3. The mythical government purse
Back in the 1970s & 80s, my prime function as an accountant revolved around the concept that tax was an overhead not an obligation and so, according to clients and my bosses, it was my job to keep their tax bills as low as possible.
As I developed my own practice and tax regulation became more sophisticated I got fed up with this pressure and started trotting out the line that, “as you are using the roads, police, schools & the NHS, it’s my job to make sure you pay the right amount of tax”. In other words, as we still hear today, tax pays for government spending.
So all these years later how does this hold up to scrutiny under the realities of money creation and through the lens of MMT?
Tax is collected into a government account with the BoE but there’s no matching or correlation with government spending. In other words, rather than “tax & spend” it’s “spend & tax” with the policies for both sides being independently decided and processed.
To sum up, similar to my bank loan, the government tells the BoE to spend money into existence and then the tax system claws back some of the money, effectively destroying it. There is no “government purse”, no “taxpayer’s money” and certainly no household type budget that you or I have to operate. Unlike the government, we are limited by our income, we can’t create new money.
The best analogy for all of this is air miles. You fly and earn air miles and then later you reclaim some or all of them against future flights. The operator records both sides for you but doesn’t keep its own stock of air miles to hand out, it just creates them as you fly (spends), and destroys them as you reclaim them (taxes).
Every month, the government adds up what it has spent and deducts the tax collected, reporting the difference as that month’s shortfall, referred to as a deficit*. It does this because that’s what it has always done; from 50+ years ago when there was a hard limit on new money. The government deficit isn’t lost money, as it would be in say a business, it merely reflects the net amount of money created that month that the government has left out with us. It’s our surplus sitting in millions of bank accounts.
At this point there’s an obvious question. If the government spends out more than it collects, month after month, this will just accumulate a larger overdraft with the BoE. Surely, as an independent public body, the BoE will want the overdraft cleared?
The government does actually clear the overdraft by “borrowing” (more in the next piece) but, as the BoE is owned 100% by the Treasury, even if it didn’t, the Bank could never send around the bailiffs to collect. To keep it simple, just think of the BoE as part of government.
So my line to clients bemoaning their tax bills never did hold up to scrutiny. When the government decides to spend on something, be it the NHS or free school meals, despite what it says, it’s not a “who’s going to pay?” or “what public spending will we need to cut?” decision. It’s a political decision. The government can always pay for anything in pounds sterling it needs to, it can’t default or run out of money.
That’s not to say that the government should just keep spending (printing) money without limit. If too much money is allowed to flow into the real economy, ie more money than can be absorbed by the available people, goods and resources needed to do the work, the spending might spark inflation. Excess government money flowing out would compete with the private sector, already employing the people etc, resulting in increased wages and prices. Through the lens of MMT therefore, taxation’s prime role has nothing to do with spending, rather it’s needed to make sure that excess money is not left out in the economy.
With the above in mind, when the government’s advisors say that billions need to be spent on retrofitting our homes or clawed back in fossil fuel subsidies to help deal with climate change, the government may well ask, “who is going to pay for it?” But it’s more likely to be the case that, unlike Covid or the 2008 financial crash, in which that question was never asked, the government doesn’t yet view Climate Change as an emergency.
*In 8 of the previous 60+ years the tax exceeds the spend and so the “surplus” is deducted from historic deficits.
3. The mythical government purse