From the early 80s, the idea that Governments can only spend what they receive in tax, was heavily promoted, especially by UK Prime Minister Mrs Thatcher. She famously said, in 1983, “We know that there is no such thing as public money“, and added “there is only taxpayer money“.
“To most of us, the idea that the Government must tax more to spend more probably sounds reasonable“, as Professor Kelton puts it in her bestselling book. Because we all understand “budgeting”. But let’s think about it.
Almost all of us have an average income of, say, £x per month, and outgoings/expenditure of say, £y per month. If £y is less than £x, then happy days, we’ve got more to spend next month. If £y is more than £x, we have to spend less next month, or borrow some. We’re all familiar with this, so it has been easy to convince us that government money works the same way. I used to believe it too, once. It has been called, “handbag economics”.
Why governments, (and famous economists who serve them) choose to deceive the public, to suit their own political agendas, is explained in my later blog pieces, such as #6 Austerity: A choice,not a necessity.). Or, put another way:
“However, like all successful advertising slogans, the phrase ‘tax-payer’s money’ invokes what psychologists call a schema…. a whole body of emotions, experiences and knowledge which mediate our response.”
“Hence, ‘Tax payer’s money’ is intended to create a direct link between government spending and the individual. You are invited to visualise your hard-earned pennies being frittered away unwisely ……. which is hugely convenient for a politician intent on running down public services, so that they can be privatised. Also implicit in the schema is the threat that if the government spends more, you’ll have to pay out, depleting even more of your income”. Read more here.
But, the idea that any UK Government receives tax income, puts it into an account, and then spends from that account, is just false. It doesn’t work like that, for a government with its own independent (sovereign) currency, and its own central bank (Bank of England).
So, where does public money actually come from? It’s created by governments, by spending it into existence. If they didn’t, there would be no money in the economy for public services to be provided, public buildings, roads, the NHS, businesses to grow, or people to spend or pay taxes.
Still think it comes from everybody earning money in various ways, spending some of it, and paying tax with the rest? That went out with the barter system, hundreds of years ago, if indeed, it ever existed. We can’t dig money up from the ground, or grow it in fields, and if we hire an industrial unit and manufacture our own, the police take a dim view. So, it is created by the State.
(Yes, commercial banks play their part in this. They are licensed by governments to lend money to their customers for such things as consumer purchases, or business finance. This acts as a sort of “gearing”, which allows the economy to grow, jobs to be created, etc, but all that is based on the initial injection of money by governments.
How? The money governments create is spent into existence on things like the NHS, schools, Police, Courts, the Civil Service, Armed Forces, etc etc. Much of that goes on wages, which are spent to sustain lots of other businesses. Or, on materials needed for these, which creates more companies, jobs, etc. Part is given to councils to help pay for all the services they provide, because council tax isn’t anywhere near enough. Some goes on social security, so that people with no access to income, have some money to spend (remember, benefits tend to be spent on buying goods & services, not stashed away in the Cayman Islands!).
How is it “spent into existence”? By the Bank of England (BoE) marking up the balance in the accounts of those who are receiving the money. With their computer keyboard, simple as that. If, for example, state pensions are paid, a pensioner’s bank account is credited up. If you pay some tax, your account is marked down. If the Government decides to build a big new bridge, the BoE marks up the Department for Transport account, and the DfT marks up the contractor’s account.
A government with its own currency, such as the UK, can create/issue as much money as it chooses to. Or, not to.
The media talk about “printing money”, but that is nonsense- when you go to the bank for a car loan, they don’t go to the vault and bring back a big sack full of banknotes. They press a few keyboard keys, and it appears in your account. (No, it’s not taken from other people’s savings or deposits, it is just created. Economists call this “endogenous” money). The Government of the UK, effectively, does the same, via the Treasury and the Bank of England. (Just as Sainsbury’s don’t “print” Nectar points, they issue them electronically.)
So how does a Government avoid an excess of money in the economy? By taxation, which acts like a regulating valve, which prevents the economy from over-heating. Amongst other things, It regulates the amount of money sloshing around, and under-pins the economy. It can be used to damp down demand, if for a while, if there aren’t enough people/materials resources to be utilised. My third piece, “Let’s talk about taxes”, explains this more, and talks about what else tax does. But remember, taxation is not a government’s source of money to spend.
The money collected in tax is just cancelled on the master balance-sheet, the same one that is used to spend. It is not, actually, saved up in some account, from which it is later spent. It is simple double-entry book-keeping, essentially.
If you are uncomfortable with the realisation that the UK Government can spend as much as it chooses to, you may be glad to hear that there is a situation where Governments need to rein in spending, or take back money through taxation.
When is that? It is when:
*Everyone who is capable of working is fully employed for an appropriate number of hours at fair pay
*All reasonable demand for health and social care is met promptly and to a high standard
*Education is available, free, to a high standard
* There is enough decent, affordable housing to go round.
*There is still enough bricks or other stuff needed to build houses, hospitals, roads, etc.
*Energy consumption and pollution have been reduced to a minimum, by conservation and “green” generating.
This list doesn’t cover everything, but once all these are in place, excess government spending into the economy might cause demand which cannot be met, which could result in high inflation. Ain’t gonna happen anytime soon, though, is it?
To recap, a country, with its own currency, (not tied to the dollar, yen, gold, etc) can just order its central bank to create funds. To finance investment, or proper funding of public services. And if it does, then, for example, the healthier level of public sector wages gives all those workers more to spend. So they spend it, creating more business activity, creating a healthy economy, creating more tax income, etc, etc. Giving ordinary people a better standard of living.This is what actually happened in Britain in the 1950s.
(note: the countries in the eurozone share a pooled currency, so they cannot do this individually).
So, there is actually no such thing as “taxpayer’s money”. It’s a politically convenient myth, a fib.
For a more detailed, full , but extremely clear and straightforward explanantion of how government money is created, read Richard Murphy’s piece here. For the full technical, legal basis of UK government accounting, this provides it.
Revised January 2022. I am grateful to David Harvey and David Vigar for suggesting edits to the original article.