From every politician, every political, business and economic pundit - often from the public themselves whom the gatekeepers allow onto the mass media - we hear about the plight of the poor taxpayer.
The notion is that the taxpayer pays for any spending carried out by the UK government, from defence and health to the grants that go to local authorities in England and the devolved governments for Wales, Northern Ireland and Scotland.
In a recent article on the BBC Scotland News website, Business and economics editor, Douglas Fraser, made the following statement about recent spending plans by the UK Chancellor of the Exchequer:
"We - the taxpayers - could be on the hook for a third of a trillion pounds."
I'm not wishing to specifically pick on Douglas. His notions about taxpayers are very much the norm, but this statement is simply wrong - as wrong as notions that Earth is flat and that it sits at the centre of the universe with the Sun, planets and stars revolving around it. I will endeavour to explain why.
The core assumption in such statements about taxpayers is that in order to spend, the UK government must first acquire pounds from the public via taxation (or it must borrow - another story). This begs the question, where did those pounds come from in the first place? We know that there are trillions of them out there in non-UK-government bank accounts. How did they get there? (I will heretofore refer to 'non-UK-government' as the private sector.)
I will discount paper and coin money in my discussion. They represent only about 3 percent of the total number of pounds in the private sector and they are really just vouchers that represent pounds in an account somewhere.
Thinking about the pounds in my bank account, I got them through selling my labour to companies. Where did they get them? They likely acquired them by selling their produce. And so on, each credit to one account balanced by a debit to another. This trail of buying and selling must end somewhere, so what was the original source of those pounds?
As I understand it, the UK government is the only entity in this kingdom that has the legal right to issue those pounds. It does so via its agent, the Bank of England, a supposedly independent organisation that is in fact 100 per cent owned by the UK government.
As an aside, I will discount pounds created by loans from commercial banks. Except for the interest charges that are added on top, they are a zero sum as they must be paid back to the bank, thereby cancelling that debt and deleting the pounds that were created in the first place.
When the UK government wishes to purchase, say, an aircraft carrier from BAE Systems, it will instruct the Bank of England to credit the reserve account of BAE Systems' bank. Every commercial bank has a reserve account with the Bank of England. These accounts act as buffers between banks for the clearing of funds between them. The bank where BAE Systems has its current account can now credit that account so that BAE Systems can buy materials, pay workers and looks after its assets and shareholders - and eventually deliver a ship! It's a simplified explanation, I know, but that's essentially the process.
In effect, the pounds that got added to BAE Systems' current account were created merely by a few keystrokes in the Bank of England at the UK government's behest. The pounds didn't come from anywhere. The Bank of England didn't look in an account stuffed with taxpayers' pounds to see if the carrier could be afforded. If that were the case, then going to war would become a difficult process as the taxed pounds would be far too scarce to fund a typical war effort.
A better model for what really happens comes from sports. Take the Scottish Professional Football League (SPFL). This organisation keeps a table, a sort of database that records the results of football matches, goals scored and the wins and losses. The most important part of the table is the points, three for a win and one for a draw. Where do those points come from? Does the SPFL go into a safe of used points from previous years to get them? Certainly no. Is there a possibility that it will run out of points. Of course not.
It is the same with pounds Sterling. The Bank of England creates pounds merely by changing the numbers on a database, spreadsheet, account; call it what you will. Likewise, taxed pounds are deleted, wiped out, removed from an account by HMRC much like how the SPFL can delete points from a football league when a club is deemed to have transgressed some rule. Both examples are run by authorities which have the right to increment or decrement the numbers in those databases.
While taxation is vital to the process as we shall see, the concept of "taxpayers' money" is a false one when the UK government needs to make payments to the private sector. Further, the concept is divisive because it implies that those who haven't paid tax (either through poverty or by having very good tax advisers) are in some way cut out of the political process and unworthy of benefitting from UK government spending.
I contend that what the UK government spends isn't taxpayers' money. It is the people's money. The UK government was voted into power by the people (taxpayers or not) and thus by democratic means, it was granted the power to provision itself. It does this by placing legally binding obligations (taxes) on the people and it demands that payment to clear those obligations are made using pounds and only pounds.
Now the people need to acquire pounds so that they can cover their obligations to the state. But first, the government must create them. It does so by handing them out in return for goods and services. This way, the government's currency and no other becomes the de facto currency in the kingdom. It can spend pounds into the economy in order to achieve the goals it has set out for itself. In the long term, those pounds will be taxed back and deleted.
In a very real sense, the UK government has no money. It creates pounds when it spends and it deletes them when it taxes them back. Liam Byrne was right with his joke note to the incoming coalition government in 2010 saying, "I'm afraid there is no money." He knew it and I believe that all who are at the top of government ultimately come to realise it, especially those dealing with the effects of Covid-19. It's a shame that those incoming to Number 10 at the time chose to naively weaponise the joke.
The upshot of having such a 'sovereign' or 'fiat' currency is that by the logic of double-entry bookkeeping, the UK government's deficit is the private sector's surplus. Those pounds in our accounts, that's the deficit right there. If the UK government, naively or wilfully, wishes to pay down the deficit, they will also remove our surplus. In the process, they will throttle the economy, encouraging the use of debt to maintain standards of living. All the while, those who commentate on these matters perpetuate the myth of taxpayers' money, either through lack of awareness or deliberate obfuscation.
To sum up, the logic that stems from the UK government's monopoly position as the issuer of the currency is that ultimately, and despite politically created 'fiscal rules', is that it is only constrained by the resources available to it. If those resources are there and inflation is low, it can always spend. It can always pay its debts. It can never become insolvent. It is not fiscally constrained.
It does not spend taxpayers' money.
The current situation regarding the effects on the UK economy of Covid-19 has exposed the accuracy of this analysis. When a government like the UK's, with a fiat currency, needs to mobilise the resources available to it, it does not first go looking in the taxation pot for funds. It simply spends as necessary to achieve what is necessary. If it overspends and outbids the private sector for scarce resources, then inflation will ensue. A wise government will be watchful for that.
The situation that the global community finds itself in requires that past misconceptions about the mechanisms of money need urgent updating. The current model ought to be disposed with, much like how notions of a flat Earth and an Earth-centred universe are now the province of cranks.
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