“Government Doesn’t Have to Borrow to Spend”

FACT: The Government doesn’t need to borrow to pay for it’s spending.

Despite this fact, the prevailing view is the exact opposite i.e. if the government doesn’t collect enough taxes, by necessity, it must cover its spending shortfall through borrowing. Most people think this is obviously true. Nevertheless, it is a myth. Don’t just take my word for it though. Here’s economist James K Galbraith explaining further*:

“In the modern world, when the Treasury writes you a check, your bank credits your account. That’s how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Bank of England (BoE) buys back many of them, leaving the public with the cash it would have had in the first place.

Could the Treasury skip the rigamarole and pay its bills without bonds? Economically, sure. Why doesn’t it? Well, the BoE has regulations governing “overdrafts” — but apart from these, the answer is plain: to do so would expose the “public debt” as a fiction, and the debt hysteria as a sham.”

* I have changed “Federal Reserve” in the original article to “Bank of England” as we are in the UK. Galbraith also refers to the debt ceiling, which we fortunately don’t have here, so I changed ‘ceiling’ to ‘hysteria’.

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8 thoughts on ““Government Doesn’t Have to Borrow to Spend”

  1. Gov’t does not need Taxes or Borrowing to spend. There is no such thing as DEBT or DEFICIT in Gov’t. Your Gov’t cannot run out of Money there is no GLASS CEILING. Which makes the USA look like a bunch of ignorant school children. who had better go to Economic Lessons

  2. “Well, the BoE has regulations governing “overdrafts” ”

    The BoE doesn’t even have that. HM Treasury has a ‘Ways and Means’ Account at the Bank of England that it simply chooses not to use at present.

    The UK is essentially ‘MMT ready’ – all the laws and powers are in place to just run an overdraft at the central bank.

      1. The Ways and Means Account was used for years to ‘balance the books’. It used to be what provided the ‘assets’ that backed note issue until the Treasury ‘paid them back’ a few years ago.

        AFAIK the only restrictions on its use are if the government of the day decides to observe the letter of the EU treaties – primarily Maastricht. But given that other countries in Europe do not, you do wonder whether those ‘pirate rules’ are less rules and more guidelines.

  3. Reblogged this on Guy Debord's Cat and commented:
    Here’s one of the Tories’ popular myths debunked. You know how Gidiot and the rest of the wrecking crew talk about having to “borrow” money to spend on all manner of things? Well, it’s bunkum, just like this idea that social security spending will cause an exponential rise in the level of national debt. For all their talk of fiscal responsibility and superior economic practices, the Conservatives are grossly irresponsible and reckless with the public finances. The only reason they cut public spending is crush those beneath them who rely on public services. They claim that no one should have to be “addicted to the state” and they sell off nationally owned assets to their chums who own the hedge fund companies. In short, they’re a bunch of crooks but you knew that already.

  4. Its worth just mentioning that they do appear to borrow by issuing securities and bonds. on which they pay interest.

    They do that to set the levels of interest rates in the economy Its not really about borrowing.

    It is not possible to borrow back your own IOU anyway. It is just replacing an old IOU for a new one. There’s no real point in doing that.

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