How to finance the government spending | Mainstream and Heterodox View

How to finance the government spending  

 Mainstream and Heterodox View

Dr. Engin YILMAZ

2020

PART I : Mainstream View

Mainstream economist speaks, please listen:

We need to understand that how the Treasury finances the government spending in USA. What is the exact mechanism for financing the government spending in USA ? Can we formulate this mechanism with the items of public borrowing, changing in treasury account in Fed or changing in by other sources.

We firstly go to treasury web page which indicates monthly treasury statements and we click the current monthly treasury statements.

Source: https://fiscal.treasury.gov/reports-statements/mts/

Please click "Monthly Receipts, Outlays, and Deficit or Surplus, Fiscal Years 1981-2020" in the new web page (excel format)

Source:https://fiscal.treasury.gov/reports-statements/mts/current.html

You can see the columns of  this file, we use them in explaining the mechanism and its formulation.

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts.xls

Receipts are generally the tax revenues and the outlays are the government spendings.

Deficit = Receipts < Outlays

Surplus= Receipts > Outlays

Borrowing from the Public is the change in government's newly issuing bills, bonds and notes. (Attention, the intragovernmental borrowing is not included)

Reduction of operating cash is the change in Treasury account in Fed balance sheet.

By other means are 

• Accrued Interest Payable to the Public
• Allocations of Special Drawing Rights
• Uninvested Balances, Deposit Funds
• Miscellaneous Liability Accounts (Includes Checks Outstanding Etc.)
• Special Drawing Rights
• Maintenance of Value Adjustments
• Letter of Credit Issued to IMF
• Dollar Deposits with the IMF
• Receivable/Payable (-) for Interim Maintenance of Value Adjustments
• Loans to International Monetary Fund
• Other Cash and Monetary Assets
• Non-Federal Securities of the National Railroad Retirement Investment Trust
• Net Activity, Guaranteed Loan Financing (See Schedule E)
• Net Activity, Direct Loan Financing (See Schedule E)
• Miscellaneous Asset Accounts
• Transactions Not Applied to Current Year's Surplus or Deficit (See Schedule A for Details)

Where can I find these accounts ? Good question.

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts1119.xlsx

Please click excel file section in "Current Issue".

You can find all items of other means in the Table 6.

Table 6. Means of Financing the Deficit or Disposition of Surplus by the U.S. Government, November 2019 and Other Periods

The assets need to be substracted from the liabilities.

 The liabilities are

• Accrued Interest Payable to the Public
• Allocations of Special Drawing Rights
• Uninvested Balances, Deposit Funds
• Miscellaneous Liability Accounts (Includes Checks Outstanding Etc.)

The assets are

• Special Drawing Rights
• Maintenance of Value Adjustments
• Letter of Credit Issued to IMF
• Dollar Deposits with the IMF
• Receivable/Payable (-) for Interim Maintenance of Value Adjustments
• Loans to International Monetary Fund
• Other Cash and Monetary Assets
• Non-Federal Securities of the National Railroad Retirement Investment Trust
• Net Activity, Guaranteed Loan Financing (See Schedule E)
• Net Activity, Direct Loan Financing (See Schedule E)
• Miscellaneous Asset Accounts
• Transactions Not Applied to Current Year's Surplus or Deficit (See Schedule A for Details)

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts1119.xlsx ( Table 6)

You should the last adjustment in the amount. The item of the "Transactions Not Applied to Current Year's Surplus or Deficit" need to be substracted from the liabilities.

The liabilities - The assets + Transactions Not Applied to Current Year's Surplus or Deficit

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts1119.xlsx ( Table 6)

and result will be -8.947 .

By other means are -8.947 for November 2019.

We return the first excel file for understanding mechanism.

In november 2019, there was 208.839 million deficit and  there was other deficit from "by other means" (equal to the 8.948 million dolars).

Total deficit was -217.787 million

How to close this deficit ?

Borrowing from the Public was 125.462 million

Reduction of operating cash was 92.324 million

Bingo !

The result is 0 (deficit is financed)

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts.xls

We should take account 

that the accounts of by other means and borrowing from the public can be negative or positive.

that the reduction of operating cash (TGA account) is residual account.

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts.xls

The result is 0 (deficit is financed)

You notice that the account of by other means is positive and the account of borrowing from the public is negative in March 2019.

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PART II : Heterodox View

Heterodox economist speaks, please listen:

We need to think all this process in the concept of the liquidity drain and liquidity injection.

Taxes create the liquidity drain; means that liquidity is drained from government and this liquidity goes to Treasury account in FED (TGA).

Government spendings create the liquidity injection; means that liquidity is pumped by government and this liquidity goes to bank reserves in FED.

Government borrowing creates the liquidity drain; means that liquidity is drained from government and this liquidity goes to Treasury account in FED (TGA).

We return the first excel file for understanding mechanism.

In november 2019, there was 208.839 million liquidity injection and  there was other surplus from "by other means" (equal to the 8.948 million dolars).

Total liquidity injection was -217.787 million

Borrowing from the Public was 125.462 million and this created the liquidity drain.

-217.787 + 125.462  = 92.324 million in liquidity injection and this is residual account. 

The RESULT is the reduction of operating cash  (92.324 million)

Bingo !

Source:https://fiscal.treasury.gov/files/reports-statements/mts/mts.xls

Dr. Engin YILMAZ

14.01.2020