Do taxes really fund public services?

How is the interest on the Government debt repaid please?

I know about Government debt (The Government has borrowed from me!) and I know about QE and that it is a fine balance to avoid rapid inflation but the debt fluctuates too.

Maize why do think Hunt says ‘taxation funds public services’? Is he trying to ‘simplify’ it for us ‘plebs’? Or does he want us to believe that the only way public services can be funded is by raising taxes, ergo, if we want to pay less tax, we’ll have to accept fewer public services such as NHS etc.

LizzieDrip

Maize why do think Hunt says ‘taxation funds public services’? Is he trying to ‘simplify’ it for us ‘plebs’? Or does he want us to believe that the only way public services can be funded is by raising taxes, ergo, if we want to pay less tax, we’ll have to accept fewer public services such as NHS etc.

It's because taxation did fund a lot of government spending for 100s of years. That was when the value of currency was based on how much gold and silver the king/government 'owned'. This became known as 'the gold standard'. But, in reality, a lot of borrowing went on, too...that's what the issue of government bonds was all about.

However, we don't use the 'gold standard' to value currencies any more. It was abandoned in the early 1970s. Our currency is valued against other currencies now, notably the US $. It is now a 'fiat' currency which we can issue into existence at will.

As I said earlier, that doesn't mean that we can issue huge amounts without a limit, but what it does mean is that we don't have to raise money from taxation before we can spend anything.

This has been the case for the last 50 years but old habits die really hard and it is also politically much more convenient to promote the 'household finance' view of the national budget and spending. It plays one section of the populace off against another and it gives a perfect excuse to cut spending that the government doesn't want to undertake.

After all, a government that says 'We've all got to tighten our belts because we're short of money' is appealing to our sense of community.

The government that told the truth and said 'we're going to make you all a bit poorer and cut to the bone the services you depend on because we'd rather the money went to privatised services that our friends, relatives, donors and supporters can make big profits from' isn't going to get much support...

Yes, but doesn't taxation pay off the interest on the debt and some of the debt too?

Thank you MazieD for your excellent synopsis of government finances. I totally agree and become so frustrated at the simplistic explanations consistently fed to us by politicians and the media.

I'm sorry, but who are we paying this 'debt' to?

From an earlier post:

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

Have you got some premium bonds? If you have, do you want the government to pay you back what you paid for them? (Unless you want to cash them in of course...)

The interest on the 'debt' (which is what the debt holders do want) is paid with 'created money, just like everything else.

There is a school of thought that says we really don't need to offer bonds anymore. The bondholders could just as well put their money into an interest paying savings account with the government if what they want is a reliable guaranteed income. But the bondholders who play the secondary market to speculate wouldn't be very happy about that, and there's a connection between the BoE and using bond sales to maintain the short term interest rates; but, to be honest, I haven't got my head round that yet

Thank you, Mawmac

I usually get brickbats

I was thinking of doing something more on money circulation and the multiplier effect, but I don't want to bore everyone rigid. I think it's fascinating, but not everyone does...

There is indeed a Magic Money Tree because in theory any government can create or borrow as much as it needs, BUT, it has to be in a responsible way, as Liz Truss found any hint of uncosted spending is going to be punished by international money markets loosing confidence.

In the past 20 years public debt has risen from 35% of GDP to 95% of GDP, in that period sterling exchange rate has fallen from $2 to $1.26, that matters because much of what we consume is priced in US Dollars.

Taxation despite being at the highest rate since WW2 we still can’t fund government spending, more has to be borrowed each year, in practice taxation repays under half of government spending.

We're not funding what most of the population seem to see as essential public services, but the money is going somewhere and is escaping realistic taxation.

What got a hint of where that money might be going with the disclosure that the charming racist Mr Hester was making so much money with his NHS IT contracts that he was able to donate a known £10million and a suspected £5million to the tory party...

We, not 'what'

MaizieD for chancellor - you’ve got my vote

MaizieD thanks, great explanations that I can understand.

MaizieD

I'm sorry, but who are we paying this 'debt' to?

From an earlier post:

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

Have you got some premium bonds? If you have, do you want the government to pay you back what you paid for them? (Unless you want to cash them in of course...)

The interest on the 'debt' (which is what the debt holders do want) is paid with 'created money, just like everything else.

There is a school of thought that says we really don't need to offer bonds anymore. The bondholders could just as well put their money into an interest paying savings account with the government if what they want is a reliable guaranteed income. But the bondholders who play the secondary market to speculate wouldn't be very happy about that, and there's a connection between the BoE and using bond sales to maintain the short term interest rates; but, to be honest, I haven't got my head round that yet

The only reason that the BoE issues bonds to raise they money needed is transparency, so that investors can be confident the government is not borrowing too much.

Interesting discussion but
Monaco
UAE
Andorra
Switzerland
are the top lowest taxed countries. So how is it okay for these countries to have loads of money in their economy but that doesn’t work for the UK?
Also I think non doms are financially advantaged in the Uk in a way the indigenous people are not!

Katie59

MaizieD

I'm sorry, but who are we paying this 'debt' to?

From an earlier post:

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

Have you got some premium bonds? If you have, do you want the government to pay you back what you paid for them? (Unless you want to cash them in of course...)

The interest on the 'debt' (which is what the debt holders do want) is paid with 'created money, just like everything else.

There is a school of thought that says we really don't need to offer bonds anymore. The bondholders could just as well put their money into an interest paying savings account with the government if what they want is a reliable guaranteed income. But the bondholders who play the secondary market to speculate wouldn't be very happy about that, and there's a connection between the BoE and using bond sales to maintain the short term interest rates; but, to be honest, I haven't got my head round that yet

The only reason that the BoE issues bonds to raise they money needed is transparency, so that investors can be confident the government is not borrowing too much.

I find your statement incoherent. For a start, Katie59, bonds aren't issued by the BoE.

They are no longer money raising instruments, they are just a savings facility.

'Investors' (I assume you mean bond purchasers?) aren't really interested in how much the UK 'borrows', they know their guaranteed interest will always be paid and their principle returned at term. The country cannot 'run out' of the currency it issues.

OK bonds are issued by the Treasury.

Of course investors are interested how much we borrow, if they invest in sterling they want the currency to stay stable if the value falls they loose out. If they invest today at £1.26 they don’t want to be repaid at £1.10, conversely if sterling gains they get value back

Are you talking about the secondary bond market now? Speculators have to live with risk.

MaizieD

Are you talking about the secondary bond market now? Speculators have to live with risk.

All investors live with risk, if your interest rate is 2% and inflation is 4% you loose out, if the value of sterling falls your shopping basket costs more.

First we find politicians fancy free lifestyles and the Royals, all their properties!
After that what ever is left over ( oh and we forget the fancy high living of all our diplomats abroad) and their fancy lives - which cost millions -
So whatever is left is shared out unequally to everything else.
Ooh I forgot all the fancy donors and their benegits

MaizieD

We're not funding what most of the population seem to see as essential public services, but the money is going somewhere and is escaping realistic taxation.

What got a hint of where that money might be going with the disclosure that the charming racist Mr Hester was making so much money with his NHS IT contracts that he was able to donate a known £10million and a suspected £5million to the tory party...

a lot of money is going in hugely expensive private company contracts which do not provide better services. I work in fostering which is now dominated by just a couple of companies who own several different foster care with offices offshore and they earn a lot through it. When I was a child protection social worker if you got a referral from say, a young parent struggling with their child you could refer them to the sure start centre, take them along & introduce them, they were very nurturing & kind & helped people see different ways of managing and the majority of times families grew in parenting skills and their cases could be closed.
Since the Tories have been in charge many sure start centres were closed so we have more children in care. I suspect the gov't thinks if we have less good parents take the children away and give them to people who can manage them.
But in reality its a different matter, it's hard to detach from your parents no matter how bad & often causes long term feelings of rejection.
I hold this up as just one example of gov't lavish spending on services with private companies whilst starving its equivalent local authority services to justify the private contracts so beloved of the Tory party.
Multiply this as many times as you like & it's easy to see how the treasury is spending a lot on public services that are poor.

bylinetimes.com/2021/12/13/cash-strapped-councils-and-a-crisis-in-childrens-care/

I read this the other day - and now I'm more confused than ever ..!
voxpoliticalonline.com/2024/03/19/isnt-martin-lewis-wrong-about-the-purpose-of-tax/

On much the same theme, The Lancet has published this today:

The effect of health-care privatisation on the quality of care

Over the past 40 years, many health-care systems that were once publicly owned or financed have moved towards privatising their services, primarily through outsourcing to the private sector. But what has the impact been of privatisation on the quality of care? A key aim of this transition is to improve quality of care through increased market competition along with the benefits of a more flexible and patient-centred private sector.

However, concerns have been raised that these reforms could result in worse care, in part because it is easier to reduce costs than increase quality of health care. Many of these reforms took place decades ago and there have been numerous studies that have examined their effects on the quality of care received by patients.

We reviewed this literature, focusing on the effects of outsourcing health-care services in high-income countries.

We found that hospitals converting from public to private ownership status tended to make higher profits than public hospitals that do not convert, primarily through the selective intake of patients and reductions to staff numbers.

We also found that aggregate increases in privatisation frequently corresponded with worse health outcomes for patients.

Very few studies evaluated this important reform and there are many gaps in the literature. However, based on the evidence available, our Review provides evidence that challenges the justifications for health-care privatisation and concludes that the scientific support for further privatisation of health-care services is weak.

www.thelancet.com/journals/lanpub/article/PIIS2468-2667(24)00003-3/fulltext?link_id=2&can_id=5bf3d622540b0d5c62525085450ec38b&source=email-nhs-privatisation-is-linked-to-avoidable-deaths&email_referrer=email_2255395&email_subject=nhs-privatisation-is-linked-to-avoidable-deaths

With the Shadow Health Secretary promising make more use of private health care to reduce NHS waiting lists should Labour win the next GE this report is rather worrying...

I was always under the impression that Council Tax paid for Social Services, Refuse Collection, Road Repairs and many other local things. Was also subsidised by Government funds which see to be decreasing at a rate of knots.

SueDoku

I read this the other day - and now I'm more confused than ever ..!
voxpoliticalonline.com/2024/03/19/isnt-martin-lewis-wrong-about-the-purpose-of-tax/

It's not saying anything essentially different from what I keep on explaining.

There are only two takes on this, either 1) you believe (as most people do, and those in control of 'the money' are happy for you believe) that taxation funds spending, or you 2) are convinced by research evidence that state spending comes before taxation and isn't dependent on it.

So what is confusing you?

I’m beginning to wonder about that - every time I hit a horribly pot-holed and crumbling road. Or reading about a severely underfunded school.

Where did my tax dollars go?? Building new shopping malls, building a new football stadium in an already affluent school district, let’s repaint the ugly water tower.

The town or city elected councils need to be held accountable for some of this misspending. If I were younger I’d run for office myself!