THERE are many things about economics that annoy me. Politicians can also irritate me. Put the two together and I think you can guess the outcome. Time and again I find myself getting aggravated as yet another politician talks nonsense into a camera.

The list of things they might annoy me with is almost endless, but let me address just one of them. That is the near universal habit that politicians now have of referring to what they call “taxpayers’ money”.

The term “taxpayer’s money” (note the different location of the apostrophe) makes sense. That is the money that an individual taxpayer has available to them to spend after they have paid their taxes. I have no problem with that term. It is accurate.

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What there is not, however, is “taxpayers’ money”. It is a term politicians now seem to use whenever they refer to any spending by the government. That term is utterly meaningless and wrong in so many ways it is hard to know where to begin, but I will try.

The first thing wrong is that it assumes that the government can only spend if the money in question has been paid to it in advance by taxpayers. This, however, is totally untrue.

Since we know that ultimately all money is created by the government of a country (try making your own and see what happens if you do not believe me) then, as matter of fact, a government has to spend all the money used to pay tax into existence before any tax can be paid. It is impossible for anything else to be the case, however hard it is for most people to imagine.

The National: Council tax bill

But in that case, how on earth can it be said that the money spent by the government is “taxpayers’ money”? It cannot be. Instead it has to be the government’s own money, created by it and spent by it in exchange for goods and services. People will accept that payment because the government has (conveniently for itself) declared the money it creates the only legal tender of the jurisdiction it governs, and says it is the only currency that can be used to settle any tax bills owing to it.

There is a second issue. This claim that the government spends “taxpayers’ money” presumes that the government is just our agent. But that is not true. The government is a body in its own right that can not only own and control its own property, including money, but which can actually define the way in which everyone else can also own and control property.

Using that power, the government demands tax from us and we then have no choice but settle the bill or we will be penalised. Vitally though, when we settle that bill we don’t expect them to hold the money that we pay in an account that they spend on our behalf, which is what the term “taxpayers’ money” implies. Instead, just as when we pay anyone else, whether that be Tesco, the landlord or a pub, once we part with our cash we recognise that the money that was once ours now belongs to someone else.

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That is exactly what happens when we pay the government the taxes that we owe. The money that was ours is now the government’s. It is theirs to do with as they will. We have no more say over what they do with it than we would have a say over what our barber or hairdresser does with their money once we have paid them.

Thirdly, the term “taxpayers’ money” also makes no sense because it assumes that the government is solely funded by tax. It isn’t.

To cut a complicated story short, the government is funded in three ways. The first of these, and in the case of the Westminster government the most important in many ways, is by money creation. Via the Bank of England (below), the Westminster government can create as much money as it wants to fund its activity so long as there are useful things for it to spend the money on – and it taxes enough of the money it creates back from us to control inflation.

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The Holyrood government does not, however, have its own central bank. That means it must be funded either by grants from Westminster, funds it can raise through taxation, or by borrowing. This is much less flexible than the system Westminster can use, which is precisely why Scotland will need both its own central bank and currency when it is independent. But note that even in this Holyrood-style system, tax does not pay for everything because borrowing can also play a role.

In other words, whichever type of government we look at, “taxpayers’ money” does not fund it. Tax undoubtedly plays a role in government financing, but as a matter of fact the government never spends other people’s money, which would be pretty unethical if our politicians even thought for a moment about what they were saying. Instead, government always spends its own money and is responsible for its own decisions on that spending.

It really is time that at this most basic of levels politicians learned what it is they do, how the government that they control works, and how as a result they should manage it. Every time they use the term “taxpayers’ money” they show that they know none of those things. No wonder I get annoyed.