangeable - are issued by the government as a favour to the City of London, above all else. They're tools of monetary management. They are a way to offer savings mechanisms for billions of pounds and even trillions of pounds when people in the City have vast quantities of money to deposit, and the only safe place to put it is with the government. Why? Because the government is the only person who can guarantee to repay such sums when banks can't, because banks can't create money to repay sums that have been deposited with them, but the government can.
So that is the reason why bonds are issued, that, plus they're a mechanism to help control interest rates, but we'll ignore that for the minute. The fact is, government borrowing is not borrowing; it is simply like running a savings scheme. In fact, we know that because around £250 billion in total of government, so-called borrowing, is in fact things like premium bonds and money saved with National Savings and Investments by anybody, like you, who wants to put their money with the government instead of with their local high street bank or building society.
So let's then talk about the deficit because this is important, and modern monetary theory, MMT, helps us understand it.
The deficit arises when the government spends more than it taxes back; that is all a deficit is. There's a difference between the amount of money that the government spends into the economy in a year and the amount it taxes back, and the government's debt is the cumulative total of the amount by which the government has spent more than it has taxed back.
So if our total national debt at present is supposedly around £3 trillion, that's the total amount since 1694, when the UK national debt began, that has been spent into the economy and not taxed back.
What this then means is that the private sector has received new net financial assets as a consequence of the government running a deficit, and this is the fundamental insight that modern monetary theory brings to the whole issue of the deficit. A government deficit creates private assets.
How do I know? Because, quite literally, government bonds are private assets. They're owned by private banks. They're owned by private pension funds. They could be owned by private individuals, and premium bonds are owned by private individuals.
And if you want to understand for how long this has been going on, go back and read some Jane Austen novels.
Mrs Bennett was able to appraise the value of Darcy as a son-in-law by looking at how much interest he earned in the government's 4% bonds. If I remember rightly, it was £10,000 a year, meaning that he was worth £250,000, which was a staggering sum of money at the time, and therefore made him decidedly eligible indeed. But the point was that the government deficit was a private asset, and this is always the case. Fortunate young people will inherit the government's debt because they will get the private asset that it represents.
So, in this case, what MMT says is something quite radical. What it says is that money is never a constraint upon government activity. We're told it is. We're told there's no money to be had for whatever project we want. We are told that we've run out of money to pay additional pensions. We are told we can't afford to pay benefits. We are told this, that and the other, and it's not true. Never is it true, because the government can always create money. That doesn't mean to say it's always wise to create money because there are real constraints, but the constraints are in the actual economy and not within the Bank of England or the Treasury.
The real constraints are the availability of real resources, like people trained to do the jobs that we want done, skills which people haven't got, and productive capacity, which has not been invested in, or energy and materials that either have not been generated or have not been imported or whatever is necessary. And, of course, there are also ecological limits. Those things, real resources, labour, productive capacity, energy, materials and ecological limits are what constrain activity inside our economy; money can't.
As Lord Keynes once said, "We can afford whatever we can do." What he was saying was, these real constraints determine the level of actual activity we can undertake in the economy, and if we can undertake it, we can afford to pay for it, and that was true.
There is also a reality that inflation is always possible if the government tries to spend when resources aren't available. MMT highlights this. It is absolutely untrue that MMT will encourage inflation. MMT is obsessed with controlling inflation. It puts it at the very centre of its theory, and what it says is that if spending outruns capacity, prices will rise. It says that that is unwise, and that means that the control of inflation is not a monetary issue. It's an issue around demand and resources. It says we shouldn't be focusing our control of inflation in the Bank of England, which is just all about managing the money supply. We should be looking at what's going on in the real economy instead, and let's not pretend this has anything to do with money. Let's look at the real economy, and let's not offer excuses, which is what the Bank of England does.
So, let's begin to draw some of these arguments together and ask the question: Why does modern monetary theory so annoy people in this case? And that's because it exposes that austerity is always a political choice. If someone believes that austerity is a good thing and that people must pay the price to ensure that inflation is controlled and wealth is protected, then they will not like modern monetary theory, and we saw a recent example of this. Rory Stewart had a go against modern monetary theory when interviewing Zack Polanski on the The Rest is Politics channel, and really, what he was saying was that he would prefer austerity to actual spending to deliver a vibrant economy for the people of this country. Now, you know, his political spots.
What MMT also exposes is that the "There is no money left" argument is entirely untrue. There's always money left over because the government makes the stuff, but it also exposes something else. MMT makes clear that unemployment is not inevitable, and that public investment is usually affordable so long as resources are available, and that markets don't fund the state.
Now, all of those things deeply upset the City of London. They like unemployment. Our central bankers want unemployment because they believe a pool of unemployed people lets them control inflation. They make unemployment deliberately. One in twenty people in the UK at present is unemployed at the choice of the Bank of England and our politicians, who do not care that those people's talents and resources, let alone their well-being is destroyed as a consequence, all for a false understanding of inflation.
And we are not getting public investment in the way that we need because the government says it can't afford it, when that is nonsense. If the resources are sitting available and we know they are, because one in 20 people in this country is unemployed, then we could have public investment now.
What's also true, and this is why the City of London is annoyed by modern monetary theory, is that the City doesn't fund the state. That's what MMT says. It points out the truth, and they don't like it because they want to be in charge.
So, does MMT imply big government? No, not necessarily. MMT does not say, and this is where I started this video, spend more, tax less, nationalise everything, run permanent deficits and that inflation doesn't matter. It just says, be honest about the reality of the economy. Talk about the real economy. Don't talk about money as if money is the real economy. Money is the mechanism that we use to exchange within that economy; that's something different. Let's talk about real people, real resources, the real climate change that we have to face, and everything else. Let's talk about those things. But that does not mean MMT lays down your agenda. It gives you the tools to understand your agenda, and that's something fundamentally different.
So, this is where policy begins. Once you understand money, you then ask, what should the government spend money on? What should we tax and why? What level of inequality is acceptable? What is our climate obligation? What is our definition of a good society? MMT again doesn't answer those questions; politics does, but MMT empowers us to ask these questions, and that's why it's important, and that is absolutely critical to understand.
MMT is not a promise; it is just a description. It tells you how the plumbing of the economy works. It explains the operating system. It clarifies what is possible. It reveals what is a choice. It exposes what is a myth, and it lets us decide on policy in a more informed manner, and when policy failure has become absolutely synonymous with economics of late, that is why MMT is so important.
It changes the focus from money to policy.
It changes the focus from finance to people.
Let's talk about that. Let's throw aside these false monetary stories that are used to constrain us, and instead, let's talk about a simple, truthful description of money in our economy, because that is what we need, because we can only have democracy when we understand how our economy works.
Let us know what you think. There's a poll down below.
Poll
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Excellent narrative.
Suggestion: tabulate the main points with a separate column for the nonesense that the flat-earthers come out with.
As for “all for a false understanding of inflation” – the banksters know exaclty what they are doing, the idea that “bond markets call the shots” suits them.
I will look at that.
Strictly speaking, gravity is a fact that is explained by the theory of general relativity, in the same way that evolution is a fact explained by the theory of natural selection. So the government creating new money every time it spends is a fact explained by modern monetary theory.
We know MMT isn’t a “fact” because it fails to account for international trade correctly, as explained in detail by Steve Keen.
Politely, MMT is a fact.
Someone once described the fact incorrectly.
That does not stop the fact being a fact.
You are wrong.
Newton’ law of Gravity (or indeed, Einstein’s General Theory) doesn’t predict where a naval gun shell will land. Gunners adjust for atmospheric pressure, wind direction, latitude, direction of fire etc. to get a better description of a shell’s trajectory. Doesn’t make Newton’s theory of gravity “false”.
Equally, MMT does not do everything…… but it still “true” and, more importantly, useful.
To go back to the plumbing analogy.
MMT tells us how the economy works in the same way that the manual tells me how my heating system works.
However I still have the choice to turn the heating on, up, whatever suits my personal needs in the same way Governments can decide to spend or not and what to spend money on depending on their political persuasion.
Correct.
Thank you. It needs to be said again and again – MMT is politically neutral.
People on the right refuse to accept it because they see MMT as automatically meaning more government control/tax/spending.
Now, it is perfectly legitimate (wrong, in my view, but legitimate) to argue that we should keep unemployment high in order to meet other policy objectives…. but just shouting TINA (There Is No Alternative) is not an argument. The right need to justify it in another way.
Equally, the left can just say that MMT allows us to spend on everything we want – it is still always a choice about the allocation of real (limited) resources… merely that money is not one of those “real limited resources”.
So, as you say, MMT does not mandate any particular policy…. but it does allow a real debate to begin.
Thanks
More accurately Clive, the right hate MMT because it completely debunks their “we can’t afford, there’s no magic money tree” narrative.
I absolutely agree with your opening statement.
“I know I have tackled this issue before now, but this, I think, is my best yet”
Pdf downloaded, to be printed out and pinned on a wall.
Thanks
Excellent Richard. Clear and succinct.
Richard…. this is just SO apposite.
It’s precisely because it is fact that we need to find a way to drop the ‘Theory’ nomenclature.
Im so pleased you called out Rory Stewart on this. It really really annoyed/disappointed me in his interview with Zac Polansky.
I agree Lloyd. There’s an old saying the only good Tory is a lavatory. Well, having read his book, I would add Rory Stewart to that very short list. I was horrified, therfore, to see his ignorant performance on the podcast. He’s an intelligent man, I think we could win him over.
I am very pleased to see you holding the line on MMT and fully endorse the comments from others in support of it above.
I am minded so ask ‘Who is it that denies the truth?’.
The answer is that it is always vested interests – whether they are pleonexic , fascists, megalomaniacs or criminals.
Isn’t it both a theory and fact? Like evolutionary theory.
People always confuse theory with hypothesis (and others use that to their advantage). A hypothesis is an idea that you have to test. A theory is something that is substantiated by all available evidence and repeatedly seen in observation and testing. So being a theory actually gives it more weight.
So, I’m fairly sure it IS a theory?
It is a theory as far as I am concerned.
It’s a theory or even a theorem like Pythagoras’s theorem, beyond dispute.
Theory/Fact – whatever.
But it still amazes me that in the real world we have austerity, and yet the Central Bank Reserve Account is grossly enlarged and also pays out interest only to support casino banking, the ability to bet against market actors and such like and other derivatives.
There is no shortage of imagination or ‘magic money tree’ thinking in the bloody CBRA is there?
And let’s be honest – do we really have to think too hard about why that is? It’s obscene.
Thank you, this is an excellent explanation that I intend to share with others, including my MP.
One point that I find difficult, is how does MMT apply to the Euro. If the Euro is produced by the ECB, how is it distributed through the Euro user nations? Does Tax and Spend apply to Euro user nations, ie do they have to gather the funds for their spending through tax or is there a mechanism whereby they can instruct the ECB to issue payments on their behalf?
This is an important question, because MMT applies to the eurozone, but the conclusion is different because euro user states are not currency issuers. They are, in effect, currency users.
The euro is issued by the European Central Bank system (the ECB plus the national central banks, otherwise called the Eurosystem). But the key point is that EU member states do not control the issue of their currency. Italy, Spain, Greece, Ireland, and so on, cannot as such instruct their own central bank to create euros to fund government spending in the way the UK Treasury can instruct payments in sterling.
So euro governments do still “tax and spend” in the operational sense: they collect taxes, they issue bonds, and they use those resources to finance spending. They spend by instructing payments through their national central bank and commercial banking system, but they cannot create net new euros at will. The ECB ultimately controls the conditions under which liquidity and reserves are provided to them.
We saw the consequence in 2008. Eurozone countries were in positions more akin to those of UK local authorities, or US states, than to that of the UK government. Technically they can bust, as Greece evidenced. At the very least, they face genuine solvency risk, and markets can price their debt like private debt.
So they question is, can they instruct the ECB to pay on their behalf? No, not directly as a matter of democratic control. The ECB can support member state bond markets (as has happened), but it does so on its own terms and with conditions, and it has often used that power politically.
This is the heart of the critique: the euro created a currency without a unified fiscal authority, leaving states responsible for social welfare without monetary sovereignty. As a result, austerity has been imposed, often selectively, not because resources were unavailable, but because currency control had been ceded.
So: MMT still describes what money is and how it works, but it also shows why eurozone states face much harsher constraints than the UK.
FYI still a pertinent paper on the flaws of the euro
Wynne Godley Maastricht-and-all-that
https://www.lrb.co.uk/the-paper/v14/n19/wynne-godley/maastricht-and-all-that
This is why BREXIT was also so stupid. We had the best deal anyone is ever going to get. It was smart to keep the pound so we have ‘sovereignty’ over many more fiscal decisions. The EU will not now allow us back in without acceptance of the Euro, as the rules currently stand.
This is not true. The euro is not a take it or leave it. Ask Sweden.
Ah. I see your answer in the other MMT and Euro thread. Commit to it, but never ever actually join!
You’ve nailed it Richard! This is exactly why the “when are we going to do MMT?” question is so corrosive: it lets politicians and pundits pretend that the constraints they hide behind are natural, when in fact they are chosen. If the state is the issuer of the currency, then “there is no money” is never a statement of fact, only a statement of priorities. We see that every time the Bank of England quietly expands reserves to backstop markets while ministers tell disabled people, carers and public sector workers that the cupboard is bare.
What your explanation does so well is strip away the theatre. Once you accept that government spending creates the pounds that taxation later withdraws, the whole austerity story collapses. Deficits stop being a moral failing and become what they actually are: the mirror image of private sector savings. Unemployment stops being an unfortunate inevitability and is revealed as a policy choice.
That’s why this matters far beyond economics. If money is not the real constraint, then the real argument is about what we value: care or coercion, public investment or manufactured scarcity. MMT doesn’t tell us which to choose, but it removes the alibi for choosing cruelty and calling it necessity.
Yes, definitely your best yet and I think the comments on YouTube reflect this
Thanks.
So, playing devil’s advocate, as you say, MMT only describes the system, not the policies to be pursued. Assuming that MMT is accepted by all as fact, there’s nothing to stop a right wing campaign to spend money on the police and military (consuming vital resources), to pursue a victim culture of deporting immigrants (consuming vital resources) and deprioritising social security expenditure (blaming the underserving poor – the grievance culture of complaining that people are getting what they shouldn’t is prominent on the right), while continuing to privatise on the basis of “efficiency”, to choose to build roads rather than public transport. It’s just that the arguments for these policies would have changed a little. This might not be so attractive.
That’s reality.
Furst, they do those things already, and MMT is happening, already.
Second, those arguments have to be won, anyway.
What is your point? Do you want to use an economic falsehood to be used to win a moral argument? Why?
I first listened before resorting to the script.
Followed everything before and after the paragraph “private sector has received new net financial assets…a government deficit creates private assets.”
Are these the saving facilities offered by the BoE? These include premium bonds as well as gilt issues?
I reckon if I dont understand it, a further breaking down of your explanation would help me and others to grasp what’s going on.
Other than that, I felt happy in my growing level of competence!
Thanks Richard.
Time you got an invite on The Rest is Politics!
My MP is Dame Karen Bradley, a former practising Chartered Accountant.
She is in my sights, when I am fully tooled up!
When I say that “the private sector has received new net financial assets” I mean something very specific. If the government spends £10 into the economy, and then taxes back only £8, the private sector is left with £2 more than it had before. That £2 is not a metaphor. It is money sitting in someone’s bank account, or in a firm’s account, as a result of government spending exceeding tax.
That is what “net financial assets” are: the private sector has received a net addition to its financial wealth because the state has run a deficit. In aggregate, it is unavoidable. One sector’s deficit is another sector’s surplus.
Now, are these net assets the “saving facilities offered by the Bank of England”? Not quite, but they are closely connected. The deficit creates the money in the first place. After that, the state offers ways for those pounds to be held as savings instruments rather than simply as bank deposits.
So yes: gilts are one of those savings instruments, as are Treasury bills, and NS&I products such as Premium Bonds. These are ways for the private sector to swap money it already has for a safe government-backed asset.
The crucial point is this: gilts do not create the money. Government spending creates it. Gilts merely change the form in which people hold what government deficits have already put into circulation. That’s why I say a deficit creates private assets: the deficit is the source of the private sector’s net saving.
That was most helpful, Richard, and thank you for your clarity and patience.
I class myself as a weather vane; if I am not getting it, others won’t. And vice-versa.
To be an evangelist, one must understand the message:)
🙂
The problem is that while MMT is factual and therefore nominally neutral politically, the reality it describes and the policy questions it begs often directly challenge the core tenants of neoliberalism. Therefore MMT appears extremely political to those we wish to influence, particularly given many have a vested interest in rejecting the MMT reality, as you’ve said. So for many it appears almost disingenuous when we claim that MMT is not political. Unfortunately reality itself is political, just ask the Americans.
Much to agree with.
I do have one question that I hope is quick and easy to answer, in reference to taxation. I understand that taxes are removing money from the economy, and not funding the government spending, but what is actually happening to it? That is to say, I often read or hear that “taxation destroys money” or similar; but last week (on a comment on his Substack page) Steve Keen said that taxes “are an inflow to the Treasury’s account at the CB (Central Bank), without which the account would go massively into overdraft. As MMT says, they don’t finance government spending; they instead stop the government’s account at the Fed from turning negative.”
I thought I was understanding the full story here, that money is functionally destroyed through taxation, but now I worry I’m missing something important (or at least obvious). Any insights there?
When you pay tax, the money does not vanish in a puff of smoke. A payment actually occurs. Your bank reduces the balance in your account. It then transfers reserves to the government’s bank, which in the UK means the Bank of England. The Bank of England debits your bank’s reserve account and credits the Treasury’s account. So Steve Keen is quite right: taxes are an inflow to the Treasury’s account at the central bank, and without flows like that the government’s account would go negative unless other arrangements were made.
But MMT is also right to say that tax “destroys money”. What that means is that the money has ceased to exist from the perspective of the non-government sector. Your deposit is gone. Your bank’s reserves are reduced. That is a direct reduction in private sector money and spending power.
The point that often gets missed is that the Treasury’s balance at the Bank of England is not the same thing as money in your bank account. It is not part of the private money supply. It is simply an internal government accounting balance that records how much spending capacity the state has authorised itself to use under its own rules.
So the two views are not in conflict. Keen is describing the plumbing. MMT is describing the macro consequence. Tax moves money into the state’s account — and in doing so, removes it from circulation for everyone else.
To put this another way: the government’s spending creates a debt, to the private sector. So the government createss tax, a debt from the private sector to it. When the tax is paid the two net off: the debt the tax represents removes the debt the money used to pay it represented.
[…] was asked this question […]
“austerity is a political choice” – a powerful point, good rhetoric, backed by good evidence.
Here is an article about “choice” – one of the false idols held sacred by the religion of neoliberalism.
https://www.thecanary.co/uk/analysis/2026/01/19/assisted-dying-debate-falconer/
See how Lord Falconer in his worship of choice, finds himself arguing for assisted dying as a desirable principled option for the desperate disabled poor. And spot the “household analogy/austerity as choice” argument in “only a limited amount of money to go around” in the last section of the article.
Charlie Falconer and Tony Blair are great buddies (and fellow moral bankrupts).
Even ex-Tory Mark Harper can see how awful that is.
Never lose sight of the appalling moral consequences of Thatcher’s “household analogy” – it produces horrible consequences, and allows the powerful and wealthy to shrug their shoulders as if to say, “what can we do?, there’s only a limited amount of money” – so (other) people have to die.
Thanks
And you are right.
Sorry, my reply disappeared mid-sentence! On the function of tax, which you have so clearly stated in this post: I know you argue, on pragmatic grounds, that there are better ways of taxing wealth than a ‘wealth tax’. However, this article is very insightful about what happens to a society in terms of inequality and sense of security when a wealth tax is removed.
https://theconversation.com/we-got-lazy-and-complacent-swedish-pensioners-explain-how-abolishing-the-wealth-tax-changed-their-country-272041?utm_medium=email&utm_campaign=Latest%20from%20The%20Conversation%20for%20January%2020%202026%20-%203648037257&utm_content=Latest%20from%20The%20Conversation%20for%20January%2020%202026%20-%203648037257+CID_feccac19d47a7f63d09e52a4e135b60c&utm_source=campaign_monitor_uk&utm_term=We%20got%20lazy%20and%20complacent%20Swedish%20pensioners%20explain%20how%20abolishing%20the%20wealth%20tax%20changed%20their%20country
A wealth tax may not be the best and most immediate answer in the UK but it clealy illustrates what the role of taxes is within a society; and it’s not about raising revenue to spend.
Shall we stop the idealism and deal with the pragmatics first?
And Sweden’s lack of a wealth tax was not the cause of the issue: that issue was seen everywhere.