Funding the NHS: a plain English guide to money and affordability

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This article is from Gavin Barker from End Westminster Rule

However laudable the aspiration for a publicly funded NHS, whatever the scale of public support, ultimately everything boils down to money – or lack of. The refrain from both parties is ‘there is no more money’. Labour ‘will not turn on the spending taps’ if elected, and the Conservatives proclaim their ‘pledge to get the national debt falling’. And Keir Starmer has been heard to repeat the infamous phrase once used by George Osborne to usher in austerity ‘the UK’s credit card is maxed out’ and Rachel Reeves parrots Theresa May’s ‘there is no magic money tree’.

We have two choices: we can either accept what they say as true or we can educate ourselves and start asking awkward questions. Because when it comes to money, especially public money, nothing is what it seems. What follows is a plain English guide to where money comes from; the national debt and who owns it; and the fiscal (budgeting) rules followed by both the parties.

Where does money come from?

Banks create money whenever they make a loan. Many will greet this assertion with mild incredulity, yet bank lending is the main way in which new money is created. It does not come from other people’s savings. This is confirmed by the Bank of England who explain:

“If you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.”

And in a separate article on its website it states:

“The reality of how money is created today differs from the description found in some economics textbooks: rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits”[1]

The implication of this is that for money to be taxed or borrowed by the UK Government, it first has to exist in the real economy. And it can only exist if it is first created – either digitally or through the Bank of England’s printing press.

High street banks create or ‘print’ around 80% of the money in the economy as electronic deposits.

There are three types of money in the UK economy: 3% notes or coins; 18% ‘reserves’ (accounts held by private banks with the Bank of England); 79% Bank deposits (personal and business accounts held at private banks).

In effect high street banks act as agents of the state. They can only create in pounds sterling – not dollars or any other currency – and they can only do so with the express permission of the Bank of England. While regulation does not permit private banks to create unlimited amounts of money, organisations such as Positive Money and the New Economics Foundation point to light touch regulation which allows private banks too much freedom to create the kind of credit booms and their associated asset price bubbles that led to the Great Financial Crisis of 2007-9.

Central banks, such as the Bank of England, also have the power to create money

We are taught to believe that public finances are scarce and the Government only has two options when it comes to finding money: tax or borrow. But governments with their own sovereign currency (the UK has the Pound, the U.S. has the dollar, Canada the Canadian dollar) can instruct their central bank to create or print money in unlimited amounts when needed.

For example, during the Great Financial Crisis of 2007-9 the then governor of the Bank of England Mervyn King boasted to a Scottish conference in October 2009 that:-

‘A trillion (that is, one thousand billion) pounds, close to two thirds of the annual output of the entire British economy’, had been mobilised to bail out the British banking system.[2]

Yet this mobilisation of massive financial support did not extend to protecting vital public services such as the NHS. Instead, the newly installed Conservative government positioned Labour as spendthrift with the claim that the ‘UK’s credit card is maxed out’.

Another example was the covid pandemic. This brought the economy to a virtual standstill and required huge amounts of money to fund the furlough scheme. In all, the Government ‘borrowed’ £412 billion by selling government bonds (or gilts) to the money market. The sheer scale of borrowing triggered shrill headlines about the size of the national debt with the BBC claiming that ‘The Government cannot keep borrowing at this level forever, so it must find a way to cut spending or increase taxes[3]. Not once did the BBC or any other national paper mention the role of the Bank of England in quietly buying back that same debt through Quantitative Easing (QE) or ‘money printing’, thereby ‘deleting’ the debt. As the New Economics Foundation has pointed out:

‘While total borrowing between March 2020 and July 2021 was £413 billion, the Bank of England’s total purchase of government debt was £412bn, or 99.5%[4].’

In all the Government has used QE (or money printing) to buy back government debt to the tune of £895 billion between November 2009 and November 2020.[5] That is nearly 5 times the size of the NHS budget. Both these examples demonstrate the immense power of the state at a time of crisis.

The national debt and the Government’s ‘fiscal rules’

This brings us to the national debt which is rapidly becoming an election issue. The two main parties both cite the urgency of bringing down the national debt which, according to the Office for Budget Responsibility is forecast to rise from 89% in 2023/24 to 92.8% of GDP in 2028/29[6]. Both parties adhere to the present government’s self-imposed fiscal rules, the principle one being that the ratio of debt to GDP must be falling in five years’ time. Any proposed public expenditure is measured against that fiscal rule – what is called ‘fiscal headroom’.

There are four things worth pointing out:

Firstly, to stress again, these are self-imposed fiscal rules and they are constantly being broken – none of them have been adhered to for the last 15 years – and this suggests that there is something fundamentally wrong with the economics on which they are based. Chancellors simply change their fiscal rules when they become too difficult to meet.

Secondly, debt has a different meaning to a government than it does to a private individual. The major holders of the national debt are UK investors such as pension funds, insurance companies and private individuals. They buy the debt because it is one of the safest forms of investment. Thus in a sense it is a debt we owe to ourselves.

Thirdly, the debt has been greater in the past than it is now. In 1946, it stood at 250% of GDP as a result of the Government’s need to borrow heavily to rebuild after the devastation of the Second World War, and to finance the creation of the NHS and welfare state.

Fourth and finally, governments with their own sovereign currency such as the UK, US and Japan can always create the money to pay back the debt. And the Bank of England has done exactly that through its use of QE. It now owns just under a third of the national debt (including the covid debt). Since the Bank of England is in turn owned by the Government, that effectively cancels the debt (you cannot owe money to yourself). Nevertheless, the Bank of England has kept the debt on its books and passes the interest back to the Treasury.

MPs have a poor understanding of these issues

If you are surprised by the explanation about where money comes from, you are not alone: a survey of MPs conducted by Positive Money revealed that only 15% of MPs were aware that new money is created when banks make loans, and existing money is destroyed when members of the public repay loans. 62% thought this was false, while 23% responded ‘don’t know’. Tory MPs seemed to have a slightly better idea, with 19% answering correctly, compared to only 5% of Labour MPs. As Positive Money states:

“Despite their confidence in telling the public that there is ‘no magic money tree’ to pay for vital services, politicians themselves are worryingly ignorant of where money actually comes from.”


Money is not scarce, nor does it have a fixed limit. Moreover, the obsession with government debt is a dangerous distraction in the face of the existential threat posed by climate change and the crisis of underfunded public services such as the NHS. As the economist Simon Wren-Lewis has said:

“We owe it to future generations to mitigate the impact of climate change…and deal better with future pandemics. Not doing so would saddle these generations with a burden far greater than paying a bit more interest on government debt.”

[1] Money creation in the modern economy Article in Bank of England Quarterly Bulletin2014 Q1

[2] extract from Chapter 4 of Ann Pettifor’s book ‘The Production of Money’.

[3] How much is Covid costing the UK and how will we pay? BBC website 22-6-2021

[4] 99.5% Of Government Covid Debt Has Been Matched By So Called Bank Of England ​‘money Printing’. New Economics Foundation

[5] Statista Value of quantitative easing measures by the Bank of England (BoE)

[6] See Full Fact website Underlying debt is forecast to be higher in five years’ time than it is currently

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  1. While I agree with many of the points here, I think there is a big difference between the USA dollar and sterling. The external value of sterling is normally measured against the USA dollar or the Euro. If unlimited sterling balances were created I believe that the external value of sterling would fall. The USA dollar on the other hand would be relatively immune from this effect as it is the currency against which others are measured. There are peer-reviewed articles regarding modern monetary theory which make this point, and others, in more detail.

    • Thanks Steve, point well taken. All I would say is that there is much greater policy space for vital public investment that both the government and the opposition parties deny. In the governments case their fiscal rules are geared towards a small state agenda. In the case of Labour, they are terrified of a media firestorm if they were to venture to articulate some of the points made in this article

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