The UK Exchequer (1)

Illustrating the Berkeley, Tye and Wilson study - Introduction

[Edited 14/09/2025 — see below]

If you’ve ever wondered how the financial side of government works, there’s an excellent study of the UK Government’s accounting (“An Accounting Model of the UK Exchequer”), written in 2020 by Andrew Berkeley, Richard Tye and Neil Wilson. I found it extremely informative. You can read it here. It describes the interactions of different government institutions both with each other, and with the rest of the economy: the banking system, suppliers, lenders and taxpayers.¹

The core of the BTW² study consists of accounts for various scenarios in these categories:

• Banking, payments, and clearing

• Government spending

• Cash management and debt management (“government borrowing”)

• Taxation

The aim of this new series is to illustrate these scenarios using the economic action (arrow) notation, which I’ve used throughout this blog for the last 2 years. I believe, and hope I can persuade you, that this arrow notation can provide clarity and intuition not just about government and other accounts, but about economics more generally.

Here’s an example. In section 4.1, the BTW study uses the following table to represent a £5 payment from Alice (“Customer 1”) to Bob (“Customer 2”), who both bank with HSBC, when Alice needs to use an overdraft facility to make the payment:

The table shows 4 changes to the parties’ assets and liabilities. Pairs of related entries are linked by cross-references in the descriptions.

Now here’s exactly the same information using arrows to represent economic actions:

The pink-to-green arrow from Alice to HSBC represents the increase in Alice’s liabilities and the increase in HSBC’s assets. The pink-to-green arrow from HSBC to Bob represents the increase in HSBC’s liabilities and the increase in Bob’s assets. In an important sense, £5 is being transferred from Alice to HSBC, and £5 is being transferred from HSBC to Bob.

Economic actions, and arrow notation

If you’ve been reading this blog for a while, this should seem very familiar, and you can skip to the next section (“Five key institutions”). If not, then read on…

An economic action is an instantaneous event which changes (one or) two people’s assets and/or liabilities in a consistent way. For example, when Alice gains a liability, someone else (in this case HSBC) must simultaneously gain a corresponding asset (or, less commonly, lose that same liability). Those two journal entries are the same action (“New debt”) seen from two different parties’ perspectives: Alice (the new debtor) and HSBC (the new creditor). Analysis of economic activity into actions makes clear exactly which journal entries are inherently related in this way, and which are less-closely related by being part of the same transaction.

To see why an action is represented by an arrow, we need to understand the fundamental idea of this blog, “Raw Net Worth” (RNW). It’s:

• what someone owns + what they’re owed - what they owe, or in other words

• assets - liabilities

Most actions are zero-sum for RNW. In the action diagrams, an arrow points:

• away from the person whose RNW↓, and

• towards the person whose RNW↑

The colour of the end of the arrow nearest to a person represents whether they are gaining/losing:

• a tangible asset (purple),

• a debt asset (green), or

• a liability (pink).

There are exactly 7 types of action:

The 7 types of economic action

All economic activity can be divided into these 7 actions — even services. The first 4 types of action are the building blocks of the financial economy, and the final 3 are the building blocks of the real economy.

Five key institutions

To finish this introductory article, I’ll summarise the BTW study’s description of the most important institutions which it discusses. If you haven’t read the study, this should give you enough information to understand the diagrams in the subsequent articles of this series.

When I’m referring to a specific part of the BTW study, I’ll put the original’s section number in square brackets e.g. “H M Treasury [2.1]” to help you refer to that section for more details.

H M Treasury [2.1]

This is the UK Government’s economic and finance ministry. It manages government spending and taxation, and records the government’s accounts.

Parliament [2.2]

This is the legislature (the institution which creates laws). It also decides how much the government is allowed to spend, and for what purposes. Each year, the government submits its spending requests, and Parliament decides which of those requests it will authorise.

Parliament also decides which taxes will be levied.

Bank of England (BoE) [2.4]

This is the UK’s central bank. It holds an account for each of the major private UK banks, as well as a number of accounts for the UK Government.

The UK Government has several accounts at the BoE. The main ones are:

1. The Consolidated Fund (CF) account [3.1.1]. This is the main government account.

2. The National Loans Fund (NLF) account [3.1.2]. This was originally in place to keep track of government borrowing, but seems to have become less important since the introduction of the DMO (see below).

3. The Debt Management Account (DMA) [3.2]. This is managed by the Debt Management Office (separate from H M Treasury), which is responsible for government borrowing (and repaying).

4. The “Paymaster General” (PMG) Drawing account [3.3]. When a government department has been authorised to spend, transfers (up to the authorised limit) can be made from the CF account to this account for the department to spend. When a payment is actually made, it comes from this account instead of directly from the CF account. (Apparently, this is a simplification of the real accounts, but good enough to understand the idea).

Debt Management Office (DMO) [2.5]

Before 1998, the Bank of England was responsible for managing the operations of government borrowing. The DMO was created to transfer the responsibility to within the UK Government itself, around the time that the BoE was given the responsibility for setting interest rates.

The DMO decides how much borrowing the Government will do. It issues “gilts” and bills. They are both essentially IOUs — promises to repay. Bills are for short-term borrowing (repaid within months), while gilts are longer-term (repaid years or even decades later).

Government Banking Service (GBS) [3.3]

This acts like a bank for government departments. When Parliament has authorised a department to spend, the department’s account balance at GBS is increased accordingly. The department can then draw down from its account into more specialised accounts (of which there are apparently over 2,000). These other accounts are actually operated by a chosen supplier — NatWest at the time of the study’s writing.

If I’ve understood this correctly, NatWest runs these accounts as though they were normal NatWest accounts, except that when an inter-bank payment is made from one of these accounts, a transfer is made to the receiving bank from the government’s PMG account instead of from NatWest’s own account at the BoE.

Summary

This was an introduction to a series of articles which will discuss UK government finances and their accounting, based on a 2020 study by Berkeley, Tye and Wilson, but representing the scenarios using economic action (arrow) diagrams instead of the study’s text-based journals. I hope this will give both readers of this blog and people familiar with the BTW study some useful insights and intuition about government finance and economics more generally.

Part 2 of the series will look at the banking system.

Edits

2025-09-14

1. It’s NatWest, not Barclays, which manages the government spending accounts of the GBS. Barclays manages accounts for tax receipts.

2. Transfers from the CF account to the PMG account don’t happen immediately on spending authorisation, but only when “drawn down” as needed.

1. Even though this is specific to the UK, I strongly suspect that other nations’ governments work in a similar way.

2. BTW = Berkeley, Tye and Wilson