The Self-Financing State: An Institutional Analysis of Government Expenditure, Revenue Collection and Debt Issuance Operations in the United Kingdom

This article provides the first detailed institutional analysis of the UK government’s expenditure, revenue collection, and debt issuance processes. We show that public expenditure is always financed through money creation rather than taxation or debt issuance. Spending involves the government drawing on a sovereign line of credit from a core legal and accounting structure known as the Consolidated Fund (CF). The Bank of England then debits the CF’s account at the Bank and credits other government accounts held at the Bank. This creates new public deposits, which are used to settle spending by government departments via the commercial banking sector. Only the UK parliament can mandate expenditures from the CF. Revenue collection, including taxation, involves the reverse process, crediting the CF’s account at the Bank, offsetting past injections. Similarly, gilts have been issued to temporarily withdraw money to assist monetary policy objectives. Under the current conditions of excess reserve liquidity, however, debt issuance is best understood as a way of providing safe assets and secure collateral to the non-bank private sector. The findings support neo-Chartalist accounts of the workings of sovereign currency-issuing nations and provide additional institutional detail regarding the apex of the monetary hierarchy in the UK.