Long ago, most people believed that the sun revolved around planet Earth, instead of the other way around.
Today, most people still believe that a government gathers up all the money paid in taxes, and then uses that to pay for all the things that governments provide.
It’s actually the other way around-people pay tax out of the money that governments put into the economy, when it provides what the country needs.
( Unless it chooses not to, in which case you get all the hardship and decline that comes from “austerity” policies.)
Think that’s wrong? We’ve all been told about “taxpayers’ money” for years, so it must be true?
Well, have a little think about what happened in 1940. The government had to find a mind-boggling amount of money to provide ships, planes, armaments, servicemen, etc, etc, in order to fight the Second World War against Nazi Germany. I don’t know the actual figure, but I would guess about £500 billion in today’s money. Yes? Okay then-
Did they go to the bond markets to borrow the money? No, there could not possibly have been enough money to be had like that, even if the bond markets were functioning in the normal way.
Did they raise taxes, and then wait for the money to roll in? Of course not, it would have taken many years, by which time tax would have been paid in German Marks, after the War was long lost.
Did they outsource the war effort to someone like Richard Branson, believing that the “private sector is more efficient”? Hardly, they needed to run a successful war, not be ripped off royally.
So they just authorised the expenditure. Told the Bank of England to produce the money. Of course, it wasn’t digital in those days, but I don’t expect they actually printed pallet-loads of banknotes. But, the process of government money creation is often called “printing money”.
What’s that? Governments wilfully “printing money” leads to rampant inflation, destroying the economy? So, was there an economic catastrophe after the War? Nonsense. In the 1950s, the UK was actually more prosperous than ever before in history.
Not in the sense that the rich got richer, though. In the sense that millions of ordinary working people, for the first time, had decent affordable housing, because millions of council houses were built. They could go to the doctor, or a hospital, without fear of a huge bill that they couldn’t pay. Anyone who wanted work, could get a secure job, not hired by the day, or on poverty wages. They could get a pension to live on when they were too old to work, and an allowance, called “National Insurance”, if they were sick or disabled. The railways were nationalised, and became more reliable and affordable. All these things came about because the Labour Government (1945-1951) had the vision to provide them, and created the necessary funding. (despite a “National Debt” of approx 250% of GDP) Just like the War government did between 1940 and 1945) to provide what they needed. This investment drove the whole economy.
(note: an important part of this was the launch of a drive to build a million council homes. This alone provided an enormous amount of good jobs-the builders and finishers, their suppliers, designers, planners, administrators, etc. People who now had decent wages and affordable housing were able at last to afford to spend a little on furnishings for their new homes, leisure, clothing, transport, etc. The whole economy started to boom in a way it had never done before.)
My own parents were able to buy a house in 1955. (My father had a good job as an engineer, but was not filthy rich, and my mother stayed at home to look after my sister and me.) In 1957, even Conservative Prime Minister Harold Macmillan made his famous “You’ve never had it so good” speech, in which he said:
“Indeed let us be frank about it – most of our people have never had it so good.
“Go around the country, go to the industrial towns, go to the farms and you will see a state of prosperity such as we have never had in my lifetime – nor indeed in the history of this country.” What he didn’t mention, was that this fairer, more equal prosperity was the consequence of what the Attlee government had established.
And it was the same story in the USA, but bigger. So, still think governments can only spend “taxpayers’ money”? You’ll be telling me the Sun revolves around the Earth next.
Note 1. I know, there was an actual debt, in dollars, to the USA & Canada for the armaments, ships etc we bought from them, that did have to be repaid, because the goods were priced in dollars, not pounds. But this debt was managed so that it never became a burden, and did not prevent the UK becoming prosperous.
Note 2. For further study of how the WW2 government understood policy and finance, here is a link to Lord Beveridge‘s 1944 book, “Full Employment in a Free Society”: (with thanks to Malcolm Reavell)
the pound in your pocket 