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.
Over the last 12 months, motivated by the reality that the economic approach of the last few decades has resulted in social wealth being drained towards private, I went on the search for alternatives.
I quickly found MMT, watched people like Randal Wray, Bill Mitchell, Steve Keen and your good self who have all provided an heterodox view of not how the system could be, but how the system actually works now.
I’ve become aware that neoliberal orthodox economics, which is perpetuated by all streams of influence, reject this heterodox explanation.
So my question amongst many is, how can MMT be evidenced, including money creation & the household myth, so that the main streams of influence, be them political, academic, financial or media, be forced to accept or agree that the system does actually work like this?
As great as your and your colleagues influence is, the majority of people won’t be inclined to accept on face value something that either is not easily evidenced or something that can be rejected by the main streams of influence.
Even the new Green MP is on the record as referring to Government funds as taxpayer’s money.
You have put your finger on the core problem: this is not mainly a technical debate, it is a narrative and power problem. But MMT can be evidenced, as I have shown this weeeknd, because it describes operational reality.
Start with three “hard” anchors:
1. How spending happens. Government spending is executed through the banking system. Payments are made by instructions that result in commercial banks’ accounts at the central bank being credited and, in turn, private bank deposits being credited. That is the mechanism. Tax is then paid using the deposits that then exist.
2. The accounting identity. Public deficits equal non-government surpluses. If government runs a deficit, the private sector, in aggregate, must be accumulating net financial assets. That is double-entry bookkeeping applied to the whole economy. It is not ideology. It really is that simple.
3. The policy record. When crises hit (as it is right now), the state always “finds the money”. The constraint is never “taxpayer money”. It is always real resources, inflation risk and political choice.
So why don’t mainstream institutions accept this? Because accepting it forces an honest debate about distribution, inflation, regulation, and who benefits from scarcity narratives. It also undermines the household myth that is the foundation of austerity politics.
What shifts this is repetition with simple proof points: central bank operations, sectoral balances, and real-world examples. And yes, it means challenging even sympathetic politicians when they say “taxpayers’ money”. It is state money, used for public purpose, with tax serving to manage inflation and shape behaviour.
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.
I’m using my full name as well to avoid confusion. There is any legal limit, in terms of length of time, for the HM Treasury overdraft account at the BOE to be closed?? It has to be closed by the end of the day? Thank You!
It is convention, not law.
Remember, the government can always change law to create new convention.