Funding Prosperity. Taxing Inflation.
In modern economies such as the UK, where the national currency is fiat money (GBP £) established and created by government, the economy operates very differently from how it is described by politicians who compare government budgets to that of a household.
The UK government in fact, under close examination, necessarily spends first and only subsequently collects taxes or borrows the funds it has spent, and therefore has an unlimited capacity to pay for public services & infrastructure that benefit all its citizens and to fulfil promised future payments. That also means it has an unlimited ability to provide £ funds to other non-governmental sectors (domestic & overseas). Thus, because it spends first, and then taxes or borrows, insolvency and bankruptcy of the UK government is not an applicable concept. It can always pay.
The reality is that tax does NOT fund government spending, all of which can in principle be funded by issuing currency or borrowing.
It is, of course, very unlikely that this would actually happen: inflation would rapidly destroy the value of a currency in this situation and the willingness of people to lend would quickly expire. This means that TAXATION, a necessary fact of economic life, is an essential tool to CONTROL INFLATION as it allows excess money to be removed from the economy.
The purpose of tax is to achieve a number of goals (funding government spending is certainly not one of them),
- Reclaiming the money the government has spent into the economy. To prevent excessive inflation.
- Redistributing income and wealth within the economy. Redistribution of income and wealth is an essential function of Government.
- Ratifying the value of money. Gives the currency created by the government its value in exchange and as a result passes control of an economy to the government that charges that tax.
- Reorganising the economy. To meet social and economic goals.
- Repricing goods and services. Markets cannot always price the externalities of the goods and services they supply or reflect social priorities.
- Raising representation in a democracy. It is important that people are in the system. When they are they want a say on how the system works and democracy is enhanced as a result.
Government spending is essential to deliver prosperity to its citizens and also provide a balanced and stable economy that benefit the many households and businesses not just the few. With a currency issuing sovereign government the UK can fund its own spending and use taxation as a tool to control inflation.
Private sector savings are unspent income. Low levels of private sector spending causes unemployment. It is therefore only pubic sector spending that can that can help create full employment (prosperity) whilst also maintaining price stability using taxation as a control tool. Money created by private banks typically do not contribute to either full employment or price stability since the allocation of these funds contribute to increasing private sector savings of a privileged few (via asset bubbles and financial speculation).
Modern Monetary Theory underlines how funding of essential pubic services by the government can lead to prosperity without causing inflation or devaluation of the currency.
The Basics of Modern Money: Similar to the Federal Bank in the USA, the Bank of England is the Issuer of Currency in the UK.