Author Archives: John Medway

No, Sir Edward, we are not going bankrupt!

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“We are going bankrupt as a nation — there will not be the money to pay for the NHS or pensions.” This was the impassioned cry from Sir Edward Leigh (Con, Gainsborough) in Tuesday’s Commons debate on public health restrictions. He referred in particular to the closing of pubs at 10pm and more generally to what he saw as a need to let businesses “get on and do business”.

Fortunately he was wrong. We won’t go bankrupt as a nation. This is because we create our own money. He no doubt thinks that business activity is always needed, through taxation, to pay for public services such as the NHS. This is not the case. The state is at liberty to create whatever money is needed to pay for public services. Taxation is needed to remove money from circulation to prevent inflation, not to pay for public services.

Inflation occurs when the economy is working at full capacity and the money in circulation creates effective demand beyond what the real economy can meet. The pandemic reduces both supply and effective demand. The supply of hospitality services is reduced by measures to prevent the spread of the virus. Effective demand for hospitality services, and for other services and goods, is reduced by the loss of income suffered by many businesses and employees whose work is affected by the COVID restrictions.

Most money circulating in the economy is normally created by private banks when they make loans. Money is destroyed when loans are repaid or written off, such as through bankruptcies, and when taxes are paid. Investment in several areas of the economy – such as hospitality, the arts and aviation – is likely to be depressed at the moment, which means that private money creation will be below normal.  It is not at all clear that the money being put into circulation through business support schemes, additional social security payments and health expenditure needs to be balanced by increased taxation. In any case, increased business activity could create its own need for taxation by stimulating an increase in the money created by private banks.

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