FACT: The Government doesn’t need to borrow to pay for it’s spending.
Despite this fact, the prevailing view is the exact opposite i.e. if the government doesn’t collect enough taxes, by necessity, it must cover its spending shortfall through borrowing. Most people think this is obviously true. Nevertheless, it is a myth. Don’t just take my word for it though. Here’s economist James K Galbraith explaining further*:
“In the modern world, when the Treasury writes you a check, your bank credits your account. That’s how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Bank of England (BoE) buys back many of them, leaving the public with the cash it would have had in the first place.
Could the Treasury skip the rigamarole and pay its bills without bonds? Economically, sure. Why doesn’t it? Well, the BoE has regulations governing “overdrafts” — but apart from these, the answer is plain: to do so would expose the “public debt” as a fiction, and the debt hysteria as a sham.”* I have changed “Federal Reserve” in the original article to “Bank of England” as we are in the UK. Galbraith also refers to the debt ceiling, which we fortunately don’t have here, so I changed ‘ceiling’ to ‘hysteria’.
