No problem, will take a while so bear with me.
As the issuer of the pound sterling, all £s originate via the UK government. In order for the UK to be able to claim back £s for taxes it must have spent those £s into existence by purchasing goods/services for use by gov. 1/?
As the issuer of the pound sterling, all £s originate via the UK government. In order for the UK to be able to claim back £s for taxes it must have spent those £s into existence by purchasing goods/services for use by gov. 1/?
In the UK our unit of account is denominated as the £, the US the $, Japan the ¥. Via the Treasury and Central Bank, the UK government controls and owns the unit of account. The £ is simply a measure of a relevant obligation/debt in relation to a good or service in that unit. 2/?
In laymans terms, we price things in our unit of account. A TV is not priced as 700, it is £700 or equivalently if we were measuring in dollars $990. The TV is a real thing, the obligation attached to it however is not, it is a measure of the price in the required unit 3/?
Money is not a scarce commodity that we pan for in streams or dig out of the ground, it's not a medium of exchange or veil over barter. Money is a credit denominated in a certain unit of account capable of offsetting an obligation denominated in that same unit of account 4/?
By virtue of its ability to levy taxes in its chosen unit of account, each relative government is able to coerce its population into accepting payment in £s as this is the only means the government will accept to clear tax obligations. As such a monetary instrument is formed. 5/?
As the UK gov declares the UOA, denominates tax obligations in the UOA and issues tax credits (currency) in that UOA, floating on an exchange rate unhampered by a peg to a commodity or other currency, the UK gov can be described as the monopoly supplier of £s for the nation. 6/?
As individuals require £s to settle taxes, fees and fines, the gov is able to provision itself with goods and services in the currency required to settle those obligations. As such, spending must occur prior to taxation or there are no £s to pay taxes, fees and fines with. 7/?
So how does spending occur by government? The UK government agrees the desired spending levels for their policies and day to day requirements and authorises the Treasury to make the required payments. Treasury credits bank accounts as necessary and increases deposits 8/?
In order to ensure the clearance of these payments, the BoE must coordinate with the Treasury to ensure that the adequate level of reserves are injected into the banking system to ensure Treasury payments clear. This is done via keystrokes, increasing deposits and reserves £s 9/?
The money in the account in question has risen, providing a record of the account holders new claim on the clearing reserve balance. For example, when you spend £10 at Tesco, your ac bal drops £10 and Tesco up £10. In the background your bank reserve bal shifts £10 to Tescos 10/?
Reserves are simply central bank liabilities denominated in £s and sit atop the hierarchy of monetary instruments in the UK. As such, UK government spending creates the reserve balances and deposits required to enable the banking system and economy to function. 11/?
As sectoral balances show, in order for the private sector to be able to pay taxes and save in the aggregate, the government must spend more into the economy than it taxes out as it must also accomodate demand leakages of the £ via net imports. 12/? 
This means that when government reduces its deficit spending or attains a surplus, it is in effect extracting more £s from the economy than it is placing in. This restricts private sector savings and as such reduces demand and subsequent taxation. 13/?
Careful examination of gov balance sheets show that Treasury spends first, BoE ensures clearing of payments via reserve injection and then bond issuance takes place as required. Bonds are used after the fact if there are excess reserves created in the banking system. 14/?
The reason this is done is in order to defend the central banks target rate. If there are excess reserves, interbank lending can threaten the target rate and as such bonds drain these reserves to eliminate that competition. Bonds are a monetary policy tool not fiscal 15/?
In order to purchase a bond, you must already be holding some £s with which to buy it. That is the functionality they provide, they remove reserves, and as a reward provide interest to the purchaser. If the target rate was at or close to 0, bonds would no longer be required. 16/?
So when I say that reduced finance is a fallacy, I am pointing out that taxes are a function of private sector saving desires, bonds are not borrowing for revenue but to defend the target rate and that government spending occurs as a separate operation to both these things. 17/?
The deficit should be whatever is required to ensure that the nation is fully utilising its resources and labour, and should flex to maintain this whilst providing the private sector's desired saving levels. Not to do so based on fallacies of what money is is irresponsible 18/?
Banks are also able to create credit which trades at par with the £ however, all loans net to zero in the aggregate and as such do not create any asset without a corresponding liability in the same way government spending does.Excess credit is far more dangerous than pub deb End/
This is putting the onus back on that which is important, real full employment, full utilisation of resources, and delivering public services that are required. Functional finance should be the aim today.
If you wish for more in depth explanations than here I suggest reading here neweconomicperspectives.org/modern-monetar…
Alternatively I can explain the interactions between the consolidated fund, NLF etc if you like, however, this would take another full thread or so, and the info is already written and available elsewhere.
