It's just like a household budget

The household analogy is perhaps the most pervasive misconception in economic discourse. It sounds intuitive because we all manage household budgets, but it misunderstands the nature of sovereign currency.

A household must:

• Earn income before spending
• Borrow in a currency it cannot create
• Face genuine solvency constraints
• Eventually repay all debts

A currency-issuing government:

• Spends by crediting bank accounts (creating currency)
• Borrows in a currency it creates
• Cannot involuntarily run out of its own currency
• Faces real resource constraints, not financial constraints

When the UK government spends, the Bank of England credits the recipient’s bank account. This is an accounting operation. The constraint is not “where does the money come from?” but “are there real resources available to purchase?”

The relevant questions for government spending are:

• Is there spare capacity in the economy?
• Are there unemployed workers with relevant skills?
• Are there available materials and equipment?
• Will this spending cause bottlenecks in specific sectors?

These are questions about real resources, not financial arithmetic.