Is the UK Government Really Broke? A £22 Billion “Black Hole”? But We’re a Sovereign Nation That Prints Its Own Currency—We Can’t Go Bust! Change My Mind.

Is the UK Government Really Broke? —We Can’t Go Bust! Change My Mind.

We’ve all heard the dire warnings. A £22 billion “black hole” in our finances. Tough choices ahead. Tax hikes on the horizon. It’s the same old story, whether it’s the Tories or Labour holding the purse strings. But what if I told you it’s all a grand illusion?

Here’s a bold claim for you: The UK, as a sovereign nation that prints its own currency, cannot go bankrupt. More provocatively, money is not the issue when it comes to funding government projects or policies. Sounds too good to be true, doesn’t it?

Let’s lay out the foundations of this argument:

During the COVID-19 crisis, our government demonstrated this power by creating £313 billion out of thin air. Did the sky fall? Did we suddenly find ourselves unable to pay our debts? Of course not. Because for a country like ours, money is not the constraint – political will is.

Our government can afford any project it desires, provided the real resources – labour, materials, technology – are available. The constraint isn’t money, it’s our capacity to mobilise these resources effectively.

Taxes and borrowing don’t fund government spending in the way we typically think. They’re tools for managing inflation and shaping economic behaviour, not filling a piggy bank.

The true limits are political will and the need to manage inflation, not some arbitrary financial ceiling.

This isn’t to say we can spend with reckless abandon. Inflation is a genuine concern that requires careful management. But the notion that we’re hamstrung by a financial straitjacket? That’s where I’m calling bluff.

This isn’t to say we can spend recklessly without consequences. Inflation is a real concern that needs careful management. But the idea that we’re hamstrung by some arbitrary financial limit is pure nonsense.

Remember the post-war period, when we built the NHS and undertook massive reconstruction despite being far poorer than we are today? We didn’t let imaginary financial constraints stop us then. Why should we now?

Starmer’s government is choosing austerity and broken promises. They’re not forced into it by economic reality. It’s a political choice, plain and simple.

The next time you hear talk of “black holes” and “tough choices”, remember: for a country like ours, the only real deficit is one of political courage and imagination. We can afford to build a better society. The question is, do our leaders have the will to do so?

As Keynes said, “Anything we can actually do, we can afford.” A sovereign currency-issuing nation is limited only by resources, not money. A Labour chancellor should understand this…

There's a line from Keynes that says 'if you can do something, you can afford it.' The UK has convinced itself over the past 15 years it cannot afford anything, with the result public and private investment has collapsed leading to general economic stagnation.

— Mark Blyth (@MkBlyth) March 26, 2024

So, here’s my challenge to you: Prove me wrong. If you believe the UK truly can go bankrupt, or that money is the primary constraint on government policy, I want to hear your argument. Let’s have a good-natured debate about the economic realities facing our nation.

Are we really broke, or is it just a convenient political fiction? Is the “black hole” real, or is it just smoke and mirrors? I’ve laid out my case. Now it’s your turn. Can you convince me that the conventional wisdom about government finances is correct?

Oh, and I’m not married to any one theory or another. I just believe MMT holds water and I’m in good company with that…

The floor is yours. Let’s dig into the economics, challenge our assumptions, and see where the truth really lies. After all, understanding how our economy truly functions is the first step towards building the society we want. So, what do you say? Are you up for the challenge?

Modern Monetary Theory

A sovereign country like the UK, which issues its own currency (the British pound), operates under a fundamentally different financial reality than households, businesses, or even countries that do not control their own currency. Here’s an explanation of why such a country can theoretically never go bankrupt and can afford any project it sets its political mind to, according to Modern Monetary Theory (MMT):

1. Monetary Sovereignty

The UK is a monetarily sovereign nation, meaning it has full control over its own currency. It can:

Issue its currency at will: The UK government, through the Bank of England, can create British pounds whenever needed. This means it does not need to rely on tax revenues or borrowing from others to finance its spending. It can always generate more money if necessary.

Settle its debts in its currency: The UK can issue bonds and other debt instruments, but since these are denominated in British pounds, it can always print more money to pay off these debts. Therefore, the risk of default (bankruptcy) is non-existent because it can always meet its obligations in its own currency.

2. The Impossibility of Bankruptcy

Bankruptcy, in the traditional sense, occurs when an entity cannot meet its debt obligations. For households or businesses, this means they run out of money. However, for a country like the UK:

No Risk of Running Out of Money: Because the UK can always create more pounds, it cannot run out of money in the same way a business or household can. This eliminates the possibility of bankruptcy in the conventional sense.

Debt in Foreign Currency: The only scenario where a risk could arise is if the UK borrowed in a foreign currency (e.g., U.S. dollars). In such cases, it would need to obtain that foreign currency to service the debt, which could be challenging. However, as long as the debt is in pounds, this issue does not apply.

3. Financing Any Project

Because the UK controls its currency, it can afford any project or initiative it desires, provided:

Real Resource Availability: The key constraint is not money but the availability of real resources (labour, materials, technology, etc.). If the resources are available, the government can mobilize them through spending.

Managing Inflation: While the UK can print money for any project, excessive spending in an economy already operating at full capacity could lead to inflation. MMT acknowledges this and suggests that the government should monitor and manage inflation through taxation, spending adjustments, or borrowing.

4. The Role of Taxation and Borrowing

Contrary to traditional views, under MMT:

Taxes Do Not Fund Spending: Taxes serve to regulate inflation, influence behaviour, and redistribute wealth, but they do not directly fund government spending in a monetarily sovereign state. The government can spend first and then manage inflation through taxation.

Borrowing Is a Policy Tool: Borrowing is not about raising funds but about controlling interest rates and providing safe assets (like government bonds) for investors. It’s also a tool for managing inflation and demand.

5. Political Will and Policy Choices

The ability to afford any project depends on political decisions:

Political Will: The government must choose to prioritise certain projects or goals. Whether it’s investing in healthcare, infrastructure, education, or green energy, the limit is political, not financial.

Public Perception and Confidence: While the government can print money, it must maintain public confidence in the currency. If people or markets believe that government spending is reckless, it could lead to loss of confidence, depreciation of the currency, or higher inflation expectations.

6. Practical Examples

COVID-19 Response: The UK, like many other countries, significantly increased spending during the COVID-19 pandemic without immediate concern for deficits, demonstrating that it could finance large-scale interventions when needed.

Post-WWII Reconstruction: After World War II, the UK undertook massive public projects, including the establishment of the National Health Service (NHS) and extensive rebuilding, financed largely through government spending.

In essence, a sovereign country like the UK that prints its own money cannot go bankrupt in the traditional sense because it can always create more of its currency to meet its obligations. It can afford any project it sets its political mind to, constrained primarily by the availability of real resources and the need to manage inflation. The focus shifts from financial limits to policy decisions about how resources are allocated and how inflation is controlled.