Where MMT Goes Wrong… · Rebel Economist (Free)

Where MMT Goes Wrong…

The Self-Financing State: An Institutional Analysis of Government Expenditure, Revenue Collection and Debt Issuance Operations in the United Kingdom - Review and Critique

Andrew Berkeley, Josh Ryan-Collins, Richard Tye, Asker Voldsgaard & Neil Wilson (05 Sep 2025) Journal of Economic Issues, 59:3, 852-880, DOI: 10.1080/00213624.2025.2533726. Link to this article: https://doi.org/10.1080/00213624.2025.2533726

The paper "The Self-Financing State: An institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom" (2022) by Andrew Berkeley et al. provides a remarkably detailed mapping of the UK’s fiscal-monetary mechanics:

“This article provides the first detailed institutional analysis of the UK government’s expenditure, revenue collection, and debt issuance processes.

The paper is often cited by MMT supporters as the source or academic truth or ‘proof’ that Government spending is financed through new money creation, not tax revenue or bond sales:

“We show that public expenditure is always financed through money creation rather than taxation or debt issuance.”

However, if HM Treasury is not spending tax receipts or bond sales revenue, then the BoE by law would be forced to create new reserves and new fiat money when crediting the reserve accounts of banks of Government payees. This requires the Treasury to BORROW new reserves from teh BoE, which requires Balance Sheet expansion of both the Treasury and the BoE to create new reserves. However, the data shows for the last 18 years shows zero Treasury borrowing from the BoE, and 100% of Government spending has been paid for by the BoE crediting the reserve account of the bank of the Gov payee, and then debiting Treasury accounts of funds already on deposit via a BoE “Liability Swap”. If there is no borrowing from the BoE to complete Treasury spending, no BoE BS expansion to lend, no Treasury BS expansion to borrow from the BoE, then there is no new fiat money creation.

The reader might be forgiven for wondering if the authors’ motivation was to ‘prove MMT correct’ from the outset, and they were attempting to ‘cherry-pick’ their research to confirm their pre-conceived ideas. If that was the case, the authors have utterly failed, as their paper has inadvertently had quite the opposite effect, completely disproving MMT assertions that Gov spending is being financed by new money creation, and not tax receipts or gilt sales revenue. In this regard, the authors’ have helped clarify the errors in modern money mechanics that the authors and Neo-Chartalists and MMT supporters alike are making. The proper conclusions below are clear and unavoidable.

Modern Money Mechanics Of Financing Treasury Spending And BoE Open Market Operations

A. HM Treasury spending tax receipts does NOT create new net reserves or new net deposits, and thus does not expand the money supply.

B. HM Treasury deficit spending financed by selling gilts to the non-bank public does NOT create new net reserves or new net deposits, and thus does not expand the money supply.

C. HM Treasury deficit spending financed by selling gilts to banks (2% - 5% of new gilt sales) does NOT create new net reserves, but DOES result in banks creating new net deposits, and thus does expand the money supply a minor amount.

D. HM Treasury deficit spending financed by the Treasury borrowing reserves from the BoE on the Ways & Means Facility DOES create new net reserves, and causes banks to create new net deposits, which DOES expand the money supply, but this has not happened in 18 years.

E. If HM Treasury borrows from the BoE, under the FFR Treasury has to borrow existing funds from the public through new gilt sales to repay the BoE no less than annually, which decreases the supply of deposits and decreases the supply of reserves, essentially reversing the new money created by Treasury borrowing for the BoE, and this contracts the money supply.

F. When the BoE ‘Monetizes Debt’ by buying gilts from the public in the secondary market, none of the proceeds funds flow to Treasury, so these sales have no direct effect on Treasury balances or spending, but this does increase the supply of reserves. If the seller was the non-bank public, the seller’s bank then credits the seller’s deposit account, increasing total deposits and this does increase the money supply.

G. When Treasury pays off the Principal of gilts held by BoE, the BoE de-issues those reserves and contracts the supply of Fiat money. This has no effect on the supply of deposits.

These are the proper conclusions the authors should have come to and explained in their paper.

The public would be well served to be placed on sound footing in regard to modern money mechanics. The subject is the source of great confusion, caused in part by papers like this. In truth the subject is not simple, but also the subject is not so difficult that our minds cannot see it clearly with some minimal level of effort. If we then follow the common MMT practice of using a Consolidated Balance Sheet (CBS), this hides the debt, even though the debt service obligations remain intact. There simply is no magic money tree that allows the Government to issue new money to spend without requiring repayment from the public, or causing negative Government equity.

For those that want to develop a deeper understating of the modern money mechanics involved, this subject is explored in my book "Everything Youy Think About Money Is Wrong" available for free on kindle. However, the conclusion is clear: due to drawing factually and mathematically incorrect conclusions in support of MMT and neo-chartalist mistaken ‘imaginations,’ the authors have misled the public and academic community towards an affirmation of MMT assertions, and to correct the public record, the paper needs to be immediately retracted.

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