I note that the Hard of Accounting are out in force again pushing their fallacious line that Taxes Must Rise because we decided to use government to save the economy in the face of a nasty pandemic.

There must be Fire and Brimstone. The Sin must be Purged.

Clueless idiots the lot of them - particularly those at the ironically named Institute for Fiscal Studies who really ought to know better. (If they do study Fiscal they don’t do it very effectively).

This is how it works in reality.

You receive some furlough pay, which is taxed, you spend that money at a shop, which is taxed, they pay their staff which is taxed, who spend that money at a shop, which is taxed and so on.

Imagine a stone skipping across a pond where every bounce is a transaction and every ripple is taxation.

If you expand that sequence you’ll find that eventually the initial injection of money (G) for the furlough pay disappears in taxation (T). Or as it tends to be written mathematically:

$$\delta(G - T) = 0$$

Bonds come about when not everybody in the sequence spends all their money - aka saving. There’s been a lot of that recently due to frightened people increasing their rainy day funds, people paying off loans and simple lack of opportunities to spend.

The increase in Savings (S) and decrease in Loans (I) creates a government deficit. Or as I like to write it

$$\delta(S - I) \implies \delta(G -T)$$

A change in net savings causes a change in the government sector deficit

Under our current regime that deficit is swapped for Bonds. Green Dollars are swapped for Yellow Dollars (treasuries), Silver Pounds are swapped for Gold Pounds (Gilts).

The Treasury or the Gilt or the JGB is just a savings instrument held by somebody who didn’t feel like spending their money right now.

In our stone bouncing sequence above you can imagine the video is paused just after a ripple occurs. A Bond is a pause button in the spending sequence.

Eventually the sunny uplands will return, people will feel less frightened, go to the shops more, and break out the credit card again. And that is like hitting ‘play’ on our sequence. The saved money is then spent at a shop, which is taxed, who pay their staff, which is taxed, who then spend at the shop, which is taxed… The bouncing continues, creating a decrease in savings and/or an increase in Loans. Which gives:

$$\delta(S - I) \implies \delta(0-T)$$

A reduction in net savings causes additional tax!

And there, by accounting identity, is your extra tax, which reduces the government deficit and may even eliminate it completely and create a surplus. The extra tax ensures that bonds that mature are not reissued and the rate of issue of bonds slows downs and may even reverse.

The tax arises and the bonds disappear completely automatically when people who hold the savings they represent decide to spend their savings.

The same percentage of a bigger number is another bigger number. Mathematics will still work as it always has done post-Covid.

No raid on wallets required.