How much money is government borrowing? The perennial ‘angels on a pinhead’ question. As one of those who has analysed UK government spending in depth and described how the payment system functions I’m in a position to answer that conclusively.

When the government spends anything, every penny is borrowed. It happens automatically without limit and it is interest free.

Every working day, at about 8:30am, the government’s scheduled BACS payments are transferred by the Bank of England from the Paymaster General Account. It is a substantial sum, including the daily payment of the State Pension, and it is in the tens of millions at least. To cover this, an amount is credited to the Paymaster General Account from the Consolidated Fund Account, via the National Loans Fund Account. Since the Bank of England accounts of Exchequer Funds Team1 start each day with a zero balance that results in a negative balance, which ends up in the Consolidated Fund Account.2

The Bank of England is required, by law, to make this transfer into the Paymaster General Account. They have no discretion in the matter, and cannot object to it regardless of the amount or the balance on the accounts. Once the BACS payments have been made, the net effect is a transfer within the books of the Bank of England from the Consolidated Fund to the settlement accounts of the commercial banks.

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. This borrowing is created automatically and without limit. It is borrowed interest free from the government’s own bank and has been for centuries. All without issue.

In aggregate, the National Debt is nothing more than an overdrawn Consolidated Fund. All the Sterling we hold is just a claim against that overdraft; hence why it says on the front of every banknote “I promise to pay the bearer on demand the sum of …”. What we call money is just government debt in its primordial form.

In a rational economic system, that is where it would stay - an interest free overdraft at the bank the government owns - quietly and costlessly balancing our savings in Sterling on the national balance sheet.

After all, if you owned a bank outright, who would you borrow from? Why would you pay interest and fees to anybody else? It wouldn’t make any sense if your intention was to control costs.

As we have seen only recently, Parliament is perfectly capable of stopping any government expenditure that is considered excessive and government is perfectly able to ignore interest rates if they want to.

Any interest or fees paid by the government to a third party is a deliberate political choice - basic income for people who already have money.

Cui Bono?

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  1. The National Loans Fund Account, The Consolidated Fund Account and the Paymaster General Account ↩︎

  2. HM Treasury confirmed the Consolidated Fund can run with a negative balance in FOI2019/08205 ↩︎