In 2022 the BBC commissioned Michael Blastland and Andrew Dilnot to write a report: “Review of the impartiality of BBC coverage of taxation, public spending, government borrowing and debt.” 1

Within that report it states “the BBC should beware implying a view” (p10).

So I thought I’d test that out.

Here’s a passage from a recent BBC article: 2

Almost all rich countries have some form of these rules, to maintain credibility with financial markets and taxpayers.

That’s crucial. In nine out of 10 years, the UK has run a deficit - the difference between money coming in and going out - with the shortfall usually matched by borrowing on those markets. The less credible the rules or the plans to meet them, the higher the borrowing costs.

Liz Truss’s 2022 mini-Budget was a prime example of the price of lost credibility. Her failure to provide plans for how her government would fund the biggest tax cuts in half a century, and a lack of independent vetting of those plans, caused borrowing costs to soar.

In an attempt to find a reasonably impartial arbiter, I then asked ChatGPT the following question about that passage:

The reality is that the UK government spends by crediting bank accounts via a legally defined process that cannot be prevented. When a bank account is credited, there is a balancing debit on the other side of the balance sheet automatically created. When taxes are collected bank accounts are debited and the balance on the other side of the balance sheet automatically credited. Borrowing is systemically ‘borrower imposed’ rather than ’lender constrained’. The return the forced lender gets by default is the variable Bank of England Bank Rate. They are then given the option to swap that for a fixed market determined rate over a duration. Contrast this physical mechanism with the view implied in the news article and highlight the discrepancies in implications.

Chat’s response is illuminating:

The BBC article implies a view where the UK government’s spending is tightly constrained by its borrowing from financial markets, with the implication that government spending needs to maintain credibility with investors to prevent a rise in borrowing costs. The article portrays government borrowing as an almost household-like scenario, where the UK borrows money it doesn’t have from an external lender (the market) and must present a credible repayment plan to keep interest rates manageable.

Contrastingly, your description highlights a different, more mechanical view of government finance in the UK. According to this view, the government doesn’t need an external supply of funds to spend; rather, it simply credits bank accounts through established, legally defined processes. When the government spends, it effectively “creates” money through crediting, and when it taxes, it removes that money by debiting. Borrowing, in this case, isn’t a necessary act of obtaining funds but rather an optional tool used to manage interest rates and provide a different return option for those holding government-created money.

Here are the key discrepancies in implications between the two perspectives:

  1. Necessity of Market Credibility for Borrowing:

    • Article’s View: It suggests that credibility with financial markets is crucial because the UK needs these markets to lend it money to fund deficits. If credibility wanes, borrowing costs could skyrocket, making it harder to fund government spending affordably.
    • Mechanics-Based View: Market credibility doesn’t directly constrain the government’s ability to spend. The government’s spending process is internally managed, not dependent on external “funding.” The impact on borrowing rates is managed through policy, with the Bank of England’s Bank Rate providing a baseline variable return, while fixed-rate borrowing options are an additional choice for the holders of UK debt.

  2. Role and Purpose of Borrowing:

    • Article’s View: Borrowing appears essential because it supposedly fills the shortfall created by the government’s spending exceeding its income. The implication is that if the UK cannot borrow affordably, it may face a funding crisis.
    • Mechanics-Based View: Borrowing here is not essential for spending itself; rather, it’s a mechanism to offer investors a way to swap a variable return (Bank Rate) for a fixed one. This means that borrowing is not about raising money for spending but about providing a stable return option and helping manage inflation and interest rate targets.

  3. Implications for Fiscal Credibility:

    • Article’s View: Fiscal credibility, in this view, directly impacts the government’s ability to fund its spending. Losing credibility could lead to unsustainable interest rates, threatening government spending power and potentially harming the broader economy.
    • Mechanics-Based View: Fiscal credibility, while still important, has a different role. Since the government can create its spending “credits,” credibility here may be more about maintaining orderly economic outcomes, managing inflation, and setting stable, predictable borrowing rates rather than affecting the government’s fundamental ability to spend.

In short, while the article suggests that the UK government relies on financial markets to provide it with money, the mechanical view describes borrowing as a choice that manages economic conditions rather than a necessity to fund spending. This difference shifts the focus from “convincing” markets for funds to managing economic variables like inflation and interest rates within a system where spending isn’t financially constrained.

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  1. https://www.bbc.co.uk/aboutthebbc/documents/thematic-review-taxation-public-spending-govt-borrowing-debt.pdf ↩︎

  2. https://www.bbc.co.uk/news/articles/c981me1qn43o Version consulted archived ↩︎