IN the debate between representatives of the seven main parties in the UK broadcast by the BBC on Friday June 7, a question that came up repeatedly was, “How are you going to pay for what you are promising the electorate?” It is a question that betrays an ignorance of how the modern monetary system works.

Unlike a household, which has to balance its income and expenditure, the Westminster government issues the currency it spends. It has what is known as a “fiat currency”, so it can cannot run out of its own currency. It is not financially constrained and can pay for whatever it deems is necessary. That is how the British government could support the British people and British businesses when the Covid pandemic hit us. That money wasn’t borrowed, it was created. When the Westminster government spends more than it receives in taxes, it makes a financial contribution to some other aspect of the economy. Sadly, until Scotland is an independent nation with its own fiat currency, the Scottish Government has to balance its budget, and hence cannot do what the people of Scotland need it to do.

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As Stephanie Kelton, author of The Deficit Myth, pointed out in a TED talk, “Every deficit is good for someone. The question is for whom? And what are those deficits are being used to accomplish? Tax cuts with huge windfalls for those at the top without sparking investment and opportunity for the rest if the population don’t make good use of deficits.”

So the real question that the politicians should be asking is not, “What can we afford to do?” but, “What do the British people need us to do so that we can all feel better off and live healthy lives with a reasonable degree of financial and social security?”

And the real constraint on government spending is not how much money it has, but how much spare productive capacity the nation has in its economy. In other words, what is the gap between what the nation is producing and what it is capable of producing? Instead of aiming to balance the budget, governments with fiat currencies should be aiming to balance the economy – that is, aiming at full employment and stable pricing.

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Our government can create money for what the British people need: housing, health care, social security etc, and create jobs for people so long as there are people who need employment and we have the resources that are needed to enable people to do the jobs that serve the wellbeing of the people. But if that capacity is exceeded – that is, once full employment is reached – the consequence is inflation. Inflation, not deficits, is evidence of overspending if it is caused by demand exceeding supply.

The inflation that followed the increased spending during the Covid pandemic was not caused by us reaching full capacity and still spending, but by a shortage in supply of oil, food and housing. That means that hiking interest rates to slow demand may not have been the way to deal with the inflation that followed the pandemic.

Secondly, we have been led to believe that the government needs us to pay our taxes in order to spend money on its programmes. Whist that was the case when our currency was backed by the value of gold and silver, it is not the case today.

The government needs us to pay our taxes for two reasons. Firstly, when we are required by law to pay our taxes in the government-backed currency it means we will be happy to be paid by either the government or others in that currency so that we have the money we need to pay our taxes. Secondly, taxes serve to withdraw money from the economy. Creating money puts money into the economy and taxes take money out of the economy. What is important is the net increase and decrease in money supply.

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When the government spends more than it receives in taxes, the net result, as mentioned above, is that money is injected into the economy. If they tax more than they spend they will be withdrawing money from the economy.

Therefore, if there is spare capacity in the economy, a budget deficit will boost the economy and reduce unemployment. Conversely, when inflation is rising, a budget surplus will reduce the money supply and hence inflation. Rather than paying for what the government wants to spend, taxes are simply a means of managing the economy in a way that maintains it in a healthy state.

Finally, taxes are an important way for governments to alter the distribution of wealth so that we live in a more equal society. And, as it has been shown time and again, nations in which the gap between the rich and poor is narrow have healthier, happier people who all can flourish and thrive, each in their own way.

I am not an economist, but if you want to check whether what I have said is true, check out books by Stephanie Kelton and Randall Wray, or videos of talks and interviews they have given.

Ken Webb