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ARTICLE IN PRESSCCFOR-333; No. of Pages 17

Accounting Forum xxx (2016) xxx–xxx

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Accounting Forum

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ublic debt accounting and management in UK: Refunding orefinancing? Or, the strange case of Doctor Jekyll and Mryde in the aftermath of the Global Financial Crisis

uri BiondiSCP Europe (Labex ReFi), 79 avenue de la Republique, 75011 Paris, France

r t i c l e i n f o

rticle history:eceived 4 December 2015eceived in revised form 1 February 2016ccepted 26 February 2016vailable online xxx

eywords:ublic debt managementovernmental accountinglobal financial crisisinancialisationew public financial managementK

a b s t r a c t

Since the 1990s at least, UK HM Treasury has been leading a general transformation of publicservice and the relationship between public and private sectors, driven by a distinctivepreference for the private sector. This preference has led to transplant the IFRS to providea balance sheet accounting representation of public administration, while favouring therecourse to private actors for financing, delivering and even auditing the public service.However, in the aftermath of the Global Financial Crisis, since 2007–2008, the joint action ofthe HM treasury and the Bank of England has been running exceptional policies that belongto and activate the very financial–economic core which constitutes the specific economy ofpublic administration: (i) its use of public borrowing for redistributive purposes; and (ii) itspublic debt management based upon issuance and progressive refinancing over time. Ouranalysis provides clear-cut evidence of these policies and their material impact on publicdebt management. This tells the strange case of Doctor Jekyll who advocates the imitationof private sector by the public administration, while Mister Hyde does actually foster publicpolicies based upon the specific economic working of public administration, which makesit and its public debt different from private entities and their corporate securities.

© 2016 Elsevier Ltd. All rights reserved.

. Introduction

The current debate about public debt management is somewhat influenced by the prominent development of inter-ational financial markets in the last four decades. The Bretton–Woods Accords institutions were explicitly established toecome “instrumentalities of sovereign governments and not of private financial interests” (Gardner, 1969, p. 76; Helleiner,006). Since the disbandment of these Accords which used to regulate monetary and financial architecture between curren-ies before 1972, a market-based understanding of public debt management has emerged at the international level, forminghe so-called ‘Washington Consensus’. This consensus was driven by several forces, including international institutions suchs the World Bank and the International Monetary Fund; new macroeconomic thinking such as new classical macroeco-

Please cite this article in press as: Biondi, Y. Public debt accounting and management in UK: Refunding or refinancing?Or, the strange case of Doctor Jekyll and Mr Hyde in the aftermath of the Global Financial Crisis. Accounting Forum (2016),http://dx.doi.org/10.1016/j.accfor.2016.02.003

omics; and new macroeconomic regimes such as ‘The Great Moderation’. Moderation for some, it could be added, since theecent decades have been ‘roaring’ times of ever-greater financialisation and ever-growing financial sector, including in butot limited to UK (Boyer, 2013; Newberry & Robb, 2008).

E-mail address: [email protected]: http://www.yuri.biondi.free.fr/.

http://dx.doi.org/10.1016/j.accfor.2016.02.003155-9982/© 2016 Elsevier Ltd. All rights reserved.

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2 Y. Biondi / Accounting Forum xxx (2016) xxx–xxx

A market-based view of public debt management assumes an alleged equivalence between public and private (corpo-rate) securities in the making of financial markets. They are expected to compete against each other under a universalfinancial architecture that treats them equally (Biondi, 2013b; Newberry, 2015). Regarding international sovereign debtrestructurings (SDR), a market-based view of public debt might be progressive in that it distinguishes public debt fromdirect foreign investments which are protected by international arbitration tribunals and treaties. This distinction pavesthen a way to sovereign debt rescheduling and forbearance (Grossman & van Huyck, 1988; Ishikawa, 2014; Lienau, 2014:Chap. 7; Schwartz & Zurita, 1992; UNCTAD, 2012). At the same time, this market-view accompanies SDRs with structuralreforms of public administration, prompting and ‘accustoming’ governments to approach international financial marketsas if they were running private sector entities that issue corporate securities (Lienau, 2014: p. 139 endnote 49; chapter 6).Structural reforms imposed to developing countries in the context of SDRs generally involve free movement of financialcapitals and exposure to international financial markets, independency of central banks, macroeconomic stabilisation, andthe limitation of public expenditure and government economic involvement (Lienau, 2014, p. 170), including programmes ofprivatisation, ‘modernisation’ of public management, and adoption of international accounting standards (Helleiner, 1994;Sutcliffe, 2003; Tabb, 2003; Woods, 2006).

Austerity policies in developed countries appear therefore to be somewhat framed by the same financial market-based view as sovereign debt restructuring in developing countries. Moreover, this view is also driving ‘new publicmanagement’ movement and the ongoing reforms of national and international public sector accounting standards.Both assume alleged identities between: private and public debts; management of private and public finances; andaccounting and reporting for the respective financial positions and performances. Accordingly, a market basis couldbe adopted to understand and regulate all of them. The reference to business-style accounting is one of the pil-lars of ‘new public management’ (McCulloch & Ball, 1992; Stewart, 1999, 2002). For instance, Humphrey, Miller, andScapens (1993) indicate that the “appeal of enterprise” constitutes a principal feature of recent trans-national trendsin accounting and governance for public administration (Ellwood, 2002, 2003; Broadbent & Laughlin, 2003). In thiscontext, business-style accounting and management are considered to be the benchmark for all socio-economic organi-sations that perform various collective activities. Financial-market accountability becomes the key focus for governmentalaccounting, while business-style financial accounting is allegedly considered to be its most appropriate representation(GASB, 2006; Mack & Ryan, 2006). According to Newberry (2015), a preference for balance sheet accounting approachemerges in this overall transformation of public debt management because attention is now focused on matching (oroffsetting) the risks associated with assets against the risks associated with similar liabilities (so-called asset-liability match-ing), even though some government assets and liabilities denote significant definition and measurement issues for thisapproach.

This driving reference to and preference for a market-based view on public finances and accounting constitutes a majorsocio-economic transformation. As for accounting systems provide rules, incentives and representations which activelyframe and shape the underlying organised activities that those systems make “accountable” to their constituencies. Account-ing plays here a distinctive role as an institution that governs these activities at a distance, through its regulatory action(Burchell, Clubb, Hopwood, Hughes, & Nahapiet, 1983; Hopwood & Miller, 1994; Hopwood, 1983; Knorr Cetina & Preda, 2005;Robson, 1992). Accounting regulatory action involves a specific ideational role, as for it provides a quantified representationof financial performance and position of the activity made accountable in monetary terms. This representation drives thevery definition of public debt sustainability, defining what is acceptable and permissible among the public administrationand its constituencies (including its debt-holders) across events and circumstances. Money enters the public administrationworking accompanied with a rule of accounting (an accounting frame of reference). From a socio-economic perspective,accounting defines and controls how money is entered, processed and spent in the public administration working process.From an institutional perspective, accounting defines the rule of law that makes this money power accountable to publicadministration constituencies (Biondi, 2010, Chap. 3). A market based view on public finances and accounting constitutesthen one peculiar accounting frame of reference, one that does modify the working conditions of public administrationand of its overall assessment, including its very definition of financial sustainability (Broadbent & Laughlin, 2003; Lapsley,Brunsson, & Miller, 1998; Mayston, 1993).

From this institutional socio-economic perspective, the ‘enterprise appeal’ has had a considerable rhetorical force in justi-fying and fostering the ongoing process of reform. However, a straightforward reference to business-style accounting involvessome perhaps-unintended consequences for the nature and role of public administration. The latter has been understoodand organised as a non-lucrative collective activity that performs specific functions in our economy and society. Its account-ing frame of reference was then organised to represent it as a non-lucrative ongoing entity mostly concerned with cashflows and funds. A market-based view imposes an identity between lucrative (business) and non-lucrative (non-business)entities. How may governmental financial sustainability be similar to that of business entities when public administrationdoes not have either shareholders’ equity to be maintained, or business income to be generated over time? Should weimpose both concepts and objectives to public administration, because of this reform process? Are we already in the pro-cess of imposing them through the regulatory action at a distance driven by a market-based view on public finances andaccounting?


At the present, the reference to and preference for business-style financial accounting and accountability result to be atodds with current practice and intended purpose of public administration. As the US Governmental Accounting StandardsBoard (GASB, 2006, p. 16) concludes in its recent white paper on the matter:


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Y. Biondi / Accounting Forum xxx (2016) xxx–xxx 3

Governments are fundamentally different from business enterprises. As a result, separate accounting and financialreporting standards for governments are essential to meet the specific needs of the users of governmental financialreports. The standards for governments need to reflect the unique environment of government, including differentorganizational purposes and special legal powers, and to effectively address public accountability issues inherentlyrelated to the unique government environment.

In particular, although influential and diffuse, a market-based view of public debt is still inconsistent with longstandingractice of public debt management within currency areas for most developed countries (Biondi, 2013b; Newberry, 2015).oncerning UK, domestic outstanding of governmental debt is 2006.1 USD billions at December 2012, while internationalutstanding is 21.2 USD billions, that is, 94.5 times less (or 1.1%), according to Bank of International Settlements (BIS)’s Debtecurities Statistics to 9 March 2014. Within each monetary and financial jurisdiction, since the end of WWII at least, publicebt has been issued and refinanced through special arrangements that make it different from corporate securities (Biondi,013a; Reddy, 2007).1 In this context, markets for public debt have been organised to assure its quasi-monetary dimension,ccompanying and reinforcing its interdependence with monetary policies run by central banks under regime of fiat moneynd bank money creation (McLeay, Radia, & Thomas 2014a, 2014b). Under this regulatory architecture, the monetary baseas been endogenously created by central banking in interaction with monetary financial institutions in a way that doesccommodate and embed issuance and refinancing of public debt. In turn, this special status of public debt has enabledwo complementary specificities of the economy of public administration: (i) its use of public borrowing for redistributiveurposes; and (ii) its public debt management based upon issuance and progressive refinancing over time. Both specificitiesave been accepted so far by private investors and monetary financial institutions, as confirmed by large and stable liquidityenerated by public debt market-trading at low (risk-free) interest rates since the WWII at least. A corollary of this specificconomic working of public administration is that public debt outstanding cannot and is not expected to be refunded throughresent and future tax revenues alone. Under an accruals-basis of accounting, this corollary implies a material and steadyor steadily increasing) negative net liability over time (see Biondi, 2013b for numerical illustration).

An ideational clash is then presently at work in the current socio-economic context of public administration in generalnd public debt management in particular, concerning the specific economic nature of both. A market-based view of theman foster and has been fostering their radical transformation into an inappropriate business corporate dimension. In theftermath of the global financial crisis, this market-based view has been accompanied by austerity policies and rules thaturport to constrain public debt to make it refundable through present and/or future tax revenues. This is a deliberateccounting choice by design, one that is inconsistent with longstanding practice of public debt issuance and refinancing.mplications and consequences of this austerity claim are not fundamentally foreseeable to date. The debate is still vivid,

ith some leading economic thinkers opposing such hazardous move (Krugman, 2013; Rocard & Larrouturou, 2012). Fornstance, on 28 July 2011, a group of leading economists, including five Nobel Laureates in economics, have publicly released

letter to President Obama and Congress opposing a constitutional balanced budget amendment (Arrow et al., 2011). Theconomic Policy Institute and the Center on Budget and Policy Priorities organised this letter, which outlines the reasonshy writing a balanced budget requirement into the US Constitution would be “very unsound policy” that would adversely

ffect the economy. Adding arbitrary caps on federal expenditures would make the balanced budget amendment even moreroblematic, the letter says. “A balanced budget amendment would mandate perverse actions in the face of recessions,” the

etter notes. By requiring large budget cuts when the economy is weakest, the amendment “would aggravate recessions”ibidem).

In this context, this article shall tell the story of the strange case of the UK HM Treasury (alias Doctor Jekyll). UK HMreasury has been favouring and advocating transplanting private sector practices to public finances and accounting forore than two decades. However, in the aftermath of the Global Financial Crisis, it decided to apply aggressive public

olicies (alias Mr Hyde). The reference to the well-known novel by Stevenson (1886) is made to capture the two-facednessf this situation, or the disconnection between what has been pretended to be good (public debt reduction, austerity policynd the private sector imitation) and what is actually performed in terms of public debt management and monetary policy.

Our UK case study analysis shall show how the Mr Hide’s unconventional policies activate the two complementary speci-cities of the economy of public administration mentioned above. These policies generate a financial-economic dynamicshat makes governmental finances and accounting specific and different from the private sector. The very definition andnforcement of public debt sustainability is at stake here. From the one hand, public debt is deemed sustainable if netook asset or net worth is above zero, enabling its refunding. From the other hand, public debt is deemed sustainable if itsefinancing is feasible and accepted through available financial and economic systems and conditions.

Our analysis shall investigate the public debt management in UK, jointly managed by the UK HM Treasury and the


ank of England, especially in the aftermath of the global financial crisis, to reveal those specificities and their inconsistentnteraction with a balance sheet accounting representation of public debt management. Concerning UK, the ideational clashccurs between, on the one hand, the IFRS (International Financial Reporting Standards) business-style accounting approach

1 In fact, major corporations and financial institutions can and have been applying refinancing and other sophisticated financial policies to their own debtanagement. This reverse analogy of corporate entities (especially financial institutions) with public administration (and not vice-versa) is meaningful,

ut this paper does not investigate it further.


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which is about measuring negative net worth and public debt refunding, and, on the other hand, the refinancing of publicdebt and associated accounting processes that may be designed to be consistent with public finances specificities. Especiallysince the aftermath of the global financial crisis, a Dr Jekyll and Mr. Hide tension has been occurring between the need toreflate and stimulate the economy through deficit-spending and monetary policy (which enable refinancing and rolling-overpublic debt positions) and the restrictions implied by the austerity request to raise taxes to reduce negative net worth asmeasured by a balance sheet accounting approach matching assets and liabilities.

The rest of the paper is organised as follows. The first section introduces the main characters of our story-telling(Stevenson, 1886): Doctor Jekyll in the role of the UK HM Treasury and its monetary arm, the Bank of England (being toplay Mr Hyde); and the National Audit Office, which plays John Utterson, a prosecutor inquiring on Doctor Jekyll and MrHyde. All these institutions hold fiduciary responsibilities on behalf of the UK people. The second section resumes the officialdiscourse of the UK HM Treasury on public finances and accounting, pointing to an austerity view and ruling which this dis-course implies. The third section analyses Mr Hyde’s actual practice of public finances and accounting in exceptional times,showing the material impact of both governmental specificities mentioned above: (i) use of public borrowing for redis-tributive purposes; and (ii) public debt management based upon issuance and progressive refinancing over time. The fourthsection shall infer that both this actual practice and the related specificities hold even in normal times and belong to thefinancial-economic core that constitutes the specific economy of public administration. This specific economic working ofpublic administration should then be taken into account for establishing its specific modes of accounting and accountability,since the latter define its specific mode of financial sustainability. A summary concludes.

2. The leading actors of governmental accounting and finances in UK

2.1. The HM Treasury

The UK Treasury, still called “Her Majesty’s Treasury” (HM Treasury, thereafter), dominates the budgetary and accountingprocess for the UK central government (Jones, 2003). The Prime Minister is in charge of the HM Treasury from the politicalviewpoint, while the “Chancellor of the Exchequer” manages it from the administrative viewpoint.

The UK Constitution – which is not written, that is, it is not codified in a unitary and consistent body of law (Phillips,Jackson, & Leopold, 2001, §1–006 and §1–007) – submits public finances and accounting to the management by The Crownunder the authorisation by the House of Commons. According to the constitutional principle: “the Crown demands money,the Commons grant it, and the Lords assent to the grant” (Limon & McKay, 1997, p. 732; Phillips et al., 2001, §12–002).In current practice, the Crown means the government and then the HM Treasury, which is also in charge of public debtmanagement. One core aspect of this management is issuance and refinancing of public debt positions over time.

Parliamentary authorisation is granted especially through the Finance Act that is passed every July. To prepare this act,the “Chancellor of the Exchequer” announces the budget to be approved, including intentions to change taxes, on the so-called “Budget Day” of March or April. This event receives great attention from media and the public, enabling the Treasuryto present the annual Budget whose subtitle clarifies its purpose and scope: “Economic and Fiscal Strategy Report, FiscalStatement and Budget Report.”

Since the forties to date, this Budget applies a macroeconomic and macro-budgetary logic. It refers to macroeconomicmeasurements of national statistics, more than to the microeconomic and micro-budgetary measurements based uponfinancial accounts. A specific attention is given to public spending and its financing, which leads to maintain a focus on cashbasis in this context. Nevertheless, some items and measurements are nowadays reconciled with their evaluation underaccruals basis, especially through summary of consolidated accounts and the accruals-based budget.

Since 1866, with the Gladstone’s reform, public money is required to pass through an account held by the Central Bank,called the “Consolidated Fund”. Since the “National Loans Act” of 1968, this account is complemented by another “NationalLoans Fund”, which deals with inflows from public borrowing. Furthermore, advances to public entities which are not yetauthorised by the Parliament are collected through a third account called “Contingencies Fund”. Money that is not expensedduring the budget year should be refunded to the Consolidated Fund, although the introduction of a tri-annual budgetextended this refunding rule from one to three years of reference. Bookkeeping and public disclosure of these accounts areevidently on cash basis.

Cash-based accounting is nowadays complemented by accruals-based accounting (Biondi, 2016b), which required theestablishment of a public register of assets (prepared by kind since 1997 and coupled with monetary evaluations since2001). On this basis, the budget allocated to each department or public entity is called “supply”, and its annual budget isthe “supply estimate”. This budget is prepared on cash basis and reconciled with accruals basis for each annual report of theaccounted entity. Tri-annual budget – which is not submitted to authorisation by but only information to the Parliament – isestablished only on accrual basis. The latter budget does concern only the expenditures under the administration’s control,called “Departmental Expenditure Limits” (DEL).


Accruals-based accounting has no impact on the Consolidated Fund and does not apply to its bookkeeping or disclosure.Every entity also establishes its own financial statements, which provide detailed information but may not be available as theyear budget is presented and approved. Therefore, accruals-based accounting did not replace cash-based accounting, whichis still central to the year budget and is articulated among capital and current spending, at least for central government.


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The introduction of accruals-based accounting has complemented this budget through consolidated accounts and anccrual-based budgeting. The first decision to introduce accruals dates back to 1993. A consultation paper was publishedn 1994 (open to comment to 31 January 1995) to explain the reasons of this choice, paving the way to the new accrual-ased budgeting. Law proposals were presented by the government in July 1995. Accordingly, accrual-based accounting wasrepared and submitted to the Parliament on the fiscal year 1999–2000, coupled with a tri-annual accrual-based budget on000. Consolidated accruals-based accounts were also introduced and eventually published for the first time on 2010–2011.he new mode of accounting was utilised for the first time to prepare the tri-annual budgets for 2001/02–03/04, publishedn July 2000.

In sum, public finances and accounting in UK are today characterised by three loosely coupled systems of control: (i)ational statistics, which do further relate to the European framework; (ii) cash basis of accounting that is central to theudgetary and authoritative process of central government at least; and (iii) an accruals basis of accounting that nowadayspplies the yearly official interpretation of the IFRS provided by the HM Treasury itself.

.2. The National Audit Office

In this context, the National Audit Office (NAO) is nowadays called to scrutinise spending by the UK public adminis-ration in general, and the HM Treasury operations on public finances, accounting and reporting in particular. The NAOarries out its work on behalf of its head, which acts as the “Comptroller and Auditor General”, vested with audit andnspection rights to assure that the public spending follows the parliamentary authorisation that is granted on the basisf the Budget (Exchequer and Audit Departments Act 1921, section 1). The NAO scrutinises public spending on behalf ofhe House of Commons, being the Comptroller and Auditor General an Officer of the House of Commons. Both he and histaff at the NAO (some 860 in November 2012) are totally independent of government. They are not civil servants ando not report to any Minister, but to both a Parliamentary committee, the Public Accounts Committee that oversights

ts work, and to the public. After the “Government Resources and Accounts Act” of 2000, accruals-based accounts werentroduced. The responsibility of the NAO was then expanded to include public spending on both cash and accrual basis.

oreover, after the National Audit Act of 1983 (section 6), the Comptroller and Auditor General must examine the statef the economy, efficiency and effectiveness of public entities and their use of resources to accomplish their missions andunctions.

It seems remarkable to note here that, when its major reform was led by W.E. Gladstone in the 1860s, the Comptrollernd Auditor General was granted with the power to authorise the issue of public money to government from the Bankf England, having satisfied himself that this was within the limits Parliament had voted, and to audit the accounts of allovernment departments and report to Parliament accordingly. Its mediating function between the Government and theank of England seems then to be part of its historical institutional root.

.3. The Bank of England

HM Treasury’s economic functions and responsibilities include the administration of central government finances, asell as monetary and financial policies that are operationally delegated to the Bank of England (BoE), the UK central bank.ccording to the “Bank of England Act” of 1998, the British central Bank is responsible to maintain price stability whileustaining government economic policy on growth and employment. HM Treasury holds the power to operationalise theoncepts of “price stability” and “economic policy” in this context. It further holds the power to directly decide monetaryolicy if (and as) this is demanded by the public interest or exceptional economic conditions. Since 2010, the Chancellornnounced the government’s intention to grant the central bank with statutory responsibility for protecting and enhancinghe stability of the financial system and the necessary powers to do so. In its financial report, the Bank of England (2007)tates two core purposes affirmed by its ‘Court of Directors’:

‘Monetary stability’ means stable prices and confidence in the currency. Stable prices are defined by the Government’sinflation target, which the Bank seeks to meet through the decisions on interest rates taken by the Monetary PolicyCommittee, explaining those decisions transparently and implementing them effectively in the money markets.‘Financial stability’ entails detecting and reducing threats to the financial system as a whole. Such threats are detectedthrough the Bank’s surveillance and market intelligence functions. They are reduced by strengthening infrastructure, andby financial and other operations, at home and abroad, including, in exceptional circumstances, by acting as the lender oflast resort.


BoE’s operations are articulated by law between a Banking Department and an Issue Department, the latter managingotes in circulation. For accounting and reporting purposes, the Banking Department applies a modified version of the IFRS,hile the statements of account of the Issue Department are prepared in accordance with the requirements of national

tandards established by the Currency and Bank Notes Act of 1928 and the National Loans Act of 1968. All profits of the notessuance are payable back to the National Loans Fund held on behalf of the HM Treasury.


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3. The austerity view and ruling (alias the public face of doctor Jekyll)

Together with former British colonies such as New Zealand and Australia, the UK HM Treasury has been leading a generaltransformation of public service and of the relationship between public and private sectors, driven by a distinctive preferencefor the private sector (Biondi, 2016b; Newberry, 2015). This preference has implied the recourse to a balance sheet accountingrepresentation of public administration, while fostering the recourse to private actors for financing, delivering and evenauditing the public service (Broadbent & Laughlin, 2003; Ellwood, 2002, 2003; Humphrey et al., 1993).

Along with this imitation and transplantation of financial and accounting practices from the private sector, EuropeanUnion reforms since the 1990s have driven public finances and accounting into a quest for macroeconomic stability andsustainability through institutional regulation and public policy control, long before the aftermath of the Global FinancialCrisis (GFC). From this perspective, austerity policies and rules – which have been advocated and adopted since the GFC –are factually continuing and reinforcing this European quest, which somewhat reminds structural reforms advocated fordeveloping countries in SDRs in international finance.

Concerning budgetary controls imposed through budgetary rules, UK central government is not yet submitted to anyformal rule to balance its annual or multi-annual budget. Nevertheless, responding to the European stability pact includedin the “Maastricht Treaty” constituting the European Union, signed in Maastricht on 7 February 1992, UK has introduced thefollowing two budgetary rules (HT Treasury, 2010b, 2.4.1, p. 6):

• The “Golden Rule” requiring that, relative to economic conditions, public administration shall not borrow but to financeinvestment, not current spending;

• The “Sustainable Investment Rule” requiring that borrowing to finance investment is limited, in order to keep net publicdebt around a stable and prudent level fixed in proportion of Gross Domestic Product (GDP).

The Golden Rule was one of several fiscal policy principles set out by the incoming Labour government in 1997. Theprinciples were first set out by then Chancellor of the Exchequer Gordon Brown in his 1997 budget speech. Subsequentlythey were formalised in the Finance Act 1998 and in the Code for Fiscal Stability (HM Treasury 1998), approved by the Houseof Commons in December 1998. These budgetary rules target macroeconomic aggregates based on national statistics whichdiffer from microeconomic aggregates based upon financial accounts prepared according to central government accountingstandards, either on cash- or accruals-basis (HM Treasury 2010b, 2.4.4., p. 6).

From an ideational viewpoint, the GFC has triggered the coming together of a longstanding preference for the privatesector – which has been influential in the overall ‘new public management’ movement – with austerity claims againstgovernment spending. Let subsume and label this synchresis into an ‘austerity view’ on public administration and publicdebt management. Co-inventor of the famous Black and Scholes formula for pricing options, Fischer Black (1995, pp. 6, 8)candidly stated a similar attitude, which he applied to financial markets: “I don’t see that the private market, in creatingthis wonderful array of derivatives, is creating any systemic risk [. . .] however, there is someone around creating systemicrisk: the government”. As Mark Carney (2014, p. 3), Governor of the Bank of England, states: “Capitalism loses its sense ofmoderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis, suchradicalism came to dominate economic ideas and became a pattern of social behaviour. As Michael Sandel argued, we movedfrom a market economy to a market society. Market fundamentalism – in the form of light-touch regulation, the belief thatbubbles cannot be identified and that markets always clear – contributed directly to the financial crisis and the associatederosion of social capital”, which “refers to the links, shared values and beliefs in a society which encourage individuals notonly to take responsibility for themselves and their families but also to trust each other and work collaboratively to supporteach other.”

As a matter of fact, government spending was not at the origin of the GFC, which was driven by doubtful private financialpractices including over-indebtness by non-banking and banking financial institutions. As showed by Fig. 1, public debt out-standing was the least expanding sectoral debt in UK between 1994 and 2007, while debt by non-bank financial corporationswas the most expanding.

Since the GFC of 2007–2008, especially in UK and USA, the public debt has increased by having politically accepted totransfer some financial sector debt burden to the public administration. At the same time, central banks from US and UKinitiated ‘exceptional’ monetary policies, broadly labelled as ‘quantitative easing,’ focusing on direct lending to banks (andfinancial institutions) and expansion of respective monetary bases by purchasing government securities.2 Since May 2010,the European Central Bank is also manoeuvring to stretch the limits of its institutional mandate and adopt accommodating


policies for European banks and governments in distress. These policies intend to support economies in recovery from theGFC. Since April 2013, the Bank of Japan has announced adopting further policies with similar intentions (Fawley & Neely,2013; Kozicki, Santor, & Suchanek, 2011; Meaning & Zhu, 2011).

2 In line with a market-view of finance, orthodox monetary policy (framed by monetarism) confines the guiding role of central banking to the settlementof discount and lending interest rates (and conditions) applicable to banks and other financial institutions having access to credit lines and repurchaseagreements with the central bank.


ARTICLE IN PRESSG ModelACCFOR-333; No. of Pages 17


Fig. 1. Evolution of Debt/GDP ratio by sector in UK, between 1994 and 2007.Source: (Barwell & Burrows, 2011: 4 Chart 4)

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Fig. 2. Estimated total support and fees by the HM Treasury, according to NAO (2011b, p. 5).

Concerning UK, HM Treasury and the Bank of England have effectively accomplished this private debt transfer into theirublic domain through joint action. In particular, HM Treasury has nationalised some major UK financial institutions, somef them being threatened by old-fashioned bank runs at that time, while the Bank of England has initiated exceptionalonetary and financial policies (so-called quantitative easing) to sustain the national financial system (and its role in the

nternational financial system: Carney, 2013) under distress. Fig. 2 provides an official estimation of total support explicitlyledged to the banks by the HM Treasury as to March 2011.


In 2009, the Office of National Statistics (2009) published an article concerning public sector interventions in the financialrisis. Estimates modelled in this article show that central government’s net financial liability position for the interventionsas £5.2bn at end-2008. It had fallen to £2.8bn at end-September 2009 mainly as a result of higher equity values for its

hareholdings in financial services corporate groups.


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Although falsified by empirical evidence, the austerity view has been quite influential and pervasive in the public debatesince 2010–2011 at least, displacing attention from the private financial sector towards the public sector, in an overall searchof recovery from and remedy for the Global Financial Crisis (GFC). However, this austerity view is inconsistent with the verypublic policies jointly run by HM Treasury and the Bank of England to cope with the GFC, as the following section shallexplain.

4. The clash with austerity in exceptional times (alias Mr Hyde in action)

As a matter of fact, the UK application of the 1998 fiscal rules was suspended since November 2008 (HM Treasury 2008),to enable a massive public administration response to the GFC that hampered the British economy hugely dependent on theprivate financial sector (Erturk, Froud, Sukhdev, Leaver, & Williams, 2012; Kaletsky, 2014). This suspension was acceptedby the European Council in its Budgetary Frameworks Directive (Council Directive 2011/85/EU of 8 November 2011) whichdid not apply the obligation of numerical fiscal rules to the United Kindgdom (Article 8). Furthermore, together with CzechRepublic, UK has not signed the recent TSCG Treaty signed on 2 March 2012 by all the remaining Member States of theEuropean Union (EU) enforcing austerity rules trough the so-called ‘fiscal compact’.

In its overview of December 2009, the National Audit Office (NAO, 2009) has concluded that the public support providedto UK banks and financial institutions by the HM Treasury was justified, given the scale of the economic and social costs ifone or more major banks had collapsed. In providing that support, moreover, the HM Treasury met two of the government’sprincipal objectives: protecting depositors’ money in banks and maintaining the stability of the financial system. The finalcost to the taxpayer will not, however, be known for a number of years. NAO (2009) shows that the purchases of shares bythe public administration together with offers of guarantees, insurance and loans made to banks reached £850 billion todate, an unprecedented level of support (Fig. 2). However, there have been no disorderly failures of UK banks and no retaildepositor in a bank operating in the UK has lost money.

While the suspension of national austerity rules and the EU Treaty waive have factually enabled the HM Treasury to runthese exceptional policies, the latter do actually clash with an ‘austerity view’ on public finances and accounting that theHM treasury appears to have foreshadowed since the 1990s at least, long before the GFC. This clash involves two paradoxes:the first one concerns public debt management; the second one concerns government accounting representation. The restof the section shall treat them one after another.

4.1. The clash with public debt management

HM Treasury has adopted a peculiar balance sheet accounting approach to public finances (Biondi, 2016b). This approachfactually undermines the meaning and usefulness of financial accounts for purposes of public borrowing control and account-ability. To be clear, longstanding practice of public debt management is not based upon its full repayment (refunding) throughpresent and future tax revenues and/or the liquidation of public properties, contrary to the idea that is implied by its balancesheet accounting representation.

From a financial management viewpoint, public debt issuance has been based for long on its refinancing. Refinancingmeans that most of the public debt that becomes due at a certain date is substituted by fresh debt progressively reissued overtime, with successive cohorts of investors being then able to enter, exit or renew their public debt commitments over timeunder the same aggregate level of public debt outstanding. Interest charges paid by the HM Treasury on this debt becomethen the remuneration for debt-holding investors that maintain their commitment.

From a more general macroeconomic perspective, public debt outstanding further points to monetary policy, since publicdebt constitutes the main means of monetary base management through the interplay between the central bank and thosemonetary financial institutions which are granted with privileged access to the central bank operations. In this context,public debt holdings by both the central bank and these institutions should be carefully distinct from holdings by ultimateinvestors such as non-financial corporate entities and households.

The clash of an austerity view with public debt management is particularly evident since the Global Financial Crisis, sinceexceptional monetary policies are in place that do substantially and materially facilitate monetary policies by transforminga significant share of public debt outstanding in central bank reserves (monetary base).

These monetary policies (labelled quantitative easing) consist of increasing both direct issuance of notes in circulation,and indirect money creation through purchase of gilts.3 As Table 1 shows, the Issue Department of the Bank of Englandhas progressively increased notes in circulation from some £36.9 billions in 2006 to £58 billions in 2013, or 57.2% increase.Moreover, since 2008, the issue department has progressively delegated the management of circulating notes to the Banking


Department, expanding its deposit with the latter that represents 90.9% of notes in circulation as to 28 February 2013. Thisdelegation also amplifies the effect of notes issuance through the money multiplier mechanism put in place by central banklending.

3 See also WSJ (2012), evoking cancellation, intra-group sterilisation and money financing of government spending for UK under quantitative easingregime.




Table 1Evolution of Bank of England Accounts since 2006.

£ m 2006 2007 2008 2009 2010 2011 2012 2013

Issue departmentNotes in circulation 36,914 38,449 44,978 48,608 50,220 52,194 54,921 58,022Notes held by the Banking

Department6 – – – – – –

Which provide funding forDeposit with the Banking

Department (A)53 49 19,211 29,225 26,655 36,284 47,562 52,744

Reverse repurchase agreementswith monetary financialinstitutions (buy-and-sellback)

23,497 25,030 17,599 9798 17,886 10,223 1610 15

Securities of, or guaranteed by the British Government, of whichWays and means advance to the

National Loans Fund13,370 13,370 7370 4142 370 370 370 370

British Government Stocks – – 798 5443 5309 5317 5379 4893

Banking departmentLiabilities – Other Deposits

(including A)1081 1083 21,297 31,638 32,335 50,043 70,163 78,063

Assets – Loans and Advances tobanks and other financialinstitutions (including reverserepurchase agreements, loans tothe BOEAPFF, and BritishGovernment SecuritiesAvailable-for-Sale) (B)

16,717 33,997 66,265 139,457 215,766 221,345 306,145 391,180

Liabilities – Deposits from banksand building societies (C)

3208 20,778 24,872 42,186 169,920 154,405 217,623 297,124

Net Monetary Lending (B–C) 13,509 13,219 41,393 97,271 45,846 66,940 88,522 94,056Liability – Money Market

Instruments in issue– – – 42,212 – – – –

Bank of England Asset Purchase Facility Fund Ltd. (BEAPFF)Liability – Loan from the Banking

Department (included in B) (1)199,932 199,804 286,579 375,193

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ource: Bank of England Accounts, years from 2007 to 2013ote 1: Mainly devoted to purchase gilt-edged government securities (gilts). As at 31 March 2011, the maximum size of this programme was £200 billion

increased to £375 billion by July 2012) and the BEAPFF was holding some £184 billions of gilts at that point.

Since 2010, the implementation of quantitative easing passes through the Bank of England Asset Purchase Facility Fundtd. (BEAPFF), a shell subsidiary of the Bank of England. A compulsory loan is then granted to the BEAPFF. Upon receipt ofotification of BEAPFF’s intention to draw down under this loan, the BoE is required to make the advance and may onlybtain repayment with the agreement of BEAPFF. The loan is ultimately repayable on termination of BEAPFF’s operationsBoE, 2011, p, 65, note 11). According to NAO (2012, p. 28), “the Treasury indemnifies the BEAPFF against any loss and willeceive any profits generated by selling the assets back to the market or holding them to maturity”, following the schemeeproduced in Fig. 3.

As a consequence of quantitative easing, a significant share of public debt outstanding is sterilised for both capital instal-ents and interest payments. The Bank of England (BoE) being a fully consolidated entity of the Whole of Governmentccounts (WGA) since 2010–2011 (Biondi, 2016b), gilts (liabilities of the National Loans Fund) held by the BoE are eliminateds intra-government transactions, and transformed into central bank reserves (either as notes in circulation, or consolidatediabilities of the Bank of England). Furthermore, gilt interest payments to the BEPAFF are fully paid back to the HM Treasury,

hile those paid to the Bank of England should be eliminated as intra-government transactions.According to NAO (2012, p. 25 and 26), “the yield on UK gilts is currently low in comparison to historical levels and when

ompared to debt issued by other many countries.” As Fig. 4 shows, its tendency over the next 5 years (60 months) as to 20ebruary 2014 seems sustainable by historical standards, while deflated yields appear consistently negative over the sameeriod.

In particular, UK ranks third as at 31 March 2012, after Japan and Germany, and before USA, France, Italy, Spain, Ireland andreece in this order. It is significant to notice that countries with the most elevated ratios of public debt on GDP (Japan) andxceptional quantitative easing policies (USA) do not seem to perform poorly in comparison to other countries in financialarket trading on their securities. This somehow corroborates claims for active public policies during recession and financial


istress (Arrow et al., 2011). Moreover, the historical trend in GBP exchange rates seems to have already reacted to the impactf quantitative easing in UK (Fig. 5).

It is not possible to reconstruct the exact impact of the sterilisation of public debt through quantitative easing, since theanking Department of the BoE is authorised to not fully disclose its holding of government securities, either directly or




Fig. 3. The implementation of Quantitative Easing since the Introduction of the BEAPFF according to the NAO (2012), p. 29, Figure 12.

Fig. 4. Nominal and Real (deflated) Spot Yield Curves for UK Gilts over 60 months. Note: “The yield is the annualised return that an investor would make
from holding a gilt to maturity. Because investors can choose to buy existing gilts instead of new gilts, the yield is a measure of the interest rate thatgovernment would need to pay on any new gilt issuance.” (NAO 2012, 1.37, p. 25 footnote 21).Source: The Macro Financial Analysis Division of the Bank of England as at 20 February 2014. Our calculations
through the BEPAFF.4 According to the Table D2.3.1 of the Bank of England’s Monetary and Financial Statistics,5 the wholeoutstanding of the BEPAFF is employed to buy and hold government gilts. The following paragraph shall nevertheless providesome crude figures and the overall order of magnitude.

4.2. The clash with government accounting representation

The peculiar balance sheet accounting representation – that the HM Treasury has adopted through its official interpre-tation of the IFRS – requires taxpayers to recover changes in the financial value of the governmental net worth. This implies


that the negative balance between assets and liabilities (consisting of £1.23 trillions to March 2010) is expected to be recov-ered by future fiscal revenues. As a matter of fact, it is currently compensated in the balance sheet (on accruals-basis) by the“Taxpayers’ equity” composed by three funds respectively called general reserve, revaluation reserve, and other reserves

4 Although financial impact of transactions is recognised as they occur, their content can then remain confidential.5 Available at: http://www.bankofengland.co.uk/statistics/Pages/bankstats/default.aspx.




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HT Treasury, 2010c, p. 73). In particular, the revaluation reserve (+218.6 MLD £ to March 2010) compensates the generaleserve, as if the government could (or should) dispose of its public properties (assets) to liquidate the public debt.

This understanding and accounting representation of governmental economy is inconsistent with public debt man-gement through progressive refinancing, since this management implies a material, systematic and possibly-increasinglyegative balance between assets and liabilities. This imbalanced net liability is consistently recognised by all the threeccounting systems of control (national statistics; cash basis; and accruals-basis). As Table 2 shows, the net liability onccruals-basis is £1.35 trillions in 2011–2012, while the Public Sector Net Debt reported by the Office for National Statisticss £1.1 trillions in the same period. At the same time, the gross public debt outstanding (computing by adding back issues inirculation and BoE holdings to borrowing and financing on accruals-basis) can be estimated at 1.25 trillions in 2011–2012,n line with NAO (2013, p. 25)’s estimation as at March 2012. To be sure, all these figures exclude contingent liabilities which

ainly relate to the financial stability interventions, estimated at £427 bn in 2010–2011 (NAO, 2011, 2012, par. 1.33, p.4). They further exclude liabilities held indirectly through state-owned banks and financial institutions (especially Lloydsanking Group pcl, Royal Bank of Scotland plc, Northern Rock (Asset Management) pcl and Bradford & Bingley plc) whichere not consolidated by the HM Treasury (NAO, 2012, p. 46); their total liabilities consist of £ 2.46 trillions as to March

011, more than 1.5 times the UK GDP at nominal prices.Exceptional public policies intended to support the economy in distress have largely employed public debt expansion

n times of recession. Both the Public Sector Net Debt (on national statistical basis), the Certain Public Sector Liabilities (on


ccruals basis), and the Gross Public Debt Outstanding (on accruals basis) have been materially increasing since 2006–2007,t an increased growth rate since the GFC. In this context, it is then significant to notice how quantitative easing has effectivelyeduced public debt burden, at least temporarily, from £1108 to £966 billions, or less 12.8% as to March 2012. Moreover, some

able 2nalysis of Whole of Government (WGA) liabilities in UK.

£ bn 2006–2007 2007–2008 2008–2009 2009–2010 2010–2011 2011–2012

WGA net liability 1228 1186 1347Public Sector Net Debt as reported

by the Office for NationalStatistics (HF6W) (1)

507.5 537.8 633.0 828.4 1004.9 1106.4

EU Treaty Debt (YEQG) 577.1 619.7 800.0 1046.4 1185.5 1315.8

WGA liabilitiesPublic service pensions 1135 961 1008Borrowing and financing (net of

BoE holdings)782 908 966

Others 561 551 641Total, of which 2477 2420 2615Certain Public Sector Liabilities

(payables, borrowing andpensions)

2375 2313 2501

Gross Public Debt Outstanding(adding back BEAPFF holdings)

982 1108 1252

ource: NAO (2013), Whole of Government Accounts 2011–2012; Office of National Statistics Databank, January 2014. Our calculationsote 1: Relative to WGA definition of net liability, Public Sector Net Debt excludes both Public Service Pensions (Liabilities), and Property Plant andquipment Assets because the latter are illiquid (NAO 2012: 15).


http://www.xe.com/



Fig. 6. Public Sector Net Debt (HF6W) and treaty Debt (YEQG) as reported by the Office for National Statistics (figures since 2013–2014 are forecasted).

£55 billions, or 4.9%, was actually funded by issues in circulation that do not represent a liability in accounting terms, furtherreducing the public debt outstanding to £911 billions as at March 2012. As long as the BoE continues to hold these gilts, theircapital instalments and interest charges are then sterilised from the viewpoint of HM Treasury’s operations. Quantitativeeasing has sterilised around £291 bn as to March 2012 (including British Government Securities Available-for-Sale held bythe BoE), or 43.2% of new debt issued between 2007–2008 and 2011–2012 (estimated at £673.25 bn as from 2007–2008),excluding the impact of new notes in circulation (increased by £14 bn over the same period). To be sure, these calculationsexclude gilts held indirectly through state-owned banks and financial institutions which were not consolidated by the HMTreasury (NAO, 2012, p. 46); their total assets consist of £2.59 trillions as to March 2011, more than 1.5 times the UK GDPat nominal prices.

5. Austerity view goes against the public service and the general interest

Our analysis clearly shows how the austerity view and related budgetary rules are at odds with the actual working ofthe economy of public administration with its specific way of financing over time. While exacerbated by exceptional times,these findings do still hold for precedent times, as Fig. 6 clearly shows.

This history of public debt points to the specific economy of government through: (i) its use of public borrowing forredistributive purposes; and (ii) its public debt management based upon issuance and progressive refinancing over time.

The ongoing working of the UK government is not an exception to this specificity: its net liability with its historicaldynamics proves that the whole of current expenses (including interest charges) are not recovered only by taxation (fiscalrevenues of the period of reference).6 Progressive issuance and refinancing of public debt become then essential to financetotal public expenditure over time. This structural imbalance is at odds with an austerity view, while enabling redistributionof financial holdings accumulated by private actors (debt-holders) to fulfil redistributive policies at the social level (Biondi,2012, 2013a). It further points to the macroeconomic connection of public borrowing (and debt issuance) with monetarybase management, which should be operated in the general interest under an economic Republican order, in Berle’s words.Therefore, from an institutional socio-economic perspective, an austerity view goes against the general interest by under-mining the effective implementation of redistributive policies and money base management in view to fulfil the generalinterest.

This conclusion has important implications for the accounting representation of the public administration. The Dr Jekylland Mr Hide story reveals the tension between public expenditure as a flow in the GDP circuit and the IFRS-based focuson representing it from a balance sheet accounting perspective. As Olson, Humphrey, and Guthrie (2001) show, the publicservices appear to be nowadays caught in an ‘evaluatory trap,’ where the continual promotion of new performance-driven


reforms eventually lead to ever-decreasing public services at ever-increasing costs, putting the future for public services atissue. In addition, according to Ellwood and Newberry (2007), the shift towards business-style accounting systems appearto have implied a downsizing of the public sector activity. Moreover, according to Bowman et al. (2013), this kind of control

6 This net balance should remain stably negative if the whole of current expenses were covered by taxation (current fiscal revenues). It should reverseto parity if taxation eventually would pay for all the expenses, for both current and capital spending.




Table 3Financial analysis of UK WGA balance sheets 2010/11 and 2013/14.

2010/11 2013/14 Change (£ bn) Relative impact of change overnet worth change (%)

Total assets (TA) 1234 1337 103LiabilitiesPublic sector pension obligations 961 1301 340 +51%Government borrowing 908 1096 188 +28%Financial liabilities 295 490 195 +29%Trade payables 148 159 11 +2%Provisions 108 143 35 +5%

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Total liabilities (TL) 2420 3189 769Net Worth (TA – TL) −1186 −1852 666

n public spending has been driving the recourse to external procurement through private sector outsourcing, undermininghe capacity of government to maintain, govern and monitor public service activities.

From this perspective, an austerity view and ruling purport to constrain public debt to become refundable through presentnd/or future tax revenues. This adds an ‘austerity trap’ to the evaluatory trap just mentioned. An austerity-based accountinguling may inevitably lead the public service to shrink, due to lack of refinanced funding. An IFRS business-style accountingepresentation – based upon matching assets and liabilities – along with performance metrics of net book value or netorth, injects further bouts of austerity into the public administration financing because it acts as a brake on government

xpenditure, compromising the level of public service that can be maintained. In particular, exceptional monetary policieshat led to expand the Bank of England liabilities add to the gross liability outstanding and may inflate the negative netorth if impairments of related private asset purchases materialise.

Moreover, the presentation of the Whole of Government Accounts (WGA) under IFRS reveals that pension obligationsonstitute a material share of the persistent asset-liability mismatch. Not only are pension obligations large relative to otheriabilities (including governmental borrowing), they are inflating at a faster rate and they account for 44% of the increase inovernmental liabilities since 2010, with major impact on the growing negative net worth imbalance (Table 3). A refinancingolicy would be then recommended to preserve social welfare obligations to those entitled to public administration pensions,hile a refunding policy may lead these social welfare obligations to be impaired.

In sum, the presentation of WGA under IFRS business-style reporting does not constitute a mere reformatting exerciseut it reframes the governmental accounts to make appearing a growing negative net worth which may suggest that govern-ent is insolvent or unable to match its obligations. This may suggest or require implementing austerity policies through

igher taxes and lower expenditures going forward to reduce this negative net balance. In particular, the balance sheetepresentation of WGA liabilities under IFRS reveals that a material component driving the change in net worth is pensionbligations. A complementary austerity response may then involve a significant erosion of public pension settlements andntitlements to counter the growth in future claims as expressed by their metrics as present value liability. Most of thisetrics change depends on discount rate updating, since reference interest rates decreased over the period. In fact, from

refinancing policy perspective, lower interest rates implies better financial sustainability of actual payments related tobligations which become due. Moreover, this present value liability change does not signal increase in future settlementsf pension obligations over time. Concerning this critical representational issue, the House of Commons’s Committee ofublic Accounts (2012, pp. 3 and 6) argued that:

“The WGA includes estimates of costs several decades into the future, such as public service pensions (£1,132 bil-lion) and nuclear decommissioning (£56.7 billion). Interpreting the movement, year on year, for these liabilities iscomplicated by the instability of the discount rates used to calculate the present value of future money. For example,in 2009–10 the change of discount rate from 3.2% to 1.8% was largely responsible for a £300 billion increase in thepensions liability. The discount rate for valuing pension liabilities subsequently changed again for 2010–11, to 2.9%,which will result in continuing instability in the estimate of the pensions liabilities. The rationale for settling on aparticular discount rate should be transparent so that its validity can be checked.”

“[Conclusions and Recommendations, point 5] It is difficult for users to interpret underlying trends in long termliabilities, such as pensions and nuclear decommissioning, because of inconsistency and, more importantly, volatilityin the discount rates used. Discount rates are used to calculate the present value of future money. The WGA for2009–10 used different discount rates to estimate the cost of public service pensions and nuclear decommissioning.Even worse, the discount rate used to estimate the pensions liability changed from 3.2% to 1.8% during 2009–10,increasing the net liability by £300 billion. Treasury should be transparent in explaining its reasoning for adoptinga particular discount rate and should apply that rate consistently when estimating long term liabilities and identifyways to minimize volatility in this rate.”


An austerity-based accounting ruling may further disconnect the public debt issuance from the monetary base, although theatter – through refinancing – has constituted a major source of funding for public administration activity over time. In line

ith Ellwood and Newberry (2007), this actually implies the further privatisation of the monetary base itself, as far as public




Table 4A dualistic comparison between stock and flow accounting approaches to public administration.

Stock accounting approach Flow accounting approach

Focus Net book asset or net worth Flows and fundsPublic finances mechanism Refunding Refinancing
Accounting framework Balance sheet approach Revenue-expenditure approachAccounting method Stock method Flow method
debt is replaced with private debt in monetary base management. This monetary base privatisation was already substantiatedby the prominent development of ‘money market funds’ (MMFs) and ‘intermediate other financial corporations’ (IOFCs) inthe lead-up to the Global Financial Crisis. In recent decades, financial innovation has both expanded the range of instrumentsthat might serve as money (or collateral) and the range of non-bank financial institutions that borrow from and deposit withthe traditional banking system (Fig. 1; McLeay et al., 2014a, 2014b). Many of the non-bank institutions that hold deposits,such as MMFs and IOFCs, mainly intermediate between banks (and non-bank financial institutions) themselves (McLeayet al., 2014a), creating an alternative inter-bank market outside the traditional one that is governed by the central bank.In fact, the opaque expansion of this alternative interbank-intermediated form of money creation (shadow banking) hasinvolved systemic risk and financial fragility throughout the Global Financial Crisis, which was triggered by the breakdownof the inter-bank loan markets in the summer of 2007 (Bengtsson, 2013; Biondi, 2016a; El Khadraoui, 2012).

Quite the contrary, alternative accounting representations can be developed and adopted that remain consistent with thespecific nature and role of public administration (including public debt and monetary base management) as a non-lucrativecollective activity featured by (i) use of public borrowing for redistributive purposes; and (ii) public debt management basedupon issuance and progressive refinancing over time. Public administration has been working for long on this basis. Itsaccounting representation may then shift away from a balance sheet accounting approach that proves to be inconsistentwith its specificities, to adopt a flow (dynamic) basis of accounting that combines cash- and accruals-basis in an integratedapproach (Biondi, 2012, 2016b, providing further references and analysis; on accounting and management modes for pensionobligations, see Biondi and Boisseau, 2015).

An IFRS business style accounting approach involves a stock method of accounting (balance sheet accounting) which refersto refunding as reference policy for public finances concerned with public debt issuance. However, public administrationspecificities imply refinancing of deficit-spending through monetary policy. A balance sheet representation is inconsistentwith this flow of public expenditure that purports to enter the GDP circuit. A flow method of accounting (revenue-expenditurebasis of accounting) is then more appropriate to represent its refinancing mechanism, whose sustainability is not based uponfuture tax revenues or asset liquidation.

From this perspective, accounting is not only an information instrument that is neutral to the underlying practice.Accounting constitutes a governance mechanism that actively frames and shapes this practice. Since the public administra-tion working is characterised by the two specificities mentioned above, its accounting representation should be designed toproperly represent and govern them (Table 4).

In a nutshell, public administration does not purport to cover its imbalance between current tax revenue and expensethrough future tax revenue or asset liquidation. Therefore, its accounting representation should uncover this special workingcondition, in order to be consistent with and useful for public administration financial management, control and account-ability.

6. Conclusive remarks

In the aftermath of the Global Financial Crisis, since 2007–2008, the joint action of the UK HM Treasury and the Bankof England has been running exceptional policies that activate financial policies that are specific to the public sector. Thesepolicies belong to the very financial-economic core which constitutes the specific economy of public administration: (i) itsuse of public borrowing for redistributive purposes; and (ii) its public debt management based upon issuance and progressiverefinancing over time. Our analysis has provided clear-cut evidence of these policies and their material impact on public debtmanagement of UK. Therefore, a tension occurs between an official discourse framed by an austerity view, and the significantimplementations of these policies. This situation reminds the strange case of Doctor Jekyll who advocates the imitation ofprivate sector by public administration, while Mr Hyde does actually foster action based upon its specific economic naturethat makes public administration and its public debt different from private entities and their corporate securities. Presently,Dr. Utterson (alias the NAO) did somewhat uphold this action in the aftermath of the Global Financial Crisis.

To be clear, longstanding practice of public debt management is not based upon its full repayment through presentand future tax revenues and/or the liquidation of public properties, contrary to the idea that is implied by its balance sheetaccounting representation. As for the latter requires matching liabilities with assets, implying refunding of liabilities through


future revenues by taxes or asset liquidation.To overcome this paradox, sustainability of public spending should be understood in its own specific context, taking into

account both borrowing for redistributive purpose, and the monetary dimension of public debt. Its accounting representation


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hould then remain consistent with this specific context, enabling users of financial accounts to understand and assess thispecific economic working and its evolution through time and hazard, including but not limited to exceptional times.

At the present, both business and non-business accounting representations have been converging through and towards aarket-based view on both. However, this peculiar process of accounting reform and transformation should pay attention to

he specific economy of public administration and to its cognitive, organisational, and institutional needs, if its specific naturend role as non-lucrative collective activity is intended to be maintained. Specific accounting representation can be developednd adopted that properly define sustainability and intergenerational cost-sharing implied by fiscal and monetary policies.

From this perspective, our analysis casts doubts on the misplaced application of a balance sheet accounting approachhat generates a profound misunderstanding of the underlying economy and finances of public administration. This staticccounting approach misrepresents the working of public administration as it has been operating for long in our economynd society. Pursuant to a dynamic accounting approach, public sector accounting may then abandon the very notion ofealth (patrimony) that must be maintained and recovered. Instead, a flow basis of accounting is suitable that enables theroper understanding and consistent representation of the socio-economic flow of relationships that characterise the publicdministration activity devoted to the satisfaction of social and collective needs across space and over time.

To conclude, which is the moral of our story? Doctor Jekyll shall not pretend to control public debt through inappropriateepresentations driven by an austerity view, but, Mr Hyde said, purport to manage public debt in view to fulfil generalnterest purposes and missions, ‘bringing the life of that unhappy Henry Jekyll to an end.’

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BoE – Bank of England (2007), Annual Report 2007, LondonBoE – Bank of England (2008), Annual Report 2008, LondonBoE – Bank of England (2009), Annual Report 2009, LondonBoE – Bank of England (2010), Annual Report 2010, LondonBoE – Bank of England (2011), Annual Report 2011, LondonBoE – Bank of England (2012), Annual Report 2012, LondonBoE – Bank of England (2013), Annual Report 2013, LondonCouncil of the European Union (2011), Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary

rameworks of the Member States, Official Journal of the European Union, non-legislative acts, 23 November 2011, L 306/41.HC Public Accounts Committee (2012), Whole of government accounts 2009–10, Sixty-seventh Report of Session 2010–12,

eport, together with formal minutes, oral and written evidence. HC 1696, London: The Stationery Office Limited, 7 February012.

HM Treasury (1998), The Code for Fiscal Stability, London.HM Treasury (2008), Pre-Budget Report – November 2008, Cm 7494, London.HM Treasury (2010b), Financial Reporting Manual 2010–2011, London.NAO – National Audit Office (2009), “Maintaining financial stability across the United Kingdom’s banking system, Report

y the Comptroller and Auditor General, HC91, Session 2009–2010, London: 4 December 2009NAO – National Audit Office (2011), Whole of Government Accounts 2009–2010, Certificate and Report of the Comptroller

nd Auditor General, London: 31 October 2011NAO – National Audit Office (2011b), The financial stability interventions, The Comptroller and Auditor General’s Report

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nd Auditor General, London: 29 October 2012NAO – National Audit Office (2013), Whole of Government Accounts 2011–2012, Certificate and Report of the Comptroller

nd Auditor General, London: 15 July 2013Office of National Statistics (2009), Public Sector Interventions in the Financial Crisis. Statistical Classification Decisions,

NS, Newport, South Wales.

cknowledgement

Yuri Biondi is tenured senior research fellow of the Cnrs (France) and research director at the Financial Regulationesearch Lab (Labex ReFi). He thanks Colin Haslam, Glen Lehman, Marion Sierra Boisseau, Ana Carolina Cordilha, and thenonymous referees for constructive criticism and suggestions. A previous version of this article was accepted at the 12thorld Congress of the International Association for Accounting Education and Research (IAAER), Firenze (Italy), November

3–15, 2014. Usual disclaimer applies.

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