That’s all very well but as a nation we just can’t afford it

Health and social care and education are now just unaffordable. There are too many old and sick people and too many people want to go to university. We can’t afford it. We have to do something different, they say.

However, affordability at the level of a nation is widely misunderstood. The common metaphor for a nation’s finance is drawn from household budgets and an appeal to prudence. Dickens expressed this through the character of Wilkins Micawber in David Copperfield,

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

This we are told is the basis of sound fiscal management of a national economy – the books should be balanced. We are reminded of this on a daily basis in the news and media. Recently when the UK Prime Minister, Theresa May, announced additional funding of £20 billion for the National Health Service, the first questions from the press were “where is the money coming from?” and “will there be additional taxes to cover the cost?” The Micawber principle is deeply embedded in public discourse. Indeed to suggest otherwise is considered to be incompetent or economically reckless, or both.

What the mainstream media rarely talk about is the differences between a national economy and a household. The difference is very important in understanding the nature of public spending. What makes a household different to a nation is that most nations are the issuers of the currency used in that nation. Households do not in general issue their own currency. This is an essential fact in understanding a nation’s finance. The demand for that currency is a consequence of taxes having to be paid in the national currency.

The next bit takes a little bit of thinking about. It is worth allowing your imagination space to contemplate what I am about to say to assure yourself of its validity.

The sum of all surpluses in a national economy must equal the sum of all deficits. 

Let us unpack this with a thought experiment. Imagine there are just two of us on a fabled desert island. We decide that we are going to issue a currency and agree that is the only legal tender on the island. If one of us, for some reason or another is acquiring more currency than they are spending, then that person is running a surplus. It follows then that the other person must be in deficit – they are losing more currency than gaining. Of course, no one would issue a currency for two people, but this does illustrate how in a simple case, with a single legal tender, deficits and surpluses must sum to zero. If we now start adding people into the economy the same accounting fact must hold; all deficits and surpluses must sum to zero since there is only one source of currency.

The zero-sum of deficit and surpluses is profoundly different from the Micawber principle of income and expenditure. The implication of this is that if the government tries to generate a surplus by reducing the difference between spending and taxation, members of society will have to start to carry a deficit (and accumulate debt) in order to meet the needs of the nation. At the same time, public services are run down as result of lack of funding. Yet a government, as the currency issuer, has the capacity to create money to spend on things like health and education. In fact, a government with a sovereign currency (i.e. one that is not pegged to another currency) does not need to borrow money to spend, it has the power to create currency to spend on the things we need, like health and social care, education, housing, welfare, infrastructure, defence and an industrial strategy (secure and meaningful jobs).

It is incorrect then to argue that public services are unaffordable, the choice is to fund them through public funding or through private debt. I know which I prefer. Political activists are quite right in saying that austerity is a political choice and not an economic necessity.

I am going to end here, but no doubt, there are many questions from this which I will address in subsequent posts. Questions like:

  • How does this relate to the £2 trillion national debt in the UK?
  • Doesn’t currency creation lead to massive inflation?
  • Why does the mainstream media insist on the Micawber principle?


I have not referenced these ideas and none of theme are mine, so I would like to acknowledge some sources, past and present: Bill Mitchell, L Randall Wray, Stephanie Kelton, Warren Mosler, Ellis Willingham, John Maynard Keynes, Karl Marx, Win Godley, Alfred Mitchell Innes and all the Modern Money Theory proponents on social media #learnMMT

Taxation and government spending: which comes first?

The common assumption is that the UK’s taxation is the source of revenue that pays for public services, health, welfare benefits, education and defence. It is often assumed, and commonly framed as, taxpayers money. I was having quite a discussion on Twitter about this. I was putting forward the idea that taxation is not a source of income. The following justification comes from Larry Randall Wray and is a view held by heterodox [1] economists who subscribe to Modern Monetary Theory or Modern Money Theory (MMT) (see Mitchell, 2016; Wray, 2015).

Wray explains the principles in the following video. If you want a brief overview read on.

Imagine year zero for a country’s economy, the notional point at which the economy begins. The first thing that the country has to do is invent a currency. In the UK we have the pound. The government creates a currency with which transactions and trade can take place. The government is the only institution that has the legal power to create that currency. Anyone else who tries to faces criminal prosecution.

At year zero, the UK has to introduce that currency into the economy, it can give it to its citizens and it can pay them to provide the things we need for our society. The government pays people to provide administration, build hospitals, schools, sports facilities and weapons. It can pay people who don’t have a job. It can pay people to be doctors, teachers and it can provide training for those individuals. It can pay for research and development.

It is only after the government has introduced currency into the economy that it can tax people and businesses. This flow of spending followed by taxation continues year-on-year. And in fact most of the time the UK runs at a deficit, there is lag between spending and taxation. Because spending precedes taxation. You can see this in the graph below.

Government General Expenditure (GGE) and Government General Revenue (GGR) (IFS source)

So what is taxation for, if it does not provide government its revenue?  Wray and other MMTers argue that it creates a demand for the currency, it makes it flow round the national economy. If we did not have taxes then the currency, the pound for example, would not be in demand in the economy. We need it because we have to pay taxes in that currency. Richard Murphy (2015) considers tax a kind of democratic subscription, it gives citizens a commitment and right to participate in democracy. Taxation is also used to redistribute wealth and to regulate inflation by increasing or reducing demand in the economy.

It is important to recognise that running an economy in deficit does not necessarily increase the national debt, because the national debt is not really a debt in the sense that we understand personal or household debt (Wray, 2015). The national debt are bonds created by the government to drain accumulated reserves in the banks. This represents the accumulation of currency in the private sector and technically speaking it is used to maintain the overnight interest rate. This, I understand is common knowledge for anyone in banking or finance.

So when a government talks about maxing out the government credit card, or leaving a debt for our grandchildren this is highly misleading. A government cannot run out of its currency. Therefore, there is really no excuse for not funding health and education and other public services properly.

Related blog posts:

There is plenty of money to spend on schools: a Modern Money Theory perspective

Education, policy and pedagogy: It’s the political economy stupid!


[1] Heterdox economics contrasts with orthodox or mainstream classical economics.

[2] 0n 22/2/2017 I noticed that this blog had been replaced with an earlier incomplete draft, I have now restored it

[3] Thank you to Sandra Crawford who introduced me to this excellent illustration of the ideas in this post.


Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.
Murphy, R. (2015). The joy of tax: how a fair tax system can create a better society. London: Bantam Press.
Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Houndmills, Basingstoke, Hampshire ; New York, NY: Palgrave Macmillan.