Challenging what we're told about public finances
"There is no such thing as public money, there is only taxpayers' money."
— Margaret Thatcher, 1983
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it…"
— John Kenneth Galbraith, Money, 1975
Duration
~25 min
Followed by Q&A. No economics degree required.
Part One
We all know what money does. But what is it?
Fiat is Latin for "it shall be." The pound has value because the UK government decrees it, not because it is backed by gold or any physical commodity.
Private citizens cannot create money. That is called counterfeiting. Only the currency issuer can.
The pound is backed by Parliament's power to tax.
Government Spending (the tap)
Adds money to the economy
Taxation (the drain)
Removes money from the economy
Inflation (overflow)
Too much money chasing too few goods. The tap running faster than the drain can handle
The bath cannot "run out of water" because government is the source of the water. The challenge is managing the level.
Part Two
The currency issuer is fundamentally different from the currency user
These two entities look similar. They operate by completely different rules.
🏠 You (Currency User)
🏛️ UK Government (Currency Issuer)
The Exchequer and Audit Departments Act 1866 establishes the legal framework. This is not modern theory. It predates modern economics entirely.
Exchequer and Audit Departments Act 1866, s.11. This is not MMT. It predates the theory by over 130 years.
Part Three
What taxes actually do, and what they don't
Myth
Taxes fund government spending. The government collects money from us and then spends it.
Reality
Government spends first (creating money), then taxes remove some of that money to prevent inflation.
Taxes perform several crucial functions:
"The government does not need your money to spend."
"You need theirs to survive."
This completely changes the political conversation about what is "affordable."
The accounting of what actually happens when you pay £100 in tax:
You (Taxpayer)
−£100
deposit lost
Your Bank
−£100
reserves to HMRC
HMRC → BoE
+£100
govt account
Consolidated Fund
Offsets
prior spending
Net result: £100 of money has been destroyed. It no longer exists in the economy as a private sector asset.
Sequencing matters: The government spent first, creating the £100. Your tax payment cancels out that earlier creation.
UK GDP is approximately £2.5 trillion. Government spending is roughly 45%, around £1.25 trillion. That is the scale of money being created and managed each year.
ONS National Accounts
Part Four
The private sector's savings, explained
UK Sectoral Balances as % of GDP, 1987–2024. Sectors sum to zero by accounting identity
Government deficit = private sector surplus. Every pound the government "overspends" is a pound of net financial assets held by the private sector.
A government surplus forces the private sector into deficit. The 1999–2000 Blair surplus preceded a private debt binge.
Source: ONS. Note 2009 and 2020 surges in private saving correspond to financial crisis and Covid, requiring matching government deficits.
"It seems more accurate to view the national debt less as a form of debt and more as a form of money in circulation."
David Andolfatto, St Louis Federal Reserve, 2020
The national "debt" is the sum of all previous deficits, i.e. all previous untaxed government spending, held as:
NS&I Annual Report 2022: "When customers invest in NS&I, they are lending to the Government."
ONS 2022. That is 16% of UK national "debt."
The national debt is the private sector's savings.
If we "paid it off," we would be eliminating NS&I accounts, pension funds, and the safe assets the financial system needs for collateral.
Part Five
Why the myth persists, and what it costs ordinary people
Three main reasons, not all of them innocent:
① Market Ideology
The moral argument: if you can't afford it privately, you shouldn't have it publicly. Scarcity narratives enforce conformity and work discipline.
② Political Control
Deficit myths justify keeping government small. If people understood spending is a political choice, not a financial constraint, the debate changes entirely.
③ Genuine Ignorance
Many politicians and commentators genuinely don't understand how monetary systems work, though this is less true of those writing the rules.
"I think there is an element of truth in the view that the superstition that the budget must be balanced at all times is necessary. Once it is debunked, it takes away one of the bulwarks that every society must have against expenditure out of control. One of the functions of old-fashioned religion was to scare people into behaving in a way that long-run civilized life requires. I see merit in that view."
— Paul Samuelson, Nobel Laureate in Economics, 1995
When politicians discuss public spending, we're told there are only three options:
The real question is never "where will the money come from?" It is: "Do we have the real resources (workers, materials, productive capacity) to deliver this without causing inflation?"
The primary spending constraint is inflation and the productive capacity of the economy. If there is insufficient real capacity relative to demand, additional spending raises prices, not output.
✓ Real Constraints
Inflationary pressure
Available workers and skills
Physical materials and supply chains
Productive infrastructure capacity
✕ Not Real Constraints
Affordability in monetary terms
The size of the deficit
Debt-to-GDP ratios
Bond market "confidence"
"A multi-billion pound plan to expand free childcare risks being undermined by 'significant' nursery closures this year... capacity issues posing challenges to universal rollout."
— Sky News, July 2022
The childcare example is perfect: the constraint was nursery places and trained workers, not money. During Covid, no one could buy toilet rolls no matter how much money they had. Real resources are the limit.
Real consequences of austerity justified by monetary myth:
NHS / The Guardian
Record NHS waiting lists exceed 7.7 million, longest in history
Decade of underfundingLocal Councils / BBC
Birmingham, Nottingham, Woking among councils declaring effective bankruptcy
Austerity cutsEducation / DfE
700,000 children in schools with buildings requiring urgent safety repair
Capital underspendPoverty / JRF
4.2 million children in poverty, up from 3.6 million in 2012
Benefit cutsMental Health / Mind
1.8 million people waiting for mental health treatment as lists doubled
Service collapseInfrastructure / ONS
UK infrastructure investment lowest in G7 as a share of GDP for 30 years
Productive declineSocial Care / LGA
Social care gap reaches £2.8 billion with 1.5 million without care they need
PreventableClimate / CCC
UK falls behind on climate targets with green investment gap of £50bn per year
Future costWales / Senedd
Wales faces £900m real-terms budget cut as councils warn of service collapse
Budget cutsWhat is actually true about government finances:
Part Six
The questions we should be asking instead
We face a genuine choice. Not a financial one, but a political and moral one:
Believe money is scarce and continue to make "tough choices"
• Austerity as moral discipline
• Public services treated as luxuries
• Climate investment deferred as "unaffordable"
• Future generations inherit broken systems
Recognise that the true constraints are real resources and inflationary capacity
• Investment in productive capacity
• Public services as essential infrastructure
• Green transition as investment, not cost
• Future generations inherit functional systems
"Without our own vision, we'll end up living someone else's."
Replace "How will you pay for it?" with these:
We have the resources to repair our broken systems. Don't let myths about debt and deficits hold us back. Focus on the real deficits: health, education, infrastructure, and good jobs.
"The difficulty lies not so much in developing new ideas as in escaping from old ones. Once we allow ourselves to be disobedient to the test of an accountant's profit, we have begun to change our civilization."
— John Maynard Keynes, The General Theory (1936)
We have enormous untapped productive capacity: unemployed nurses and GPs alongside an NHS in crisis; skilled workers underemployed; communities capable of far more. The money myth keeps that capacity locked away. Once you see through it, the politics of scarcity look very different.
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."
— John Maynard Keynes, The General Theory (1936)
If government spending creates money and taxation destroys it, how should we talk about "investment" vs "spending" in public debate?
What are the strongest objections to this analysis, and how would you answer them?
How should we assess whether we can "resource" major public investment, and what are the real bottlenecks?
Should devolved nations campaign for greater fiscal powers so they can act more like currency users with real spending authority?
How might better public understanding of these mechanisms change the conversation about austerity, public services, and climate investment?
Contact: vincent_gomez@hotmail.com
Recommended reading:
Bank of England (2014) "Money Creation in the Modern Economy"
Berkeley et al. (2024) "The Self-Financing State"