I think Rachel Reeves and Keir Starmer are financially illiterate

After a long career in accountancy, I have got used to talking to people who do not understand the terminology that my profession and the economics profession use when they are discussing finance. I think that is quite understandable, especially when the people in question have no responsibility for the finances of the organisations for which they work.

When, however, someone holds the office of First Lord of the Treasury, which Keir Starmer does (which is what makes him Prime Minister), or Chancellor of the Exchequer, as Rachel Reeves does, then I think that ignorance of basic government finance is unforgivable and neither of them seems to have a clue when it comes to government finances.

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As evidence, I refer to the claim that these two make that there is a £22 billion “black hole” in the UK Government's finances. To put it bluntly, this is not possible. They should know that, and yet it appears that they don’t. In that case, since it appears that they need some instruction on this issue, let me explain.

As a matter of fact, the UK Government does not need to have funds deposited at the Bank of England before it can spend. That is because so long as whatever it is that the Government plans to spend is legal, which means that it has been included in a budget approved by Parliament, then if it instructs the Bank of England to make a payment to someone on its behalf, then the Bank has no choice but to do so.

The Government is, of course, unique in being in this position. That is because no other organisation owns a bank that can, as the Bank of England is permitted to do, create new money without limit. Every other bank is regulated as to what it can lend; the Bank of England is not.

The Bank of England, London

The inevitable consequence of this is that the Government is not dependent upon the receipt of funds from taxpayers or from those who lend it money by depositing their savings with it before it can spend. Instead, it can always, if it wants to, run up an overdraft with the Bank of England to cover its spending if it so wishes, and there is nothing that anyone, including the Bank, can do to prevent this. But, that means there can never be a “black hole”, because the Bank of England has always covered it. 

It might not appear that the Treasury and Bank of England are working in this way, but that is just because they like to disguise this fact from the unknowing, who on this occasion appear to include both Keir Starmer and Rachel Reeves. That’s because anyone knowing that the Government has this power could be reckless, and the Bank and Treasury would not like that. But whatever Bank officials and civil servants might like to pretend to be the case, as a matter of fact, every time the Government spends it deposits new money that has been created by the Bank of England into the economy.

To control inflation, which everyone agrees is a desirable goal, the Government then demands that tax be paid to cancel part or all this money that it has created. It does this by quite literally taxing that money out of existence. Then, those who have any of the remaining government-created money are offered the chance to save such funds with the Government, either by buying UK Government bonds or by saving them with National Savings and Investments. That then takes these funds out of circulation as well, which also helps control inflation.

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Just as there is nothing surprising, or mystical, or unknown about this process of the Government creating money, nor is there any secret about the fact that tax and deposit-taking by the Government have the consequence of recovering the money that the Government has spent, taking it out of circulation, and consequently cancelling its inflationary impact as a result. This is something that happens day in and day out.

What this does, however, mean is that any money the Government creates does not disappear, which is the implication that follows from the suggestion that there can be a “black hole” in the Government’s funding. Money spent by the Government does, instead, flow into the economy and then, in due course, flows back to the Government. It never disappears into a black hole. It is either taxed back, or it ends up being saved with the Government, and as a result, the Government can always balance its books, as some like to describe this process.

Chancellor Rachel Reeves

The only thing that is baffling is that right now, Keir Starmer and Rachel Reeves seem to not know this. Instead, they are claiming that there is a “black hole“ in the Government’s finances and that they must impose pain on us to close it when that is total nonsense. There can never be a “black hole” in the Government’s finances because it always has the power via tax and the savings arrangements it can offer to recover the money it has spent into the economy. It is technically impossible to claim otherwise.

In that case, the obvious question to ask is why are Rachel Reeves and Keir Starmer claiming something that is untrue as an excuse to impose austerity on the people of Scotland? I wish I knew the answer to that, but I do not. That claim on their part is as baffling as their financial illiteracy when it comes to the subject of government finances and “black holes” within them.

But that leaves me with one final question: How were two people so ill-suited to the task that they are now undertaking after being elected to public office? Again, I do not know, but what I do know is that we will all pay a very high price for their ignorance.