Review of the article : Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A. and Wilson, N. (2022). The self-financing state: An institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom. UCL Institute for Innovation and Public Purpose, Working Paper Series (IIPP WP 2022-08). Available at: https://www.ucl.ac.uk/bartlett/public-purpose/publications/working-papers/wp2022-08.

Published in 2022, the working paper The Self-Financing State (Berkeley, Ryan-Collins, Tye, Voldsgaard, Wilson) offers a unique institutional insight into the spending, revenue, and public debt mechanisms of the United Kingdom government. Drawing on legal texts, accounting practices, and reports from key British public institutions, the authors demonstrate a striking fact: the British government creates money when it spends. And it does so independently of any prior tax revenue or debt issuance.

Such a conclusion overturns the dominant representation of the state as an actor that must « find financing » before it can act. It also confirms, without explicitly claiming to do so, several key elements of Modern Monetary Theory (MMT).

A State That Spends First

At the heart of the British system is the Consolidated Fund (CF), created in 1787. This is not a traditional bank account, but a fundamental accounting and legal construct. It is from this fund that all public spending is authorized, following a vote by Parliament. Once this authorization is obtained, the Bank of England credits the relevant accounts without requiring prior tax revenues or bonds to be issued.

Every day, the CF starts with a zero balance. And yet, billions of pounds can be spent without a prior « war chest »: public spending then becomes an act of money creation. The government issues new deposits at the Bank of England, which are then injected into the economy.

Taxation is not financing

In this context, tax collection appears for what it is from an operational perspective: a mechanism of monetary destruction. Tax revenues credit the public accounts at the Bank of England, thus removing currency from the economy. They allow the currency to maintain its value by maintaining demand for the pound sterling, but they do not finance spending. The logic here is the opposite of that usually taught.

Public Debt: A Safe Asset – Not a Source of Financing

Contrary to conventional budgetary rhetoric, the authors show that the issuance of government securities (gilts) is not there to finance deficits. Historically, debt served to manage monetary policy by regulating the liquidity of the banking system. But since the introduction of the « floor system » (interest rate floor) in 2009, following quantitative easing (QE), this function has weakened.

Today, the issuance of public debt primarily fulfills two functions:

• To provide the private sector with a safe and liquid asset, highly prized by pension funds, insurance companies, and banks;
• Provide high-quality collateral, necessary for the proper functioning of financial markets, particularly in repo transactions.

Four myths are shattered

This rigorous institutional perspective helps deconstruct several preconceived ideas:

• The State can run out of money
  False. The government creates money by spending. It never needs to « find » funds upfront.
• Taxes and borrowing are essential to finance the State
  False. They are ex post adjustment mechanisms. Spending precedes revenue.
• Financial markets impose their law on the State
  False. Banks are structurally in excess of liquidity and easily absorb public debt issues, often at rates close to the key interest rate.
• The State could default
  False for debt denominated in the national currency. The government, through Parliament, can always honor its commitments, unless a political decision to the contrary is taken.

A Central Bank less independent than it appears

Another idea that has been debunked: the operational independence of the Bank of England. While the BoE sets its key interest rate autonomously, it cannot refuse to execute an expenditure approved by Parliament. The legal framework (notably the Exchequer and Audit Departments Act of 1866) requires it to do so. Public spending is therefore not constrained by monetary policy.

Better still, the BoE is largely financed by public assets (government bills and bonds). In practice, the strength of the Bank’s balance sheet relies on the Treasury’s signature. This reinforces the MMT idea of ​​analytical consolidation between the government and its central bank.

Towards a reform of accounting transparency?

The authors conclude that the United Kingdom already functions as a monetary sovereign state, capable of financing its expenditure in its own currency, without external dependence. However, this reality remains masked by inherited accounting conventions and political narratives.

A reform of the presentation of public accounts, and in particular a clear abandonment of the « full funding rule, » would allow for a better understanding of the true constraints—which are real, but ecological, technological, and social, not monetary.

A valuable contribution to the understanding of public finance – and an empirical echo of MMT

The study « The Self-Financing State » constitutes a rigorous and well-documented contribution to the analysis of public finance operations in the United Kingdom. By describing in detail the functioning of the Consolidated Fund, public payment circuits, and debt issuance, the authors highlight an institutional architecture that:

• Allows the State to spend by creating money, without any prior financing conditions;
• Makes taxes a mechanism for withdrawing money, rather than pre-financing expenditures;
• Ascribes to public debt a monetary and financial management role, rather than a budget financing role;
• And challenges several constraints traditionally associated with a State’s solvency in its own currency.

Although the authors do not explicitly subscribe to Modern Monetary Theory (MMT), their conclusions largely correspond to the neo-chartalist description of the monetary functioning of a sovereign state. Through the analysis of British procedures, the paper thus provides empirical institutional support for the central assertions of MMT, particularly regarding the actual order of budgetary operations and the absence of a role for taxes and debt in financing public spending.

In this sense, this study contributes to a better understanding of the internal monetary logic of modern states and to informing contemporary economic debates through a better understanding of the institutional rules that, in practice, govern the creation of money by the state.

Finally, the authors suggest that current conventions regarding cash management—such as the full financing rule—are administrative choices and that their abolition or revision would not fundamentally alter the economic impact of public spending. The analysis of the British institutional framework thus strengthens the understanding of the levers available for budgetary policy, and invites us to reconsider current assumptions about public finances in monetarily sovereign countries.