Government Borrowing: A Myth Busted

The media often portrays government borrowing as a necessary evil, with economists warning of impending financial disaster if interest rates are not kept low. However, this narrative is based on a flawed understanding of how money creation works.

In reality, the UK government has the power to create its own money through the Bank of England, which runs an overdraft for the government every day. The government does not need taxes to spend, as it can simply print the money needed to fund its activities.

The government's borrowing is actually a favor to the City of London, allowing foreign companies and governments to save their funds by holding government bonds. These bonds provide a safe haven for these institutions, which cannot create new money to repay their depositors if they face a crisis.

The full funding rule, introduced in 1981 by Sir Geoffrey Howe, requires the government to borrow funds to clear its overdraft with the Bank of England. This rule has been used to make the government dependent on financial markets, but it is not necessary and can be ignored.