What does it mean for a nation to become bankrupt?

The reason I ask that question is because I read in the UK Guardian article yesterday (published August 11, 2025) – As dark financial clouds gather, Labour has to heed its past: when it chooses austerity, it loses elections – that “Britain is in danger of going bankrupt. It may happen slowly or quickly, but since Labour took office this possibility has increasingly been promoted and discussed in the press, by opposition parties and in the City of London”. And when the author of that article poses his own question: “What exact form will this bankruptcy take?” – he offers the rather tepid response that it will happen because the government is “spending too much, generally on people who have little”, which offers nothing by way of clarification or definitiveness. So it is useful to interrogate the notion of a nation going broke. Can it happen? Can Britain become insolvent?

The Guardian author was seemingly motivated by an increasing chorus of British journalists and commentators who are whipping up fears that the nation is going broke.

He cites one article that uses this sort of fear to rehearse one of the usual demands (that are related to the ‘going broke’ narrative) – that the welfare system needs to be significantly retrenched and there are too many non-contributors in British society.

There are, of course, but rather than seek out these characters in the council estates of the big cities (for example), I would head over to the House of Lords or down to around 51.5130° N, 0.0895° W and walk around there and you will find non-productive hangers on all over the place.

The author is somewhat aligned with that sentiment and notes that:

When journalists, economists and politicians say sternly that Britain “can’t afford” certain things, they rarely mean nuclear weapons that will probably never be used, or bailouts for reckless banks, or the rapidly growing grant for a royal family that already has highly profitable estates. When sweeping austerity is called for, the most entrenched establishment interests are usually exempt.

Nor do these supposed tellers of hard financial truths often consider whether the UK can afford low taxes on the rich, by international and historic standards, or the deterioration in public services already caused by cuts, with all its damaging consequences for productivity, social relations and public health.

But the alignment only goes so far.

Yes, the author thinks that whenever austerity is proposed it is the:

… more progressive policies and poorer people’s living standards …. [that] … are the first things that should be sacrificed in hard times.

But, no, he doesn’t challenge the bankruptcy narrative and the resulting austerity that is called for to avert it.

He just wants the Labour Party in government to be able to shift the burden of the (necessary) austerity onto the rich.

And that offers the Labour Party nothing useful.

The damage – as far as reinforcing the fictional world of mainstream macroeconomics – is done in his opening line – “Britain is in danger of going bankrupt”.

Beginning with that framing makes it impossible for him to engage the readership with any other narrative other than gloom and defeat.

The authors concludes by stating that the progressive side of politics, which he mistakenly places the British Labour Party:

… would have to set out an alternative: a centre-left politics that can survive financial crises – or avoid them altogether. After so many fearful retreats, that work has barely begun.

The work has been done – but the British Labour party in both opposition and government refuses to embrace it.

According to the Oxford Dictionary, the etymons of the English word bankrupt come from French (bancque roupte) and the Italian (banca rotta) and the “earliest known use of the noun bankrupt is in the mid 1500s” when in 1533 Thomas More who was the lord chancellor used the word (Source).

It is not a word that should be used in relation to any currency-issuing government.

We know categorically that the British government can never go broke for lack of financial capacity.

The reality for the UK is clear.

1. The British government does not issue debt instruments that are denominated in foreign currencies.

There were some legacy borrowings in other currencies dating back decades but the modern practice is to avoid denominating the bonds in anything other than sterling.

That means one thing above all: that the British government can always meet the terms of its outstanding liabilities at all times – without exception.

It could, in the most extreme circumstances decide as a political act to not repay a debt but that is a different matter to not having the financial capacity to do so, which is what bankruptcy refers to.

2. While strict application of the meaning of the word ‘borrowing’ means that it is correct to say that the British government borrows sterling from the non-government sector in exchange for financial promises to pay an interest for the term of the promise and then repay the principal upon maturity.

But if one thinks about it clearly, the term is a misnomer.

The British government always has the capacity to instruct the Bank of England to credit private bank accounts or issue cheques to the non-government sector to match the spending decisions it takes.

On the Bank credits the relevant account, the spending is ‘funded’ irrespective of what is happening in the bond market or the British tax office.

There are legal processes that the Government must abide by but they just abstract from the reality – that it is the government via the Bank of England that issues sterling and the Treasury does not need to borrow from the non-government sector in order to spend sterling.

3. It is more meaningful to think of the British government’s debt issuing behaviour as being an exercise in providing the non-government sector with a financial asset that carries zero credit risk that allows the non-government wealth portfolios to diversity into different risk exposures.

In other words, so-called government borrowing is really not about ‘funding’ government, but, rather providing instruments to satisfy the risk-return desires of the wealth holders.

4. Think about the following situation.

If (G – T) > 0 then government spending (G) exceeds the taxation revenue (T) it receives and a fiscal deficit is recorded.

There is more currency flowing into the non-government sector (via G) than is flowing out (via T).

That state would be essential if the non-government sector was withholding some of its income (received from offering inputs to the production process) in the form of saving and if the nation was importing more than it was exporting (or some combination of the two).

In other words, if income that is being produced in any period is not being re-spent in the next period, firms would start to accumulate inventories and cut back on production.

The spending gap would thus lead to a recession.

The solution that was understood back in the 1930s, was that to avoid such a recession, the government should fill the non-government spending gap (the difference between non-government income and its spending) by spending more into the economy via G than it took out via T.

That is, the role of the fiscal deficit.

In the rare case, that the non-government sector spending is so strong that it comes up against the supply capacity of the economy – for example, when nation has massive export potential – then a fiscal surplus is required once the economy is at full capacity.

Otherwise, total nominal (money) spending would exceed the supply capacity and inflationary pressures would develop.

But one should understand that the wherewithal that allows the non-government sector to purchase the government debt comes from these past fiscal deficits.

In other words, the decision of the government to leave some of its spending untaxed (that is, run a deficit) creates the stocks of wealth that the non-government sector can then prorate across a range of financial assets including government bonds.

So it is always better to think of the practice of government debt issuance as being a provision of a risk free financial asset that delivers a positive return to the non-government sector which anchors its wealth portfolio and provides a safe haven when there is uncertainty and the appetite for risk declines.

Government debt is thus like a risk-free piggy bank for the non-government sector and there is no other financial asset that is available that provides that capacity.

5. Should the City of London decide that it didn’t want to buy any of the debt that the Government was offering to it – then so what?

Under current institutional processes such a decline would drive up yields in the auction process until some investors would buy in.

But those processes are not like the laws of physics.

They are voluntary and as we saw during the GFC and later the early years of the pandemic, the Bank of England (as did other central banks) provided all the ‘funding’ for the significant increases in government spending that occurred during those periods.

No City investment was needed – and nor is it ever needed.

Which means the British government can never become bankrupt.

One or more of the 20 Eurozone nations can clearly become bankrupt – and several nearly did during the GFC.

This is because they use a foreign currency – the euro – and in order to spend it they have to get tax revenue or sell debt if they wish to spend more than the available tax revenue.

And the debt that is issued by a Eurozone nation is not risk free (in terms of risk of default).

If bond investors stop buying that debt, then insolvency becomes a very real prospect for such a nation.

No such risk is applicable to the British government.

Credit risk (that is, risk of default) is, of course, only one source of risk exposure that investors face when buying financial assets denominated in a certain currency.

In relation to the UK, exchange rate risk is usually at the centre of the fear mongering.

We are constantly being assailed with stories of financial types selling off sterling because they don’t like the direction of government policy.

This is the principle reason given by Labour Party types for their fiscal reticence and their obsequious towards the financial institutions.

I have dealt with that issue many times before.

I invite you to browse the extensive array of blog posts under the – Britain – category for further discussion.

Our 2017 book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – also considered that issue in depth.

Conclusion

It is unfortunate that I keep reading these sorts of articles in the UK Guardian.

The framing is terrible.

The facts are wrong.

And the message is self-destructive for progressive causes.

But then history is just repeating.

It is a pity that the Guardian doesn’t allow more balance in its economic commentary.

But then I guess that is what happens when an institution is part of the establishment.

PS: Australia announced today it will next month recognise a State of Palestine.

It’s next step should be to stop supplying weapon components to the murderous Netanyahu government and impose bans on all trade with Israel.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.