We face polluted seas, crumbling schools and no sensible energy security strategy. And, as reported recently in The Argus, crumbling hospitals across Sussex, with a repair bill of £11.6 billion for hospitals across England hospitals last year.
According to the National Infrastructure Commission, overall public and private sector investment needs to increase from an average of about £55bn per year over the past decade to between £70bn and £80bn per year in the 2030s, to respond to global warming and bolster growth across UK regions.
Yet even as our infrastructure crumbles and costs escalate, we hear an old refrain from both the main parties that ‘there is no more money’. Keir Starmer has said that “the UK’s credit card is maxed out” – the infamous phrase first used by ex-chancellor George Osborne to usher in a decade of austerity while today’s Conservatives proclaim their pledge to get the national debt falling.
None of these claims bear close scrutiny. The management of public debt by a government with its own sovereign currency is in no way analogous to a household budget.
So where does money come from?
Banks create new money whenever they make a loan. They do not borrow from savers. And banks, including the government-owned Bank of England, can create money in vast amounts if needed. This is not a political point but a description of what actually happens on a daily basis. Here is what the Bank of England has to say:
“If you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists… essentially, banks create money, not wealth.”
And in a separate article on its website it states:
“The reality of how money is created today differs from the description found in some economics textbooks: rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”
The implication of this is that for money to be taxed or borrowed by the government, it first has to exist in the real economy. And it can only exist if it is first created or spent into existence.
High street banks create or ‘print’ around 80% of the money in the economy as electronic deposits. In effect they act as agents of the state with the express permission of the Bank of England. The latter not only controls total money supply but exercises similar money-creating powers.
The role of the Bank of England
So when it comes to the government’s insistence that to fund vital services it can only tax or borrow, this is not strictly true. Governments with their own sovereign currency can instruct their central bank to create or print money in unlimited amounts when needed. This was amply demonstrated during the financial crisis of 2007-9 when the then governor of the Bank of England Mervyn King boasted to a Scottish conference in October 2009 that:
“A trillion (that is, one thousand billion) pounds, close to two thirds of the annual output of the entire British economy”, had been mobilised to bail out the British banking system. (Extract from Chapter 4 of Ann Pettifor’s book The Production of Money).
No such financial largesse was extended to vital public services such as the NHS or to those who lost jobs and homes and found themselves reliant on diminishing welfare support. Rather, the new narrative of ‘austerity’ was promoted by the newly installed coalition government, and the media failed to expose a specious economic narrative that did untold harm to both people and economy.
A more recent example of Bank of England intervention was the Covid pandemic which brought the economy to a virtual standstill and required huge amounts of money to fund the furlough scheme. In all, the Government ‘borrowed’ £412 billion by selling government bonds (or gilts) to the money market. The sheer scale of borrowing triggered shrill headlines about the size of the national debt with the BBC claiming that:
Not once did the BBC mention the role of the Bank of England in quietly buying back that same debt through Quantitative Easing (QE) or ‘money printing’, thereby ‘deleting’ the debt. As the New Economics Foundation has pointed out:
“Between April 2020 and July 2021, the Bank of England’s ‘money printing’ programme – creating new money to buy up government debt — matched 99.5% of total new debt issued by government to pay for Covid support schemes like furlough…While total borrowing between March 2020 and July 2021 was £413 billion, the Bank of England’s total purchase of government debt was £412bn, or 99.5%.”
In all the Government has used QE (or money printing) to buy back its own debt via the Bank of England to the tune of £895 billion between November 2009 and November 2020. That is nearly 5 times the size of the NHS budget. Both these examples demonstrate the immense power of the state at a time of crisis.
The national debt and the Government’s ‘fiscal rules’
This brings us to the national debt which is rapidly becoming an election issue. Both main parties are engaged in a game of fiscal chess to position themselves as the ‘responsible party’ when it comes to handling taxpayers money and both cite the urgency of bringing down the national debt which, according to the Office for Budget Responsibility is forecast to rise from 89% in 2023/24 to 92.8% of GDP in 2028/29. And both parties adhere to the present government’s self-imposed fiscal rules, the principle one being that the ratio of debt to GDP must be falling in five years’ time. Any proposed public expenditure is measured against that fiscal rule – what is called ‘fiscal headroom’.
But these are self-imposed fiscal rules and they are constantly being broken – none of them have been adhered to for the last 15 years – and this suggests that there is something fundamentally wrong with the economics on which they are based.
There are three things worth pointing out:
Firstly, debt has a different meaning to a government than it does to a private individual. The major holders of the national debt are UK investors such as pension funds, insurance companies and private individuals. They buy the debt because it is one of the safest forms of investment. In a sense it is a debt we owe to ourselves.
Secondly, the debt has been greater in the past than it is now. In 1946, it stood at 250% of GDP as a result of the Government’s need to borrow heavily to rebuild after the devastation of the Second World War, and to finance the creation of the NHS and welfare state. If we can do it then, we can do it now.
Thirdly, as the economist Richard Murphy has pointed out, the Bank of England owns just under a third of the national debt (including the Covid debt) and interest on that debt is recycled back to the Treasury. Rather than cancel the debt it deliberately keeps it on its books for as he explains:
“It is intended to perpetuate the deficit narrative. The claim is that the country is over-burdened by debt and that as a result the country cannot afford things like education.”
MPs have a poor understanding of these issues
If you are surprised by the explanation about where money comes from, you are not alone: a survey of MPs conducted by Positive Money revealed that only 15% of MPs were aware that new money is created when banks make loans, and existing money is destroyed when members of the public repay loans. 62% thought this was false, while 23% responded ‘don’t know’. Tory MPs seemed to have a slightly better idea, with 19% answering correctly, compared to only 5% of Labour MPs. As Positive Money states:
“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are worryingly ignorant of where money actually comes from.”
A way forward
We are in an election year. Let’s make sure that whenever a candidate parrots the phrase ‘there is no magic money tree’, they are challenged. Given the multiple crises we face, such an answer should be greeted with the scorn that it deserves.
Crumbling schools may be symptomatic of crumbling government and it is natural to look for a change of government as the answer. But what can we do if both the main parties are wedded to rigid fiscal rules that deny vital investment?
The flawed economics on which these rules are based mirrors a flawed political system. Ultimately, it is not just a change of government that is needed but a fundamental change in how we are governed. We need a more participative democracy that enables citizens to co-design the fiscal rules by which we are governed.
