The vexed question of whether the UK can afford Modern Monetary Theory doesn’t even make sense

The concern about whether the UK could ‘afford to adopt’ Modern Monetary Theory (MMT) contains a category error worth unpacking because the confusion it reflects is widespread.

MMT is not a policy package. It’s primarily a description of how currency-issuing governments already operate. The UK doesn’t need to ‘adopt’ MMT. The institutional mechanics MMT describes are already how the British state functions.

What MMT actually means

The core MMT insight is that countries which issue their own currency operate differently from households and businesses. When the UK Treasury authorises spending, it doesn’t first rummage through a vault of accumulated taxes. It instructs the Bank of England to credit accounts. The bank must comply as it has no legal power to refuse parliamentary-authorised expenditure. Money flows into the economy. Taxation and bond issuance occur after spending, draining reserves created by the act of spending.

This is the operational reality documented in treasury publications, Bank of England bulletins, and peer-reviewed institutional analyses. As the Bank of England explains, we can create money digitally in the form of “central bank reserves“. Berkeley et al traced these mechanics in detail in The Self-Financing State. The government’s main account at the Bank of England starts each day at zero. Spending occurs through balance sheet expansion – a form of money creation. The sequence runs opposite to household budgeting.

There’s a self-imposed rule from 1981 called the Full Funding Rule that requires the government to sell bonds whenever it spends more than it taxes. The economic thinking behind it was abandoned in 1992, but the rule stuck around anyway. It’s not a law. It’s just treasury policy – a choice masquerading as a law.

None of this is seriously contested by anyone who understands the legislation and accounting.

Mechanics versus policy

The institutional mechanics of government spending are independent of MMT. The Consolidated Fund, the Bank of England’s role and the spending-then-taxing sequence are factual descriptions of how the UK exchequer operates. You don’t need to believe in MMT to accept them, any more than you need to believe in a particular school of physics to accept that gravity exists. An accountant tracing the ledgers would find the same thing. This is just how the system works.

But MMT proponents often go beyond describing mechanics. They put forward specific policy proposals that are genuinely contestable. Examples of these are Zero Interest Rate Policy (the argument that paying interest on government debt is a policy choice distributing income to bondholders), the Job Guarantee (government as employer of last resort), and framing imports as unambiguously beneficial since you receive real goods in exchange for currency you can create.

These are economic and political choices, not accounting facts. The Job Guarantee is an economic programme, not a description of existing institutions. You can accept every word of how MMT economists describe the monetary system and still oppose it. The treatment of imports as pure benefit arguably understates the vulnerabilities of a mid-sized open economy like the UK which can’t print dollars or euros, and where persistent trade deficits can pressure the exchange rate.

Accountants versus economists

So, when someone invokes MMT, you need to ask which part they mean. The institutional mechanics of money creation and government spending are real and largely uncontroversial accounting questions. They have factual answers. You trace the ledgers and follow the debits and credits. An accountant examining the Exchequer’s operations would tell you that spending creates deposits, taxation drains them, and bond issuance swaps one government liability for another. These are not ideological claims. 

Economists, by contrast, are in the business of interpretation. Zero rates, Job Guarantees, and particular views on imports are policy positions that require separate arguments. Conflating the two and treating contested policies as though they follow automatically from correct accounting shouldn’t go unchallenged.

Choice masquerading as law

Give the same national accounts to a neoliberal, and you’ll hear about fiscal incontinence and intergenerational theft. Give them to a Marxist, and it becomes evidence of late capitalism devouring itself. Both conclusions were reached with the same numbers. The conclusions were preordained. You can be a neoliberal economist or a Marxist economist, as the profession accommodates both. But there’s no such thing as a neoliberal accountant. 

Too often, economists who lack knowledge of the institutional mechanics allow their ideological priors to determine what they claim the constraints are. They treat ‘the government must borrow before it can spend’ as a factual description when it’s actually a misunderstanding of how the system operates. When economists misrepresent the mechanics to support their preferred policies, they’re not doing economics. They’re doing politics dressed up in technical language.

This doesn’t mean accountants should make policy. The accounting tells you how money moves and what the balances show. It doesn’t tell you what ought to be, or how much to spend, on what, and with what risks. That’s where economics, politics and judgment come in. But we need cleanly to separate the two and establish the mechanics first, with accounting precision. Then have the political argument about what to do, without either side pretending their preferred answer is dictated by the financial architecture.

The real questions

Once you clear away the category error, the substantive questions emerge. What are the actual constraints on government spending? They are:

• Inflation.

• Productive capacity.

• Skilled labour.

• Import dependence (30% of UK consumption is priced in foreign currency, mainly dollars, and you can’t print them).

• Planning dysfunction.

• Supply chains.

Should we obsess over debt-to-GDP ratios? To paraphrase Abba Lerner: a 100% debt-to-GDP ratio is what happens when the face value of government debt equals the value of the flow of domestic production that occurs during the period when the Earth completes one orbit around the Sun. When put that way, the concept seems rather stupid. The reason is that it is rather stupid, as we’re comparing a stock of government debt to a flow of income. To be strictly comparable, we need to compare stocks to stocks or flows to flows.

Have fiscal rules actually worked? Britain’s track record on fiscal rules is poor. In practice they have consistently produced austerity and declining economic growth. The requirement to balance spending against taxation ignores everything the accounting tells us about how the system actually works. A rule requiring current spending to match current revenue is rarely optimal. It prevents counter-cyclical policy (where government adjusts spending and taxation to counteract recessions or booms). It also biases against investment, and treats deficit reduction as an end in itself rather than asking what the deficit is actually for.

The problem isn’t that we need no constraints. It’s that we’ve had the wrong constraints, derived from a faulty model of government finance. Rules that target arbitrary debt ratios or mandate balanced budgets embed the household analogy within policy. They force governments to cut when they should spend, creating the very stagnation they claim to prevent. Britain’s infrastructure gap, its productivity collapse, and its decade of lost growth are partly the consequences of fiscal rules that misunderstood what they were constraining.

But acknowledging that existing fiscal rules have failed doesn’t mean constraints are illusory. It means we need better ones, namely rules that account for inflation risk, productive investment, and the actual mechanics of government finance, rather than rules built on the false premise that the treasury is a large household.

Should the UK borrow more for productive investment? Almost certainly yes. That’s a judgment about specific projects and their returns, informed by the accounting reality that ‘borrowing’ for a currency-issuer isn’t what the word implies. But it’s still a judgment requiring evidence and careful planning.

The bottom line

The UK already operates the way MMT describes. It has since 1971, arguably since the end of the Gold Standard in 1931. The question isn’t whether to adopt this framework but what policy conclusions follow from it.

We mustn’t conclude that because the government creates money, fiscal constraints are illusory and ‘brave leadership’ can spend freely on desirable things. The constraint shifts from monetary scarcity to inflation. That’s not the same as the constraint disappearing.

The hard questions remain: how much inflation risk is acceptable, how do we identify productive capacity, what investments actually generate returns, and how do we manage an open economy dependent on imports? These require judgment, evidence, and humility about what we don’t know.

They aren’t answered by pretending the government is a household that must earn before it spends. Both sides of this debate have been guilty of letting ideology masquerade as accounting. The accounting is clear. The politics remains contested. We should stop confusing the two.