Do taxes really fund public services?

Where else can the money come from?

The government can create money but that is done in the expectation of tax revenue coming in to back it. So yes, of course taxes fund public services - do you believe in the magic money tree?

I’m simply asking the question. I had hoped responses wouldn’t be quite so ‘dismissive’. Is there any wonder that people are reluctant to ask questions in search of knowledge? Thanks anyway Jane71 & ‘Germanshepherdsmum’

Germanshepherdsmum

The government can create money but that is done in the expectation of tax revenue coming in to back it. So yes, of course taxes fund public services - do you believe in the magic money tree?

No, but we are told so often that taxes don't fund public services that some of us almost believed it!

So, if we currently have the highest taxes for 70 years, why are our public services on their knees? Clearly, the revenue the government has collected has not been spent on public services. So, where has all the tax money gone?

Inefficiency?

We are still trying to recoup from the 2008 crash, and that was followed later by Covid. Covid cost us billions, a country cannot afford to pay much of it’s workforce to stay at home on furlough for months, some up to eighteen months, and not feel the effects for years. The sheer cost of Covid has been crippling. Then we have up to two million people not working who could be working. Some are able to self fund, many don’t. They are not contributing to taxation/NI even if they have sufficient funds to manage without state help. The population has risen by nearly two million over the last couple of years, and whilst many, but certainly not all, are working, they do have medical needs and housing needs, and their children need education, just like the rest of us. Everything costs. There are more pensioners who need pensions. We support people who arrive legally or illegally if they can’t work. The extortionist cost of the numerous inquiries which cost us billions. Just why is the Covid inquiry going to last till 2026? Sweden completed theirs in a matter of months! Crazy!

As a result we borrow money and that will take us years to pay back. Most of us will be long dead before it’s repaid.

Taxes fund some public spending.

The Institute of Fiscal Studies provides a breakdown of spending - here:

ifs.org.uk/taxlab/taxlab-key-questions/what-does-government-spend-money

For 2023/23, by far the biggest costs were health, social security (pensions) and social security (working age and children) and education, accounting for over 50% of Total Managed Expenditure TME).

The various means by which tax is raised is explained here:

ifs.org.uk/taxlab/taxlab-key-questions/where-does-government-get-its-money

In 2023–24, total UK government revenue is forecast to be £1.06 trillion, or 41% of gross domestic product (GDP). The primary source of revenue is taxation, which is forecast to raise £950 billion in 2023–24, or 37% of GDP – equivalent to around £17,200 for each adult living in the UK.

That isn’t just coming from direct taxation but all the other taxes we pay. Alcohol duty, airport duty, betting levies, insurance premium tax are just a few examples

If spending exceeds income, the difference in the deficit that has to be borrowed. This adds to the National Debt currently standing at around £2.5 trillion.

The government borrows money by selling financial products called bonds. A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments over the bond's lifetime. (Premium Bonds are exactly that. The amount of money PB holders have lent to the government makes up around 5% of the National Debt - that is pays interest on in the form of prizes.)

UK government bonds are known as gilts. They are normally considered very safe, with little risk that the money will not be repaid. Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.

The Bank of England has also bought hundreds of billions of pounds' worth of government bonds in the past to support the economy, through a process called quantitative easing, a mechanism used to control interest rates.

Although bonds are considered safe they are traded on the stock market like any other commodity. Market values rise and fall. It’s why Kwarteng’s wreckless 2022 Autumn Budget brought pension funds to the brink of collapse and why unfunded tax cuts are so dangerous. It was only the intervention of the Bank of England which stepped in to buy bonds that saved pension funds from collapse.

Up to that point, the OBR forecast had estimated that net debt interest would cost £29 billion for 2023/24. Thanks to Kwarteng, it now expects that to be £82 billion.

There are three ways to fund that. More borrowing, raising taxes or cutting public expendure. However, the government has set fiscal rules to reduce borrowing so the choice boils down to raising taxes or cutting public expenditure.

Thanks TinSoldier.

Cue those who follow the modern monetarist theory, who do not see debt as a driver.

Might see a good debate here.

Oh dear Whitewave, have I inadvertently opened a can of worms

Yes, WWM2. I posted this expecting the argument that we can just create new money.

As a disclaimer, I’ll just say that I am an accountant not an economist. I look at things from the perspective of balancing the books as Micawber would. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery!

LizzieDrip

Oh dear Whitewave, have I inadvertently opened a can of worms

Of course! Impossible to start any thread on the N&P threads without a can of worms hovering in the background😄

Mind you I’d be happy to see a debate as I am somewhat on the fence with this, but not yet convinced of the MMT argument, although I’m open to argument.

TinSoldier

Yes, WWM2. I posted this expecting the argument that we can just create new money.

As a disclaimer, I’ll just say that I am an accountant not an economist. I look at things from the perspective of balancing the books as Micawber would. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery!

And me! Although I did economics at degree level.

You must admit though that running a country with massive very long term debt and the ability to print money etc is not remotely like running a company.

No, taxes don't fund public services and never have. The government has always run a 'debt', right back to the foundation of the Bank of England in the 17th C. A large part of the 'debt' is from the sale of government bonds, a practice which has gone on for 100s of years and which provided a safe source of assured income from the interest paid on the money invested by bondholders. You can find references to this in all sorts of places, including literature. e.g in Jane Austen where you might find reference to a heroine's income of, say, £50 pa from £1,000 invested in 5% consols (ie govt bonds). Anyone who has an NS&I savings account, or premium bonds has a share in the govt. 'debt'.
Pension funds and other institutions invest in govt bonds and many wealthier people still use them for reliable income. There's also a secondary market for bond sales used by people speculating on making a profit on their initial purchases.

Most of the holders of UK 'debt' don't actually want it to be repaid to them.

About a third of the 'debt' is that created by Quantitative Easing (QE). The Bank of England created the money to buy govt bonds. on the orders of the govt. The money from the bond sales went to the Treasury for the use of the government. As the BoE belongs to the govt. So the 'debt' is 'owed' by one branch of government to another branch of government. There is no pressing reason why this money should be 'repaid, it could sit in the national accounts for years. In fact, 'repaying' it by the BoE selling the bonds on the secondary market could adversely affect bond prices by causing a glut.

What is certain is that none of the 'debt' which worries people so much is dependent on taking extra money in taxation.

Thank you tinsoldier and Maizied, there certainly is a lot more to it than straightforward taxation and money trees. I have a reasonable grasp of economics, but only to a certain level.

TinSoldier

Yes, WWM2. I posted this expecting the argument that we can just create new money.

As a disclaimer, I’ll just say that I am an accountant not an economist. I look at things from the perspective of balancing the books as Micawber would. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery!

As an accountant, TinSoldier you must know that 'balancing the books' just means that all credits must have a corresponding debit.

The end result might end up with the accounts showing a negative or a positive balance, or (highly unlikely), that revenue and expenditure balance out to £0. The 'balancing' element is in accounting for all revenue and expenditure, not in making the two streams match each other.

Also as an accountant you might find this interesting, it is based on detailed examination of government accounting...

www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_purpose/files/the_self-financing_state_an_institutional_analysis_of_government_expenditure_revenue_collection_and_debt_issuance_operations_in_the_united_kingdom.pdf

Strangely, no-one ever seems to have seen an adverse critique of this paper... yet economists are usually very quick to jump in to defend their corner....

Hello maizie 😄😄

I will read the 39 pages of that at my leisure!

But for now, one thing you might be able to explain to me is to do what Reform UK are proposing in their manifesto to fix the NHS in two years at a cost of £30 billion. They talk about QE and Corona bonds sitting on a Bank of England computer for 75 years??? Is this just back of an envelope stuff or it there any merit and sense in what they are proposing in line with MMT?

assets.nationbuilder.com/reformuk/pages/19/attachments/original/1670234264/Reform_UK_Emergency_Health_Plan.pdf

Whitewavemark2

Hello maizie 😄😄

🤣🤣🤣

Can't keep me down for long...

I will read the 39 pages of that at my leisure!

I hope you do, TinSoldier and that you let me know your thoughts on it.

But for now, one thing you might be able to explain to me is to do what Reform UK are proposing in their manifesto to fix the NHS in two years at a cost of £30 billion. They talk about QE and Corona bonds sitting on a Bank of England computer for 75 years??? Is this just back of an envelope stuff or it there any merit and sense in what they are proposing in line with MMT?

The first thing you have to understand about MMT is that at its core is the fact that it is a description of how government financing actually works (as described in the Self Financing State paper.

The second thing is that it is not purely about money creation. Taxation is equally important to MMT. Because unlimited money creation, as we know from much quoted examples like Weimar and Zimbabwe, would just lead to hyperinflation with too much money chasing too few purchasable resources. What taxation does is to control the amount of money in circulation by taxing back the excess.

With that in mind, I believe that Reform also proposes to reduce taxation. So putting £30billion into the economy without taxing any back at a realistic level would just be inflationary. There is no merit at all in the proposal as it stands.

'Money' only has value if it can purchase something. The foreign currency we might have left after a holiday abroad has no value at all in the UK because it isn't legal tender. We can't buy anything with it in the UK. The more actual money there is in an economy the more it loses its value if there is very little that can be purchased with it.

LizzieDrip

Oh dear Whitewave, have I inadvertently opened a can of worms

Oh yes, but I've been out so missed it 😂

Maizie it makes sense when you explain it. Thanks!