Could Britain really need another IMF bailout?

The Financial Times has revived memories of 1976, when Britain turned to the International Monetary Fund for financial support. But the circumstances today are fundamentally different, and understanding why tells us something very important about government debt, money and the supposed threat of national bankruptcy.

In this video, I explain what the IMF actually does, why countries sometimes need its help, and why foreign currency debt is crucial to understanding an IMF crisis.

I look back at what happened to Britain in 1976, when sterling was under pressure, foreign currency reserves mattered, and the international monetary system was still adjusting to the collapse of Bretton Woods.

Then I explain why today’s position is different. UK government debt is overwhelmingly denominated in sterling. The UK government creates sterling. A government that owes debt in its own currency faces fundamentally different constraints from a country struggling to obtain dollars to meet foreign currency debts.

That does not mean Britain has no economic problems. High interest rates, inflation, weak investment and struggling public services all matter. But they are not the same thing as government insolvency.

So why revive the spectre of an IMF bailout? And does talk of a financial crisis risk becoming another argument for austerity?

That is what this video is about.

Why should money earn interest simply because somebody owns it? We usually treat interest as a natural and inevitable part of the economy, but in this Understanding Economics video, I question whether that assumption is justified.

Commercial banks do not need to collect deposits before making loans. When a bank lends, it creates new money through its accounting records. The process of creating that money itself costs very little, so why are interest rates often so high, even after allowing for the fact that lending does involve administration and the risk that borrowers will not repay?

That question is especially appropriate when much lending is now virtually risk-free. Interest should not be confused with an investment return. Investment involves taking a genuine risk in the hope of making a profit. Interest, by contrast, is a payment for allowing somebody else to use money for a period of time.

I argue that we should separate the different costs currently bundled together as interest. Borrowers could instead see a basic charge for using money, an administrative charge and a separate premium reflecting the genuine credit risk involved.

This matters because interest rates have significant economic consequences. Higher rates redistribute income towards people who own financial wealth while increasing mortgages, rents and borrowing costs. They can also discourage productive investment and spending on priorities such as the green transition.

I am not arguing that interest should be abolished. I am arguing that the basic interest rate on low-risk money should be close to zero in real terms, while genuine costs and risks should be identified and charged transparently.

Understanding what we are actually paying for would make borrowing clearer, improve competition and help us understand who gains and who loses from the interest rates that shape our economy.

Neoliberalism promised us prosperity, security and freedom through markets. Increasingly, it is delivering insecurity instead. So what does it have left to offer? Fear. And that is it.

We are told to fear government debt. We are told to fear the bond markets. We are told governments must maintain “fiscal credibility”, even when doing so means higher taxes, weaker public services, lower living standards and fewer jobs.

Martin Wolf’s recent arguments in the Financial Times provide an example of this thinking. But the issue is much bigger than one commentator. It is about an economic ideology that treats satisfying financial markets as more important than meeting human need.

The argument rests in part on the household analogy: the claim that governments must finance themselves in much the same way as households do. But a currency-issuing government is not a household. That misunderstanding produces profoundly damaging economic policies.

In this video, I argue that neoliberalism increasingly relies upon fear because its promise of prosperity is failing. When insecurity is already widespread, however, threatening people with more insecurity eventually stops working.

We need another objective for politics: freedom from fear.

That means economic security, decent housing, worthwhile work, healthcare, security in old age and protection from climate change.

Can we build an economics that puts those things before appeasing financial markets? That is the question.

The Conservatives are using their party conference to put inheritance tax back at the centre of political debate. In this video, I question why Kemi Badenoch is focusing on a tax that affects only a small minority of estates when millions of people face much more immediate economic pressures.

According to the figures discussed in this video, just 4.72% of deaths resulted in an inheritance tax charge in 2023–24. More than 19 out of every 20 estates therefore paid no inheritance tax at all.

The headline 40% inheritance tax rate can also be misleading. Allowances mean substantial amounts can potentially be passed on without inheritance tax, while the 40% rate applies only to the taxable portion of an estate above the available thresholds.

I argue that the bigger question is why inherited wealth should receive greater political protection than income earned through work. Inheritance is wealth received because of family circumstances rather than something the recipient has earned through employment.

Meanwhile, Britain faces problems with housing costs, insecure work, stagnant wages, struggling public services, poverty and substantial inequalities of income and wealth. Cutting inheritance tax does little to address those problems.

There can be legitimate debate about how inheritance tax should operate and whether it needs reform. But making it a flagship political issue tells us something about the priorities being placed by the Tories on inherited wealth compared with the economic insecurity experienced by many households.

The question is not simply whether inheritance tax should change. It is whose economic problems politicians choose to prioritise.

AI could cost you a fortune, and not because of the price of a ChatGPT subscription.

The AI investment boom is drawing enormous amounts of capital towards US technology companies. At the same time, war in the Gulf is pushing up energy and other real-world costs. These forces are colliding in global financial markets, with potentially serious consequences for interest rates, mortgages, rents, inflation, public spending and jobs.

In this video, I explain how the rush into AI shares is connected to movements in government bond markets, why central banks may respond by raising interest rates, and why those higher rates cannot solve supply-driven inflation caused by war, energy shortages or disruption to world trade.

The danger is that governments will then use higher borrowing costs as an excuse for austerity. Pensions, social care and other essential public services could come under pressure, even though ordinary people did not create the crisis.

This is about more than AI. It is about the relationship between financial markets, political power, war, central banks and economic policy.

The extraordinary concentration of money and power behind the AI boom has consequences. The question is who will ultimately be made to pay for them.

For more analysis, transcripts, explainers and infographics, visit Funding the Future.

As the UK approaches the Budget, one phrase is going to be repeated again and again is “fiscal headroom”. Politicians, economists and journalists talk about it as though it represents money the Chancellor has available to spend. In this video, I argue that this is deeply misleading.

Fiscal headroom is not a pot of money sitting at the Bank of England. It is simply the estimated margin by which the government is forecast to meet the fiscal rules it has chosen to impose upon itself.

Those rules are political choices. Change the fiscal rule, change the economic forecast, or change assumptions about growth, tax receipts, spending or interest rates, and billions of pounds of supposed fiscal headroom can appear or disappear without anything changing in the real economy.

I argue that this focus on fiscal headroom distracts us from the questions that really matter. The UK’s economic constraints are not numbers on Treasury spreadsheets, but the people, skills, infrastructure, energy and other resources available to meet society’s needs.

Instead of asking whether there is enough fiscal headroom for investment, pensions, healthcare, education or tackling poverty, we should ask whether the economy has the capacity to provide them and how that capacity can be expanded.

Economic policy should be judged by employment, investment, public services, inflation, sustainability and people’s well-being, not by the margin between a self-imposed fiscal rule and an uncertain economic forecast.

Fiscal headroom does not tell us what government can afford. I argue that it turns political choices into supposed accounting necessities, and that leads to bad economics and bad political decisions.

Is the UK facing a government debt interest crisis? More than £100 billion a year is now being spent on debt interest, and this is frequently presented as a threat to the government’s finances. In this video, I argue that this misses the real issue.

The UK government cannot involuntarily run out of pounds with which to meet sterling-denominated payments. The important question is therefore not whether the interest can be paid, but who receives that money and what those payments do to the distribution of income and wealth.

Government interest payments become somebody else’s income. They flow to the owners of government bonds and other savings, including pension funds, investment funds, banks and other financial institutions. But because financial wealth is distributed very unevenly in the UK, the benefits of those payments are also unevenly distributed.

I argue that this means higher government interest payments can contribute to wealth inequality. Those who already own substantial financial assets receive additional income, while households with little or no financial wealth receive very little direct benefit.

That raises an important question when politicians simultaneously argue that spending on pensions, health, education and other public services must be constrained. Why is austerity discussed for those services while the scale of interest payments to asset owners receives much less attention? Is this a case of austerity for the poor and interest for the rich?

The real interest crisis, in my view, is therefore not government solvency, or even the cost being paid. It is the distributional impact of transferring such large amounts of income to the owners of financial wealth while claiming that spending elsewhere must be restricted.

Politicians and economic commentators constantly talk about “taxpayers’ money”. In this video, I argue that this phrase fundamentally misrepresents how government spending and taxation work.

The conventional story says that the government collects taxes and then uses that money to pay for schools, hospitals, pensions and other public services. I argue that the actual monetary process works in the opposite order: government spending creates money, while taxation subsequently removes money from circulation.

When the UK government spends, payments are made through the banking system. Taxation then withdraws spending power from the economy. There is no pot containing individual taxpayers’ payments waiting to be spent again on public services.

But that does not mean tax is unnecessary. Far from it. Tax plays essential economic and social roles. It helps control inflation by removing spending power, can redistribute income and wealth, and can encourage or discourage particular activities.

Tax can therefore be used to tackle inequality, discourage pollution and harmful consumption, support socially desirable activities and strengthen the relationship between citizens and government.

The mistake is treating government finances as though they work like household finances. Households need income or credit before they can spend. A currency-issuing government operates differently.

Understanding that difference changes the way we think about government spending, taxation, inflation and the supposed financial constraints placed on public policy.