Thread by @jryancollins

Today we publish the first detailed academic analysis of the mechanics of the UK's spending, taxation and borrowing mechanics as an @IIPP_UCL WP.
Bad news for the MMT sceptics out there I'm afraid.
The government always creates new money when it spends.
newstatesman.com/economy/2022/0…

The Consolidated Fund is the institution via which all spending and revenue collection flows. The CF has an interest free account at the @bankofengland, with no limits. When govt. spends this is debited & BoE credits govt. accounts in commercial banks. This creates new deposits.

Taxation reverses this process. Any outstanding balances are swept up in to a different account (National loans Fund). Bonds are either issued or sold to bring this balance to zero and prevent disturbances to monetary policy. This means the CF always starts each day at zero.

In other words, the state never 'uses' existing balances to spend. It does not intermediate. It always creates new money. It is not dependent on the BoE - the BoE is obliged by law to turn the CF's IOUs in to reserves and then deposits.

But: this 'full funding rule' (FFR) is no long necessary given the BoE's QE program and that it now pays interest on banks' holdings of reserves. Not entirely clear why this FFR convention continues but clearly certain parties make a lot of money out of it.

This was a great collaborative effort with co-authors @AskerVoldsgaard of @IIPP_UCL @spatchcockable Neil Wilson of @GowerInitiative and Richard Tye. The full paper is available here: ucl.ac.uk/bartlett/publi…

The latter three authors also published a book setting everything out in even more detail than the paper: gimms.org.uk/2021/02/21/an-…

Please spread the word. We need to end the 'state is like household' analogy. The main constrain on govt. spending is the productive capacity and resources in the economy and the risk of inflation - not the size of the budget deficit.

@ChrisGiles_ @andyverity @PEF_online @MazzucatoM @StephanieKelton @wbmosler @LevyEcon @AnnPettifor @JoMicheII @KateRaworth @BenChu_ @NIESRorg @angusarmstrong8 @NEF @Frank_vanlerven @themmtnetwork @meadwaj @RJPartington @RebuildMacro @JoMicheII @DanielaGabor @PositiveMoneyUK