What is "Taxpayers money"?

   #1.  What really is “Taxpayers’ money”? (approx 3 minute read)

 From the early 80s, the idea that Governments can only spend what they receive in tax, was heavily promoted, especially by Mrs Thatcher. The concept of “no magic money tree” was created, and it sounded quite convincing. 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.

So, if it isn’t true that governments spend only what they receive in taxes, where does money actually come from? It’s created by governments, by spending money into the economy.  If they didn’t, there would be no money in the economy for people to spend, businesses to build, or taxes to be paid. 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. 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.

How? The money governments create is used to pay for things like the NHS, schools, Police, Courts, roads, buildings, 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 economic activity. 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!). All this business creates tax income back to the state.  So the whole economy is based on Government money.

A government with its own currency, such as the UK, can create as much money as it chooses to.It's called "fiscal policy". (About £400bn was created in 2008, to rescue the banks from the consequences of their greed and irresponsibility, without causing inflation or any other problem.) And no, it doesn’t “have to be paid back by future generations”, because we effectively borrowed it from ourselves, and don’t have to ask for repayment. The papers 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. In this example, a high street bank is doing exactly what a government does- create money (except, high street banks are subject to controls which governments are not.). The "printing money" scare story dates back to when money was linked to the value of gold (long gone).

So, how does taxation work? It’s actually a sort of regulating valve, which prevents the economy from over-heating. It regulates the amount of money sloshing around, and under-pins the economy. . It can control excessive inflation. (more details on this in my second blog piece, "Let's talk about tax"). Our tax system is fairly efficient (except when we allow large multi-national companies, or very rich people, to pull a fast one.)  But, tax is not a government’s source of money to spend. In fact the opposite, because until a government "spends" money into the economy, there is no money to be paid in taxes!


A country, with its own currency (e.g. pounds, dollars, yen, krone), can just order its central bank to create funds, to finance investment or proper funding of services. As much as it chooses to. 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. Remember, nurses, fire-fighters, prison officers etc don’t usually have expensive accountants advising them how to pay less tax! 

But what happens if a country creates too much money, and uses it un-productively?  If a country spends money un-wisely, a weak currency, or hyper inflation, can result. If a government creates so much money that demand rises more than jobs can be created, factories built, materials to provide stuff can be found, then, yes, runaway inflation can result. But, if a government uses it's power to create money, to invest that in things which create better services and greater, fairer wealth for the people of that country, then there is no effect on inflation. An example of this, is the growing call in the USA (the "Green New Deal") and UK, for investment to be used to create widely-available positive, valuable, and decently paid skilled jobs for everyone who is able to work, and wants to. These could be in areas such as healthcare, environment (e.g energy-saving), or building the genuinely-affordable homes that we are desperately short of. And, there's still plenty of scope for us to do these things.

If Jill and Jack Jones borrow, say, £5000 and spend it on a luxury holiday, they will come back with great memories, but nothing else to show, except increased loan payments. But, if Jill borrows £5k for a train season ticket to travel to a new job at a much higher salary, then she not only saves a lot against the cost of buying a ticket each day, but also the loan payments are easy to cover out of the bigger wages. This is how positive investment works.  But, for a government with its own currency, such as the UK, USA or Australia, there is no need to "borrow" to invest. And no need for "tax revenue". 
I will talk about debt and deficit more, in a later piece.

I am grateful to Mike Hall, for his many insights into  modern, progressive ideas about money policy. Also to David Harvey and David Vigar  for suggesting edits to this article.

Next time:  More about taxation- "Let's talk about tax"

To find out more: here are a few links to information on the modern understanding of  how public money really works, rather than the false and misleading beliefs which have been around for a long time. It's known as MMT, Modern Monetary Theory.

This is from a highly respected American Economist, but exactly the same principles apply here. (Trailer advert before it starts)  https://www.cnbc.com/video/2019/03/01/stephanie-kelton-explains-modern-monetary-theory.html?__source=sharebar|facebook&par=sharebar&fbclid=IwAR1SHvO7hIVIz4cZRfoJ7f1QHgmBHechvefmeUcKvs-Av9-xDil54RUqs6c

Another explanation of MMT:,
https://gimms.org.uk/mmtbasics/

Lots of information from a leading UK group of modern economists:
https://www.progressiveeconomyforum.com/blog/