The same way everything can be paid for, the same way Covid was paid for. The government can pay for anything it wants, it only chooses what to pay for and what not to pay for.
I asked this question and ended up doing lots of research which ended up learning what money actually is - i then wrote an article on it for a local group i belong to - below:
The government is happy for us to not know how money works, how it is created and what ‘public borrowing or spending’ is. Because then the can feed us lies about not being able to afford some things, and treat us like children by saying things like ‘magic money trees’.
National Government spending is in no way at all like managing household finances, it cannot be -you simply can’t run a country like a household. The government doesn’t have a big safe of money, that it doles out and then has to wait until its filled up again from tax revenues.
Here is a very simple explanation:
The government ‘borrows’ or creates most of its money by selling gilts, which are bits of paper that are promises to pay back, it then sells them on the financial markets - they are brought by investors as it is the safest way to invest money, most commonly pension funds, the government then pays back the money with interest. How does it pay it back - yep, by selling more gilts, and on and on. This is what the deficit is, this is public or national debt. Its not money owed to somebody whose going to come and get it or its not on a credit card - it is money the government owes itself.
Everything we think we know about debt is wrong. Money is meaningless - cash, notes, coins and digital money (numbers in a computer) are nothing but paper, metal and numbers in a computer. Money is simply a representation of wealth. The reason for this is due to the ending of the gold standard and particularly the USA’s decision to end the Bretton Woods system by stopping the convertibility of dollars into gold bullion. This changed the dollar to FIAT currency (not the car), which means money not backed by any commodity whatsoever - which was traditionally gold and silver for fixed currencies.
The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion. This was done to regulate the global monetary system in rebuilding the world economic system after WWII. The dollar was chosen because of its strong performance at the time and the dollar was backed by gold bullion money represented gold held in US vaults.
In 1971 President Nixon acted to try and stabilise the US economy and one of the results was that the dollar was no longer convertible to gold. The economic, political and social factors that led to this act are numerous and complex - however by the 1960’s European and Japanese exports became more competitive with U.S. exports. The U.S. share of world output decreased and so did the need for dollars, making converting those dollars to gold more desirable. European and Japanese exports became more competitive with U.S. exports. The deteriorating U.S. balance of payments, combined with military spending and foreign aid, resulted in a large supply of dollars around the world - meaning lots more dollars outside of the USA. But the increase in dollars had not been matched by an increase in gold reserves, meaning a run on gold was likely, all the country’s wanting to convert their dollars into gold would not be able to. The end result was the dollar became a FIAT currency and the rest of the world followed.
FIAT money has no intrinsic value at all. It is simply a promise to pay, the government issues bank notes and says this £20 is worth £20 and we all agree and trust the promise and thats how money pays for things. Money is really an IOU, its not related to gold in a bank safe or anything else other than the promise that government guarantees it’s worth the value stated and we agree. Thats why bank notes have ‘I promise to pay the bearer the sum of ..’ printed on them, they are a promise to pay.
So now we know that money is just a promise to pay, where does it come from? In the UK the Bank Of England makes the bank notes that are in circulation just like that, it prints it and the government promises its value. However only 3% of the currency in the economy is made like this by the Bank Of England, how is the other 97% made? It is made by private banks, they make the majority of all the money thats in the economy out of nothing - it is digital or electronic money that only exists as digits on a computer.
Many people think banks operate by taking your money as a deposit and then lend it to someone else to make a profit. That is not how banks make money, they don’t lend the money you deposit to anyone.
Banks actually make money every time they issue a loan. They do this by simply typing a number on a keyboard - say a thousand pounds - a person receives a loan by the bank issuing a new balance of £1000 by issuing it as line in their account. No money is taken from another account it is just made as a digital entry by tapping it on a keyboard.
The bank recognises this new £1000 entry because it expects to get the £1000 repaid. The bank ‘promises’ you can get the money in cash from a cash machine, or send digital money to buy things - its a digital IOU.
The bank charges interest on the loan, by doing this it creates money out of nothing - the money created never existed before the interest was drawn and it wasn’t produced by making anything it just appeared, like magic.
The bank keeps the interest as profit and uses it as capital. The new money that was typed into your bank account then disappears when its paid back, it’s cancelled out, destroyed - disappearing as mysteriously as it appears.
This is how banks actually create money, this is how money is made and where it comes from. So why does a bank take your money at all if it doesn’t use it for loans? They are not particularly desperate for your money, but they have a use for it. The bank uses customers deposits as security in case people want to take out lots of money at once, if literally everyone did this at once it wouldn’t be to give them their money it would cause ‘a run’ because it doesn’t hold all that money, but it counts on not all its customers taking all their money out at once - it can at a reasonable level provide for those wanting to make big withdrawals.
You may come across the argument that the the bank created money is not money in the same way money is created by the Bank Of England and that it is in fact credit, this is false. Some politicians and civil servants will argue this - but it isn’t credit because all credit comes with an element of risk. The Financial Services Compensation Scheme (FSCS) backs £85,000 for individual accounts - if the back goes bust, the government will give you your money back. The government will compensate you and help banks if they can’t provide your money that you deposit - its risk free so cannot be regarded as credit. The Government prints money and borrows it through selling gilts (bonds) to banks and investors this is how it borrows money, this how it paid for Covid, bails out the banks and spends money needed because not enough is provided by taxation - this is what is known as the budget deficit and public borrowing.
In a way the government makes money from nothing too, from printing it and borrowing by selling bits of paper - gilts. However there is one big difference, the government needs to pay back with interest the money it borrows. Can you see where this is going?
Apparently 85% of the UK population do not know or are only partly aware of this, including politicians (worryingly) and most of the media. This understanding needs to become commonplace, not least because it would resolve the widespread angst present in the population presented with a myriad of serious global challenges that seem insurmountable. It would also mean the continued political decisions that cause them and the misinformation and manipulation by the rich and powerful could be effectively challenged.
These facts are not secret, the information is freely available and can be found. But yet the question is not asked, it is assumed - the fact that it isn’t is to the benefit of the group of people already rich and continually getting richer and to the detriment of everyone else and the future of the very planet.
Organisations such as Positive Money, The New Economics Foundation and analysts like Richard Murphy provide factual information in order to raise this public awareness - his website ‘taxresearch’ has some excellent videos that clearly explain the issues. Sir Mervyn King the Governor of the Bank of England 2003 - 2013 is quoted correctly explaining that “When banks extend loans to their customers, they create money by crediting their customers’ accounts.”
The key issues we face are becoming more and more pressing with each decade, financial instability, huge wealth disparity, lack of public services, poverty, environmental catastrophe become
more and more critical.
Private banks make astronomical amounts of money, it is how money in our economy is created (helped by Government). This could be good, but Banks are private businesses mostly owned by investors who hold shares in the bank (with exceptions ie credit unions)- their reason for existence is to make more and more money for these shareholders. Banks invest in the things that provide the highest return - which are primarily the financial markets and property. They don’t invest in small businesses or community projects things that are actually needed and useful because there is no incentive to do so.
Because our current financial system is dependant on debt, borrowing from banks to create more money - it pushes more and more people into poverty while continuing to make a tiny group of people richer. The more loans that are taken on, the more profit is generated : More loans, more debt, more money. If nobody went into debt, there would be virtually no money in the economy - the system depends on debt, the electronic money that banks create. Every pound coin that is generated requires interest paid on it and because its the people or businesses who need or have to borrow money, the 99% of the population. Money is transferred to the 1% of people who don’t need to borrow money the very rich. Income and wealth is sucked up by the wealthy minority and the gap between the wealthy and the rest of us gets bigger and bigger. This is why so called ‘trickle down’ theory is impossible under the current system, it doesn’t allow it, so as long as the money we use is dependent on interest being paid by the majority the wealth disparity will keep increasing.
The beneficiaries of wealth created by debt get richer and more powerful. They steadily own more of the assets in the country and the world, this is why corporations get bigger and we lose more smaller and diverse businesses that we need. Its the reason the same shops and businesses appear everywhere you go, its the reason chain stores and food franchises have replaced high streets, its the reason everything is getting more expensive, its the reason transport, housing, healthcare and social care is slowly disappearing.
A system that depends on debt creation from a majority of the population has to continue to make that majority poorer it has to in order to create more money. If it didn’t there would be no new money in the economy, which means less spending, fewer jobs and on and on… Currently we are stuck with two choices; more money and more debt or less debt and less money.
The only aim of private business is to create profit and it has to continually increase those profits. Just like banks, businesses do the things that ensure profit these things are not in the interests of servicing society. Wealth creation that sits with a small group means that group and the business they own get more powerful - this power ensures the priority of profit trumps everything including the planet. If you depend on working for a living you will continue to have less and less money, that money becomes worth less and less and your debt increases. If you depend on returns from your capital, you will get richer. Work has become a route into poverty not out of it - but the government continues to use the “work is the only way to get out of poverty” mantra when discussing solutions - this popular line should be true, but it’s not anymore.
An economy that is dependent on the financial sector and the financial system is structurally flawed to increase debt to increase wealth and wealth inequality this is why UK poverty is increasing at a rapid rate, the fastest area being in-work poverty. It is the reason behind the cost of living crises, the crises in public services and untold misery for millions. But just as banking practices are surrounded by myth, the causes of wealth inequality, poverty, unemployment and social mobility are also surrounded by myths and so are the solutions to it. Instead of understanding and confronting the true causes in effective ways the government continues to at best to muddle through, basing its decisions on myths and can continue to do so when the majority of the voting public are misled and ignorant of the
the real cause and real solutions.
Britains economy is a service economy particularly dependent on the financial services.
Government is supposed to be the regulation that ensures the public that votes it into power and pays taxes - ensures its needs are met, that the population is healthy, housed, healthy fed, educated, employed and (the promise of capitalism) can improve its standard of living via social mobility through work. Why is the opposite happening and why has it been increasing?
Government pays for services it provides through taxation of the population, when the expenditure of the government cannot be met just from taxation alone it borrows money in order to pay.
Government borrowing has been in existence in the UK since 1694. The government borrows money by issuing bonds known as gilts which are IOUs promising to pay back the money with interest. The government doesn’t just print more money, but the gilts that it issues are just bits of paper that are an IOU, a promise to pay back the money - with interest
At its simplest the government owned bank, the Bank of England is the only body that is allowed to produce and print money. But because the government allows private banks to create the majority of money electronically and doesn’t tell it where to invest its profits government produced money is only 3% of total money in the economy.
The government will say it can’t fund things like the NHS because it means increasing taxation, or moving money from other services - that tax income simply does not cover everything we need. This is where you hear the ‘magic money tree’ or ‘the governments credit card is maxed out’ statements being made. Now can you guess the problem? All the money coming from taxation is dependant on bank created money, which is dependent on debt. Because the government allows all money to be created by banks, who create it through debt, if taxation increases so does borrowing and so does debt, banks make profits, the rich shareholders and investors get richer and everyone else gets poorer.
Because the wealth producing banks are not government owned, or regulated better the government can’t create profit for public expenditure. So what does it have to do instead - it has to borrow money from the same banks as we do, in the same way!
Government borrowing has been in existence in the UK since 1694. The government borrows money by issuing bonds known as gilts which are IOUs promising to pay back the money with interest. Because the nature of a government is unlike any individual, family, or business the gilts it offers are incredibly safe ways for for investors to make a return on their money from the interest the government pays. The investments come from things like pension funds and similar, basically its money stored by people and businesses who have plenty of it who are looking to make a safe return on their money. Again this is the wealthier end of the scale of people who have benefited from debt created money the most - whats even worse is the interest on these gilts is paid for by taxation!
OK thats not entirely true, there have been different ways the government has paid down the deficit (the gap between the amount of money the government needs that can’t be covered from taxation) since 1694. If we look at the times when the deficit has peaked its a story of huge spikes and then drops since 1815 at the end of the Napoleonic wars the highest the deficit has ever been more than 200% of GDP, other spikes followed namely World War I, World War II, the Stirling Crises of the 1970s, smaller peaks in the 1980s and 90s then the 2008 global financial crises initiated by the huge bank bailouts (then reduced taxation as productivity slowed down due to declining taxation on personal income and commercial activity) the vast swathes of money needed in the Covid response has added to this.
The problem of government borrowing from private banks is that interest has to be paid which remains an ever increasing burden. Although this interest does not have the same implications for government as it does anyone else. Because all money is based on a promise to pay a promise to pay that stops at the government - it doesn’t have an end date where it has to pay the money back by, it can just keep refinancing the loans by issuing new gilts and technically keep doing this forever, all the while the interest keeps building up - which is what everyone is worried about, if it has to be paid back through taxation and the reason we have to borrow is because there isn’t enough money brought in by taxation how are we ever going to pay for it?
There are a few different answers to this, which are generally variations of - we can’t and we won’t because without massive structural changes to the economy its impossible. A big reason being because investors buy gilts to create profit from debt, government debt - the interest owed, the government depends on the same system as everyone else.
The government has tried to reduce the deficit by paying it down since around 2010 by cutting public spending through austerity measures. This has been a complete and utter failure, causing untold misery for thousands of people. In 2010 public debt was 62% of GDP in 2022 it was 94%, similar to the figure in 1962 - for long periods of history, most of the 20th century UK debt was much higher.
The problem of government debt comes from how the government pays it down. Since 2010 the government has told us that borrowing and the deficit is a huge problem, that has to be paid back urgently and this has to be done via taxation and the only way to do this is to cut services severely. But because government borrowing can continue indefinitely this is not true. We often hear a reason given for the need to pay down the debt is to prevent future generations being saddled with it - but this argument is insane. We can’t protect future generations by throwing the existing generation onto the scrapheap, each successive generation since 1970 has been worse off than their parents. The current generation of young adults are already saddled with debt, have little chance to own a house of their own, can’t save, have worse job opportunities, worse access to public services, non existent pensions and can’t afford basics like food and heat. This will get worse for their children - not better. Just relying on cutting spending alone and not increasing taxation is not viable it only serves a small section of society.
Government issues bonds or gilts to borrow money instead of raising taxes, but doin that creates debt and lots if it. As we have seen the economic boost this provides only benefits a small number of people - it doesn’t stimulate the economy outside of existing wealth owners and this economic growth is ineffective as a way to pay back government debt - this is most clearly seen from the results of the government’s bailout of financial institutions ofter the 2008 banking crisis.
There are lots of ways and arguments and theories of the best way to reduce public debt and lots of countries have achieved it in different ways throughout history. However the issue remains that all solutions involve tinkering with the existing flawed financial system - effectively papering over the cracks, the problems keep coming back and come back worse.
Why can’t we reduce debt the same way achieved after WWII ? In 1945 the UK’s debt peaked at over 230% of GDP, but declined consistently until 1990. In this period the welfare state was created which included the NHS, and a sustained period of economic growth with full employment was experienced until the 1970s.
How was debt reduced from 230% to 32% of GDP? Firstly, to be clear debt to GDP was definitely not reduced through cutting government expenditure. UK debt to GDP fell in the post-war period due to a sustained period of economic growth and near full employment. This growth saw rising real incomes which in turn led to higher tax revenues and falling debt to GDP ratios, alongside a positive inflation rate, which helped erode the real value of debt.
Debt to GDP fell, despite higher real government spending on the newly formed welfare state and national health service. In fact, government spending as a % of GDP rose from around 35% of GDP in the early 1950s to the high 40%s in the 1970s.
There are many factors that provided the post war economic boom, some of which are not apparent today. However if we take a look at the key factors behind growth in this period- it might be surprising for many considering government policy of the last 12 years.
The government makes money out of thin air, as do banks - the system depends on this relationship. It is hugely flawed, because it is dependent on debt, debt from 99% of everyday citizens. This is why we in the West continue to see growth in wealth inequality, crashes, poverty, injustice and why it will continue, the public always foots the bill. Its why Economists don’t care about debt, and neither do politicians - outside weaponizing it. The whole system is short term, it is a house of cards that at some stage will come crashing down.
However until then, this is how the government pays for things, and how it lies about what it can and can’t afford.