Government Spending Creates Money, Not the Other Way Around

Every time politicians and economic commentators talk about 'taxpayers' money', they are fundamentally misrepresenting how government spending and taxation work. The conventional story says that the government collects taxes and uses that money to pay for schools, hospitals, pensions, and other public services.

But this is the opposite of what actually happens. Government spending creates new money through the banking system, while taxation withdraws spending power from the economy. There is no pot containing individual taxpayers' payments waiting to be spent again on public services.

Taxation plays essential economic and social roles, including controlling inflation by removing spending power, redistributing income and wealth, and encouraging or discouraging particular activities. However, it does not fund government spending as many believe.

The Bank of England creates money through accounting entries when the government spends, and taxation is used to reclaim the money from the economy. When tax is paid, the taxpayer's debt is cancelled, and the money no longer exists in the ledger.