Exchequer and central government finance

In the Exchequer tables in the statistical defined later in this article) are now grouped annex to this Bulletin, and in official publica­ with the Exchequer's revenue and expenditure, tions, it has not been easy to see how the U.K. and with its loans, to form balance of payments can affect Exchequer a " central government" group. As will be seen, financing; nor has it been easy to relate the the three items are closely associated; and the Exchequer's accounts to the statistics of aggregate of the three is called the central national income and expenditure. Until now, government's "net balance". An economic the Government's total need for finance, classification of transactions which make up the whether met through changes in home or in "net balance" is provided in a new Table 2; overseas holdings of government debt, has this table, which summarises and reproduces been shown as one item-called the "cash in a convenient form the classification already deficit/surplus". This item reflected, on the published by the Central Statistical Office, external side, changes in the foreign exchange covers the same periods as Table 1 except that holdings of the Exchange Equalisation figures for the latest quarter (October­ Account, but not the net changes in overseas December 1965) are not yet available. holdings of government stocks and of Treasury The second main alteration is that Table 1 bills which are often closely related. now separates known overseas transactions in In co-operation with the Treasury, some government debt from those of domestic changes have therefore been made in this issue holders. Changes in overseas holdings of all of the Bulletin in the presentation of Exchequer forms of government debt are grouped, under statistics. The principal change is designed to the heading "external transactions", with the gather together those "external transactions" E.E.A.'s purchases and sales of gold and which in total should give a better indication foreign currencies, because these items are of the impact of the country's overseas trans­ interrelated. Thus the lower half of Table 1 now actions on the Exchequer's domestic financing. relates, as far as possible, to changes in the This is discussed on page 32. amount of government debt held by u.K. A further change in presentation provides a residents. link between the Exchequer's cash accounts While Table 1 continues in principle to be and the statistics of national income and expen­ a sterling cash account, derived mainly from diture, so as to bring out more clearly the statements of account, the division between economic classification of the central govern­ domestic and overseas holdings of government ment's transactions. This change is "discussed stocks and of Treasury bills is not exact. As first, because the article describes the altera­ hitherto, some unidentified changes in overseas tions in the presentation of Exchequer statistics holdings may be included among the residual in the order in which they appear in the tables. figures for domestic holdings, but the amounts involved are thought not to be very large. Changes in The first main alteration is Exchequer borrowing from domestic sources he t statistics that in Table 1 of the also continues to include all holdings of U.K. statistical annex net receipts from, and pay­ banks, whether or not they represent the invest­ ments to, extra-Exchequer funds (which are ment of deposits received from overseas. Exchequer The word "Exchequer" is Extra-Exchequer Table 1 first shows the normally used to mean the Account of H.M. funds net amount paid out, or Exchequer, held mainly at the Bank of received, by the Exchequer in the first two . This is the central cash account of categories mentioned above (that is its deficit, H.M. Government. By law all revenue, with a or surplus, and the net amount of Consolidated few exceptions, must be paid into this account Fund loans); it then brings into the account and nothing may be paid out except as Exchequer lending to, or borrowing from, authorised by Parliament. A summary of all extra-Exchequer funds. Changes in extra­ transactions over this account is provided Exchequer funds arise from a variety of annually in the Financial Statement issued on causes. In the first place, as already noted, they and subsequently in the Finance reflect changes in the cash balances of govern­ Accounts of the , and also ment departments. These departments do not weekly in the Exchequer Return issued by the themselves maintain any significant deposits Treasury and published in The London with the commercial banks; instead their Gazette. balances are kept in an account with the Paymaster General-who holds only a small Transactions over the Exchequer account can cash balance at the and lends be divided into three broad categories: the rest to the Exchequer in the form of (i) taxation and other revenue and expendi­ ways and means advances. In this way funds ture (both current and capital), whether drawn by government departments from the

voted annually by Parliament (" supply Exchequer under parliamentary authorisation services") or for which there is a per­ but not yet spent are automatically lent back

manent authorisation (" Consolidated to the Exchequer until actually required. Fund standing services "). The net total Secondly, changes in extra-Exchequer funds of this item is called the Exchequer's reflect alterations in the amount of government surplus or deficit; debt, whether short or long-term, held by certain funds which are statutorily independent (ii) loans to, and repayments by, local of the Exchequer but which are administered authorities, nationalised industries and by the central government. The main example a few other bodies (known officially as is the National Insurance Funds. Contributions " Consolidated Fund loans"); and under the national insurance schemes from insured persons and employers are not, like tax (iii) all other transactions, largely receipts revenue, paid direct to the Exchequer; instead and payments reflecting changes in the they are credited to the National Insurance National Debt (grouped together, both Funds administered by the Ministry of Pensions in the Financial Statement and in the and National Insurance, which pass surplus Exchequer Return, under the heading money to the National Debt Commissioners "Exchequer borrowing and special for investment. These Funds also receive an transactions "). annual grant from the Exchequer, as well as A study of the Exchequer account by itself interest from their investments in government cannot give any complete guide to the flow of debt. Any excess of total receipts over expendi­ central government spending. The Exchequer ture, both on benefits and on administration, is rarely deals direct with the general public, and immediately invested in government debt, and most of its transactions are with other govern­ any shortfall is financed by selling government ment departments. It is the transactions of debt. In this way the operations of the National these departments with the public which affect Insurance Funds, though separate from the the economy. These departments effectively Exchequer, are brought into its accounts-a pool their cash resources with the Exchequer; surplus reducing the total amount the so changes in the amount they lend to the Exchequer has to borrow from other sources Exchequer, mainly included in extra-Exchequer and a deficit increasing it. funds, reflect any difference between the Thirdly, receipts from extra-Exchequer funds Exchequer's net outlay and the net amount paid include the net income of the Issue Department out to the public. of the Bank of England. By statute the income

30 of the Issue Department is paid over to the Normally, the sterling resources available to E.E.A. and goes to increase the Account's the E.E.A. are adequate to ensure that frequent sterling resources (and hence its holdings of changes in the capital of the Account are not government debt). In this table, however, the required. But substantial changes in the level of income is kept separate from the E.E.A.'s other its foreign currency holdings will ultimately be transactions. reflected in an increase or a reduction of A fuller description of transactions included capital by means of a sterling transfer from or under the heading extra-Exchequer funds is to the Exchequer. Such transfers are made given in the notes at the end of this article. periodically in round amounts and represent only a matter of book-keeping between two government accounts, because the increase or decrease in the Account's sterling assets Central government's By combining the Ex­ immediately gives rise, other things being equal, net balance chequer surplus or deficit to an increase or decrease of the same amount and Consolidated Fund loans with extra­ in its lending to the Exchequer. In other words. Exchequer funds, the central government's any change in the Account's capital merely net balance thus measures the finance needed ensures that it has an appropriate working to meet the net expenditure, including lending, capital in sterling immediately available to of the central government as a whole-includ­ cover its needs; the change itself has no net ing, for example, the National Insurance Funds effect on the Exchequer's borrowing from out­ -rather than just that of the Exchequer. It side the central government. An increase. or reflects payments at the time they are made by decrease, in such borrowing occurs only as the the spending departments rather than when the E.E.A. uses the sterling to buy foreign funds are provided by the Exchequer; and it is exchange. or as it receives sterling from sales not affected by Exchequer transactions with of foreign exchange. For these reasons. the other government accounts. item E.E.A. in the table merely records, in sterling. the change in the official reserves; an increase is shown as a payment of sterling by Exchange Table 1 now turns to the Exchequer and a decrease as a receipt.!/) Equalisation Account external transactions. In the United Kingdom the official gold and foreign currency reserves are held by the Exchange Equalisation Account, a government account Overseas holdings " External transactions" operated by the Bank of England. In addition of government debt include not only changes to gold and foreign currencies, the Account in the E.E.A. 's holdings of gold and foreign holds sterling, which is all lent to the Exchequer currency reserves but also any increase or against Treasury bills or, through the Pay­ decrease in overseas holdings of government master General, in the form of ways and means stocks and of Treasury bills. and any change in advances. To pay for its purchases of foreign other forms of debt to overseas. The last named exchange day by day the E.E.A. withdraws category includes changes in the United King­ sterling from the Exchequer, so increasing the dom's net position with the International Exchequer's need to borrow from other sources. Monetary Fund. that is any increase in the Conversely, when the Account sells exchange u.K. SUbscription to the Fund less any change it acquires sterling which it lends to the in the Fund's holdings of interest-free notes; Exchequer, so reducing the Exchequer's need other government borrowing (and repayment to borrow from elsewhere. The Account also of borrowing) from overseas governments and carries gains or losses arising from the weekly institutions; and the sterling counterpart of revaluation of the assets of the Issue Depart­ central bank assistance in the form of currency ment of the Bank of England, and receives the deposits. It does not include other government income earned on those assets. transactions with overseas, such as lending to

(1) Even allowing for transfers of the net income of the Issue Department (referred to earlier), the net amount of sterling withdrawn from, or made available to, the Exchequer may in practice differ slightly from the change in the reserves, and the difference is included under " extra-Exchequer funds"; the reason for this difference is explained in the notes at the end of the article.

31 overseas governments or current expenditure receipt of both types of aid the foreign cur­ abroad; these are taken into account in calcu­ rencies were sold to the E.E.A. for sterling. In lating the central government's net balance. the case of swaps the sterling was subsequently held on behalf of the central bank undertaking the swap and was usually employed for it in Treasury bills; the Exchequer tables thus Total external The total of external trans- record a payment by the E.E.A. matched by an transactions actions is unaffected by increase in overseas holdings of Treasury bills. transactions which result in both a change in In the case of foreign currency deposits the the E.E.A.'s holdings of foreign currencies and sterling counterpart was also held in Treasury also an equal change in overseas holdings of bills. but these bills were not directly owned by government debt. Thus an inflow of funds from the central banks concerned and are recorded abroad for investment in government debt among" other debt". The drawings from the appears in the table as a payment by the I.M.F. had a similar effect-a payment of E.E.A.. offset by an increase in one of the other sterling by the E.E.A. offset by increased lend­ items included in this group; in other words the ing by the Fund to the Exchequer. which is increase in overseas lending to the Exchequer included, like the sterling counterpart of matches the additional Exchequer borrowing foreign currency deposits, among" other debt ". necessary to finance the E.E.A.'s purchase of Thus the total of external transactions is the foreign currencies. and no extra finance is unaffected by any inflow or outflow of overseas made available to the Exchequer. A fuller dis­ funds invested in government debt, or by almost cussion of the effect on the economy of inflows all forms of government borrowing from and outflows of foreign funds will be found in abroad. Without there being any strict corres­ the June 1962 Bulletin. pondence, there is, however, a broad relation­ For similar reasons government borrowing ship between this item and the balance of from abroad does not normally affect the total payments, a large balance of payments deficit of external transactions. If the Government being reflected by a surplus on external trans­ borrow foreign currency from abroad. this is actions and vice versa. This is because the sold to the E.E.A. for sterling; but to provide balance of payments surplus or deficit during the sterling the E.E.A. has to withdraw funds a particular period is normally matched, to a from the Exchequer. with the result that the large extent, either by a change in the E.E.A.'s Exchequer finishes up as it was. These trans­ holdings of gold and foreign currencies, or by actions appear in Table 1 as a payment by the a change in overseas holdings of government E.E.A. offset by a receipt under overseas debt. The total of external transactions will holdings of "other debt". A loan received however, fail to reflect a surplus or deficit to th� from abroad in sterling usually has the same extent that such an out-turn gives rise to a effec! because the lender first needs to purchase change in the net overseas liabilities of U.K. sterlIng from the E.E.A.: if the lender already banks. local authorities or the private sector­ holds the sterling in. say. Treasury bills. a for example, a change in overseas deposits with direct loan to the Government merely results the banks. local authorities or hire-purchase in a switch from one form of government debt finance companies. to another.!/) The support for the reserves received in the last eighteen months or so from overseas central banks and the I.M.F. was a particular form of Metbods of Unlike governments in overseas official borrowing; and none of it. in financing some other countries, the itself, had any net effect upon the amount of U.K. Government have virtually no cash sterling finance available to the Exchequer. balances to draw on, nor do they build up The central bank assistance was partly in the temporary surpluses, seasonal or otherwise, on form of swaps against sterling and partly in the a bank account for use when required. . form of foreIgn currency deposits. On the Government deposits with the commercial

(1) . However in the rare case 0 f ts er\" Ing w h'Ich has been Invested by an overseas holder in local authority or private s�ctor debt t hen being. lent to the Government. there would be a single positive entry under" external transactions ".

32 banks are relatively small and stable: they are amount of net sales from, or purchases by, largely the working balances of those depart­ official accounts. Changes in the public's hold­ ments that need to maintain accounts through­ ings of stocks are analysed by holder in Table out the country for local disbursements and 3 (i) of the annex. receipts. Nor does the balance on the Treasury bills are issued each week by Exchequer account itself vary much. As was tender, and also, at any time, direct to govern­ explained in the article "The management of ment departments and other official holdersP) money day by day" in March 1963, the Bills issued initially to the public at the tender authorities aim to maintain a daily balance of may subsequently be bought for official port­ £2 million altogether on the accounts of the folios and those issued direct to official holders Exchequer and of the Paymaster General with may be on-sold to the market. It is thus the the Bank of England. Any excess of govern­ changes in the total amount of bills held outside ment payments over receipts is matched by an official hands (known as the total of market increase in the amount of government debt held Treasury bills) which are significant in relation outside the central government; and any excess to Exchequer finance. These changes, which of receipts over payments by a reduction of may be very different from changes in the total such debt. of tender bills outstanding, are also analysed There are in effect five main instruments by holder in Table 3 (i) of the annex. through which the central government borrow Bank notes issued by the Issue Department from the public-national savings in various of the Bank of England are backed almost forms, tax reserve certificates,ll) government entirely by government debt; and any change stocks, Treasury bills, and (through the Issue in the total amount of notes issued is directly Department of the Bank of England) bank matched by a similar change in the amount of notes. Only the last three forms call for some government debt held. It is therefore convenient explanation here. to regard .the holders of Bank of England notes New issues of government stocks are made as the real source of the lending to the from time to time either by conversion of a Exchequer represented by the Issue Depart­ maturing stock or for cash. Except where the ment's holdings of government debt, and in the terms include a cash payment, no money passes table changes in holdings of notes are classified on a conversion issue and it therefore has no according to the holder. Furthermore, Bank of effect on Exchequer finance. Issues for cash are England notes held by the Scottish and customarily made for amounts larger than banks as backing for their could reasonably be taken up by the public on own note issues are classified according to the one day; they are therefore usually taken up holders of the Scottish and Irish notes. mainly by the Issue Department and later on­ sold to the market. Similarly, in order to avoid Domestic Changes in overseas hold- large disturbances in the market on the day a borrowing ings of government debt stock is redeemed, maturing issues are mostly have already been included under external bought from the market by the Issue Depart­ transactions. The lower half of Table 1, under ment during the preceding weeks or months. "domestic borrowing", now shows the changes Apart from selling newly-issued stocks and in the amount lent to the central government buying maturing stocks, the monetary authori­ in various ways by all u.K. residents. Changes ties in effect act as residual jobbers in the in the holdings of the banking sector are gilt-edged market, selling or buying other stocks grouped separately from those of other holders largely in response to market demand. Such because they have different consequences for transactions with the public are usually made monetary policy. by the Issue Department, though occasionally by the National Debt Commissioners. Thus the Borrowing from The banking sector, which net amount of stocks acquired, or disposed of, the banks includes the Banking De- by the public depends not only on the amount partment of the Bank of England, provides such of new issues and redemptions but also on the residual finance as the Government cannot

(1) For a description of tax reserve certificates see the September 1962 Bulletin. (2) For a further description of U.K. Treasury bills and their method of issue see the September 1964 Bulletin.

33 immediately borrow from others. This is usually stocks or Treasury bills-the latter because any excess of payments from official either through the authorities' day-to-day accounts over receipts, not matched by an operations in the money market, or through increase in borrowing from outside the banking the weekly tender. sector (such as higher outside holdings of Bank Thus the Government's residual finance is of England notes, or of Treasury bills, or of initially provided, one way or another, by the government stocks), puts cash in the hands of banking sector-although in the long run a the banks. In practice, this cash in the first considerable increase in the banking sector's instance takes the form of balances with the holdings of government debt, and in their Banking Department of the Bank of England. deposits, normally leads to more government An individual bank can retain its surplus debt being taken up by holders outside the balance with the Banking Department; it can banking system. Since, as noted earlier, the use it to buy government stocks or Treasury banks and discount houses avoid holding more bills, or lend it to the discount houses, which cash (in the form of balances with the Banking may themselves buy stocks or Treasury bills; Department) than they need, fluctuations in or it can use it to make advances, to buy government borrowing from the banking sector commercial bills (direct or by lending to the are normally reflected in the amount of govern­ discount houses, which may use it for this ment debt held by the banks and discount purpose), or to invest in other private sector houses rather than by the Banking Department. debt. From time to time there are substantial move­ ments in the Exchequer's net indebtedness to In practice, the surplus cash is unlikely to be the Banking Department; but these rarely retained in the form of a balance with the reflect the provision of much extra finance for Banking Department, because the banks and the Exchequer;(2) they normally result from discount houses avoid holding higher, non­ transactions within the banking sector. These, earning, balances than they need. But even if for example, could include changes in bankers' it were, it would be invested in government balances consequent on seasonal or other move­ debt at one remove-since it would give rise ments in the banks' total deposits, or in their to an increase in the Exchequer's net indebted­ holdings of bank notes; or changes in Special ness to the Banking Department. Deposits; or changes in Bank of England The choice for an individual bank, therefore, advances to the discount market. is usually either to use surplus cash to buy government debt or to use it to lend to the private sector, direct or through on-lending by a discount house. But lending to the private Summary To sum up, Table I now sector-though it may reduce the surplus cash classifies Exchequer transactions in three main of an indrvidual institution-will do nothing, categories: those making up the central in itself, to reduce the cash of the banks as a government's "net balance"; "external trans­ wholeJI) (The banks' total private sector assets, actions"; and "domestic borrowing". The and deposits, might rise enough to make the central government's net balance is a measure oash they hold no longer surplus; but in that of net government expenditure (including lend­ case it would remain in the form of banks' ing) resulting broadly from decisions of a balances with the Banking Department and budgetary nature; while the total of external would be invested by the Banking Department transactions largely corresponds to the V.K. in government debt) The surplus cash of the balance of payments position (both on govern­ banks as a whole, however, can be reduced ment and on private account)-though only so through their purchases of government debt, far as that position is reflected in changes in the

(1) The banks' cash would however be subsequently reduced if, for example, the increase in bank lending to the private sector led to a larger take-up of government debt by the private sector or to greater expenditure overseas. (2) There is normally little movement either in the Banking Department's investments in private or overseas debt or in its liabilities to private or overseas customers. Its largest customers in these groups are overseas central banks, and any surplus funds on their accounts are usuaUy automatically employed on their behalf in government debt (and included among overseas holdings under" external transactions ").

34 reserves or in overseas holdings of government related to the country's balance of payments debt. The balancing total of domestic borrowing position. represents the consequent domestic financing The total of the Exchequer's domestic requirement. The three sub-totals are not borrowing is then analysed to show the impact wholly independent (for example, government on the banking system. To the extent that the expenditure overseas is included both as a debit central government's requirements are not met within the central government's net balance from sources outside the banking system the and if it is spent in foreign currency, which banks' total lending to the Government will has to be purchased from the E.E.A., as a rise alongside a similar increase in their positive entry within "external transactions "); deposits. Conversely an increase in non-bank nevertheless the table illustrates that the holdings of government debt will, other things amount the central government need to borrow being equal, be accompanied by a decrease from domestic sources depends not only on both in bank lending to the Government and their own revenue and expenditure but is also in bank deposits.

Notes to Table 1 of the statistical annex

Exchequer (iv) The difference between changes in the official gold and currency reserves and the actual net Revenue and expenditure (net): the difference amount of sterling made available to, or with­ between expenditure and revenue as shown in the drawn from, the Exchequer by the E.E.A. (see weekly Exchequer Return, a positive figure represent­ beloW). This difference arises mainly from the ing a surplus and a negative figure a de ficit. There E.E.A.'s earnings-including interest received is normally a deficit in the first three quarters of the on the Government's holdings of foreign financial year followed by a very large surplus in the currency securities, which has no sterling last quarter, when tax revenue is at its greatest. counterpart. Consolidated Fund loans (net): the net amount (v) The difference between net investment in disbursed by the Exchequer as loans (mostly to national savings by the public and the net finance capital expenditure) to nationalised industries, amounts made available to the Exchequer, to the Local Loans Fund for on-lending to local either direct or through the National Debt authorities, and to some other bodies. To the extent Commissioners (see below). that these loans are not financed by a surplus of revenue over expenditure, the Exchequer is in effect (vi) The increase in the face value of coin out­ standing. The proceeds of sales of coin by the �ul.filling the function of a financial intermediary, i.e., It IS borrowing in the market in its own name and , less costs of production, are in on-lending the funds mostly to other members of the effect included as a receipt under revenue and public sector. expenditure (net). However, to achieve con­ sistency with other financial statistics, it is Extra-Exchequer funds. etc.: these comprise the convenient to regard the increase in the public's following items. holdings as a loan to the Government like their holdings of notes; and, to offset this, the (i) Changes in the total amount lent to the increase is also included in extra-Exchequer Exchequer, whether against stocks, Treasury funds as a government payment. bills, ways and means advances or other forms of government debt, by: (vii) Payments to intemational lending bodies (other (a) the National Insurance Funds and various than the I.M.F.) in the form of increased sub­ other government funds; scriptions less withdrawals of interest-free notes �b) (see below). the. Local Loans Fund, representing funds I� transIt to, or repaymentG by, local authori­ Exchange Equalisation Account: the figures tIes; and recorded here are the changes in the official gold (c) the Iron and Steel Realisation Account, and currency reserves. Hitherto the figures shown representing broadly the proceeds of the resale against this item were the actual amounts of sterling to the private sector of the nationalised part made available to, or withdrawn from, the Exchequer of the industry, less any funds used to finance by the E.E.A. (apart from that arising from the capital development in that part of the industry transfer to the E.E.A. of the net income of the Issue still nationalised, and also less any transfers Department of the Bank of England). The change to the Exchequer. has been made in order to obtain a common entry -the central government's net balance-in both the (ii) Changes in the balances of government depart­ Exchequer accounts and the central government capi­ ments. mainly with the Paymaster General. tal account. The difference between the two series (iii) The net income of the Issue Department of of figures is small and is now included in extra­ the Bank of England. Exchequer funds.

35 Overseas holdings: in extra-Exchequer funds, represents lending by the Stocks: these figures comprise changes in: U.K. Government to third countries through these organisations; and because other government lend­ (i) government and government guaranteed ing overseas is included within the central govern­ stocks registered in the name of a bank or ment's net balance, it is not unreasonable that this bank nominee company but held for over­ should be too. seas customers, as reported by banks in the United Kingdom; and Banking sector: the figures for changes in the (ii) other overseas holdings of government banking sector's holdings of government debt and 8 stocks to the extent that they can be cash are taken from Table of the annex. No identified from the stock registers. allowance is made for any holdings of tax reserve certificates by the banks, as these are not separately The figures are not complete because the analysis identifiable. of the stock registers does not yet cover all stocks, Other holders: the figures for government bor­ and also because it is not possible to identify all rowing from "other holders" are residuals, arrived overseas holdings held through U.K. agents or at by deducting changes in the amounts of govern­ nominees other than banks. Any unidentified over­ ment debt held by overseas holders and by the seas holdings are included among the residual banking sector from the total amount in each cate­ figures for other domestic holders. gory borrowed by the Exchequer from outside the Treasury bills: the figures are taken from Table central government. 20 of the annex. It is assumed that other overseas The figures for national savings record changes in holdings (that is bills held other than through a savings at the time when payments and withdrawals U.K. bank) are negligible. are made by the public and include, as an increase Other debt: these figures are identical with those in savings, the accrued interest on national savings shown against "other external items" in earlier certificates. An analysis by type of savings is given tables except that they exclude, while the earlier in Table 3 (ii) of the annex. The amount actually tables included, U.K. subscriptions to the Inter­ made available to the Exchequer, through the national Bank for Reconstruction and Development National Debt Commissioners in the case of savings and the International Development Agency, less the bank deposits, is slightly different, mainly because change in these institutions' holdings of interest­ the Exchequer does not pay out accrued interest free notes. The change has been made, as with the on national savings certificates until they are encashed entries for the E.E.A., to achieve consistency with but partly also because of differences in timing. In the central government capital account. The net consequence, an adjustment is included in extra­ amount of these transactions, which is now included Exchequer funds.

36