Taxation is the most significant way in which a government receives its income. Last year, the UK government raised around £1,017 billion in tax revenue, accounting for approximately 40% of GDP. A similar trend is seen within governments worldwide, with tax revenue being the primary source of government income. Governments tend to rely so heavily on tax revenue, but it is necessary to consider other methods of income.  

Central banks have the unique power to create money to circulate in their economies. A potential method to reduce the government’s dependence on tax is to switch to the use of newly created money by central banks. With this, there would sizeable benefits to all economic agents. Considering consumers, the main benefit would be no income tax or any other taxes, such as VAT, enabling drastically higher disposable incomes, which in turn could result in higher standards of living across the economy. For example, an earner with an annual income over £125,140, the threshold for the highest UK tax band, would then receive around an additional £50,000 yearly in disposable income. Overall, an increased disposable income would result in higher levels of demand in an economy, which in turn would result in more national output and economic growth.

A taxation relief would also benefit producers, since their cost of production would be a lot lower. Examples include, cheaper raw materials for their good and services, as they don’t have to pay tax on them, or the vast increase in profits since they do not have to pay local governments. This can incentivise producers to produce more goods in said tax-free economy, because they would be making more money per good sold. This would result in better conditions for businesses across the economy. In addition to this, there would be a higher level of competition between businesses, which would benefit consumers as they’d receive higher quality goods potentially at a cheaper price. In total, there are many potential benefits associated with the idea of newly created money for consumers and producers.

However, an increase of aggregate demand would result in higher levels of inflation, shown by an increase in price level. The levels of inflation would be unimaginably high. An example of this can be seen from the US in 2020. The country printed more than $3 trillion in 2020 alone. This is a staggering amount, with the effects still being felt today. This caused a jump in inflation from 1.2% in 2020 to 4.7% in 2021. This is due to an increased use of newly printed money by the central bank. If newly created money was the only source of government income, there would be a much more extreme scenario of inflation. Prices of goods and services would uncontrollably rise, causing the value of money to depreciate rapidly. Such high levels of inflation would counteract the gains in disposable income, and potentially overpower them. Further to this, high inflation often leads to high inequality, since it is the poorest who are often unable to afford even necessary goods. The richest in society, however, would greatly benefit with higher levels of inflation, since their asset prices would increase, giving them the sense of more money owned, known as the wealth effect. This would defeat a macroeconomic objective, since inequality would be widened. 

On the positive side, a huge advantage of taking this approach would mean that governments would become more able to invest in new projects and fund other expenditures. Since funding for the government would likely never be an issue, the government could keep on creating money to fund their projects. The obvious advantage of this is that funding projects would no longer be an issue, meaning that projects could theoretically have any cost and there would be no issue for the government to fund them. An infamous project that would’ve benefit greatly from this is HS2. With an original budget of £33 billion in 2015, the government was able to finance the infrastructure project without too many issues. However, as the estimated cost of the project kept rising, with an estimate of £98 billion in 2023, the government struggled significantly more to raise the needed capital. In 2020, they had to borrow another £17 billion for HS2’s development, highlighting the time-consuming process of generating funds. However, if instead the government solely used newly created money, there would be little to no issues in terms of raising capital for projects such as HS2. The increasing project costs would not be a political controversy in the slightest with this method of government income and the delays to the project would be minimised. This principle could be applied to other projects, suggesting that an increase in money supply to the government would significantly increase the efficiency of them, enabling faster and more thorough financing. 

Although, there are multiple issues associated with this. Alongside inflation, there is another significant issue- the role of the central bank may become redundant. The International Monetary Fund describes central banks to: “Use monetary policy to manage economic fluctuations and achieve price stability”. Price stability would most certainly not be achieved with the sole use of newly printed money by the government, defeating the purpose of having a central bank. In general, central banks act independent from the government. If the government makes use of so much newly printed money, the central bank loses control of the money supply. This reduces the power of the central bank, and, to an extent, of monetary policy.  Therefore, by solely using newly created money as revenue, governments have the ability to corrupt the way in which the money supply is handled, which can be detrimental for the economy. It is imperative to keep central banks free from government control in democracies. 

To conclude, it is fair to say that the impacts of solely using newly created money would be wholly negative to all agents in an economy: consumers, producers, and the government. Of these, it can be said that consumers and producers would be impacted more harshly, with the drastic effects of inflation, whilst the government would be less negatively impacted. An ideal solution instead, could be to increase money creation whilst reducing taxation, enabling economic agents to get the best of both sides.