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All Government Spending Is Borrowed, Every Day

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Summary

This article explains how government spending works in the UK. Every day, the Bank of England automatically transfers money from the Paymaster General Account to the Consolidated Fund Account via the National Loans Fund Account. This borrowing is interest free and is done in the same way as a loan from any other bank. The money we have is a claim against the government's overdraft, and any interest or fees paid by the government to a third party is a deliberate political choice.

Q&As

What is the Bank of England required by law to do with regards to government spending?
The Bank of England is required, by law, to make a transfer into the Paymaster General Account.

How does the Bank of England fund government borrowing?
The Bank of England uses the newly increased deposits of the commercial banks to fund the resulting government borrowing - in precisely the same manner as a loan is funded in any other bank.

What is the National Debt comprised of?
The National Debt is nothing more than an overdrawn Consolidated Fund.

What is money in its primordial form?
Money in its primordial form is government debt.

What is the purpose of the Consolidated Fund running with a negative balance?
The purpose of the Consolidated Fund running with a negative balance is to balance the national balance sheet.

AI Comments

👍 This article does a great job of breaking down a complicated topic in an easy to understand manner.

👎 The article does not provide enough detail to fully understand the implications of government borrowing.

AI Discussion

Me: It's about how government spending is funded. It explains that all government spending is borrowed, and that the borrowing is interest-free and without limit. The article goes on to explain that this borrowing is done through the Bank of England, and that the money is essentially a form of government debt.

Friend: Wow, that's really interesting! It's almost like the government is printing its own money.

Me: Exactly. And this has major implications for the economy. For starters, it means that the government has much more control over the money supply than we might think. It also means that the government can choose to ignore interest rates if they want to, reducing the cost of borrowing. On the other hand, it could also lead to a situation where the government is printing too much money, resulting in inflation.

Action items

Join the New Wayland community on Discord to discuss MMT topics.
Research the National Loans Fund Account, The Consolidated Fund Account and the Paymaster General Account to gain a better understanding of government borrowing.
Reach out to HM Treasury to learn more about the Consolidated Fund running with a negative balance.

Technical terms

BACS: Bankers Automated Clearing Services. A system used to transfer money between banks in the UK.
National Debt: The total amount of money owed by a government.
National Loans Fund Account: A government account used to manage the national debt.
Consolidated Fund Account: A government account used to manage the government’s revenue and expenditure.
Paymaster General Account: A government account used to manage the government’s payments.
MMT: Modern Monetary Theory. An economic theory that argues that governments should use their own currency to finance spending.
Cui Bono: Latin for “who benefits?”. A phrase used to question the motives of a particular action.