The public finances

Introduction

The United Kingdom uses the European System of Accounts to structure its macroeconomic data, and part of this system includes rules for the public sector accounts. In this explainer, we outline the structure of the acccounting identities for the public finances in macroflow, and how they can be used to trace the link between general government net lending in the national accounts through to the issuance of gilts and Treasury bills by the government.

In an accounting sense, the main difference between the national accounts and the public finances is that the former operate entirely on accruals basis accounting, while the latter operate on a mix of accruals basis and cash basis accounting. Essentially, accruals basis accounting records transactions as they occur, whereas cash basis accounting records transactions when cash changes hands. So, for example, a self-employed person might owe the government £5,000 in tax for 2022, but not pay this sum until 2023. This transaction would enter the series for accruals basis government receipts in 2022, and the series for cash basis government receipts in 2023.

As with the national accounts, we have designed macroflow to present a natural mapping to the public finances. Specifically, the identities for a simplified system of the UK public sector accounts are presented front and centre. Each series in the system of accounts has a page at which both it, and the identities in which it enters, can be viewed and downloaded.

Users can, therefore, access the public finance data in macroflow by navigating through the relevant accounting identities. At the same time, we realise that different users access information in different ways, so there are also alphabetic lists of series and identities, as well as a search tool.

A simplified system of public sector accounts

The simplified system of public sector accounts presented in macroflow is a subset of the full dataset published by the Office for National Statistics. We have included those series and identities which are most likely to be needed on a day-to-day basis by students, researchers, and journalists. Unfortunately, the full structure of the public finances is not explicitly described in a publicly available document, but much of the necessary information can be found in the PUSF dataset and its appendices. The structure of the simplified system in macroflow is centered on the determination of the central government net cash requirement, which is reconciled with the national debt on the one hand, and the national accounts net lending series on the other. Finally, we include two series for the government's primary balance, and two series for the Bank of England's holdings of government and corporate bonds.

Central government net cash requirement

The starting points of the simplified system of public finances in macroflow are two identities for the cash basis series of central government receipts and outlays:

Together, these series determine the most straightforward measure of the central government net cash requirement:

which is the difference between cash outlays and cash receipts in any given period. We arrive at the headline measure of the central government net cash requirement by adding transfers to local government and public corporations:

If this is positive then the government has to raise cash by issuing liabilities, whether monetary or non-monetary. If it is negative then the government can accumulate liquid assets or pay down existing liabilities.

Reconciling the net cash requirement with the national debt

The central government net cash requirement determines the change in central government net debt as follows:

in which the final term is a catch-all series summarising a number of stock-flow adjustments. To understand this identity, we need to understand how gilts and bills are accounted for in the public debt. Simply put, gilts are UK government bonds that are issued with maturities greater than a year, whereas Treasury bills are debt instruments with maturities less than or equal to a year. Other than this, the major difference between gilts and bills is that gilts pay biannual interest payments, known as coupon or dividend payments, whereas Treasury bills do not. The total cash return to a Treasury bill is, therefore, simply its face value (the redemption payment at maturity) minus whatever price was paid for the bill, whereas the cash return to a gilt is the difference between its face value and purchase price plus the sum of its coupon payments.

If the market price of a gilt is equal to its face value, it is said to be 'trading at par'. In the usual course of events, however, both bills and gilts are sold at prices which are different to their face value. Importantly, while the cash raised from bill and gilt sales is determined by their sale price, they are recorded in the central government net debt at their face value, and it is this difference which comprises the net premia / discounts of gilt and bill issuance adjustment. For example, suppose that the central government net cash requirement in a given month is correctly forecast to be £1,000,000 and the Treasury instructs the Debt Management Office to cover this deficit by the sale of gilts with a face value of £100 each. If these gilts are issued at auction with a sale price of £80 each, then the DMO will have to sell 12,500 gilts such that the central government net debt increases by £1,250,000. In this case, an adjustment factor of £250,000 will be recorded to account for the difference between the net cash requirement and the change in central government net debt.

Aside from the effects of issuing gilts at a premium or discount to their face value, the other major adjustment linked to gilts is the index-linked gilt capital uplift. Like conventional gilts, index-linked gilts pay dividends twice a year, but whereas conventional gilts pay a fixed coupon rate on a fixed nominal face value, index-linked gilts pay a fixed coupon rate on a face value that increases in line with inflation. Again, the cash raised from index-linked gilt sales is determined by their sale price, but they are recorded in the central government net debt at their 'real' face value (i.e., their face value at the point of sale uplifted by the RPI inflation rate). This means that, even if the central government net cash requirement was equal to zero in a given year, central government net debt would increase by an amount equal to the RPI inflation rate multiplied by the current value of index-linked gilts.

The next identities define central government gross debt as a sum of instruments, and central government net debt as the gross debt plus a number of adjustments:

So gross debt is defined by the actual liabilities of central government, and the net debt removes the liabilities of Northern Rock Asset Management (NRAM), Bradford and Bingley (B&B), and Network Rail. In addition, there is an extra historical adjustment for Network Rail, and the net debt subtracts liquid assets held by the government. We can add local government gross debt to the central government gross debt figure to arrive at general government gross debt, which leads to the headline measure of public debt used in the UK:

Finally, the contribution of the Bank of England to the public sector net debt, via the reserves issued to finance unconventional monetary policies, can be added to this figure to arrive at the public sector net debt excluding public sector banks but including the Bank of England.

Reconciling the net cash requirement with the national accounts

To reconcile the central government net cash requirement with the national accounts measure of net lending, we first need to define two measures of the cash requirement that include the nationalised banks and Network Rail:

We can use this last definition of the net cash requirement to reconcile with central government net lending:

This identity reconciles a cash basis series (the net cash requirement) with an accruals basis series (net lending). So, for example, accounts receivable/payable are monies that are owed to the government or the government owes, but have not yet been paid. Finally, we can add local government lending to this series,

to arrive at general government net lending, which is the series that connects the public sector financial data in macroflow with the national accounts data.

Miscellaneous series

The structure of the simplified public sector accounts in macroflow is summarised in the identities above. Aside from the series in these identities, we also include series that define two meaures of the central government primary surplus, transfers to and from the Treasury from the Bank of England relating to quantitative easing profits, and series relating to the Bank's holdings of gilts and corporate bonds. If there are any series that we do not include, but you would like to see, just let us know and we will try to include them in the next update.