Submitted by Bill Fernie
1st November 2026
For years, governments have told us that the country must live within its means, that borrowing is dangerous and that reducing the national debt must be a priority.
Whenever public services need more money, hospitals need investment, councils face financial difficulties or infrastructure projects are proposed, the familiar response is that the country cannot afford everything it wants.
It is an argument that sounds perfectly reasonable. After all, most households understand that they cannot continually spend more than they earn without eventually getting into trouble.
But what if applying household economics to a national government is fundamentally misleading?
That is the question being raised by a growing number of economists, including American economist Stephanie Kelton, British accountant and economist Richard Murphy, and Australian economist Professor Steve Keen.
Their work challenges some of the assumptions that have dominated economic policy for decades. In particular, they question whether governments are placing too much emphasis on controlling borrowing and not enough on investing in the economy, improving productivity and making better use of the resources available to the country.
At the centre of this debate is Modern Monetary Theory, usually abbreviated to MMT.
It is a subject that can become complicated very quickly, but its basic argument is relatively straightforward: a government that issues its own currency does not face the same financial constraints as a household, and the most important limits on government spending are economic rather than simply financial.
This does not mean that governments can spend without limits, that deficits do not matter or that inflation can be ignored. It does, however, challenge the way politicians explain public finances and the choices they make.
And it raises an uncomfortable question for Britain: have successive governments been so concerned about controlling the national debt that they have neglected the investment needed to make the economy stronger?
The household budget analogy: where does it go wrong?
When a Chancellor talks about balancing the nation's books, the comparison with a household is almost inevitable.
If a family earns £2,000 a month, it cannot continually spend £2,500 without borrowing. Eventually, its debts become a problem.
But a government such as the UK government has a fundamentally different relationship with money.
Britain issues its own currency, sterling. The government, working through the Bank of England and the banking system, has the capacity to create additional pounds. It does not need to earn pounds in the same way that a household does before it can make payments.
This is one of the central observations of Modern Monetary Theory.
Stephanie Kelton, in her book The Deficit Myth, argues that governments have misunderstood the significance of deficits and that public spending should be judged by what it achieves and by the resources available to the economy.
Richard Murphy makes a similar argument. He has repeatedly explained that taxation does not simply provide the money government needs before it can spend. Taxation also helps control demand, redistribute income, influence behaviour and create demand for the currency.
There is an important qualification here. The UK government does not operate outside the law or the institutional arrangements governing the Bank of England, the Treasury and the gilt market. Government spending, taxation and borrowing are conducted through an established financial system.
Nor does the ability to create sterling mean that Britain can create unlimited quantities of skilled workers, electricity, food, building materials or hospital beds.
That distinction is essential.
A government can create money, but it cannot create real resources simply by changing the figures in a bank account.
If governments can create money, why do they borrow?
This is one of the questions that often causes confusion.
If a government issues its own currency, why does it sell government bonds and pay interest to investors?
In the conventional explanation, borrowing helps finance the gap between government expenditure and tax receipts.
MMT economists look at the monetary system differently. They argue that government spending, taxation and bond issuance perform different functions within the economy.
Government spending puts money into the private sector. Taxation withdraws money. Government bonds provide investors with interest-bearing financial assets and help manage the amount and form of money held in the financial system.
A government deficit also means that, in accounting terms, the non-government sector has a corresponding financial surplus.
That does not mean every household or business benefits equally, or that every deficit produces economic growth. It does mean that government deficits are not simply money disappearing into a financial black hole.
The relationship between public borrowing and private saving is particularly important.
If households and businesses collectively want to save more than they invest, a government deficit can help sustain economic activity. If the government attempts to eliminate its deficit while the private sector is still trying to increase its savings, the result can be weaker demand and reduced economic activity unless exports or private investment compensate.
This is an important part of the wider economic argument.
The real limit is inflation, not an arbitrary debt figure
Perhaps the most important contribution of MMT is its emphasis on real economic resources.
Imagine that Britain has unemployed construction workers, unused industrial capacity, businesses looking for orders and infrastructure projects that could be undertaken.
If the government invests in those areas, it could create employment, stimulate businesses and increase the country's productive capacity.
The additional spending would not necessarily produce serious inflation if there were sufficient spare resources to meet the demand.
But imagine the opposite situation.
There are already shortages of construction workers, building materials are in short supply, energy prices are rising and businesses cannot increase production quickly enough.
Injecting additional government spending into that situation could simply push prices higher.
This is why MMT economists argue that inflation, rather than a particular level of government borrowing, should be the principal economic constraint.
Taxation becomes important because governments can use it to withdraw purchasing power from the economy when demand becomes excessive.
That is a very different way of thinking about fiscal policy.
It also exposes one of the major challenges facing any government adopting an MMT-inspired approach: recognising when the economy is running out of spare capacity and taking appropriate action before inflation becomes entrenched.
The experience of the 1970s and the inflation experienced after the pandemic demonstrate that these risks are real.
MMT does not make inflation disappear, and it does not offer a simple solution to shortages of energy, food, housing or skilled labour.
Why do governments continue to concentrate on deficits?
There are several explanations.
The first is political. The household-budget analogy is easy to communicate. Politicians can tell voters that borrowing must be reduced and that difficult decisions are necessary.
It is much harder to explain the difference between financial constraints and real economic constraints, or to persuade voters that a deficit might sometimes be beneficial.
The second explanation is the influence of conventional economic thinking.
For decades, economic policy has been built around controlling inflation, managing public borrowing and maintaining confidence in financial markets.
The Treasury, the Office for Budget Responsibility and many mainstream economists place considerable importance on the sustainability of government debt.
There are sound reasons for examining these issues. Britain has experienced periods of high inflation, currency instability and rising borrowing costs.
But MMT challenges the assumption that controlling borrowing should always take priority over other economic objectives.
The third explanation is the fear of financial markets.
The UK may issue sterling, but that does not mean investors can be ignored. If confidence in government policy deteriorates, sterling can weaken, bond yields can rise and the cost of servicing government debt can increase.
The 2022 mini-Budget demonstrated how quickly financial markets can react when they lose confidence in a government's economic plans.
However, that episode should not be interpreted as proof that all deficits are dangerous. It demonstrated the importance of credible policy, institutional stability and confidence in the government's ability to manage the economy.
There is also a political disagreement about the role of the state.
Some economists favour a smaller public sector and believe that private investment and market decisions should determine much of the country's economic development.
Others believe that governments must take a more active role in infrastructure, housing, energy, education and industrial development.
MMT provides an alternative way of understanding how governments can finance such activity, but it does not by itself settle the political argument about what governments should do.
Britain's experience: the cost of austerity
To understand why this debate matters, it is worth looking at Britain's economic experience since the financial crisis of 2008.
Following the banking crisis, successive governments placed considerable emphasis on reducing the budget deficit. Austerity became a central feature of economic policy.
Public spending was restricted, local authorities faced substantial financial pressures, and investment in many areas of public infrastructure was reduced or delayed.
The argument was that Britain had to get its finances back under control.
But there was another side to the story.
The economy experienced a prolonged period of weak productivity growth. Public services came under pressure, local government struggled to maintain services and infrastructure, and the country failed to invest at the rate achieved by many comparable economies.
It would be wrong to attribute all these problems to austerity. The financial crisis itself, demographic changes, Brexit, the pandemic, energy shocks and wider international developments all played a part.
Nevertheless, the question remains whether the emphasis on reducing government borrowing contributed to Britain's longer-term economic difficulties.
There is some striking evidence.
A House of Commons Business and Trade Committee report published in 2026 examined Britain's investment performance. It found that between 1997 and 2025, UK whole-economy investment averaged just 17.3% of GDP, the lowest average among the G7 countries.
The report also highlighted the relationship between investment and productivity. GDP per hour worked in Britain grew by only 0.6% between 2010 and 2025, compared with approximately 1% a year in France, Germany and the United States.
The committee concluded that Britain's investment gap was a significant obstacle to economic growth.
These figures do not prove that austerity alone caused Britain's poor investment performance. They do, however, demonstrate that the country has a serious problem with investment and productivity.
And they raise a question that is central to the MMT debate.
If governments restrict investment in the name of financial responsibility, but that restriction contributes to weaker productivity and lower future economic growth, have they really made the economy healthier?
There is a potentially substantial cost to not investing, just as there is a cost to investing badly.
The obsession with fiscal headroom
One of the clearest examples of the way conventional economic thinking influences British politics is the importance attached to something called fiscal headroom.
The Chancellor operates within a set of fiscal rules. These rules determine how much borrowing the government can undertake while still meeting its stated financial objectives.
The Office for Budget Responsibility assesses whether those rules are likely to be met.
The difficulty is that governments can become preoccupied with relatively small changes in the forecasts.
A few billion pounds can make the difference between meeting a fiscal target and missing it. That can influence decisions about taxation, public services and investment.
The October 2026 OBR assessment illustrates the problem.
It forecasts public sector net debt reaching approximately 97% of GDP in 2028-29. It also forecasts that the government's current-budget surplus target for 2029-30 will be met by a margin of around £15 billion.
The OBR estimates that there is only a 56% probability of meeting that particular target.
In other words, the government's plans are vulnerable to relatively small changes in economic conditions.
The OBR also highlights the risks associated with higher interest rates, energy prices and weak productivity growth.
These are real concerns. But they also demonstrate how difficult it is to manage an economy by relying heavily on forecasts several years into the future.
The Institute for Fiscal Studies has made an important contribution to this discussion. In its October 2026 Green Budget analysis, it argued that fiscal headroom never provides a complete picture of the health of the public finances.
It also highlighted the pressure that inflation is placing on departmental budgets and the possibility of further reductions in the real value of public services.
The question is whether fiscal rules have become an end in themselves rather than a means of achieving a stronger economy.
A government can meet its borrowing targets while allowing infrastructure to deteriorate, public services to struggle and productive capacity to weaken.
Equally, a government can borrow heavily without achieving anything worthwhile.
The size of the deficit alone cannot tell us which situation we are facing.
Steve Keen: why private debt matters as much as public debt
Steve Keen brings another important dimension to this debate.
While Stephanie Kelton and Richard Murphy concentrate substantially on the relationship between government spending, taxation and money creation, Keen has devoted much of his work to private debt and the instability that can develop within financial systems.
He argues that economists often pay insufficient attention to the way banks create money through lending.
When a bank makes a loan, it generally creates a corresponding deposit. This means that money creation is not exclusively a government activity.
Private borrowing can therefore have a substantial effect on the economy.
Keen is particularly concerned about the consequences when household and business debt grows faster than incomes and the productive economy.
For example, rising house prices can encourage households to take on larger mortgages. This can increase economic activity for a time, but it can also leave families vulnerable when interest rates rise or employment becomes less secure.
A country can therefore have apparently respectable government finances while its households are accumulating dangerous levels of debt.
Keen's work also draws attention to the relationship between private debt, banking and financial crises.
This is an important qualification to the conventional argument about national debt.
When politicians talk about the country's debt, they are usually referring to government borrowing. But the total indebtedness of households and businesses can also have serious consequences for economic stability.
It is not enough to examine government accounts in isolation.
Keen's work does not make him simply another MMT advocate. His analysis of private credit and financial instability has its own distinctive foundations. Nevertheless, his approach complements the wider challenge to conventional economic thinking.
The arguments against Modern Monetary Theory
There are legitimate criticisms of MMT, and they should not be dismissed.
The first concerns inflation.
The experience following the pandemic demonstrated that when governments and central banks support demand while supply chains are disrupted and essential goods are in short supply, inflation can become a serious problem.
It is not always easy to distinguish between inflation caused by excessive demand and inflation caused by supply shortages.
Britain's exposure to imported energy is a particularly important example.
If sterling weakens and the cost of imported oil, gas, food and manufactured goods rises, households can experience inflation even without excessive domestic spending.
The second concern is the cost of government borrowing.
Although a government issuing its own currency has more financial flexibility than a household, it still has to consider the interest payments associated with its debt.
The UK's interest bill is substantial. The OBR forecasts net debt interest rising from around £87.5 billion in 2025-26 to approximately £133 billion in 2031-32.
That money has an opportunity cost. It cannot simultaneously be spent on hospitals, schools, housing or transport.
The third concern is political discipline.
Who decides when the economy has reached its inflationary limits? How quickly can governments respond? Will politicians be willing to increase taxation or reduce spending when inflation becomes excessive?
These are difficult questions.
MMT advocates argue that governments should manage demand through appropriate fiscal policy, including taxation. Critics question whether that is politically realistic.
There is also a wider academic disagreement.
Professor N. Gregory Mankiw, writing in the American Economic Association's Papers and Proceedings, acknowledged that MMT contains some valid observations but argued that its more novel policy recommendations do not necessarily follow from its underlying assumptions.
This is a useful reminder that MMT remains a contested economic framework, not an established consensus among economists.
The debate should therefore be about the evidence, the assumptions being made and the consequences of different policies, rather than simply deciding which group of economists is right.
What would a different approach look like for Britain?
An MMT-inspired approach would not necessarily mean abandoning fiscal rules or borrowing without limit.
It would mean changing the questions that governments ask before deciding whether to invest.
Instead of starting with the question of whether a particular project increases the national debt, ministers would examine:
Whether the country has the workers, skills and materials to undertake the project.
Whether the investment would increase productive capacity.
Whether it would improve productivity or reduce future costs.
Whether it would create inflationary pressures.
Whether taxation and other measures would be needed to manage demand.
Consider some practical examples.
Housing: Britain needs more affordable housing. Building homes could provide employment, support local businesses and improve labour mobility. But the country also needs construction workers, materials, planning capacity and suitable infrastructure. Money alone cannot solve those shortages.
Energy: Investment in electricity generation, storage, transmission and distribution could reduce Britain's exposure to imported energy and help businesses become more competitive. Delaying essential investment can leave the economy more vulnerable to international price shocks.
Transport: Better roads, railways and local transport can help people reach employment and allow businesses to move goods more efficiently. These investments may produce economic benefits for decades.
Education and skills: Investment in colleges, apprenticeships and technical training can increase the number of skilled workers available to the economy. This is particularly relevant to areas such as the Highlands, where young people can struggle to find local opportunities.
Health: Investment in preventative care, hospital facilities and modern equipment could improve health outcomes and reduce some longer-term pressures on public services. Not every health investment will save money, but the economic and social benefits should be considered alongside the immediate expenditure.
In each case, the relevant question is not simply how much the government spends.
It is what the spending achieves, whether the economy can deliver it and whether the benefits justify the cost.
What about other countries?
The debate is not confined to Britain.
The United States has its own currency and considerable monetary flexibility. Japan has operated with very high government debt for many years, yet has not experienced the kind of sovereign funding crisis that conventional debt comparisons might suggest.
Australia, where Steve Keen has developed much of his economic work, also has its own currency and monetary institutions.
These examples demonstrate that there is no single debt-to-GDP figure at which every country automatically becomes insolvent.
However, they do not demonstrate that government debt is irrelevant.
Japan has faced its own economic difficulties, including weak growth and demographic pressures. The United States has the advantage of the dollar's international role, which cannot simply be replicated by every country.
Britain has its own particular vulnerabilities, including its dependence on imported energy and its exposure to international financial markets.
The circumstances of each country matter.
Eurozone countries also face a different situation because individual member governments do not issue their own national currencies. They operate within a monetary system controlled by the European Central Bank.
This is why the arguments advanced by MMT economists are particularly relevant to countries such as Britain, the United States, Japan and Australia, but cannot simply be applied in the same way everywhere.
The real question: financial prudence or economic prudence?
There is a danger that the argument about MMT becomes reduced to a choice between two extremes.
On one side, there are those who believe government borrowing must be tightly controlled and that public expenditure should be restricted unless it can be financed through taxation or borrowing within established fiscal rules.
On the other, there are those who argue that governments issuing their own currencies have far more freedom to spend than politicians generally acknowledge.
The most important issue lies in understanding what happens to the economy under either approach.
Britain has a persistent problem with weak productivity, low investment, regional inequalities, pressure on public services and inadequate infrastructure.
These problems cannot be solved simply by creating more money. But neither can they be solved by repeatedly restricting investment without properly considering the longer-term consequences.
There is also a difference between borrowing to finance productive investment and borrowing to support expenditure that does little to improve the country's economic capacity.
Both increase government borrowing, but their consequences may be very different.
The debate should therefore move beyond the simplistic question of whether the national debt is too high.
It should examine what the debt represents, what the borrowed money has achieved, what resources are available and whether the economy is becoming more or less capable of supporting its population.
Conclusion: have we confused balancing the books with running the economy?
Stephanie Kelton, Richard Murphy and Steve Keen are challenging different aspects of conventional economic thinking.
Kelton questions the way governments understand deficits and the limits on public spending.
Murphy argues that taxation, government spending and money creation need to be understood as parts of a wider monetary system, rather than as a household-style budget.
Keen draws attention to the importance of private debt, banking and financial instability, warning that government borrowing is only one part of the economic picture.
Their arguments are not identical, and there are legitimate criticisms of their approaches. Inflation, interest costs, exchange rates and the availability of real resources remain important constraints.
But the questions they raise deserve serious consideration.
Britain has spent many years debating how to reduce its national debt. It has spent considerably less time debating whether its economic policies have delivered the investment, productivity and productive capacity needed to make the country more prosperous.
Perhaps the most important lesson is that a government can be financially cautious and still make economically damaging decisions.
If a hospital is not maintained, a railway is not upgraded, a power network is not expanded or young people cannot obtain the skills they need, the country may eventually pay a much higher price.
The real test of economic management should not simply be whether governments balance their books. It should be whether they leave the country with a stronger economy, better infrastructure, more productive businesses and a higher standard of living.
That is a debate that deserves to be heard well beyond university economics departments and the corridors of the Treasury.
Stephanie Kelton The Deficit Myth Modern Monetary Theory and the Birth of the People's Economy
Richard Murphy MMT and the arguments against it
A Skeptic's Guide to Modern Monetary Theory
Steve Keen