I posted this video on YouTube this morning.
As I wrote in the explanatory note that accompanied it, probably the biggest challenge to understanding how the economics of governments really works comes from the need to understand that governments of the sort we have in the UK are not funded by taxes. They are funded by central bank money creation. Tax exists to control inflation (and tackle inequality, market failure and other things). Until it's appreciated that spending creates taxation and not that tax funds spending, nothing else about how the government works makes sense.
The transcript is as follows:
Taxes do not pay for government spending. It is one of the hardest things that anyone has to get their head around when they really come to understand economics. that taxes really do not pay for government spending. I promise you it's true.
Every single penny that the government spends is created by the government. Let's be totally honest, you do know that. If you pick up a five-pound note, it says, ‘I promise to pay the bearer on demand the sum of five pounds'.
They haven't paid the bearer on demand five pounds. They promise to pay the bearer on demand five pounds.
Why? Because money is debt and the government has created a debt to you.
So where does tax come into all that? Tax comes into all that because when you pay your taxes, the promise the government has made that it will accept your money in payment is fulfilled. They'll take your money back. in payment of your debt.
Let me be clear what happens then in the real financial world that we actually live in. Whenever the government spends it simply extends its overdraft with the Bank of England. Day in, day out, that's what happens. And then it asks us to pay tax because if it allowed all that money to float around the economy, of course we would get inflation remarkably quickly.
So, it asks us to pay tax to cancel the impact of the new money that it has created. And that cancellation is by taxation, and it's there to control inflation.
The spend comes first. It's paid for by money created by the Bank of England.
The tax comes second. It's there to control inflation, to ensure that the value of the money that we have in circulation remains broadly steady over time. That's the goal.
But it's never the case that the tax pays for the spending. The spending has to come first, or the money doesn't exist with which the tax can be paid. It's really that straightforward.
It takes a lot of effort to reverse what you've always thought, that tax pays for spending, to realise that spending actually pays for tax.
But it is literally true that without government spending, there could be no tax paid. There could be nothing, in fact, because there'd be no money at all.
So we have to get our heads around that fact because then we truly understand how the government functions and then we can talk about what it can do with this extraordinary power it has to create money at will, whenever it wishes, if it wants to, to deliver the outcomes that we as a society want, balanced by the taxation that we pay to control the inflationary consequences of doing so.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Interesting report here
https://www.theguardian.com/business/2024/apr/28/thames-water-collapse-borrowing-whitehall-uk-finances-bonds-liz-truss
A crisis over money the Government doesnt need to borrow…………..
Now on the blog
Richard, I haven’t yet watched the video …. My late brother introduced me to this blog and to MMT only a few years ago…. I like your initiative to reach out and extend awareness/understanding that is different from the MSM orthodoxy.
The main thing that helped me get my head around money creation, spending, saving, deficits, tax ….. are diagrams of the money flow.
That really helped me. Consider incorporating into your explanatory videos? Beatest!
Thanks
The trouble is that they are fiendishly complicated
There are version in chapter 16 of the Taxing Wealth Report 2024
Sometimes I ask friends a question: “Name one currency in history that wasn’t created/printed/minted by a government?” Neither they nor I can think of one.
Whenever I read about government finances in history books the talk is always about governments changing the coinage to put into the economy before they can tax it. A case in point is the Plantagenet Kings [about whom I am currently reading]. Although they had to raise money through taxes to fund wars, this was after a coinage reform either by themselves or their predecessor.
Would I be correct in thinking “spend then tax” has always been the case? If so, does this mean history teaching needs to be reformed as well, as there is little indication in these books that they understand the origins of money.
Thanks 🙂
Hi Richard,
surely an example of spend then tax, was the Furlough scheme. Govt. paid wages from money created, not from some hidden account.
Incidentally, inflation did not rise either, confirming that money creation itself, does not lead to inflation.
Regards
You can literally funnel into depression trying to explain to the 99% that tax doesn’t fund spending. I spent some time on our local news website explaining to a woman who would not accept it, because Sunak used ‘taxpayer’, and I was clearly an idiot or some lefty agitator.
I know….
Off-topic but disturbing enough to possibly merit a blog post too comes https://yoursforscotlandcom.wordpress.com/2023/08/03/the-freeport-ruse-exposed/
I can’t see Scotland going indie together with starting it’s own central bank if this is what’s happening to its assets.
I was grinding my teeth at the fact that Kate Andrews was offered a platform, yet again, by the BBC this time on ‘Any Questions’ in the episode released 26 April.
At roughly the 22 minute mark she asks “… where its coming from?” [The “money”…] She also states “Economic growth is a fantastic thing… you get to spend that money after you deliver the growth, not before…” And sadly, the audience applauds.
I wonder if she believes the things she says. Though I have to admit she may well have sounded very reasonable in this episode, to the ill-informed.
I should know better than to listen. The likes of ‘Question Time’ and ‘Any Questions’ merely raise my blood pressure and reinforce my disillusionment.
I know the feeling