As I have written many times before, one of the most persistent and damaging myths in economics is the so-called household analogy. This is the idea that the government's finances are like those of a household, meaning that it must "live within its means", balance its books, and cannot spend more than it can tax or borrow, with that borrowing itself being constrained by a so-called "fiscal rule", of which there are no such things.
This idea sounds plausible. It is also completely wrong. And it matters enormously that people understand why, because its consequences are dangerous for most people in a country like the UK. There are a number of reasons for saying so.
First, a household and a government do not operate in the same financial environment. A household must earn before it can spend. Its income comes from participating in the economy and is limited by what others will pay it. It cannot create new money. It cannot impose taxes. It cannot set interest rates.
A government, or at least one like we have in the UK, that can issue its own currency, can do all those things. As I have recently explained, it spends before it raises taxes, creating money in the process. It taxes later, partly to withdraw money from circulation to control inflation, and partly to influence economic behaviour. This is the process of using tax as an economic steering wheel, as I have described its role to be. Such a government does not borrow despite the appearance of doing so because it never needs to borrow the funds it has already created. Instead, what looks like borrowing is actually the making available of a safe savings facility for institutions in the City of London and international financial markets.
Second, the household analogy assumes the state is dependent on the rest of the economy for its income. The reality is the reverse: the rest of the economy is dependent on the state to create the money that makes economic activity possible. Without the money generated by government spending, there could be no private sector economy.
Third, households do not set the macroeconomic rules within which they operate. They are price-takers, interest-rate-takers, and subject to the economy's ups and downs. Governments are price-setters for the currency they issue, interest-rate-setters if they choose to be, and the ultimate shapers of demand in the economy. Pretending they are the same as households ignores that critical difference in power.
Fourth, the household analogy is almost always used to justify austerity. The story goes: “We've maxed out the credit card, so we must tighten our belts.” Even John McDonnell once said that on behalf of the Labour left when Jeremy Corbyn was Labour leader. In reality, the UK government's “credit card” provider is an institution it owns and controls, the Bank of England, which will always make any payment that the UK government asks it to do so long as Parliament has approved a budget for the payment to be made. In that case, the only limits on what the government can do economically are not financial, but are instead created by the availability of resources in the economy and the risk of inflation, and not some mythical overdraft limit.
The consequences of getting this understanding wrong are significant:
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Believing the household analogy locks us into a politics of artificial scarcity, where essential public investment is abandoned because “we can't afford it” – even when the resources exist.
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It encourages the public to see government spending as a zero-sum game: that more for the NHS must mean less for education, or more for green investment must mean less for defence, when the real question is whether the economy has the capacity to do all these things, which it might do.
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It entrenches the false belief that taxes fund spending in a mechanical sense. This obscures the real role of taxation as a tool for redistribution, inflation control, and shaping the economy's direction.
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It hands power to the financial markets by making it seem as if the government must borrow from them to survive, when in reality it chooses to issue bonds merely because the City wants to use them as savings mechanisms.
Breaking free from the household analogy would, then, change a great deal of economic understanding and so economic policy. In particular, if we accept that spending comes before taxation in a currency-issuing state, then we can ask different questions. We can debate what we want the government to spend on to meet our needs and ambitions as a society. We can design taxation to manage inflation, redistribute wealth, and discourage harmful activity, and not to supposedly pay for public services.
And crucially, discussion can focus on real limits, such as those in skills, technology, material resources and the environment, rather than on artificial ones invented by economists.
The household analogy is not a harmless simplification. That would be to completely misunderstand it. What it actually is can be best understood as a rhetorical weapon used by those whose intention is to shrink the state, weaken public services, and privatise public services. It turns the government into a supplicant to the markets, and most especially the City of London, and the public into passive consumers rather than active citizens capable of shaping our collective futures.
This is why the household analogy needs to be rejected. The UK government is not like a household. It is the creator of the money we use, the setter of the rules, and the only institution capable of mobilising resources on the scale needed to tackle the crises we face, from climate change to crumbling public infrastructure.
The choice is stark: either we keep pretending the state must balance its books, like a family in a soap opera debt-crisis scene, or we face up to the truth that it has far greater responsibilities and capacities than most of our economic and political establishment will acknowledge and start using them for the common good.
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You portrayal of the ‘like a household’ lie as a ‘soap opera ‘is spot on and inspired – it may even be a ‘kitchen sink drama’ in the true sense – whichever, it is time that its run was cancelled.
Like the tax as a steering wheel metaphor, that one went through several iterations before it was published, and I am still not sure I got it right, but I’m glad it worked for you.
Gearbox?
Every soap opera needs regular disaster episodes, to tidy up unsustainable plot lines, attract new viewers, kill off unpopular characters or allow actors to leave.
The same is true in government, to keep the household analogy alive.
If real ones don’t arrive, then the script writers can always invent them (usually threats of terrorism, subversion, and occasionally, the initiation of armed conflict).
Current threat/disaster “scripts” purported to be a threat to national solvency (necessitating more austerity) include:
Russia
China
Immigration
Small boats
Medicalisation of stress in young people
Disability
Benefit fraud
Emigration of the rich
Doctors
Nurses
Retired female octogenarian vicars
Cardboard
Sharpies
Palestine
If you can come up with a disaster script involving all of the above, resulting in a tube train crashing into The Old Vic, you may get a job at No.10 or Home Office.
I liked ‘ Retired female octogenarian vicars’
Beautifully written! Your best yet!
The Class War continues with an elite working hard to get British people to scam themselves in their beliefs.
Hang on…
I tried, I know, but lets not go overboard 🙂
And oddly, I wrte that well over a week ago and then forgot about it and went back to it this morning to give it another edit. Maybe there’s something to learn from that.
Well worked very well for me since I find the predominant stumbling block to change in this country is people thinking the government has to behave like a household and constantly look to balance the books not least to avoid increasing inflation. I also think writing as much as you do has made your wordsmithing skills very succinct.
I think doing YouTubes and learning how to write them is honing my writing.
Just to speak from my limited experience, but I find writing and editing are different but complementary skills. Doing one helps with the other. But I think I edit better when I have some distance from the text. If I’ve written it myself, that distance is usually time. I get much better results if I put it down (for an hour or a day or a week) and come back later.
Agreed. But the reality is that many blog posts here are thought up, written, edited and published within the space of 15 minutes.
Maybe a possible poll could be something along the lines of Tax and spend and the household analogy, what is your view?
Possible options for answers are
it’s the way the economy runs
I used to think it was the way the economy runs but now my view has changed
I’ve always known it was rubbish
Other
The options can be tidied up so that they read better.
It would be interesting to know if views have been/do get changed on this.
I’ll admit that I used to think it was tax and spend and that governments had limited finances available but now realise that was total rubbish.
Craig
Thius will become a video, I think. I will do it then.
Mind you, I have prepared four videos scriots already this morning in addition to the blogs, so I am not sure when. it will happen. Bit a good idea, so thank you.
Just to show that this is not a radical idea, people might also want to read:
Crisis and Myth: Why Politicians Must Stop Comparing the UK Economy to ‘Running a Household’, by Jack Mosse, in Byline Times, 1 September 2022
https://bylinetimes.com/2022/09/01/politics-has-been-captured-by-economic-fallacies/
“The household fallacy“, Roger Farmer and Pawel Zabczyk, Economics Letters, 2018, vol. 169, issue C, 83-86
Source: https://www.sciencedirect.com/science/article/abs/pii/S0165176518301915
Full text: http://wrap.warwick.ac.uk/102451/7/WRAP-household-fallacy-Farmer-2018.pdf
“A government is not a household“, Frank van Lerven, Andrew Jackson, New Economics Foundation, 26 October 2018
https://neweconomics.org/2018/10/a-government-is-not-a-household
“Are Policy Analogies Persuasive? The Household Budget Analogy and Public Support for Austerity“, Lucy Barnes and Timothy Hicks, British Journal of Political Science , Volume 52 , Issue 3 , July 2022 , pp. 1296 – 1314
https://doi.org/10.1017/S0007123421000119
“Governments Are Nothing Like Households“, Frances Coppola, Forbes, Apr 30, 2018
https://www.forbes.com/sites/francescoppola/2018/04/30/governments-are-nothing-like-households/
And on YouTube:
MMT: Government Budgets Are NOT Like A Household
https://www.youtube.com/watch?v=yofpo88ipmo
Many thanks, Ian, and do you make these list up in reaction to what I have written, or do you have a database of all these topics?
Because these topics come up time and time again, I have some of these lists on my own website,
e.g. https://www.mmt.works/the-economy-is-a-household-myth/
And then sometimes I do a quick bit of research, because I know that the topic will come up again in the future, and people need evidence.
And then I have some information in Google Keep.
No database unfortunately.
Very good
Thank you, Ian Tresman, for those links, as someone who (thinks) they understand Richard’s explanations I do my best to explain the fallacy of the household analogy to friends and family, it’s often hard and the more ammunition available the better. It’s not helped by so many reputable (?) sources still spreading it. I had friends who just listened to a ‘Rest Is Money’ podcast, from, I thought a respected publisher. Yet I thought almost everything they said was wrong! Sometimes I feel we are fighting a losing battle.
Those two are utterly economically clueless. Lineker should be ashamed of promoting it.
I know you’ve said it many times, but this is the clearest explanation of how damaging the analogy is.
I am focussing on material that can be used in a book…
Good. I, for one, can’t wait until it comes out.
The household analogy is indeed a pernicious myth. Thanks for reiterating this truth.
Sadly governments appear to deliberately obfuscate this point. I’d like to believe that it is a hangover from the gold standard era, which only ended in the UK in 1971 when the pound was allowed to float. But I find it increasingly difficult to believe that it is not a deliberate obfuscation.
The other day you posted about money creation in Canada. In one sense they are quite open about it. But it is done in a complicated way, and I struggle to believe that continuing in that way is not deliberately confusing. The fact that the paper you quoted took many words to describe the process indicates the (unnecessary) complexity.
As I understand it, the government issues bonds, which the Bank of Canada buys, thereby providing finance to the Canadian government. Then the Bank holds those bonds as an asset, as an obligation by the government for future payments. But holding the bonds is nonsense, disingenuous at best, deliberately deceitful at worst. There is no way those bonds should be recorded as assets because they are an obligation by the government to pay the bank, which the government itself owns. It is nonsense to say the government owes money to itself, even if indirectly via the bank. The government bonds should be cancelled when they are bought by the bank.
That I have taken so many words to describe the situation underlies the obfuscation.
Now that might be acceptable if it was the only way to create money. But it’s not.
The most obvious way would be for the bank to simply credit the governments account. Direct money creation, easily understandable. But governments seem terrified of doing that.
Alternatively the government could simply run an overdraft with Bank of Canada. This is almost as much nonsense as the Bank owning government bonds, but at least an overdraft is more easily understood.
Why is it that governments are so terrified to admit that they do create money, when it is something they all do from time to time (even if only in crises)?
Neoliberal politicians are terrified of admitting they have the capacity to do things that their far right wing funders would rather they did not do. As a consequence, they create false myths to justify their own inaction.
The rich put a lot of effort into persuading the public to self-scam themselves. Most of their effort goes into mainstream media which they own but they also “buy” politicians.
What always winds me up about the household budget analogy is how selective it is. It doesn’t even succeed on its own terms, if properly examined.
Real households take on massive debt in order to make their lives run more smoothly, whether that be things like a loan to buy a car, or a mortgage to ensure control of their own housing.
Correct
I may be wide of the mark but another aspect of the ‘household budget’ analogy that I find misleading is that, in days gone by when I needed a mortgage the lender enquired about the value of my home with a view to taking a charge over it. Other lenders did likewise. In the end, the size of the loan never exceeded the value of the house and, as time passed, both the loan was reduced and the value of the house increased. I have never heard anyone who promotes the ludicrous ‘household budget’ analogy discuss what the ‘mortgage valuation’ of Dear Old Blighty might be. So, at best, the ‘household budget’ analogy is not only false it is also incomplete.
On another note, I saw a headline this morning by Kevin Maguire arguing that “Brexit was a giant con by plastic patriots”. I thought the term “ plastic patriots” was excellent and I shall use it incessantly when referring to them as in my opinion it contains just the right mix of ridicule, scorn and disdain. Equally, the reference to today’s political office holders (to call them ‘leaders’ would be a gross misrepresentation) as “political brand managers” seems appropriate. May be we should come up with a similarly disdainful term for those who continue to peddle the ‘household budget’ analogy?
I like that metaphor. Kevin Maguire is good, and has, I know, been aware of this blog for a long time.
The “government budget is like a household budget” analogy only works if you imagine a very odd household. In this house, you don’t earn income from outside – you issue your own currency by printing it in the kitchen. Your children must use that currency for everything, including paying a “bedroom tax” you impose. You then pay them in that same currency to do chores, meaning the money you spend is the only money they can earn to pay the taxes you set.
In that scenario, your spending comes before their income, and you can never “run out” of money – you can always print more. The real constraint is not whether you have enough currency, but whether your household has enough labour, goods, and resources to meet everyone’s needs without causing shortages or inflation.
🙂
This from the Guardian about Crossrail (the Elizabeth line) ends interestingly:
https://www.theguardian.com/commentisfree/2025/aug/11/britain-elizabeth-line-railway-treasury-birmingham-manchester-leeds
The article is extolling the economic and social transformation that new public transport has brought, and asks why we are not doing more of it: in London, or Birmingham, or Manchester, or wherever else there is a need.
And the answer? We are locked in a small-minded mindset where there is no money, because public spending is seen as a cost to be cut, and not an investment that will reap rewards in the future.
“… the Treasury sees rail infrastructure not as investment but as a new cost centre. (Road maintenance, for some reason, never gets the same treatment.) In direct contrast to the bit of the rail network run by TfL, indeed, stealth nationalisation on the rest of the network has been accompanied by service cuts.
This is absurd. Experience suggests that, if you build it, they will come, and jobs and homes will follow. Someone should take the Treasury on the Elizabeth line.”
The UK is one of the richest countries in the world. We can afford to build and maintain road and railways and schools and hospitals and all the other infrastructure we need. All this, and have a strong defence, and look after refugees, and take care of the young and the old and the sick. If only we can mobilise the political will and the necessary resources.
Much to agree with
‘This fallacy seems to stem from a false analogy to borrowing by individuals. Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. This is in addition to whatever public investment takes place in infrastructure, education, research, and the like. Larger deficits, sufficient to recycle savings out of a growing gross domestic product (GDP) in excess of what can be recycled by profit-seeking private investment, are not an economic sin but an economic necessity. Deficits in excess of a gap growing as a result of the maximum feasible growth in real output might indeed cause problems, but we are nowhere near that level. Even the analogy itself is faulty. If General Motors, AT&T, and individual households had been required to balance their budgets in the manner being applied to the Federal government, there would be no corporate bonds, no mortgages, no bank loans, and many fewer automobiles, telephones, and houses.‘ Prof William Vickrey, ‘Fifteen fatal fallacies of financial fundamentalism: A disquisition on demand-side economics’ https://pmc.ncbi.nlm.nih.gov/articles/PMC18763/
So glad you are liberating us from ‘Margaret Thatcher’s Handbag’ it’s horrible and dark, and many know no other reality.
I would like to send a letter to someone in parliament about this issue and the ChatGPT prompt at the bottom of the post is very useful. Unfortunately my local MP is a Conservative Party member. That being the case I’m wondering if you would advise sending it to one of the candidates from one of the more left leaning parties in my electorate or to the Minister instead? I can’t see the Conservative Party, or anyone involved with them, having any interest at all in fixing the misinformation dealt with in this post sadly.
My suggestion is, try both. You won’t know until you try.
Every time you write about the household analogy etc I get the gut feeling that more and more people are beginning to lift their heads and listen just a little bit more. That the mist and fog of the long con is gradually being burnt off by the morning sun of understanding. One of favourite songs has always been ‘I can see clearly now’ by Johnny Nash
I might need as many verses as Hallelujah by Leonard Cohen then.
Hi Richard. Thanks for all you do.
I just finished listening to your Gary Stephenson takedown video from a few days ago. I’m a big fan of yours, and of Gary’s, and I think we need both to face the overwhelming task of opposing big wealth & power.
I understand where you’re coming from but I urge you to please try to zoom out a bit from the technical correctness of your position and try to see higher-level value in his populist message.
I don’t have time or space to delve into all the specifics in this comment, but I’m gonna try to write a blog post about it and if I do I’ll post the link on your blog.
But to summarise: I believe that you get the economics right, and he gets the politics right. And if I’m brutally honest, I feel like the latter is potentially more important in this current moment. But his message would certainly be greatly strengthened if someone could manage to educate him on MMT.
Robin
The right politics based on the wrong arguments is a recipe for disaster. Sorry. But in this case it really, and I won’t be compromising on that. The key word you used was populist. I don’t like populism wherever it comes from.
It would also help if he understood tax. He doesn’t.
@Tim Kent
You wrote, “I’d like to believe that it is a hangover from the gold standard era, which only ended in the UK in 1971 when the pound was allowed to float. But I find it increasingly difficult to believe that it is not a deliberate obfuscation.”
Time to adjust your beliefs right now
One of my earliest political memories is an evening listening to my father and his brother discussing the ideal tax system. It was about 1955-1957 and I was under the age of 5. They both agreed that the government spent money to make the economy work, there was no dispute there. But how did the government get its money back?
My uncle thought that all tax should be paid by the wealthy, my father thought everyone paying tax encouraged civic action by the electorate.
I have encountered on Facebook one or two people of my age who remember similar discussions, all starting with the premise that the government had to spend before it could claim tax back – but it had to always claim it back eventually. And yes, that was under the gold standard era.
Remember that Thatcher wasn’t concerned about the Great Lie. Her aim was to stop the electorate thinking that the State could create a good society. Firstly, “there’s no such thing as society”, and secondly every person is responsible for their own fate. It was an abdication of the responsibilities of government, and not so much obfuscation as striking all thoughts of democratic socialism from the country. And that was her aim.
It won’t surprise you to know my paternal grandfather was a Communist who converted to socialism, and his children and grandchildren were socialists. And we all grew up understanding at least the one basic fact – until the State spends, there is no money in the economy, and the State has to get its money back through taxes.
Everything else was too difficult for my young brain, but I have known that all my life.
Wow. That is some early memory. I have no recall of any such discussions taking place in my household, ever, but my upbringing was not in a socialist household.
The nub of the issue is whether the analogy of describing the government as being the same financially as a household actually incorporates a list of the issues a household is in a position to deal with. For example, can a household optimise the performance of an economy, move an economy out of recession, deal with a widespread financial crash in the private sector, a pandemic, a war situation whether internal or external, a severe climate effect, etc. If the purveyors of the household analogy can’t vouch safe the practicality of them being on the list because it can’t summon up the money then what use is the analogy?
You might be interested in this reply I’ve had to a letter to my MP (NOT about digital coin!):-
AS06837
Anna Sabine
House of Commons
London SW1A 0AA
Our Ref: CC08289
11 August 2025
Dear Anna,
Thank you for sharing Clifford’s concerns about the impact of the public’s understanding of Government borrowing. As a member of the Treasury Select Committee, I greatly appreciate you sharing his desire for honest and transparent debate about public finances, especially during this difficult economic time.
To address Clifford directly – you are absolutely right that the current public narrative of likening government borrowing to household borrowing can conceal much more than it reveals. The technical reality is that, via instruments like quantitative easing, the Bank of England has purchased government debt by crediting reserves to private banks – effectively creating money.
This process, and the associated circularity of debt interest paid back to public institutions, means official figures often overstate the burden of debt interest faced by taxpayers. While the rising cost of debt servicing is used to justify spending decisions, it’s key to clarify that substantial portions of these payments are internal transfers within the public sector or payments to banks on reserves – mechanisms never designed as traditional borrowing. Poor understanding of these mechanisms directly limits democratic accountability and narrows the spectrum of feasible policy responses.
As you note, misleading fiscal presentations make it harder to debate investments in public goods, like defence or the NHS, on a fair and informed basis. In recent months, the Treasury Select Committee and others have debated reforms to fiscal rules and the presentation of debt figures, such as whether or not to exclude assets held by the Bank of England from headline debt measures.
I share your belief that Parliament, HM Treasury, and civil service must actively improve fiscal literacy and provide clearer, more accessible explanations to the public. This would go a long way to restoring trust and enabling a constructive debate about our long-term public investment needs. Accordingly, I will raise your concerns with the Treasury Select Committee at the next available opportunity.
Yours sincerely,
Chris Coghlan
Liberal Democrat Member for Dorking & Horley
Wow. A useful contact to know about. Thank you.
Why do we spend £111bn a year in servicing our debt if as you say we don’t need to? That is £3k a year from every tax payer
Let’s be clear: around £30 billion of that goes straight back to the government on the binds it wons – so this figure is not in any way truthful.
Quite a significant part – more than £10 billion – will not be paid for at least 15 years on index linked bonds.
Maybe £40 pulus billion goes to UK institutions – some of which you might save with e.g. pension funds.
And maybe £30 billion goes abroad, but we will earn from other countries in exchange.
What is undoubtedly true is that the wealthiest benefit the most.
Yes but why borrow it in the first place…. Surely your argument is the government can just print money – no need to borrow at all
Yes but why borrow it in the first place…. Surely your argument is the government can just print money – no need to borrow at all.
Can you look at my articles on why we need a national debt? Easy to Google.