In the age of Modern Money, we don’t need government debt at all, everything changes when governments admit that money does work the way Modern Monetary Theory says it does, writes Dr Bronwyn Kelly.
In the lead-up to the federal budget, Australians will yet again have to put up with being told there is not enough money for them.
But at least since the mid-1990s, theories that money is a limited commodity have been comprehensively refuted by the growing number of economists acknowledging the truth that money is created by government fiat.
At their sovereign will, governments can create as much money as they need. They can create more than we need – although that is quite unnecessary and would be foolish. Even so, the point is that money is not in itself a limited commodity and governments can create as much of it as they might think necessary for the good of human wellbeing, our welfare and social cohesion, the natural environment, democratic stability, and the economy itself.
They don’t need to beg us to pay more taxes or borrow it from private banks. They just need to create it by an entry in their accounts at their own bank, the Reserve Bank.
If anything, money is probably the only unlimited commodity on the planet. And so governments can and do create it at will.
As Mark Carney – Prime Minister of Canada and former head of both the Bank of Canada and the Bank of England – has freely attested, fiat money is “the successful model” of money supply, surpassing all other experiments in the creation of currencies, such as the tying of currencies to a gold standard, which failed and was abandoned in the 1970s.
The concept of money as an unlimited commodity arose in the mid-1990s with the development of Modern Monetary Theory (MMT). But MMT isn’t actually a theory. It’s simply a factual description of the way money works in fiat currency economies.
In the age of Modern Money, money no longer works as it did under the gold standard, which means budgets need no longer be framed by the false concept that money is a limited commodity.
Unlike a household, a fiat currency-issuing government like Australia’s can never run out of money. And this is something that even the more conservative economists, neoliberal free-market advocates, and private bankers will acknowledge when it suits them, particularly when they are seeking bailouts for the latest market or financial-sector failures or relief from other types of economic shocks.
Twice in the 21st century – in the Global Financial Crisis (GFC) of 2009 and the COVID-19 pandemic of 2020 – Australia’s governments have massively boosted their issues of money to save our economies and have done so without even blinking.
And on neither occasion did the sky fall. Australia sailed through both events relatively unscathed by recessions – a fate that was not avoided by countries that did not respond as adroitly with fiscal stimulus through deficit spending.
Nor did the Labor and Coalition governments that issued the stimulus in the GFC and COVID-19 expect the sky to fall. The Treasurer of even the more conservative among these two admitted the truth that when it comes to federal budgets and public spending, “everything is affordable if it’s a priority.”
In short, for the better part of the 21st century, Australia has been easily shielded from economic disaster by governments that have accepted that they are not like households and do not need to balance their budgets. They can maintain deficits for as long as we need them to, in the interests of our financial security, our well-being, and, indeed, the growth of the economy.
Over the 50 years to 2025, Australia’s economic growth has been positive in all but three years, even though the federal budget itself was in deficit for 33 of those years (66 per cent of the time).
Between 2008 and 2022, economic growth was positive in all but one year when COVID-19 struck the country, but this extended period of growth was maintained even though the federal budget was in deficit for 100 per cent of the time.
The preponderance of deficits, and indeed the very significant government debt growth in that period, did not lead to economic contraction. Nor will it, if governments acknowledge the plain fact that they can never run out of money to repay any debt they choose to take on. They don’t need to pass these debts (or any debt at all) onto future generations or prioritise public debt repayment over the well-being of the current generation.
Modern Money shows that they have a variety of other options for this if they follow the rules of functional finance. And any rational analysis of the options for macroeconomic policy available in Australia shows that there is no need to prioritise government debt repayment above our welfare and wellbeing in any given year – or ever.
That being so, there is no argument in favour of developing federal budgets on the assumption that money is a limited commodity. And there is certainly no argument for issuing less money than we need. Or to put that another way, there is no argument in favour of imposing austerity by cutting government spending on the services we need, such as the NDIS.
The only thing responsible governments need to do – now that we have thankfully entered the age of Modern Money – is to spend everything we need them to spend for our health, wellbeing, and financial security, and then to manage any imbalances, inflation and unfairness in the economy by prioritising the use of fair taxation.
Fair taxation can rein in any excess spending that may arise from either public or private spending far more effectively than interest rate hikes, and the use of monetary policy to bring demand and supply back into equilibrium should therefore be abandoned. It’s ineffectual and harmful.
This, of course, directly contradicts the Reserve Bank Governor Michelle Bullock and the Treasurer Jim Chalmers, both of whom seem to be toting the line that, to rein in prices, public spending should be cut, and interest rates should rise.
Dr Chalmers is foreshadowing a supposedly “responsible” budget in which he says “we will save more than we spend”, the implication being that he is intending to budget for a surplus. This is exactly the opposite of what Modern Money and functional finance have shown that we need.
At this time, a budget deficit would be far more advisable for the prosperity of the private sector and, therefore, for the prevention of both growth in unemployment and a reduction in our capacity to insulate ourselves from the effects of inflation.
At the same time, an interest rate rise is the last thing we need if we want to control inflation without increasing unemployment. This is evident because the fact is that interest rate increases don’t control prices; they raise them.
The RBA’s latest increase in the cash rate target is wholly contrary to the public interest — and not just because it will increase the cost of living, but also because it will increase the likelihood of a recession.
From the perspective of Modern Money and functional finance, it appears that the Treasurer and the Reserve Bank Governor are deliberately bringing on a recession. Responsible, this is not. It’s just cruel, and unnecessarily so.
Modern Money and functional finance are two great gifts of modern economists. They offer us a path to permanent safety, well-being, security and prosperity. And yet, for some unfathomable reason, the Treasurer and the Governor have chosen to refuse us the benefits of those gifts.
The refusal to use these gifts is all the more irresponsible and cruel because it isn’t just at budget time that Modern Money and functional finance can come to our rescue. Embedded in functional finance is the insight that we do not need interest rate rises to control inflation (they don’t actually work) and we don’t need austerity – ever – to protect future generations from any debt the government may wish to take on.
The reasons for this are explained by Rules 1 and 3 of functional finance, which we can use to skirt all these problems.
In fact, in the age of Modern Money, we don’t need government debt at all; but even if governments wish to take it on, they can easily repay it by doing what MMT and functional finance have shown they can do – they can create money and use it to pay the debts if they think it’s necessary in the public interest.
Counterintuitive though this may be to those who have been taught to believe that a government is like a household, the belief doesn’t hold up. And once we accept the evidence that money is the only unlimited commodity, there’s nothing to stop us using it to manage the sustainable use of things that are limited, such as human and natural resources.
There is nothing to stop a government from spending on the essentials of our welfare and wellbeing. And there is nothing to stop them from controlling the effects of total spending (public and private) by raising and lowering taxation as needed. Everything in terms of the total prices and taxes we pay will cost us less if they do.
There’s also nothing to stop governments from releasing themselves from the myths and chains of neoclassical economics and neoliberalism.
Everything changes when governments admit that money does work the way MMT says it does. And if they follow the rules of functional finance, they’ll find a safe way out of their chains.
Find out more about how we can reorganise macroeconomic policy and governance in ‘The Public Interest Economy: the path to wellbeing, security and sustainable consumption in a democratised Australian economy’ by Bronwyn Kelly, the Founder of Australian Community Futures Planning (ACFP).
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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