What is modern monetary theory?

Modern monetary theory (MMT) says a government that issues its own currency, like the UK, cannot run out of money in that currency. Supporters argue the real limit on spending is inflation, not debt. In this view, taxes mainly exist to control inflation rather than to fund spending.

MMT builds on older ideas about how money is created. It says governments like the UK spend first and tax later. Because the Bank of England can always create pounds, the government can never be forced to default on pound debts. The real question is whether there are enough workers and resources to absorb the spending. The theory became widely known in the late 2010s, especially in the United States.

Supporters favour a job guarantee, where the state offers a paid job to anyone who wants one. They argue that during slack periods, governments should spend more freely to reach full employment. When inflation rises, taxes should go up or spending fall to cool demand. They also argue that government deficits add to private sector savings, because one sector's deficit is another's surplus.

Most mainstream economists reject MMT's strongest claims. They point out that bond markets, the exchange rate and inflation expectations still constrain governments. The UK saw this in the 2022 gilt market turmoil. Critics also doubt politicians would raise taxes fast enough to stop inflation. The UK's fiscal rules are built on the opposite view, that debt levels matter.

Where you've seen it

Mostly an academic and activist idea since the 1990s. Supporters point to Japan's large debts with low interest rates, though no government officially follows MMT.

In the UK today

Mostly discussed in think tanks, online and on the left. It comes up in debates on whether the government should worry so much about debt and the fiscal rules.