#86 Andrew Berkeley, Richard Tye & Neil Wilson: An Accounting Model Of The UK Exchequer (Part 2)
Feb 3, 2021
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Authors of a groundbreaking study delve into the UK Exchequer's accounting model, government spending impact on private sector, role of taxation in currency valuation, historical evolution of financial operations, mechanics of banking transactions, and MMT readiness of the UK financial system.
Taxes give value to money for currency-issuing governments like the UK.
The Ways and Means account helps balance UK government finances daily.
Government departments use commercial banks for retail banking, but central bank reserves for payment settlements.
Deep dives
Government's Spending and Taxing for Provisioning Infrastructure
In the podcast, it is highlighted that for currency-issuing governments like the UK, money creation starts with the government being tasked to create and maintain infrastructure, such as building schools, hospitals, and border walls. The role of taxation is emphasized as a mechanism not to fund government spending directly but to give value to money. By imposing taxes in the currency it issues, like the British pound, the government creates demand for its currency. This, in turn, enables the government to spend money into existence and engage individuals to carry out tasks related to public provisions.
Ways and Means Account: An Intriguing Financial Mechanism
The podcast delves into the intricate workings of the Ways and Means account, serving as an overnight overdraft for the UK government's financial operations. It is explained how this account helps in balancing government accounts to zero by the day's end, allowing seamless financial transactions. Historical insights into the evolution of the consolidated fund and the issuance of government securities shed light on how this account has adapted over time to meet financial requirements.
Government Banking System and Payment Settlements
The podcast explores the role of the government banking service and its relationship with commercial banks in handling payment settlements. It clarifies that while government departments may appear to have accounts with commercial banks like NatWest, the actual settlement of transactions still occurs through the central bank deposits held by the Paymaster General's accounts at the Bank of England. This dynamic showcases how the government utilizes commercial banks for retail banking services while relying on central bank reserves for payment settlements.
Role of Monetary Policy and Cash Management in Banking Sector Stability
Monetary policy plays a crucial role in maintaining banking stability by setting targets like inflation rates, managed by entities such as the Bank of England. Through methods like cash management, the Bank of England aims to keep banks from gaining excessive reserves, thus preventing the banks from becoming systemically important. By adjusting short-term interest rates and engaging in operations with banker balances, monetary policy influences the overall health of the banking sector.
Debt Management Office's Function and the Misconception About Government Debt
The Debt Management Office (DMO) orchestrates cash management through operations like repos and reverse repos to control money supply and balance reserves. Despite popular misconceptions, government debt management is more about managing deposits rather than eliminating debt. The DMO exchanges different financial instruments on the secondary market, adjusting the maturity profiles to impact the money supply. Essentially, the DMO's role is to counterbalance government spending through meticulous cash flow management.
Part 2: Patricia and Christian talk to the authors of a groundbreaking new study that details the internal accounting operations of the UK exchequer and the ultimate impact of government spending and taxing on the private sector.
Our episode 16, with Andrew Berkeley chatting with Warren Mosler and Tim Rideout in a noisy (sorry!) Glasgow pub: https://www.patreon.com/posts/41806207
