We posted this short video on multiple platforms last night:
This was the transcript:
Where does government money actually come from? Most people assume that the government works like this:
- It collects taxes.
- It puts the money in a pot, and then
- It spends from that pot.
That's intuitive. It feels right. It's also not how anything works.
I spent decades working in tax, and one of the things that experience teaches you, and that textbooks don't, is that the accounting tells a different story from the politics. Here is what the accounting actually shows.
When the government spends, when it pays a nurse's salary or funds a school or commissions a road, it does not draw down from a reserve of collected taxes. Instead, it creates new money through the banking system, the Bank of England, which it owns. That's what happens at the point of spending: new money is created.
Taxation then reclaims some of that money, to control inflation, to redistribute wealth and to shape behaviour.
But the spending comes first, which means every time you hear the claim, "We can't spend on the NHS because we haven't got the tax revenue," you're hearing something that has the relationship between spending and tax precisely backwards.
The question is then never "Can we afford it?"
The question is always, "Why aren't we choosing to do it?"
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Confirmed by quotes from multiple sources:
“At the end of World War II, the Chairman of the Federal Reserve Bank of New York (the most important branch of the Federal Reserve System), Beardsley Ruml, said the same thing in a paper he titled “Taxes for revenue are obsolete.”11 While taxes might be important for other purposes (that we’ll examine later), government doesn’t need “revenue” in order to spend.” (Randall, p. 19 quoting: Beardsley Ruml, “Taxes for Revenue Are Obsolete,” American Affairs, vol. 8, no. 1 (January 1946), pp. 35–9.) https://cdn.mises.org/AA1946_VIII_1_2.pdf
“It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.” (Federal Reserve Bank Chairman Ben Bernanke, 2009) https://www.cbsnews.com/news/ben-bernankes-greatest-challenge/
“Taxes are critically important, but there’s no reason to assume the government must raise taxes whenever it wants to invest in our economy. [..] Your taxes don’t actually pay for anything, at least not at the federal level. The government doesn’t need our money. ” (Kelton, 2020, pp. 22) Kelton, Stephanie. The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy (p. 22). John Murray Press. Kindle Edition. https://amzn.eu/d/hO2C0A9
“the UK Government creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector” (Berkeley, A. et al, 2022, Abstract) [..] “.. all spending arises as new money advanced as credit and not ‘from taxation’” (Berkeley, A. et al, 2022, Section 3.3) https://www.ucl.ac.uk/bartlett/public-purpose/publications/working-papers/wp2022-08
“The new perspective also debunks as a myth the notion that “the taxpayer” finances government spending. Since the government is always creating new money as it spends, tax payments do not serve to finance it. [..] For each dollar, the federal government owes us a reduction of tax liabilities of the amount printed on the bank note or the amount transferred electronically. US dollar bills read: “I-egal Tender for All Debts, Public and Private”. Our tax liabilities are the public debts mentioned here.” (Ehnts, 2024, p.11) https://www.amazon.co.uk/Modern-Money-Theory-Professional-Organizations/dp/3031535367/
Thanks
An excellent video which I will be sending out to friends and family.
A good follow-up video would be to reiterate and explain the key point that whilst it goes into ‘debt’ when it spends money into the economy, the government issues bonds in order to cancel the overdraft in their accounts at the BoE. Explain what bonds are, what banks use to purchase the bonds and whether or not the government can use the ‘money’ for spending.
We will be doing debt.
Great video as usual. In UK the process at least is more straightforward with the HM Treasury being able to run an overdraft at the BOE, in US the TGA (Treasury General Account) has to be in positive balance before the government can spend and the US Treasury cannot run an overdraft at the Fed. Of course there is a work around for this, the Repo market with the Fed lending reserves to Primary Dealers for bond auctions (the Primary Dealers can also simply run an overdraft themselves at the Fed) and intra-day US Treasury overdraft at at the Fed are permitted (for example a payment for the government going out at 8.00 am in overdraft and a bond auction at 1:00 pm where the US Treasury can “repay” the Fed before the end of the day). A quick question, for how long, legally, the HM Treasury can run an overdraft at the BOE before “repaying” it with taxes revenue and Gilts auction proceeds? I gave a quick glance at “The self-financing state: an institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom” paper where it says that every morning that overdraft account must start at zero, is that correct?
We start at zero this morning by convention.
I cannot comment on the US.