Modern Monetary Theory in the UK

Written by Paolo Parisi-Bush

Edited by Mehmet Yusuf Temur and Abigail Ng

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Over the last decade, many Western economies have experienced a steady increase in the ratio of national debt as a proportion of total output [1]. Whilst slowing per-capita GDP growth may reflect a longer-term trend [2], governments have increasingly utilised deficit spending to address a series of global shocks following the Covid-19 pandemic.

In the United Kingdom, chronically low productivity growth and the adjustment to a post-Brexit trading environment have exerted additional pressures on the exchequer. Meanwhile, persistent inflation has kept real UK household incomes below pre-2020 levels [3] as demands on public services continue to grow, leaving limited political space for fiscally conservative measures. This has coincided with the introduction of more radical proposals, including policies notably inspired by 'Modern Monetary Theory' (MMT).

MMT is a heterodox macroeconomic framework that fundamentally reconsiders the constraints on government spending, arguing that states with control over their own currency should reorient fiscal policy around real economic capacity, rather than nominal budgets. Pioneered in the early-1990s, MMT first gained mainstream attention in the late 2010s, when it featured in a series of US congressional debates on the national debt [4]. Notable academics often associated with its rise include Randall Wray, William Mitchell and Stephanie Kelton, author of the 2020 New York Times bestseller: ‘The Deficit Myth’ [5]. 

At its core, MMT claims that if a state maintains full “monetary sovereignty” [5] - the exclusive legal authority over the issuance of its own currency – then government expenditure is not limited by nominal money. Consequently, countries like the UK, US and Japan – fiat currency-issuing states unbound by fixed-exchange rate mechanisms or shared currency regimes – can always create new currency to fill a fiscal gap [6] and sustainably spend above revenue from taxation. At first, this statement seems myopic - expansionary monetary policy, if not met by a proportionate increase in real resources, will inevitably lead to inflation in the long run. Incidentally, this forms the foundational logic of MMT: inflation captures the point at which the monetary supply exceeds economic resources, making it the true indicator of state spending limitations - not nominal budgets. Accordingly, proponents dismiss concerns relating to annual deficits and the national debt, regarding this to uphold self-imposed constraints which create a false equivalence between government and private household spending.

MMT offers an alternative framework, arguing that until the economy reaches full employment, it is operating below its productive capacity. This leaves resources idle that could otherwise generate output. With appropriate policy design, additional spending directed towards this ‘slack’ could mobilise unused labour while maintaining relative price stability. Empirically-speaking, the basic mechanics of this statement are not necessarily controversial [7]; in fact, they broadly align with New-Keynesian theory [8]. The source of greater contention is whether full employment is practically feasible without generating a price spiral.  

This diagnosis of inflation has attracted significant criticism, particularly for being overly characterised by aggregate factors – indeed, inflation can persist in the presence of output gaps, as sticky input constraints and sectoral bottlenecks induce cost-push effects [4] which reverberate through supply chains. MMT economists acknowledge this fact, advocating instead that currency-issuers introduce a ‘Job Guarantee’ (JG) [9] – a universal fixed-wage employment offer funded by the government. The JG would absorb idle labour from the private sector, functioning as a variable buffer stock: expanding during downturns and contracting as private firms rehire during booms. Since the wage is fixed, government spending enters the economy at a stable, predictable rate regardless of the pool's size, theoretically anchoring inflation while eliminating involuntary unemployment. This would replace ‘Natural Rate of Unemployment’ (NAIRU) used by central banks.  

Thomas Palley, a notable critic of MMT, questions the JG’s feasibility [10]. Political risks aside, he argues the government wage, necessarily indexed to inflation, could trigger destabilizing price spirals as private sector wages would likely follow suit to maintain an appropriate differential. Further, if the state is financially constrained, the programme’s funding may compete with more pressing public investment priorities such as infrastructure or healthcare. Using the JG labour as a variable inflation anchor also introduces a conceptual challenge: the government must create employment that is productive enough to justify its cost, yet dispensable enough to be forgone when aggregate conditions change [11].

For the UK, a significant barrier for MMT lies in the dynamics of international trade. Much of the theory’s popular literature focuses on the United States, which enjoys the ‘exorbitant privilege’ of issuing the global reserve currency. Whilst recent policy shifts have undermined its hegemony, historically, the US has enjoyed persistent external demand for the dollar, shielding its economy from the inflationary consequences of trade deficits [12]. Contrastingly, the UK does not enjoy the same currency stability and has a high propensity to import [13]. If a British government were to pursue aggressive MMT-style expansion, the resulting increase in aggregate demand could spill over into imports, exerting downward pressure on the Pound.

Beyond trade, MMT is yet to convince mainstream academics of its practical compatibility with the realities of policymaking. While the traditional practice of balancing budgets is open to critique, it remains objective, quantifiable and easily navigable. MMT, by contrast, would demand a far more granular understanding of how spending decisions transmit into price pressures across different sectors. Policymakers would need to accurately assess the inflationary impact of fiscal proposals ex- ante, accounting for sectoral capacity constraints and the complex dynamics through which demand feeds into prices. Many justifiably question whether any government has the apparatus to credibly manage such a regime.

MMT is often framed as a mechanism to address issues like unemployment, public services and climate; however, by assigning inflation as the benchmark for fiscal decision-making, the state inherently has a greater capacity to serve wealthier individuals, who consume a smaller proportion of their income. Redistributive policies tend to carry a greater inflation multiplier [14], limiting MMT’s compatibility with a progressive fiscal agenda. This highlights a shortfall - governments cannot fully control the circulation of money once it enters the private sector. When inflation appears, the tools to reduce it tend to be blunt and politically damaging, leading many to pursue conservative monetary policy platforms. In the UK, this limits the palatability of MMT over the short to medium term. Fiscal crises take a long time to fade from the public imagination, and MMT-style policies continue to be rebuffed by the orthodox centre as erratic, populist and inevitably inflationary.

Ironically, MMT is also accused of being theoretically banal – a mere replication of Keynesian macroeconomics with an added conceptual twist [6]. Paradoxically, however, this may be the source of its appeal. MMT articulates an open secret in the fiat economy - there is no technical limit on money creation. In practice, institutions have already exposed the gap between the conventional fiscal narrative and the technical realities of the state’s financial power, namely, the Quantitative Easing (QE) programmes enacted in response to the crises of 2008 and 2020. QE involved the large-scale purchase of government debt and private assets, financed by new reserves electronically issued by central banks. At its peak in 2021, the Bank of England held £875bn in gilts, representing 40% of UK national debt [15]. This debt effectively exists in a circulatory system within the sovereign accounts, since any profits on Treasury coupon payments are remitted back to the exchequer. Crucially, this does absolve the Treasury of its fiscal liability, as it remains under an indemnity to cover losses generated by interest payments on the Bank’s reserves. 

Responding to inflationary pressures, the Bank is now pursuing Quantitative Tightening (QT)—unwinding its position by proactively selling its gilt holdings to the financial markets. Since higher interest rates have lowered the bonds’ market value, QT sales effectively crystallise a financial loss for the UK taxpayer. While less blunt inflation tools remain at the Bank’s disposal, economists have warned that inhibiting this process would blur the lines between fiscal and monetary policy, undermining central bank credibility [16]. Many, including MMT’s proponents, regard QT as a voluntary exacerbation of the UK’s fiscal position, arguing for the debt to either be cancelled or, if the Bank fears an adverse market reaction, simply be allowed to mature [17].

This signals an interesting moment in economic governance. In the face of extreme shocks, modern institutions have shown a willingness to engage in solutions which bend the conventional rulebook. Credibility and market sentiment, however, remain paramount, enforcing rigid political economy barriers for heterodox reformists. For MMT, while a growing empirical literature provides new evidence for its policy claims, mainstream economists remain unconvinced of its theoretical robustness and practical applicability, making the institutional taboo unlikely to fade over the medium term. Still, MMT continues to find resonance on the progressive left, with Green Party leader Zack Polanski's recent advocacy marking its most high-profile endorsement in UK politics [18]. Regardless of its political future, Modern Monetary Theory continues to provide an intriguing debate on the real limitations of state finance.

Bibliography:

[1] ‘World Economic Outlook (October 2025) - General Government Gross Debt’, accessed 10 February 2026, https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO.

[2]OECD, ‘OECD Economic Outlook, Volume 2025 Issue 2: Resilient Growth but with Increasing Fragilities’, OECD Economic Outlook 2025, no. 2 (2025), https://doi.org/10.1787/9f653ca1-en. 

[3] ‘Average Household Income, UK - Office for National Statistics’, accessed 24 February 2026, https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2024.

[4] Jack Fitzpatrick, ‘MMT Makes Democrats Curious Amid Debate on Health Care, Climate | Congressman Ro Khanna’, 25 March 2019, http://khanna.house.gov/media/in-the-news/mmt-makes-democrats-curious-amid-debate-health-care-climate;

‘Text of S.Res. 182 (116th): A Resolution Recognizing the Duty of the Senate to Condemn Modern Monetary Theory … (Introduced Version)’, GovTrack.Us, accessed 24 February 2026, https://www.govtrack.us/congress/bills/116/sres182/text.

[5] Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, First edition (PublicAffairs, 2020).

[6] L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (Springer Nature Switzerland, 2024), https://doi.org/10.1007/978-3-031-47884-0.

[7] Alan J Auerbach and Yuriy Gorodnichenko, ‘Measuring the Output Responses to Fiscal Policy’, American Economic Journal: Economic Policy 4, no. 2 (2012): 1–27, https://doi.org/10.1257/pol.4.2.1.

[8] Thomas I. Palley, ‘Money, Fiscal Policy, and Interest Rates: A Critique of Modern Monetary Theory’, Review of Political Economy 27, no. 1 (2015): 1–23, https://doi.org/10.1080/09538259.2014.957466.

[9] L. Randall Wray, ‘Modern Money Theory’, in The New Palgrave Dictionary of Economics (Palgrave Macmillan, London, 2015), https://doi.org/10.1057/978-1-349-95121-5_3007-1.

[10] Thomas I. Palley, ‘The Critics of Modern Money Theory (MMT) Are Right’, Review of Political Economy 27, no. 1 (2015): 45–61, https://doi.org/10.1080/09538259.2014.957473.

[11] Malcolm Sawyer, ‘Employer of Last Resort: Could It Deliver Full Employment and Price Stability?’, Journal of Economic Issues 37, no. 4 (2003): 881–907, https://doi.org/10.1080/00213624.2003.11506635.

[12] Gerald Epstein, ‘What’s Wrong with Modern Money Theory? A Policy Critique’, 21 August 2019, https://peri.umass.edu/publication/what-s-wrong-with-modern-money-theory-a-policy-critique/.

[13] ‘Balance of Payments, UK - Office for National Statistics’, accessed 9 February 2026, https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/balanceofpayments/latest.

[14] Saroj Bhattarai et al., ‘Redistribution and the Monetary–Fiscal Policy Mix’, Finance and Economics Discussion Series 2021.0, no. 013r1 (2022): 1–55, https://doi.org/10.17016/feds.2021.013r1.

[15] ‘Debt Management Report 2025-26’, n.d., accessed 24 February 2026, https://assets.publishing.service.gov.uk/media/6894b071e7be62b4f0643129/Debt_Management_Report_2025-26.pdf.

[16] Ricardo Reis, Funding Quantitative Easing to Target Inflation, n.d.

[17] ‘What next for Quantitative Tightening?’, No Category, NIESR, 12 September 2025, https://niesr.ac.uk/blog/what-next-quantitative-tightening.

[18] George Eaton, ‘What Would Zack Polanski Do?’, New Statesman, 25 November 2025, https://www.newstatesman.com/politics/uk-politics/2025/11/what-would-zack-polanski-do.