There was a fundamental flaw in the first line of the Executive Summary of HM Revenue & Customs' Transformation Roadmap, published, like many other government documents, just before the summer recess begins, yesterday. It said
HM Revenue and Customs (HMRC) has a vital purpose – collecting the money that funds public services.
The trouble is that this claim is entirely untrue. HMRC does not fund any government services. And since the government does not understand what HMRC does, or what the purpose of tax is, it's unsurprising that the rest of the report was lame, technocratic, and almost certainly undeliverable because I very much doubt that most people have the ability to make the tax system work for them online via apps, which is essentially what the plan says will happen.
In that case, bear with me as I address, for the umpteenth time, this false claim that tax funds the government and why it is wrong.
The reality is that the UK government (like other currency-issuing governments) creates money every time it spends. Tax does not fund spending; instead, tax is the necessary consequence of government spending and is required to prevent inflation resulting from excessive money supply. Tax comes after government spending, in other words.
The steps involved are as follows:
1. Government creates money when it spends
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The UK government instructs the Bank of England to make payments on its behalf.
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When the Bank of England credits bank accounts, new money is created in the economy.
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This process has been in place since at least 1866, when the Bank agreed to always honour government spending if approved by Parliament.
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Government spending is therefore not financed by taxes or borrowing, but by instructing its own central bank to create money.
2. Tax comes second—not first
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Tax is not collected and then spent.
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Instead, the government spends first, which adds money into the economy.
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Tax is then used to remove some of that money from the economy to manage inflation and regulate demand.
- The tax paid funds nothing. It simply cancels a tax debt, and then ceases to exist.
3. The purpose of tax is not to raise funds, but to serve economic and social functions
Tax serves several key purposes in the economy:
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It controls inflation by removing excess money from the economy.
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It can reduce inequality by redistributing wealth.
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It can influence behaviour through incentives or penalties (e.g., carbon, alcohol, and tobacco taxes).
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It can support democracy, by creating a link between citizens and government.
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It does give value to money, since people must pay taxes in the government's currency and so they use it in everyday transactions.
4. Borrowing also does not fund spending
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When the government issues bonds, it is not because it needs the money.
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It is offering a safe savings vehicle and a tool to manage interest rates.
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The government does not borrow to spend. It borrows after it has spent, primarily to drain excess reserves from the banking system. The funds deposited were created by government spending in the first place.
- Borrowing exists to provide:
- Stability to the banking, pension and insurance sectors.
- Macroeconomic control of interest rates.
- A place for foreign reserves to be held in sterling.
5. Misunderstanding this leads to harmful policies
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Thinking that tax funds spending leads to austerity, underinvestment, and fearmongering about deficits.
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It gives rise to false analogies between households and governments (“balancing the books”) when the fundamental constraint on government spending is a lack of real resources to spend on, creating the risk of inflation if that spending is attempted in that case, and not deficits or debt.
Conclusion:
Since all government spending is inherently financed by money creation, the role of tax is not to fund public services. Instead, tax serves regulatory, redistributive, and stabilising functions in the economy. Recognising this would revolutionise how we approach public investment, debt, and social priorities.
It would also mean that the government could provide proper direction to HMRC's management on their tasks. Instead, yesterday indicated that they have no clue as to what the economic role of tax is, and so HMRC is being misdirected. Of course, what follows on from a misdirection of such giant proportions is bound to be wrong.
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This cannot be said often enough, ever until it sinks or hell freezes over.
I think the myth of taxation funding spending is maintained because there is a belief that people will simply stop paying their taxes if everyone becomes aware of the Magic Money Tree.
Nonsense – because the law exists
This myth is also perpetuated by the Institute for Fiscal Studies (IFS):
“Where does the government get its money?
“The Government raises around £1 trillion in revenue each year. Most comes from the three biggest taxes: income tax, NICs and VAT.”
Source: https://ifs.org.uk/taxlab/taxlab-key-questions/where-does-government-get-its-money
The BBC gives the IFS as its source for it perpetuating this myth too.
I have written to the IFS several times for clarification, and they have not responded.
Evidence that taxes do not fund government spending includes:
✅Beardsley Ruml, the Chairman of the Federal Reserve Bank of New York
✅Federal Reserve Bank Chairman Ben Bernanke
✅Prof. Stephanie Kelton (and other academics)
Source: https://www.mmt.works/mmt-taxes-do-not-fund-government-spending/
Thanks
I may have asked this question on this site before so, apologies, if I have.
Do those in the mainstream media actually know what is going on but are deliberately reporting it differently and incorrectly?
Or are they totally unaware of how things work and just parrot what they are told/regurgitate the same slogans (taxpayer’s money, maxing out the credit card, balancing the books)?
Craig
I wish I could answer that
But I do know universities still teavh the drivel that they spout
I would love to know also.
I have to admit that when I first realised, several years ago and mainly thanks to this blog, that tax does not fund spending it was a bit of a mind blower (I think smoke came out of my ears as my brain came to terms with it ).
Craig
You and my wife alike then…
Economics education is still awfully neoclassical and not heterodox enough and based on so many assumptions without looking at reality. There are very few people reporting on events who would know and even once you do, what then policy wise and then getting through to others lol money creation was debated in parliament in 2014 and was a massive effort to organise but came at it from a different view so missed out MMT angle
https://positivemoney.org/uk/archive/uk-parliament-debated-money-creation-for-first-time-in-170-years/
The phrase “follow the money” may go some way to answering your question. A lot, if not most of the mainstream media is owned by or under the influence of the wealthy. As we have moved further away from redistributive taxation and government spending on welfare and social programs, inequality has increased, and the rich have become even richer. So, governments spend less, and the rich become richer. You can reach your own conclusion, I’m sure.
Are the media aware of the lie specifically? This exchange between Noam Chomsky and Andrew Marr may enlighten.
Marr: “How can you know I’m self-censoring?”
Chomsky: “I’m not saying you’re self-censoring. I’m sure you believe everything you say. But what I’m saying is if you believed something different you wouldn’t be sitting where you’re sitting.”
May I suggest that the “taxes pay for government spending” lie also creates division in society. It is used as a weapon by those attacking people on benefits and increasingly against asylum seekers.
Agreed
Such is the economic illiteracy on display, I wonder whether Ms Reeves slept all through her lectures and seminars at both Oxford and the LSE.
This is so helpful and clear, speaking as someone deceived by the lie, it might help to understand why I believed the lie? As this might be useful to demolish the lie?
The lie:
HM Revenue and Customs (HMRC) has a vital purpose – collecting the money that funds public services.
Maybe it has a folk logic that people can follow and so easily believe to be true. It’s also a simple statement to grasp.
Does the lie work because people are familiar with tax, and so think they understand tax because they see it every day, in a way which that they don’t see the BoE?
The lie is simple, has an intuitive logic, relates to the familiar and so easy to follow and thus believe, whereas the truth relates to the remote and involves more abstract ideas ?
So, are these simple statements true ?
The BoE has a vital purpose in supplying the money that funds our public services – not tax. The government can direct the BoE to supply what money is needed.
Tax has a vital purpose in stabilising our economy, but tax doesn’t fund our public services.
To say otherwise is a dangerous lie.
?
I am going to be giving a lot of time to this issue. Thank you for these thoughts.
Unraveling the lie just blows apart austerity, after that the genie never goes back in the bottle.
I like Richard A’s above , good point, the lie feeds into division and hate, fuels ‘punching down’ politics. Permission to harm people.
It seems very unlikely that ‘taxpayer’s money’ will go away.
It is so completely entrenched in all discourse – that however many times Richard – and occasionally even the Bank of England – say that money is created by government spending, it wont gel.
Instead of arguing the case from first principles it may be much more effective to simply quote Keynes ‘anything we can actually do, we can afford’ .
That may help to get people thinking in a different way – ie about what we want to do with the real economy and society – rather than starting from ‘finance’.
I think that we do need to tackle the lies, myths and misinformation head on.
A ‘both, and’ approach blow up lies and offer the hope, as neatly described by Keynes.
I’ve been using the free version of Chatgtp to answer some questions about economics. One I asked recently was what would happen if the state no longer issued new money, but depended solely on taxation to supply the money it spends. (To keep it simple I ignore revenue from exports as we import more than we export so such revenue makes a very small contribution)
I asked the question looking for an answer that would show other posters on a forum the absurdity of believing that taxation funded state spending. Needless to say, it convinced few, if any, other posters…
This was its summary of its conclusions.
“If all money originates from the state, then new state spending is essential to sustain economic growth and liquidity. Relying only on taxation (which removes money from the economy) without new issuance would:
Reduce money supply over time
Cause deflation and recession
Shrink public services
Increase private debt
Destabilize the economy”
Which was satisfying, but I have my doubts as to its general reliability in analysing national economics. I’ve recently asked it the cause of Argentina’s inflation. . It gave me a classic monetarist answer
“Inflation in Argentina (2000–2019) was not a natural disaster — it was man-made by a toxic mix of:
Deficit spending
Money printing
Weak monetary policy
Currency manipulation
Political refusal to reform”
When I pointed out that massive tax evasion (which it had mentioned earlier in the conversation) must have been a contributory factor it admitted that it was and added it to the list.
I then asked why it had given me a neoliberal/monetarist list of factors.
Its reply (after flattering me for being so perceptive).
“Why I Gave a More Standard Answer Initially:
*It reflects the dominant analysis applied to Argentina by IFIs (IMF, World Bank) and often reported in media*.”
So, don’t look to this particular version of AI to give a real in depth analysis of economic theory and practice which considers *all* standpoints on economics. ‘Ruling theory’ dominates unless you challenge it.
Remeber ChatGPT does not know – it regurgitates
Broadly the first answer is right for countries like Argentina because it has debt in dollars.
So, basically, you have to know the answer to your question before you ask it.
It told me that MMT was an ‘assumption’ and only decided that it was an accurate and evidence based description of how a state issues money into the economy when I asked it why it had used the word ‘assumption’.
I had expected a better analysis of available economic theory and practice, I thought that was what it is supposed to do, not just regurgitate the dominant belief.
Is the paid for version any better?
No. ChatGPT only tells you what is out there.
Magie, read The AI Mirror by Shannon Vallor.
Do you have any data for how much government spending (financed by the Bank of England) eventually seeps into private sector borrowing?
I am not sure whether that question even makes sense to me.
Can you explain
Some of the money created by government spending will circulate through the banking system to private borrowers: businesses and households. The rest of private sector borrowing will be funded by bank deposits and loan creation.
Is private sector borrowing 0% sourced from government and 100% from loan creation? Is it the other way round (unlikely)? Has anyone considered or researched it? Do we know the relative proportions?
This matters because private sector debt is so high, see your post https://www.taxresearch.org.uk/Blog/2025/06/20/the-real-uk-debt-crisis-isnt-in-the-treasury-its-in-the-homes-of-millions-of-people/
I genuinely have no idea what the answer to your question is.
But then, I think that all money is created by the government, because banks can only undertake this exercise if they are licensed to do so by the central bank. So is there a real difference?
Legally all private sector credit stems from legislation, but I would love to know how much comes primarily from government spending financed by the Bank of England, and how much comes from bank lending financed by the merry-go-round of deposits and loan accounts.
I suspect it’s a question nobody has thought about before.
It leads to secondary questions: is it possible to curtail one without affecting the other? Is it possible for one to replace the other? We know that austerity in the shape of reduced government spending depressed the UK economy. I suspect that in the next global recession, bank lending will become cheap but scarce as banks become choosy about who they offer loans to. If that happens, banks will have much the same economic effect as government austerity.
As I say, I don’t know or even see a way to answer your question in a meaningful way.
There are days when reading and contributing to this blog feels like a revolutionary act. Clearly this is knowledge the Government does not want to become public!
How long before all who support Richard become a proscribed organisation?
I wonder that sometimes…
Thank you, Richard, for taking the time to provide this very ckear and helpful summary, even though you have covered these facts many times before. I will share it as widely as I can. When I have tried in the past to present these facts to people, the problem isn’t that they disagree or that they ask difficult questions. Oh that they did! Instead, they tend to say nothing at all, which is far worse. Getting across its fundamental importance continues to be a challenge to me. However, I will continue trying and what you provided today will help a lot.
I have a oost coming on this, probably tomorrow. There is clearly an issue to be addressed.
I wonder how much of this goes back to the myth / lie that the national economy can be compared to that of a household.
What would be a better analogy to use I wonder? I’m sure someone creative could come up with one that is both straightforward to communicate and understand as well as somehow memorable.
As an “aunt Sally”: if the national economy was like a pebble beach, the pebbles can only move around (spend money) when the tide (money) comes in – but it is the moon (government) that directs the timing, speed and direction of the tide ie tide in (spending into the economy) before tide out (ie taxation for stability).
The faster and deeper the tide (greater government spending), the more of the pebbles can move and move more freely – more people have adequate money and more can do more. But that requires a faster and deeper tide out as well (ie a greater level of taxation).
Some gets left behind in rock pools (savings) which stagnate unless refreshed by the tide again. It probably breaks down here though!
I think it’s clear I’m not remotely creative! Could some regular contributors take up a challenge for a new analogy? Assuming of course that such a thing would be helpful?
Over to readers…
Be clear that the purpose of a metaphor is to frame an issue rather than precisely define it. People hit back by insisting your metaphor is false because it cannot be stretched to the finer details – don’t let them get away with it, it’s a massive red herring. Keep it light.
Humour is great for this. Try the internal combustion engine for the economy: money is the oil, and the bigger the engine, the more it takes to keep it going. Not much good if it all sits in the sump though, it has to get into every nook and cranny if it’s going to run smoothly. Govt is the oil pump, but it’s given up on pumping, all the oil is collecting in the sump and the pistons are seizing up. Rachel from accounts is busy cranking the start handle but aside from the odd cough and peculiar squeaking and grinding noises, we’re not going anywhere. One can then have much fun speculating on the ‘suck-squeeze-bang-blow’ and who, or what, is playing the part of the dipstick. Over to you, Mr Parr …?
Silly I know, but great fun in the pub and it actually does start people thinking, and you can come back to it in more serious conversations :). And the folks in the pub are the ones who get to vote…
Good fun, but you have to be of a certain age to know about it – engines are sealed units these days.
Imaginative 🙂
An interesting challenge:)!
Richard, you need to make a television programme about MMT that is aired by the BBC or appear on newsnight or question time. This is the best platform to get MMT understood by the masses including politicians, the IFS etc. Otherwise, you’ll be banging your head against a brick wall for a long time to come.
But they have to decide to do that
In cannot decide for them
I asked Prof DeepSeek MMT for an explanation of the BoE’s position:
The Bank of England (BoE) avoids explicitly stating “taxes and bonds fund spending” in its technical publications because it understands the operational mechanics.
However, it passively reinforces this narrative in simplified communications.
Here’s the evidence:
—
1. THE DIRECT QUOTE (Closest to the Claim)
In its April 2019 Quarterly Bulletin (“Money, Creation, and the Shadow Banking System”), the BoE states:
“The government finances its spending through tax receipts and borrowing (issuing debt).”
Source: [Bank of England Quarterly Bulletin 2019 Q2, p. 4](https://www.bankofengland.co.uk/quarterly-bulletin/2019/2019-q2)
Why this matters:
– This is aimed at a non-specialist audience (students, journalists).
– It uses neoliberal framing (“finances its spending”) despite the BoE knowing bonds are an ex-post operation.
—
2. CONTRAST WITH OPERATIONAL REALITY (BoE’s Own Admissions)
The BoE’s technical documents contradict the above:
– 2014 Q1 Paper: Confirms loans create deposits, but avoids applying this logic to government spending.
– Reserve Accounting Guides: Show that when the UK government spends:
1. HM Treasury’s account (at BoE) is debited.
2. Reserves are created in commercial banks’ accounts.
3. Bond sales later drain excess reserves.
Source: [BoE: “The Bank’s balance sheet” (2021)](https://www.bankofengland.co.uk/explainers/the-banks-balance-sheet)
—
3. WHY THE BOE USES MISLEADING LANGUAGE
1. Inertia: The “taxes/bonds fund spending” narrative is orthodox dogma.
2. Political Safety: Admitting “government spending creates money” would:
– Destabilize austerity politics.
– Empower calls for direct monetary financing (e.g., for climate policy).
3. Audience Adaptation: Simplifications for the public default to mainstream tropes.
—
4. MMT’S COUNTER: THE ACTUAL SEQUENCE
| Step | Government Action | Money Effect |
|— —|———————————|——————————————————————|
| 1 | Spends £1bn on hospitals | Creates £1bn in reserves → deposits (net new money) |
| 2 | Collects £700mn in taxes | Destroys £700mn reserves/deposits |
| 3 | Issues £300mn in bonds | Converts £300mn reserves → bonds (no net change) |
Bonds don’t “fund” spending—they sterilize reserves post-creation.
—
CONCLUSION
The BoE’s 2019 quote is the closest to the neoliberal claim, but it’s a pedagogical oversimplification contradicted by its own operational manuals.
The BoE knows better—but upholds the myth to avoid politicizing money creation.
The silence on sovereign money creation isn’t ignorance—it’s institutional complicity.
*
Thanks
People don’t like paying tax. Everyone who has been in paid employment will have had tax deducted from their hard earned wages. The false narrative that those taxes help to pay for the services we get from the government, (health, education, roads, defence,) helps to sweeten the pill. I accepted that narrative for many years. It’s a difficult one to replace.
How would it be possible to sweeten that pill by suggesting a different narrative?
Rather than: “We have a duty to pay our taxes, because we benefit from the services they fund” what should we say? “We pay our taxes because the government needs to manage inflation”? Maybe someone else can formulate a more convincing narrative.
You have a legal obligation. That is the reality. That’s it.
There are at least three recent examples of gov spending well in excess of taxation, all of which were necessary to avoid the collapse of the UK economy or mass defaults on debts.
1. The 2008 financial crisis and quantitative easing.
2. Covid and furlough.
3. The energy crisis when gov had to pay everyone’s bill.
The public lived through these and no gov ministers ever suggested that taxes needed to be collected before the spending could happen.
Surely proof positive of what happens in reality.
Furthermore, if there is ever a costly war, the money is always available to fight it. Churchill never said we cannot fight the Battle of Britain until we’ve collected enough tax to build the planes.
If people cannot follow these very simple events and the sequence of spending and taxation, then we really are in the hands of the Philistines.
Thanks for your article Richard. I subscribed to your newsletter. I think your conclusions are right regarding the creation of pounds or dollars or whatever other monetary units are created — at least outside of the Eurozone, among OECD countries.
I’m writing about this process and insight about the creation of monetary units such as pounds and dollars. I’m looking for as many different categories of evidence towards a comprehensive proof for those who are science oriented and are skeptical.
Obviously your views are consistent with MMT. And it’s a really crucial insight:
Dollars or pounds are created by central governments. Therefore, these same central governments do not need taxation for revenue and they don’t need to borrow to make up for the taxes that they don’t need for revenue. In fact, in light of this description, I think the concept of “revenue“ for most central governments itself is a misnomer.
However, it’s important to note that the there is no nation-state on the planet, where a majority of people, or a majority of public officials in national office agree. In fact, the idea is not limited to various central governments, but extends to analysis in for example the OECD reports.
So if you have more types of evidence that you haven’t put into this article or details that are pertinent for the sort of proof I’m looking for, please let me know.
Thanks for writing about this very important and accurate situation in the United Kingdom and in so many other nation-states.
The evidence is 2008 and 2020
To remember the reasons for taxation I have taken the liberty to truncate your explanation.
Why do we pay tax?
To control:
Inequality
Inflation
Investment
Currency value
Harmful effects of fags and booze
The social contract between the people and the Government.
I do enjoy quizzing my friends of finance, economics et al. After they trot out the usual, l mischievously correct them then finish with a flourishing ref to ‘Money for Nothing’. Then point them to you Richard.
Thanks