This post is one of an ongoing series explaining Richard Murphy's views on significant topics in economics, political economy, politics, taxation, and accounting. It should be read as such, as an overview of a position developed across many years of writing and analysis, and not as a comprehensive treatment. Where more detail is required, the reading list at the foot of this post is a good starting point.
Others in this series can be found here, and they can be downloaded as PDFs from here.
The Analogy and Its Political Uses
Few ideas have done more damage to economic thinking in Britain than the household analogy. It is the claim, repeated by politicians of almost every party and echoed across the media, that the government must manage its finances just as a household manages its budget. It must live within its means. It must not spend more than it earns. And if it has been borrowing, it must pay that debt down before the burden falls on future generations.
Richard Murphy has argued, consistently and at length, that this analogy is not merely imprecise but fundamentally false, and that its persistence carries serious consequences for public investment, social provision, and democratic accountability.
He traces the idea to a specific historical moment. A 1935 book, published to justify the economic policies of the National Government that had delivered the Great Depression, made the household comparison its central argument. At the time, there was at least a partial justification: the UK's adherence to the gold standard had imposed an external constraint on government spending, tying the pound to reserves that could be depleted by deficits.
But the gold standard had been abandoned in 1931, and with it the constraint that had made the analogy even remotely applicable. The analogy has been wrong ever since, and its continued use, Richard argues, is therefore either a matter of ignorance or a deliberate political choice.
What Governments Actually Do With Money
The reason the analogy fails is structural. A household is a user of money. A currency-issuing government is a creator of it. The difference is fundamental.
In the UK, when the government wishes to spend, it instructs the Bank of England to create the funds required. Those funds are credited to whoever is being paid, whether that is a nurse, a pensioner, or a contractor building a road. No prior act of taxation is required. The money is created by the act of spending itself.
This is not a fringe position. It reflects the operational reality of how the Bank of England functions, and the Bank has confirmed as much in its own published research. Taxation does not fund government spending; it cannot, because the money used to pay taxes must first be put into circulation by government expenditure.
The sequence runs: spending first, taxation later. The government spends, money enters the economy, and taxation then recovers some of that money, withdrawing it from circulation to manage inflationary pressure and to pursue social objectives.
Richard has described taxation as an economic steering wheel rather than a revenue source, and the distinction matters enormously for how policy is understood and debated.
The notion of "taxpayers' money" is therefore doubly misleading, both as a description of how government finance works and as an implicit claim about accountability. All the money in the economy was created by government in the first instance; there is no independently generated pool of private funds that citizens hand over to the state. Richard has made this argument repeatedly, and with particular force: the phrase exists not as an accurate description of monetary reality but as a rhetorical device designed to make voters feel that government spending is using something that belongs to them and should therefore be minimised when that is not true.
Why Cutting During a Downturn Makes Things Worse
If the household analogy were merely a harmless simplification, the stakes would be lower. But Richard's concern is that it directly produces harmful policy.
A household that reduces its expenditure when times are hard will, all else being equal, improve its financial position. That logic does not transfer to a government, because the government is so large a participant in the economy that its spending decisions shape the income of everyone else. When government cuts spending, national income falls. Tax revenues, which are determined by income and activity, then fall alongside it. The deficit the government hoped to reduce by cutting may not shrink at all; it may even widen.
This is not a theoretical abstraction. Richard has pointed to the experience of austerity in Britain after 2010 as a practical demonstration of the principle. The contraction in public expenditure reduced demand, suppressed growth, deepened inequality, and degraded public services, without achieving the deficit reduction that was promised. An approach modelled on the logic of household budgeting produced precisely the opposite of its stated goal, because a government's position within the economy is categorically different from that of a family within its own finances.
The sectoral balances framework, which Richard draws on extensively, makes the accounting logic plain. The financial position of the government, households, businesses, and the overseas sector must, by definition, net to zero across the whole economy. If the government runs a surplus, someone else must run a deficit. In practice, that means households or businesses are borrowing more, or the overseas sector is running a corresponding surplus against the UK. A government surplus is not, therefore, a sign of prudent management; it is a sign that debt has been transferred to the private sector, usually to the households least able to carry it.
The Analogy as Justification for Austerity
Richard identifies the persistence of the household analogy as the intellectual foundation on which successive programmes of austerity have been built.
If voters believe that government spending works like a household budget, then cuts look reasonable and even virtuous. They look like belt-tightening, like the responsible behaviour of a family that has overspent. The political language reinforces this constantly: maxed-out credit cards, money running out, debts for our children to repay.
Each of these formulations, he has argued, depends on a false premise. The government's "credit card" is the Bank of England, which the government owns and controls and which can always meet the payments Parliament has authorised.
The national debt is not a burden to be handed to future generations; it is the stock of government-created money that the private sector currently holds as savings. Paying it down would mean withdrawing money from the economy, which would reduce private savings and contract activity. Far from protecting future generations, it would impoverish them.
The real constraint on government spending is not monetary but real. It is the availability of labour, skills, materials, and productive capacity. When those resources are fully employed, additional spending will generate inflation. When they are not, as was plainly the case across most of the austerity years, restraining spending simply leaves people and resources idle, producing nothing, while public services deteriorate and long-term productive capacity is eroded.
The Analogy's Grip on Political Debate
One of the features of the household analogy that Richard finds most troubling is its capacity to survive even when the people deploying it are confronted with evidence of its failure.
Politicians who have witnessed the failure of austerity, or who lived through the extraordinary spending of the Covid period without the economic collapse the analogy would predict, continue to invoke its logic the moment fiscal pressures re-emerge. This is not, he suggests, because they are incapable of understanding the argument but because the analogy serves a function that is political rather than analytical. It disciplines public expectations, sets a ceiling on what voters are allowed to demand, and provides cover for choices that are, in reality, choices about distribution and power rather than about the availability of money.
Fiscal rules, which Richard has examined separately in considerable detail, are the institutional expression of this logic. They translate the household analogy into binding commitments, constraining what governments may spend by reference to arbitrary ratios rather than by reference to the actual state of the economy and its real resource constraints. In doing so, they embed the analogy's errors in policy frameworks that successive governments then feel obliged to respect, even when respecting them produces demonstrably bad outcomes.
What Should Replace It
Richard does not argue for spending without purpose or limit. His argument is that the right question is never "can we afford this?" but always "do we have the real resources to deliver this without generating excessive inflation?" When resources are available and needs are unmet, the government has both the capacity and the obligation to act. The constraint is real, not monetary, and policy should be designed around that reality rather than around an analogy borrowed from the finances of a Victorian household.
Understanding this distinction is, in Richard's view, a precondition for any serious programme of public investment, whether in health, in green transition, in infrastructure, or in the care economy. So long as the household analogy shapes the terms of political debate, the space for such investment will remain artificially and unnecessarily narrow, and the political imagination of what government can achieve will remain confined by a metaphor that was wrong when it was invented and has only become more wrong with every decade that has passed since.
Reading List
"Why the household analogy in economics is wrong", https://www.taxresearch.org.uk/Blog/2025/08/11/why-the-household-analogy-in-economics-is-wrong/, 11 August 2025.
"Why the government is nothing like a household", https://www.taxresearch.org.uk/Blog/2025/11/23/why-the-government-is-nothing-like-a-household/, 23 November 2025.
"Governments aren't like households", https://www.taxresearch.org.uk/Blog/2025/08/13/governments-arent-like-households/, 13 August 2025.
"Governments aren't like households", https://www.taxresearch.org.uk/Blog/2026/02/23/governments-arent-like-households-2/, 23 February 2026.
"New glossary entry: the household analogy", https://www.taxresearch.org.uk/Blog/2026/02/14/new-glossary-entry-the-household-analogy/, 14 February 2026.
"The origins of the 'household analogy'", https://www.taxresearch.org.uk/Blog/2023/01/15/the-origins-of-the-household-analogy/, 15 January 2023.
"The household analogy", https://www.taxresearch.org.uk/Blog/2018/06/15/the-household-analogy/, 15 June 2018.
"Opinion on the household analogy", https://www.taxresearch.org.uk/Blog/2025/08/14/opinion-on-the-household-analogy/, 14 August 2025.
"There is no such thing as taxpayers' money", https://www.taxresearch.org.uk/Blog/2025/07/25/there-is-no-such-thing-as-taxpayers-money-3/, 25 July 2025.
"There is no such thing as taxpayers' money", https://www.taxresearch.org.uk/Blog/2024/08/01/there-is-no-such-thing-as-taxpayers-money-2/, 1 August 2024.
"Glossary entry: taxpayers' money", https://www.taxresearch.org.uk/Blog/2024/02/29/glossary-entry-taxpayers-money/, 29 February 2024.
"Who owns a £5 note?", https://www.taxresearch.org.uk/Blog/2025/09/05/who-owns-a-5-note/, 5 September 2025.
"Why it matters that government spending comes before tax", https://www.taxresearch.org.uk/Blog/2025/08/09/why-it-matters-that-government-spending-comes-before-tax/, 9 August 2025.
"Tax does not fund spending", https://www.taxresearch.org.uk/Blog/2026/03/02/tax-does-not-fund-spending/, 2 March 2026.
"Tax does not pay for government spending", https://www.taxresearch.org.uk/Blog/2024/04/29/tax-does-not-pay-for-government-spending/, 29 April 2024.
"Government spending is your income", https://www.taxresearch.org.uk/Blog/2025/09/20/government-spending-your-income/, 20 September 2025.
"The sectoral balances show that the government has very little control over the national debt", https://www.taxresearch.org.uk/Blog/2024/05/15/the-sectoral-balances-show-that-the-government-has-very-little-control-over-the-national-debt/, 15 May 2024.
"Glossary entry: sectoral balances", https://www.taxresearch.org.uk/Blog/2026/01/07/glossary-entry-sectoral-balances/, 7 January 2026.
"Fiscal rules are as flexible as rubber bands", https://www.taxresearch.org.uk/Blog/2025/07/14/fiscal-rules-are-as-flexible-as-rubber-bands/, 14 July 2025.
"Why fiscal rules stop change", https://www.taxresearch.org.uk/Blog/2025/09/08/why-fiscal-rules-stop-change/, 8 September 2025.
"Fiscal rules", https://www.taxresearch.org.uk/Blog/2025/09/29/fiscal-rules/, 29 September 2025.
"Does the government create wealth?", https://www.taxresearch.org.uk/Blog/2026/03/09/does-the-government-create-wealth/, 9 March 2026.
"What Osborne forgot to say: austerity does not guarantee the government balances its books", https://www.taxresearch.org.uk/Blog/2014/12/05/what-osborne-forgot-to-say-austerity-does-not-guarantee-the-government-balances-its-books/, 5 December 2014.
"When will they learn that austerity is causing our deficit?", https://www.taxresearch.org.uk/Blog/2015/11/20/when-will-they-learn-that-austerity-is-causing-our-deficit/, 20 November 2015.
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Might the attached socio-economic approach of the Chinese government, which can be found under the heading of “China Daily.com”, provide an interesting contrast to the Neoliberal theory and practices of socio-economic management?
https://www.chinadaily.com.cn/a/202606/05/WS6a221e82a310d6866eb4c8aa.html
It will take a very honest, wealthy, or famous person to understand, accept and explain this before the general public will consider it. Most honest people who understand it are neither wealthy or famous. Plenty of dishonest, wealthy, and famous people understand it. Therein lies the problem.
Agreed
What the wealthy elite do understand, on some level or another, is that government can spend, will spend and needs to spend.
What they also crucially understand is that this spending results in a surplus of funds that do not necessarily have to be paid back (hence the deficit and national debt). It is this awareness that is the driving engine of the privatisation of all things. The elite want what spending that the state can, will and must do, via extraction from the majority, to be with them so that they have the opportunity to sequester disproportionate amounts for themselves.
This is the disingenuousness and deception that promotes the ‘small state’ narrative…. ultimately wealthy elites want the state to enlarge its spending, but only if the resultant surpluses increasingly come to rest with them.
I’m sure many readers here remember the wonderful head-head sketches from Mel Smith and Griff Rhys Jones where the two protagonists portray dim versions of themselves discussing a subject. Comedy and satire have power as well as the all-important popularity needed to get any message across to a large enough fraction of the population. And we must not forget the timeless brilliance of Yes Minister and Yes Prime Minister to to take the covers off the workings of politics.
Perhaps we need a Yes Chancellor version in which Sir Humphrey Murphy explains how the world really works to a hapless Mr Bean-Counter.
Interesting seems to me the fundamental difference is China sees the value in government and western neoliberal plutocracies do not.
Is the outcome thst China is on track for global dominance?
Who knows?
You’ve had a busy Sunday morning and ‘done your bit’. I hope you get enjoy the rest of it. As for my posts – take your time – please!
One of the important consequences to me of the household analogy, is that it does not actually end the power of the state to print money, but effectively helps the privatization of the money supply and diverts and locks it into serving private capital in the form of the CBRA (central bank reserve account) and subsequent bailouts. It becomes a tool exclusive to the elite whilst denying the voting majority of what they need – they get austerity. The house hold analogy is actually evidence of a political coup by capital at the heart of government in broad daylight, in our democracy, to the point that we cannot say (in my opinion) that we are a democracy anymore.
When the head of a household wants to increase his income (it’s usually a he) the government will take an increasing share of it from you.
If the government wants to increase its income it has to take an ever increasing share from the collective of households. **
So yes, the analogy fails.
**- there is the view that government can increase its income by simply issuing the chitties but it then has to deal with the inflation of the money supply and increase the taxation of it back above the current level. Which is a long-handed way of deriving the same conclusion.
A more interesting comparison is how a household can *benefit* his family and whether that is similar to how government can benefit its legal residents, but that’s not the topic of this piece so I’ll leave it there.
I think you need to read a great deal more about the nature and reasons for tax.
While we’re on the subject of fantasy economics could we add “there is no magic money tree!” There is, usually at the service of the people who are denying its existence.
Been reading through a post on Bluesky by Dan Neidle discussing tax & government spending, link below. I’d be very interested to read people’s opinions to this.
https://bsky.app/profile/danneidle.bsky.social/post/3mnkcym2rdg2s
Neidle is almost certainly a multi-millionaire
His argument is we need to fax almost anyone but those with wealth
Now why might that be?
Dan Neidle literally says he favours a Land Value Tax.
Imagine a 60 unit industrial or incubator office park, it doesn’t matter so much which, then the Landlord pays the land value tax and the tenants pay nothing. Compare that to now where the landlord pays nothing on occupied properties, the units are divided in such a way that their floor area comes under the Small Business Rates threshold which the tenant then claims and the local government collects nothing.
Dan is pretty sound on most things tax, and knowledgeable about incidence and distortions, as well as being against a flat tax system.
He knows a lot about protecting wealth from tax.
And land value tax will be passed on through increased rents. Let’s not pretend they will not pass on the tax in the rent.
He’s naive.
I like these summations, they combine key points thoroughly and succinctly.
on another point about land value tax, I can’t add to the thread.
Did Joni M write a song about the perverse consequences of tax in Hawii?
They paved paradise and put up a parking lotWith a pink hotel, a boutique, and a swinging hot spot
Don’t it always seem to goThat you don’t know what you got ’til it’s goneThey paved paradise and put up a parking lot…’
Love this song, says so much about the political economy, in my humble opinion.
🙂
I hope you don’t mind but I find these ‘Richard Murphy says’ articles rather stilted. I assume they are packaged for quotations/reproduction but as a journalist and researcher myself I am quite capable of turning anything you write in the first person into a ‘Richard Murphy says’ or writing a standfirst saying this was written by you!
Theye are meant for sharing.
good to see this once again set out in very simple and understandable form – should make us all demand more of our politicians
Thanks
Keep up the good work Richard and perhaps one day politicians and the media will break free of the Luddite shackles of the “Household Analogy” and progress into an era of Modern Monetary Enlightenment.
I can live in hope.
[…] As some readers here will have noticed, I have begun a new series of posts under the generic title “Richard Murphy's view on…”. […]
I am familiar with this argument, but the bit I have difficulty with is that the constraint on public spending is not necessarily justified in terms of “maxed-out credit card” etc. It is about the cost of borrowing, and indeed the willingness of “the markets” to lend to the UK. The implication seems to be that the government should be creating money, not borrowing it. I have seen proposals to this effect when I’ve looked for it, but the argument here, and in most such articles, ignores this aspect. I would very much like to know what Richard Murphy thinks on this issue, and the evidence for his view. And if appropriate, the exact mechanism the government could use to create new money – I believe there are a number of options, but I am not an expert in this aspect of economics.