On Theresa May, Danny DeVito and ‘other people’s money’.

PEF Council member Ann Pettifor explains how all governments finance their spending (and its not from taxation). She deconstructs Theresa May’s address to the Conservative Party Conference with its deliberate framing of Labour governments as tax raiders.

The use of the phrase “other people’s money” was not accidental. It was first used in the title of a famous work (1973) by Donald R. Cressy about the social psychology of embezzlement. The book was later made into a movie about a corrupt corporate raider, and starred Danny de Vito and Gregory Peck. Mrs May’s speech writer wanted to imply that Labour governments are tax raiders.

That is both a calumny, but also a lie – twice over. First because no Labour government has ever run out of money – not even Clement Attlee’s which started life with public debt at 250% of national income, and then spent enormous sums creating the NHS, affordable housing, a public education system etc. As a result of that spending, public debt as a share of GDP fell precipitously, because the Labour government increased the nation’s income, through well-paid employment. Good, well-paid employment in turn generated tax revenues – to pay for the borrowing, and pay down the public debt.

Second, no government – including today’s Conservative government – finances spending from taxation. Instead governments finance spending by borrowing from their own Bank, the Bank of England, or from capital markets. If that borrowing creates employment and increases income, then tax revenues accrue to HMRC, and is used to pay for the borrowing. To keep the public finances balanced at a time of private economic failure, it is vital for government to borrow and spend, to expand the nation’s income and thereby to generate the tax revenues needed to repay the borrowing, and keep the public finances in order.

Mrs May intended to imply that a Labour government is likely to finance its activities differently – by increasing taxes and thereby ‘raiding’ or embezzling the purses of Britain’s taxpayers.

Let me illustrate why this is a false characterisation of government financing. An email popped into my inbox on 4 October – the day after Mrs May’s speech. It was from the Debt Management Office (DMO) of the British government. It informed me that on behalf of Philip Hammond the Chancellor, the DMO had the previous day held an auction of a precious government asset: the 1% Treasury Gilt 2024. In other words, on behalf of the British Treasury, the DMO had auctioned and then raised £3 billion from the sale of a government asset – a bond or gilt – from capital markets. The purpose of this sale was to finance the spending and activities of Mrs May’s government.

Many of the bidders for gilts would have been pension funds, but also insurance companies and other financial institutions. They all regard Treasury gilts as a very important safe haven for their financial holdings. So keen are they to buy British gilts that the auction was over-bid – 1.73 times over, the DMO tells me. Investors were willing to hand over £5 billion when the DMO, on behalf of the British government, only wished to raise £3 billion. As a result of this over-bidding, the interest rate on the gilt was very low – 1.3%. Given that inflation is 2.4%, the interest government will pay is negative. In other words, investors are effectively paying the DMO for the privilege of lending to the British government and parking their assets/savings in a safe British Treasury Gilt.

The Bank of England (via its Open Market Operations) has also purchased gilts, including those issued by George Osborne and Philip Hammond. It has done so for many years as a way of influencing the Bank Rate of interest.

And there is one other minor, but important point to make about the DMO’s auction. Given that most Treasury Gilts are bought by pension funds and insurance companies, the interest (yield) on the gilts serve as a source of income for the pension or insurance fund, maintaining its value until claims are made on the funds. Ultimately that income is returned to British taxpayers when pensions are paid out or insurance claimed. So, in a circular process, the money paid in interest by the British government for its borrowing ultimately returns to taxpayers when they claim their pensions.

That is why government bonds or Treasury Gilts are a vital part of the ‘plumbing’ of the private financial system.

This is all by way of explaining that governments like ours finance their activities, not from “your money” – i.e. taxation, but by auctioning valuable government assets – gilts or bonds in capital markets. In other words, by borrowing. That is how this government’s expensive HS2 project, estimated to cost £56 billion (up 71% on the initial projection in 2010 of £32.7 billion) will be financed. That is how £1,000 billion was found in 2009 to bailout the banking system. That is how £1 billion was raised to bribe the DUP into supporting the government.

And even at the greatest times of crisis – such as the 2007-9 Great Financial Crisis – the government assisted by the Bank of England was able to raise huge sums to finance the bailout of RBS and the rest of the banking system.

The key point is that financing for investment (via borrowing) comes first, and taxation later. Taxation – “your money” – as we all know from our own experience, is a consequence of public or private investment in employment or of other forms of activity. We take a job, and only at the end of the month, and as a consequence of our employment, are we paid, and only then are taxes deducted. Similarly it is only after the production and sale of a good or service, can VAT be charged. Only after profits are made, can corporation tax be paid. And so on.

All governments including your own Mrs May, borrow to finance their activities. Which is why the Debt Management Office yesterday raised £3 billion to finance activities sanctioned by your Chancellor, Philip Hammond. The process is as old as the Bank of England (1694) itself, and is both legitimate and transparent.

And as is obvious to all, Philip Hammond bears no resemblance whatsoever to embezzlers like the character depicted by Danny de Vito in that movie.

Photo credit from previous page: Dix Noonan Webb


  1. stephen tomlinson

    The corrupt elite has kept the majority ignorant of how the economy works for decades, it how they and MSM get away with peddling blatant lies about the economy and debt.

  2. Kevin Blow

    I’ve never read such a clear exploitation of how governments spending, taxation, and borrowing works. And why it’s a win, win for society.

  3. Darren

    Yes your right, the government sells it is own assets, via bonds and gits,which obtained by its own bank, which is supposedly independent and private. Taxation does not come first, as you have said, if it did then no currency would be available till the tax is collected, this would take time and the process is very slow. If taxation was used as described by the government, society and the former would not able to function, not as i have said because of the time factor but taxation is not enough to run the economy and co. Every time May opens her mouth she lies, every time labour keeps its mouth shut it is a party to the lie. The old communist were right capitalists a con, its keeps people poor and its keeps people stupid. All money is debt, and all debt is ignored by the government because it owns the debt. The only time debt is not ignored, is when its private, so you borrow from a bank which creates money out of nothing and then when you lose your job, it wants pay back for nothing.,

  4. Michael Anderson

    Would it be possible for the B of E to buy up gilts and then cancel the debts? Is there a point at which debt repayment becomes unsustainable for a government?

  5. Simon Cohen

    It’s good that Ann points out that Taxation doesn’t ‘pay for things’ directly. This helps us escape from the nonsense Thatcher came out with about Governments only having our tax money.

    But I’m uncomfortable wit the rest of her argument that, in any meaningful sense, ‘borrowing’ is going on at all:

    1. Bonds are a form of money that the Government can create electronically. In other words it creates its own asset out of thin are that is a net asset (no corresponding liability as in the case of bank credit creation)
    2. The bond is ‘swapped’ for cash (more liquid financial asset) it isn’t really borrowing just a portfolio adjustment.
    3. The bond purchases shift money from the bank reserves to the treasury account at the B of E contributing to interest rate management (which is all bond sales are) just as QE ( largely bond purchases) reduced the interest rate to nearly 0%.
    4. There is no eternal law that says you have to have bond sales (out of which the Gilt Edged Market Makers earn parasitic economic rent)
    5. Eurozone countries are forced to really borrow because they don’t have a currency issuing Central Bank -we do.
    6. The concept that we borrow to spend is a ‘barbarous relic’ of the gold standard days that has no real meaning.
    7. Ann is right to say we can never default. QE demonstrated that the B of E can set interest rates anywhere it chooses REGARDLESS of the ‘market’ for bonds. This does NOT apply to the Eurozone.

    If in doubt about this, listen to Greenspan and then Draghi (both neo-liberal!) admitting that default is not possible unless you want to deliberately choose it:




    Also worth pointing out the the continuous droning by the illiterate Tories of the ‘Venezuela’ argument is further example of non-knowledge: Venezuela’s situation has zero relationship with the UK because it’s productive capacity has collapsed, there is a black market for dollars so it is, effectively, dollarized and has debts from foreign loans.

    Ditto false comparisons with Zimbabwe, Argentina, Brazil and Weimar Germany.

    Labour needs to get in and spend money, spend it intelligently and well allocated of course – and then watch the economy lift and the last 40 years of neo-liberal scam reveal itself to be the scam that it is. The bond ‘vigilantes’ have no real power unless we give it to them.

  6. Bill Kruse

    How do you get the DMO to send you emails about what they’re up to? When I was looking their details over some months back, they seemed positively opaque about what it is they do, which I gather involves taking over from the govt’s old BofE Ways&Means overdraft facility to keep the EU happy. .



  1. Ann Pettifor – On Theresa May, Danny DeVito and ‘other people’s money’. – Brave New Europe - […] Cross posted from the PEF Website […]
  2. Ann Pettifor - […] now supporting the work of the Council, and periodically writing for the Forum.  The following is a blog that appeared…

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