CO-GJIDINATION AND . CONTROL OF GOVERNMENT AGENCY }lORROWING;
A COMPAlliSON OF
THE
UNITED KINGDOM AND THE UNITED STATES
A dissertation submitted in partial satisfaction of the Degree requirements for M.Sc.,. in Public
Adhinistration and Public Policy.
Brent Schondelmeyer.
September, 1981.,
CIDN'l'ENTS
Page No .
Preface CHAPTER I
•
Introduction
1
...
3
Thesis
4
Introduction
5
CHAPTER II "" Setting the Stage
6
...
Summary
12 13
CHAPTER III - The Institutional
14
Arrangements Compared CRAP'NR III
15
-
31 19
A)
The U'O.ited Kingdom
15
B)
The United States
20
... ...
C)
Comparison
25
...
Summa-ry
24 31
31
32 CRAP'fERIV A)
Crowding Out
33
...
31
B)
Interest Rate Subsidies
37
-
39
40
...
43
CHAPTER V •
Conelusione
References
i
-iii
iv
Glossary General Bibliography 1)
Books
2)
Ardeles
3)
Government Documents : United K:!.ngdom
United States
1
1 - 2
2 ... 3 2 ... 3
ligure
2. 1
Table
2. 1
9 10
Graph Table Table
3. 1 3. 1 3. 2
21 24
1.8
PREFACE
Prefaces are usually a good read .
Tltey often contain
a personal toueb that is laeking in what follows . gracious to his reader for considering his efforts; how difficult the task has been;
•
ired him to continue;
The writer is quick to tell
grateful for individuals who insp-
appreciative fer those who read drafts;
blessed by diligent secretaries who prepared the manuscript .
and If
financial support was involved • the generous hand must be vervally shaken in gratitude . This brief indulgence . kind reader , will be straight to the task.
Be
critical and let me know what you think .
hllrder than t expected; a looming deadline :
The task was
inspiration carne in the middle of the night as
no founctation money was to be had, so as a selft
financing studen$, I shall shake my own band when all is said and done . A draft was inflicted on s friend and a typist in order that there would be otber e with whom blame could be shared.
They protested.
I am left
in the obligatory position of having to assume all responsibility for any errors be they fact , judgement, logic or simply American spellings . I het:'eby claim them all to be mine and mine alone .
All else is willing-
l y shared .
Brent Scbondelmeyer.
September. 1981.
1.
INTRODUCTION Budgets are two•sided equations wherein expenditures equal
revenues.
This accountancy equivalence does not mean that both expend-
iture and revenue sides have received equal attention in the expanding budget literature.
Attention has focused on tbe institutional frame-
work o.f expenditure de1ti&ions and bcthavioul'al tq~planations for partiei• pant& resulting in the development of the dominant increm.~»tal theory of budgeti-ng. The revea\Je side has received eeant attention.
How to raise
the revenue is resarded as a subddiaey qu.ttetion to antecedent expead• iture deeisiiu.
Expenditure dechions take place in a politically
charged enviromu!nt. whereas the revenue dedai.ons al'e often presented as "technical" matters best left to t'be dpert advice of economists and government accountants. Thus the political aspects of revenue decisions have been largely ignored. Ira S'bavk~nsky}. in 'bis influential book The Polities of Ta&i!l and Spending, comments
t~
"Because of the cruiial role that money tee1ns to play in gQVernment Jt.nd comunities., it is possible to find politically charged istues in every aspect of public finance. Not o'(lly the ta:ing and spending resources, 'but also sovernment borvowinth debt management, the regulation of commerce, interest rates and ' money supply' • $JOVe't"tlmtntt lending and controls ever tnanu• :faeturing - ... all have political aspects." The list is long, but aelde from taxation and spendinth the
'*political aspects" of the other issues are only infrequently considered. Non-economists are attracted to taxing and spending decisions because their histbly political legislative character is a relatively safe harbour. Decisions 011 the other issues, say interest rates or debt management, are made outside the legislative arena by relatively isolated individuals 2 within executive departments or the central bank. There are few public poli.tie>tal deeisi.(!)ns or votes to observe. Many of the political aspects involve devising financial rules for the implementation of braedly defined political objocdves, i.e., keep interest rates down or stimulate the ecenomy through an apansion of the money supply.
It is unfortunate that
many political aspects of economic policy have gone little noticed.
1) Sharkansky, 1969, p. 4. 2) In an excellent article, Michael Moran makes thb point about the Bank of Eqland. ••The Bank was the mere teebuical manager of government debt; but since definitions of the teehniul are not(:)riously elastic: this role was leu menial than superficial appearances might suggest." p.Sh "Monetary Poliey and the Machinery of Government... Pu'BlieAdptinistration, Spring 1981 • .. 1. -
Because of its strong normative character, economists often give inadequate attention to important institutional aspects which affect their policy recommendations. This astringent criticism is trenchantly made by the two JlUblic Choice ecomomists James Buchanan and Richard Wagner inthhitr book Democracy in Defi~it. "Whether they like it or not, those who seek to under8tand and ultimately to influence the political economy must became political economists. Analysis that is divorced from institutional realities, is at best, interesting intellectual exercise. And policy principles based on analysis may be perversely applied to the world that is, a world that not be at all like the one postulated by the theorists."
mar
A complementary critique of economists• lack of political sensitivity has been made by political scientists such as Peter Self in conjunction with re-appraisals of cost-utility techniques such as cost•benefit analysis.. There is a growing appreciation that apy economic analysis has its political aspects which often go unrecognised in seemingly value•free methodologies. This Paper attempts to find some of int the public finance questions by examining government agency borrowing in the financial upon some o£ the issues Sharkansky mentioned lending, interest rates and money supply. l-
the "political aspects" involved the eo•ordination and control of markets. The topic touches ••• debt management, borrowing,
-
The Paper uses two familiar This is not an economic treatise. public administration concepts ••• co-ordniation and control ••• and relates them to a public policy qeestion which is primarily economic. So widely used are the terms eo-ordination and control that some fear their meanings 2 have been devalued. If this is the case. the reason may well be that definitions too often have been assumed by author and reader. That will not be the case here. Co•ordination, as it relates to this Paper, is used in two distinct senses. The moat important sense is the vertical co""'rdination by a central org811isational identity of a particular financial process, i.e., agency borrowing. This is resource co-ordination. In the second sense, co•ordin• ation is concerned that the resources are obtained consistent with macro• While conceptually This is policy co-ordination. economic objectives. distinct• in practice a co•ordinative measure may relate to both policy and
resources.
Control is used in the speeifie budgetary sense of restraining
and/or sett ing limits on financial resources . Persistent public: sector deficits in the advanced industrial
economies has been an impetus for grwater attention to revenue questions in budgetir~ . The deficits are cited as conclusive evidence that public expenditure is clearly "out of control . " An aeeompanying concern is that public expenditure will continue to outstrip government recepts resulting in a shift in the x-eladve ,s ize of the public and pri.vate sector . 3 Financing these deficits has been a cause of continuing concern to
economists and the finaneial markets where the money is raised .
The debate ¡
has 'become more heat.e d wi tb the aseendaney of monetarism in both the US and the UK. as the main economic instNment .
Reluctant to increase the levels of taxationt restrained by monetary targets frn printing mere money, govertl"'' ments of necessity have made greater recourse to the financial markets to cover deficits arising from present and past expenditure decisions .
As
borrowing has increased, so has concernaabout its possible impact on interest rates, iBflation and private investment . Thia contentious macro-economic debate cannot be ignored because it provides the data, ar;gumenta and language in which the political aspects of government boroowhtg are discussed..
However• this Paper is about political
institutions and not computer modi!h of the economy,
'f'ha Paper compares two
institutional arrangements - the National Loans Fund in the UK and the Federal Financing 'Bank in the US ... through vhic.h govenunent agencies borrow. are likely to be unfamiliar .
These
One reason is that budgeting studies have
largely focused on budget formulation and appl'opriationa and given little attention to budget execution .
Despite their relative obscurity beth the
NU and the FFB play impo"rtant r oles in helping finance important govex-nment
p'topammes amd in implementing mAcro-economic objectives .
__. ___ _____ _ _ _
T HE S I S
Adopting a comparative approach means U!Ore space in a limited Paper must be given over to developing factual information, particularly when unfamiliar entities are involved . the consequence is that many detailed aspects are not developed in as detailed a form as they might otherwise be in a single case study. However, comparing and contrasting two institutional arrangements can shed new perspectives on each , bring issues into sharper focus and facilitate generalisation of basic points . Not much has been written on agency borrowing , and comparisons are rare. No explicit hypothesis is set out , though the Paper takes as a test Sbarkansky's observation that public finance qtJestions inherently have political aspects . The plan in the remainder of the Paper h this . Chapaer II sets out a model of alternatives for organising agency borrowing and develop some basic concepts important to the remaining analysis. Chapter II individually examines the trend to centralising agency borrowing in both
countries in the creation of the NLF and the FFB which are then compared . Chapter IV shifts from the institu.tions to look at two agency borrowing issues and consider their political aspects. This is followed by a brief conclud• ing chapter .
INTltOOl.JCTION Key terms are defined in an attached glossary to reduce the
possible confusion arising .from the specialised vocabulary of the financial markets which can differ between countries . Economic data is cited extens ively to provide background and to substantiate individual points . Economic generalisations are avoided . Several quick points about the economic data should be made .
First , aggregate figures over time are given in nominal terms and not constant prices . Constant prices are preferable because they remove the effects of higher nominal totals due entirely to inflated currency . The second point concerns loan programmes . Outstanding loans are the cumulative total of all loans made and not completely repaid . Net lending r efers to new loan commitments made in a year minus the repaymel'lt of old loans . When net lending is positive, new eommitmettts are larger than repayments and vice versa. Finally, figures on total gover nment borrowing are given primarily to demonstr ate central government demand for funds within its own financial markets and not for side- by- side comparisons to the individual country public sectors . The public sectors will differ depending on the form of gover nment and the extent and str uctur e of public ownership . In the UK, a unitary state , central govet'tlment borrowing includes some done on behalf of
local author ities and also 1!•1f leets the financial needs of large nationalised By comparison, in the US federal system, state and local iovernindustries . mente conduct all their own borrowing and national public enterprises are few .
- 5 -
CHAPTER
II
SETTING Tl$ STAGE Thi• chapter develops the basic financial framework through vhich agencies borrow in the financial markets and secondly sets out the basic arguments given for its co• ordination and control .
Given their frequent use . the terms "agency borrowing" and "financial markete11 are defined before proceeding any further . Both are used in very b-road senses . Agency; ·}.>orrowing ; Includes any government entities requiring the pennission ow able to borrow money through central government . In the UR, this will include local authorities , nationalised industries , public corporations as well as goveTnment departments . Government departments and agencies are included in the us. though state and local government are not.
'inar,tdal markets : Any place where government securities are traded ln an organised market; lucb as Wall Street in New York, and the City in London . Besides being a place , it can also refer to the investors . underwriters and stock• brokers involved in the actual buying and selling . Gover.nment agencies borrow for th same reasons as private individuals c they watt to obtain additional money in the present by shifting cost$ to some future period . When expenditures exceed revenues , agencies wust borrow to make up the difference . Central governments have borrowed money and would have continued to do so even if Keynes and his adherents had not put forward an inflential
general theory. Nothing in classical economic theory condemns govern• ment borrowing at all times . Central governments bad historically bor-rowed in order ~o finance vars . capital expenditures and to c.over unexpected deficits as balanced budgets were the nom. Defi.cits were to be offset by budeet surpluses !n •ubsequent years . The claesical position was to bottow as little as possible and repay as soon as possible . Balanced budget• would avoid an onerous debt which imposed coats on futu-re generat• 4 ions in the form of interest repayments and debt retirement. new
Keynesian economics argued that the nburden of debt" was more imagined than real . lf the government owed money because of borrowing, it owed it to its own citizens who acquired government bonds . Therefore ,
the community as a whole was no worse though financing the interest payments mi3ht require acme increase in taxes to pay the interest. The prescriptive norm of the balanced budget was weakened. Emphasis shifted ft'om trying to keep the budget in balance to using the budget as a discretionary fiscal tool. Deficits and surpluses would be budgeted to obtain sustained economic growth, while maintaining acceptable rates of inflation nd unemploytnent .
The Keynesian consensus has broken down in the past decade as pra,e tice has ~alled theory into question. Governments have proven unable to budget surpluses and the mounting deficits have been accompanied by persistent inflation.* the debate about expenditures being ••out of control" in the UK an4 the push for a constitutional amendment to require balanced budgets in the US are but political manifestations of deep-seated concern about the effects of continued governtnent defid.t financing . Any agency boyrowiu; will increase deficits and also potentially complicate the Treasury department's job of managing the national debt . The t'easona for this will be discussed after first looking at govl!!rnment borrowing operations and the financial markets in general . T~e
.Financial Mar kets
Borrowing is a voluntary exchange between &l imrestoT and the govertl'lllent . This makes bol:'rowing fundamentally differe.nt from taxation which 1&8ally can be imposed on reluctant and objecting citi£ens. Investors must be induced to purchase government debt securities . The government does this by offering to pay a fixed interest on the nominal amount and to repay the pl!'ind.pal at maturity . , Investors will purchase government 'bonds if they are an attractive investment compared to other available opportunities .
*
The outstanding national debt has increased each year this decaQe . During the per iod 1970/79, outstanding debt in the UK increased from 33 . 1 billion pounds to 86. 8 billion pounds , or 260% , while US outstanding debt increased from 4370.1 billion to $826 . 5 billion, or an increase of 2231 . The figures can easily misrepresent the growth in the national debt since the figures are nominal terms and not constant prices. For example, national debt as a percentage of GNP has falleu in both countries throughout the period . (Sou:rcetu US Annual Treasury Report,, Wilson Committee on Financial Institutions>. UR Central Statistical Office Annual Report 1980.) The annual average yield on 20-year UK government stocks was 7.7% for the period 1968/72; 10. 2% for 1973/77; 8. 8% in 1978, and 13.6% in 1979. (Wilson Repo-rt, Table 17 , p.76) . In the us, feder a16bt held by the public almost tripled between 1954 and 1978 while interest paid on the debt increased seven times indi• eating the long•term trend of higher interest rates having to be paid on new borrowing and debt refunding . (Special Analysis E: Budget of the US FY 1980, p. l16) . - 7-
Government and private borrowers compete directly against each other in the finaneial markets to obt~in funds on the most favourable t~rms. The overall demand for funds and the existing supply will deter• taine who eventually is able to borrow and on what te.ms. Given a dynamic financial market, the government continually must adjust ·the terms on which it seels government stoeks in order to attract investors. This is typically done through changing the interest rate, particularly during inflationary periods.* Other means are to alter maturity dates on stocks or indexing stocks to assure an in~erest yield higher than inflation.** The govern""' ment also bas scm.e dtscretion on wheniit: sells itts seeuritiea. Through sc:hedul!ng stock iasues 1 the government can reduce its demands on the financial markf!ts by restricting: how much it tries to raise during any one period. Given tha.t it accounts for a large part of the
ov~n:all
demaad• the
government is concerned how its own borrowing will be received 'by the financial markets and how its presence will affect the availability and costa of funds for others. Government ignores financial market opinions at its own peril.
In its examination of the UK monetary system• the
Radcliffe Report in 1959 stated c "The possibilities open to the author• itiea in managing the debt are eonditioned by the habits and preferenees that have developed by the institutions. business firms and persons who cont stitute the market for debt." 5 The point re111ains true 20 years lat&r and waa painfully brought home to the UK govertmlent in the fall of 1976• when the City. London's financial centre, failed to buy up as much government stock as the authorities desired. Subsequently this has been called ngUc•striken and has amply demonstrated that selling govet'1l'lnent bonds is an exchange relationship. The financial markets are capable of "voting with their feetn or at least stomping loud enough so that their aomplaints are heard. 6 Resosnit!on of this in• fluence has brought ;reater scrutiny of the financial m.ark.et's role in • • po1"1ey.7 s h _,1ng government eeonom1c
**
This baa been a recently favoured approach of the UK government. On 27th Marc..h and 8th July 1981, the first marketable indexedU.nked Treaaury Bonde we're offered for sale. (Economic Progre.ss Repott. R.M. Tt"easury, May 1981). In a sim.U ar vein, the govern• ment this September is making ita index-linked Granny Bonde aailt able to persons SO years and younger to attract additional funds. This is being done through the National Savings Bank and consequently is not being raised in the financial mal'kets per se. (The Guardian.31st August, 1981• p.l ) •
... 8-
Agency borrowing is a component of total government borrowing and a ll tbe considerations discussed above apply equally . Related to agency borrowing, however, is an additional consideration s how the agency gains aeeess to the finane.ial markets. The Treasury will enter the finaneial markets directly to fund
the government's seneral deficit; but there are three possible channels available to agencie.s . authorised to bo'trow ... we call them :1)
Agency
2)
Intermediate. or
3)
Treasury.
(See Figure 2. 1) 8
The choice of channels bas important conoequenees aa a simple
illustration will show. This is the situation. The Treasury wants to borrow £500 to cover a deflcit . Also there ar eight individual agencies who are entitled to borrow. Six of those eight want to borrow £70 each. Their combined requests means the government needs to borrow a total of £920 (£.500 + 6 x flO) in the financial uulrkets .. Which channel is used h&$ a direct bearing on how many government
entities are borrowing en the financial markets, the variety of financial instruments beius offered and , most ~portsntly , in whose nsme the money ie bottrowed . It does not affect in any way the total amount . Consider
-
eaeh channel• deaeribed below. and swmnar ised in Table 2. 1 • .... 9 -
"
II --·
AJenez (A) ~ Each Agency and the Treasury enter the !1.nancial markets i'!'l thei-r ow name to raise money. -Inter=ediate (I) : All Agency requests are aggregated by a separate Ageney which acts as an intermediary. The inteTmedisry and Treasury borrow separately in the mB.l"ket.
;r,seasury (T) o
All borrowing is eonducted by the Treasury. Table 2
No. of Channel
.Agency Intermediate Treasury
Resuet~~s
7
7 7
'!"'
No. in Market "t d21f
1
Borrower's
Amounts
N~e
each
Raised
£
£
(6/ 70
920
]It
Ag~neies
7
6
(
!SOO)
2
Treasury Intermediate Treasury
( (
500)
Treasury
(
920)
1
420)
Total
920 920
The channels can be distinguished between those where the agency has direct and indirect aecess toUbe financial markets. (See Fig. 2.1). Both indi~eet eb3nnels (Intermediate and Treasury) result in some central• isation of ageney borrowing as tbe illustrati.o n shows. It also removed the agency's name from the request and replaeea lltat o·f the indirect channel used. This is the~ most significant aspeE:t because the Treasury or the intermediate agency ean bouow \1'1oney at lower interest rates in the financial markets thanwwbat the agency can in its own name. Where the ameants being borrowed are large, the difference in payable interest can be eon!liderable, as reflected in the fact that the interest rates involved are usually carried out to thousandths of one percent. This July, the Dank of England e.estified that a nationalised industry borrow• ina directly frOlll the financial market (Channel A) could eXpect to pay three• eighths to t.bree-quartere of one percent. higher interest rates than if the Treasury were to borrow the funds. '!'his was even with a gove:t'll!llent guarantee.
.. 10 -
Similarly, us Treasury officials estimated that interest rates on agency securities vere generally one half of one :percent . above conrparable Treasury securities. *
Higher interest rates are required on ageney issues because they are unfamiliar to the market• wbieh reduces their marketability and may
often congest the financial market causing a 1eneral inerea e in interest Investors may consider ageney issues to carry a *'small perceptible 9 credit rhk'• unless backed by an ex~lieit government guarantee . The plain
rates.
fact it that general govet'nment bonds are able to eecure the lo"est available interest rate.s. The reason is that gove'l"D::!lent bonds aTe considered a reh.tively riskless investment because the only way an investor will not receive priaeipd or interest repayment is if the government goes bankrupt an improbable
ev~n
given geverl'tlt.ent•s ability to tax.
The bonds are hi.g hly
liquid.. meaning that they can be converted into cash on short notice by
selling them on the stock exchange where prices are quoted daily .
The
government is able to borrow mney through fixed interest stocks at interest • b le even to the best corporate borrowers. •• rates 1ower than those ava1la An it;1portant distinction between govet"mnent and private borrowing should he made.
Inve tors ere not direetly concerned about what programmes
are finattced by thei:r purchases of goverment bottds.
'l'bus when the financial
mal!'ket buys govel'rnnent bonds_. it is not maldng a collective "market" judgement on the value of the government programme. but on the 'Security of the invest-
ment. ln the ease of private benowing• aecurity of the !nvee~nt will he linked to the 9~ofitability of the pri~ate concern. To know that. the in~estor must evaluate the business' finettcial aetivitiea. The presence of taxpayers aesures security o.f govertment bonds while private bonds require the t>rospeet Gf pt'ofits. The judgements involved are qualitatively different even though the interest rates in both instances ean be said to be determined by the market.
*
Treatury alld Civil Service Select Cowmittee. RC 'Pape11 348 - I,. 19tn. p. xxv. 'l'be Bank also estimated that the expenses of a direct issue of stock might cost between ll% to 2% of the total amount raised. US figtJres are in "FFBt Background, Operations aud Budget Status." Mo1efalty 1 p •.310. This later work cited an empirleal study which ~alculated the average differencft between interest rates on Federal ageuey issues and Treasury issues. Dut"ing 1965/69, the average spread ranged from .31% to .84% depending on the maturity. For 1969/Jl, the ep1:ead was .25% to 1.82%.
**
This ic readily apparent by a glance any week at ''Key Indicators 1 Interest and Exchange Rates" ear~ied weekly in '!'he Economist. Among other financial information, the table earries the yield on government long-term bonds and corporate pr~e bonds for nine advanced Western industrial economies. Only in Japan• are the corporate 'bond yields lower than the long-tenn government bonds. tn the oth£lr eight countries - 11 -
Interest 't'ates tan be thought ·Of as a continuum with low rates at one end. and high rates at the other . With few exceptions, government will be able to borrow at lower interest rates than any private borrowe~ And wi.thin govQrnmant borrO'W'ing, the Treasury will get lower interest rates than a government agency.
Borrowing through the Treasury can aace addition•
at money if agency finanQ.e staffs can be reduced and underwriting costs • if any are involved• eliminated. Lower interest costs for tlie ageneies has been a forceful argument for centralising agency borrowing. Tt,e lower interest rates occur because the money is borrowed tbrgugh the Treasury or an intermediatoll. The ceutra.lf isation al•o means a g-ceateii ability to time issues to favourable fiuaneial Nrket condi tious. A second argument used in favour of centralising ageney borrowing is tbat it enhances the Treuut.'y's ability to eo-ordinate debt management
with mael!o-eeonO'Illie ohjeetives..
The objeetives may 1:equire that total
government borrowing be restricted and eeutralisatiotl provides a potential point for eontrol. The ehoiee o.f cbanaels makes a significant difference .
Indb·ect
channels ttreeent an opportunity for a convergence of interests among the major parti·c ipants. the government. ment.
Agencies can borrow at lower costs to themselves and
The Treasury enhances its ability to conduct debt manage•
Investors are offered a highly liquid government bond which is pre•
fetted over •feney eeeurities.
There i.s little ineentive for an agency to
borrow in ita owa name given an available indirect channel. An agency miuht want to borrow in its ovn name in order to avoid
contt:'o1s on how much could be bonowed through the indirect channel. However. if controlU.ng borratdng was considered i.mpotaant to government economic policy, the controls eould easilY be shifted from the indirect channel and applied directly onto the agency.
**
(continued from page 11)
.. .. the difference between the lower govert'l!:Mnt bond And corporate bond rate mgee between .20% and 1.36%. The difference in both the UK and the US was • 76%. !9e J.~cq;qomht• tst August, 1981•
p.f>o.
... 12 ..
SUMM ,.ARY Important points are summarised before turning to examining specific institutional a:r-rangements in the US and the UK :•
a)
Governments borrow beea\lse expenditures are
b)
~eater
than
re~eipt:s.
Unlike taxes, borrowing is a voluntary exchange. whe1re the government he.s to "sell" its debt to iuvestors by offering to pay interest.
e)
Borrowint is conducted by both the Treasury to finanee general government functions and al$0 by ageneies for speeifie programmes.
d)
Centralisins agency borrowing reduces the number of government entities borrowing in
the financial markets and alters the name in which th~ funds ar~ borrowed. e)
The Treasu-ry can borrow money on better terms than gcvernment ag~neies or private eoneerns •
...................
l..gency OOl:t"Owing ha3
C~Gn
eent:ralbec in the tn: ::nd the
US through the creation of a National Loans Fund and the Federal Finaneing Rank.
The legislative badt:ground .• key features and
basic financial data of each is set out in this chapter.
are then compared.
- 14 -
Both
CHAPTER
Ill
The first moves to centralised agency borrowing in the United tingdQUl oceurrad in 1956. It was to be a .. temporary" solution to an itm:~~ediate
problem.
Tha agencieo involved were the nationalioed industriea. To finance capital programmes• the nationalised industrital we_re authorised to t'aise money th"L"ough the finand.al makkets by is11uin,s stoek. The stocks es:rried a Treasu1ry guarantee on the interest and principle• but were issued in the name of the natieua.lised ittdustry. 10 Any etoek issued by a nationalised industry was underwtitten by
the Bank of England. This meant the stock ••• ~urebased in the financial Ml!'kets when it wae fi'rst issued would be taken up by the central btmk for later sale in the markets when price and oppol'tunides allowed.
In 1955, a succession of nationalised industry stocks was not bought 'by investors leaving the .Bank of England to buy up the bullt of the
new issues.
i'h.e Bauk worried it might become ''eluttered up with a lot of
unsaleable stock. ull
(Ibid., p.30}.
It also meant the government bad to
effectively &xpand the money supply to finance tha Batik's underwriting . This happened at a time when the government: was trying to eontrfll credit expansiOG.
The Conaenati.ve government,. in it& 1956 Finance Act, su$pended the iesuing of nationalised industry atocks. Instead the :na:t:i.onali.sed industries would borrow long-tem. capital from the Treasury and pay in intarest rate corresponding broadly to what it cost the Treasury to raise the funds in the financial markets . The proposal, in terms of the previous chapter's model, was to shift agen.o y bor'towir'tg from a direct to an iru!irect channel. 1'he debate noted the implieatiCins of the change: lower agency borrowing costs 1 better Tl:'easuey control over timing of iuues and averting the Bank of England The Chancello~ of the having to take up nationalised inuust~y stocks. Exchequer 1 Harold Macmillan, argued• it was as a "pt.lrely teeh~ical change
• lS ...
which I
v~nturo
reasons . "
12
to rccommene to the Committee for purely (Emphasis added).
tehhnie~l
Rarold Wilson• a Labour Minister and
economi~t,
concurred seeking to persuade doubters that the measure was not Treasury aggrandisnent . Re said the ebange was a "purely technical and firumefal one .and not related to any desire to get control over the
investment programutes of the nationalised indust't'ies . ,ll
(Emphasis added) .
!telucta:nee of the £ina.nai.el urkett to purchase the nationalised industry stocks prompted the change. t~ile in 1956 the move vas to get nationalised industries oot of direct market borrowing, only two years prior <:entral gove'nJ'Illeut had pushed local authorities back :i n . Local Authority borrowin;. 'ince 1946• had been eonduoted through the Public Works Loan Board, a 12-member unpaid independent Board . which acquired its funds dbeetly from the Treasury. tn 19:56• the P'-lLB adopted a new policy to provide funds only if a local authority demonstrated difficulty borrowing directly in the financial markets. The questi~~ of differ ent treatmeut was raised in the debate. Viscount Hinchingbrooke asked: ..What is the difference between the local autherities and nationalised industries? Why, also cannot we push the nationalised industries onto the open market and make them coapedtive?" 14 The apparent reason for different treatment was the local authorities were able to sell their stoeks and the nationalised indust1ries had not . It ie worth notitt!J that: local authorities had taxing powers which financially plagued nationalised imtustri:es lacked• causing the stock possibly to be evaluated differently by itweators . Central goverument was so successful in redirecting local autho't'ity borrning that a specialised local authority Nrket developed in the tTK financial ma-rkets . Cent~a1 government , through the PULB• had loaned l436M. to local authorities in 1952/53 ; this dropped to a mere £40M . by lnsteadt the local authorities eondueted extensive ahort• term 1960/ 61 . borr owing . Their short• tehl debt: stood at £130M. in 1955, but reached t1. 20CM. by 1962. 14 Raavy short•term bonowinA was havin- a tlerceptible eff ect on interest ratea which the gov~rmu!nt. in a 1963 White Paper. announced could not bll ignored. "Borrowing on this eale in part of the public seetor affeeta not only the novert:mtent ' e own. bo<t-rcming operations. but '11l<metaey conditione generally." 15 Local authority sbort• term bor't'owing waa t o be limited and the PWLJJ was re-opened ta local authorities so that eventually they could borrow UP. to 50% of their long•tetm funds •
.. 16 -
the Exchequer aec:ounts aulm!nated in 1968 Labour gover-flment legi.dation wh:i.c::h created the National Loans Fund. The Nt:r' b administered by the Treasury De}lart.ment and draws together most all tntere!Jt in
r~foming
eentrttl government bcrr:rowing intfl a single budget fund. 'l'he Mjor components of the NLF are borrowing by ' nat~.onu1ised
in<'!ustr.ies .
1)
The
2)
t.oc:al Authorities, a.nd
3)
Any deficit from the Consolidated Fund. th~
! he Consolidated Jiund: cove-rs ex})enditur~
1-a::gest t:>e.rt of central government
and is fincmeerl £r•>itt tax revenu.e!j ~nd curt'ent ree~ipts .
Any
deficit or surp:;.us in the Consolidt:.ted Fund is transferred automatically
into
t~
Therefore, a Consolid,..tad Fund deficit will i.net'ease the
NLF.
size of the National J-oan Fund;
a surplus will reduee it.
Fund also inc::lttdes any "subsidised" loan.
'l'he Consolhlated
This means loans "torhere the money
is leant out at an interest lowQr than what the government lvas able to borrow,
i.e, if the govermaent borrowed the money at 12%, any loans made at a lower A1 t "subsidised" loan programmes
interest rate would be "subsidised". require
annu~l
approv-al undlir Pa1rliamentary votes.
Harold Lever, Financial Secretary to the Treasury, explained in Cotamittee that the hl..F was nwimply a
tno~t>.st
step fort-Ta.rd to ta.tr.e this mass of
the Consolidated Fund and take out of it certain lendings tihieh are not really the government's
ac:t~~l e¥penditure .ultilf
(~~phasie
added).
During
any year .• the NLF will receive repayments on previous loans and also make new loans.
•
Lever 1 in effect. is saying the loans are a non+€iXhaustive expenditure;
a term sometimes
t.JSad
in budgeting literature.
They are no~ex11austive because the government acquires a note from the borrowing proudsi.Dg repayment of the full amount at a later date. No rescurces are lost. An e21:haustive u-pendi tue is where goods :tnd services are purchased and the money will net be recovered. These M.stinctions aere first
made by Francis Batnr in 1960.
- 17 -
Inclusion of the deficit/surplus al lows the NLF to show the government's additional borrowing requirements in a given financial year. The net annual figure for the NLF is commonly referred to as the Public Sector Borrowing Requirement (PSBR) .
To be clear, the PSBR aggregates
agency and general government borrowing to give a total figure.
Graph 3.1
shows the nominal growth of national debt during the seventies broken down into Consolidated Fund deficits, NLF loans (nationalised industry and local authority loans mostly) and Other (exchange equal i sation accounts, loans repayable to the Interna tional Monetary Fund, and miscellaneous). Graph 3 .1
Between 1970/79, the Consolidated Fund deficits increased by 162%, compared to increases of 86% in the NL'F loaM to nationalised industries and local authorities. reduced by budget surpluses;
The Conaolidated Fund can only be
none occurred during the seventies.
eoatrast, NLF loans requests are reduced by repayment of old loans. example, £8.5
~illion
By
For
in new loans were issued in 1979/80, but there were
repayments of £6.2 Billion making the net loans £2.9 Billion.
The
political and economic significance of the PSBR will be taken up in
Chapter rv. Creation of the NlJ? did not altel' the existing agency 'borrowing arrangement of obtaining funds through the Treasury. identified that borrowing in budget accounts.
The NLF more clearly
Two alternatives to borrow-
ing through the Treasury were considered by Treasury officials at the time and rejected.
First, was a l!'eturn to the pre-1956 arrangement of agencie•
borrowing directly in the financial markets.
The second was to create a
body, separate from the Treasury, to handle agency borrowing.
No parti•
eular advantages over the Treasury arrangement could be identified al\d it was rejected also.
A periodic debate is conducted to let nationalised industries borrow again in their own name. The issue easily unravels into a wider debate. bey-ond the scope of this Paper, about the relative merits of various means of financing the nationalised industries • private enterprise, equity
capital. joint ventures. project finance o1!' other alternatives.
All governments since 1956 have agreed not to let nationalised in.duatriea issue their own fixed•inderest stocks. The position reeeived its most recent affirmation, in familiar words, this August by the treasury and Civil Serviee Committee: "Allowing the nationalised industries to borrow on their own account rather than through the National Loans Fund would appear • • • • to increase the eoat of th!}r borrowing without bringing off•setting advantages. u The 1956
11
tempora1!"Jn solution has becoee a permanent fixture
because it offered a continuing advantage at all times.
As put by t.h e
1teeent eommittee report, "the Treasury ean raise money more cheaply than 18 any other borrower."
.. 19-
CHAPTER
'
III
B) THE UNITED _STATP.S Centralisation of US agency borrowing is tilO'te reeent, dating from the establishment of the Federal Financing Bank in 1974, a whollr
owned government corporation. Before the FFB, individual agencies raised funds in the finaneial
urkets in an •ueo-ordiaated manner. There were no format requirements to eouult with the Treasury before borrowing and on several oceaa!cms, as many aa six and eeven different tovernment securities were offered in the financia.l ma~rkets the eame week. 'l.'he a;ency securities ve!"e of varying size represent!ns an equal number of different progr~ . which often were unfamiliar to the financial community. The year before the establishment 19 of the PPB, 75 minor federal agencies made separate offerings in the market.
Lower interest rates obtainable by borrowing through the FFB redirected agency bort'owing out of the financial muket:e . bad two ehoices where it could obtain its funds.
The FF! itself
Either it could sell Fll'B
securities in the financial markets - the interest rate was better than the a3eneies• ... or. it could borrow through the Tre•umry. ('11lts is the inter• mediate and Treasury ehanneb in our model). The legislation gave the FFB the option. though hearings indicated Congress had intended for the Bank to primarily use the intermediate channel and ae11 FFB securities. A limit of 115 Billion was placed on outstanding FFB securities. thoush no limit was attached to Treasury boYrowing. The 1reasury channel has been used almost exclusively.
The reasons
the 17FB switched to the Treasury channel are the very same why agencies switched to the FFB ... money could be obtained at lower interest costs. FJ.\'B sold its
OWB
securities in the finandal markets only once.
The
ln July
1974 it auctioned off $1.5 Billion in 244-day Bills at an average interest t'ate of 8.05% 1 slightly hi:gher than the 7.88% interest rate available at the same time for comparable Treasury Bills.
PTB bot'rowing has, as a matter 20 of policy, been through the Treasury ever since. The FFB purchases three kinds of agency securities that otherwise might: be aold in the finaucial markets. are
1
The eeeurities, distinguished below
agency debt, loan assets and guaranteed loans.
- 20 ...
1*!enc;g Debt ! (These are stra.ightfor't3ard loat\s made duectly to agencies.) Loan Assets An agency when it makes a loan acquires a note whteh is a financial asset. The agency sells the note to the FFB and uses the proceeds to finance additional loans. In doing so , the agency can expand its loan programme. Guaranteed Loans : The government grants guarantees jo encourage lending to particular groups of borrowers. The guarantee assures the lender repayment of capital and interest if the borrower defaults. The Bank's holdings of $83.9 Billion at the end of the fiscal year 1980 broke down as follo~s :Agency Debt (25.4%); Agency Assets (48.5%); and Guaranteed Loans (26.0%). Growth of the FFB bas been dramatic and the eomposition of the Bank's portfolio has changed in the process. (See Table 3.1). The figures should be interpreted carefully. Part of the growth represents new agencies using the FFB in its initial years. Growth in recent . . vo. 1ume. 21 years.. h owever • represents most 1y 1ncreases tn TABLE
3.1
OUTSTANDING HOLDING OF THE FFB (Hillion Dollars)
-
Year
Agency Debt $
%
FY 1975 FY 1978
7 t018
(.52. 7)
14 ,.259
FY 1980
21,296
(29.9) (25.4)
"'geney,Asse,ts %
$
Guaranteed Loans $
%
Totals $
%
(100) (100) (100)
5,068 23,286
{38.1)
1 , 215
( 9.1)
(48.4)
10,532
(21.9)
13,301 48,077
40,747
(48.5)
tU,856
(26.0)
83,899
% Change $ Amounts
FY 1975/78 FY 1978/80
103%
359%
766%
261%
49%
75%
107%
75%
Establishment of the FFB has virtually eliminated all agency debt the security most similar to agency borrowing conducted through the National Loans Fund . Only five agencies are issuing agency debt and two of these 22 have been created after the FFB.
- 21 -
There are no NLF equivalents for FFB purchase of agency assets or guaranteed loans. These latter two categories include a variety of federal credit assistance programmes to various sectors o£ the US economy: housing, agriculture , transportation , health 1 education, small business and foreign aid. In effec;, the federal government sees that certain borrowers are able to obtain funds on better terms by guaranteeing the loan. As of 1980• no comprehensive list of credit programmes existed though the best estimate was around 16o. 23 Two aspects of the FFB have surrounded it in controversyt it can convert "guaranteed" loans into direct loans and it effectively excludes some government expenditures from the Congressionally controlled budget. The legislative history and ·later congressional hearings indicate these consequences were not fully antieipat:ed when the Bank was created. Both illustrate the political implications of "technical" institutional changes. Stmplified explanations are g:i.ven below. 24 Guaranteed Loans By guaranteeing loans, the government turns previously poor credit risks into preferred borrowers. Three parties are involved in a g~aranteed than: the borrower , the private lender and the government. ~~en the government guarantees a loan, it assures the private lender that the government will rep ;.: any capital and interest if the borrower defaults. This reduces the risk to the lender who consequently will make the loan at a lower interest rate. Guaranteed loan programmes are highly favoured by the government because they can promote acti• ities with minimal direct costs to the govern• ment. The Government only incurs an expenditure when loans are defaulted. The guaranteed loans are not ineluded in the overall budget totals either. The FFB' s ability to purchase "guaranteed" loans has altered ho'{.g these loans are financed. The FFB takes the place of private lenders as the source of loan capital by advancing the funds to the borrower when it purchases the "guaranteed'' loan. The private lender is eliminated. It is an ironical arrangement because the government is making the loan and then guaranteeing to repay itself if the borrower defaults. The net effect of the FFB ac4uiring loans is succinctly put in the federal budget . "Since the FFB finances these purchases by borrowing from the Treasury • which in turn borrows from the public , these transactions substitute Federal borrowing for guaranteed borrowing in the mar ket . " 25 This has added over $4 . 5 Billion to the Treasury borrowing
- 22 ...
requirements each fiscal year since 1978 and over $21 Billion in the FFB's 26 seven-year history. All this is borrowing which the government would not have conducted were it not for the FFB purchase of guaranteed loans. The FFB's involvement makes the guarantee meaningless since the guarantee was given to assure more favourable treatment by private lenders. The reason is that the "guaranteedn loan is converted into a direct loan financed through Treasury borrowing backed by the full faith and credit of the government. The Treasury can borrow at lower interest rates making the initial purpose of the guarantee pointless. The presence of the FFB has been an incentive to implement ''guarantees" rather than direct loan programmes. The advantages are clear. Direct loans are included in the budget, while guaranteed loans are not even though they are effectively converted into direct loans by the FFB. The funds are borrowed through the Treasury meaning the "guaranteed" loanS can obtain the
-
lower interest rate. As a matter of policy, the FFB will purchase only those loans with
a 100% government guarantee. Several loan programmeR will guarantee a smaller percentage of the capital. Private lenders , and not t\1e government 1 will provide the loan capital in these instances, though at a higher interest rate than the FFB... finaneed "guaranteed" loans.
The FFB financed guaranteed
loans increases government borrowin~ whereas the guaranteed loans do not . Thh. increased borrowing is not reflected in the Congressionally controlled budget or its deficits. Off.-~u,qget
Status
All transactions with the FFB, by legislative intention, are excluded from the Congressional budget even though all FFB funds are acquired through the US Treasury. The justification had to do with accounting princjples . 'The reason, as explained in an Office of Management and Budget technical Paper , is that "any Federalddebt transaction - borrowing or repayment - is a means of
financi~g the budiet , not an incotne or an outlay . 27 The FFB was conceived as a "neutral financial conduit" for handling debt transactions between federal entities and , therefore , its financial activities did not need to be included in the Congr essional budget. However;. as has already been shown, the FFB was able to convert "guaranteed, loans into direct loans which were not included in the budget. The 1974 Congressional Budget Act decided not to include guaranteed loans in budget totals because they were a "contingent liability" • meaning the govern-
... 23 ...
ment incurred expenses only in cases of default . Additionally, the budgetary treatment of agency assets purchases by the FPB results in an additional understatement of the Congressional budget . The basic explanation is this : The sale of agency assets is counted as a repayment of loans in the agency budget, though ownership of the loan note is still with a government entity, the FFB, The agency's budget is reduced suggesting that the loan has been repaid in full. However , the loan has not been repaid to the government , but transferred within the government to the FFB, Since the FFB is off•budget , the transfer is not captured in the Congre ssional budget . The Congressional budget will show 28 lower agency expenditures when none has in fact occurred.
The budp;etary treatment of "guaranteed" loans and agency asset sales to the FFB results in a systematic understatement of Treasury borrow• ing because the Congressional budget total is the publicly recognised budget The understatement ean be substantial in abeolute and percentage "deficit" . terms as shown in Table 3.2 . Table US
BUDG~T . DEFICITS
3.2
INqLUDING. ~ F!XCLUDING THE FFB
(Billion $) Deficitts Excluding Including F}'B FFB
Fiscal Year
1974 1975 1976 1977 1978 1979 1980 Source: .,. )
Di£Jer(tnce
Percentage Under ... sta.ten1ent: .
$
$
$
"'"'
4. 8 51 . 6 72 . 3 53 . 2 59 . 5 48 . 9 40 . 3
4.7 45 . 2 66 . 4 45 . 0 48 . 8 37 . 4 29 . 0
.1 6. 4 5. 9
2 14
8. 2 10 . 7
18 22 31 39
11 . 5 11 . 3
US Budget, various years;
9
author's calculations.
This is a perverse effect for an institution intended for the primary purpose of securing lower interest rates for agency borrowing .
The
situation has been exacerbated by the FFB's virtually unli:mited access to Treasury funds . If it had sold its own securities , the FFB would have legislatively been limited to $15 Billion, but has reached a figure five times that by going through the Treasury.
- 24 -
C)
CCMPARISON
Neither the National Loans Fund or the Federal Financing Bank is a programme agency. ~hey are financial conduits through which widely dissimil'ar governmental activities are financed. The comparison here is not between nationalised industries and credit assistanee programme.s. lt is on the process by which the ~~ and the FFB acquire funds and make loans to governmental agencies. different ends.
The NLF and FFB are similar means serving
The comparisons and accompanying analysis focuses on the chaneels used• relationship to the Treasury, agency eligibility and loan criteria and financial instruments. The means and issue of control is treated separately. Channel~
The channel used in agency boroowing is S{>~cif.ied in the UK while it is ertional in the us. This is a distinction which makes little differerence for in practice both countries have centralised borrowing through the Treasury. Institutional arrangea&nts in the two countries present four distinct channels for agency borrowing as illustrated in Fig 2.1. The major differ• ence between the two countries is the US inte~ediete agency which has no UK counterpart. Likevise the presence of the FFB means no direct borrowing between an agency and the Treasury • the dominant practice in the UK. The justification of an intermediate channel seems dubious, parti• eularly when the FFB has condue.ted its borrovri.ng exclusively through the Treasury. The UK had rejected creating an intermediate channel for agency borrowing when the NLF was created in 1968 because it foresaw no advantages over Treasury borrowing. The practice in the US seems to affirm this point. Centralising agency borrowing through an intermediate channel, as the FFB sh0t1ed 1 ~v-ill lower agency borrowing costs hut the interest rate obtained will be m~r~:indly higher or, at best, only ~qual to the Treasury rate. Preferring an intermediate channel over the. Treasury must be justified on some basis other than interest rate. The issue becomes clearer in the following Conf!ressional testimony by Harry Havens, US Assistant Comptroller General.
.. 25 ....
"The fact is ••• (the) FFB is the Treasury. There is only a concept of the FFB. The FFB per se does not exist except as a legal fiction. It is the Treasury. It does, however, have certain distinct features as a concept, one of which is that the activities of this institution are not on the budget. As a result of that, you have the advantages of centralising borrowing, which was the initial reason, but you also have disadvantages associated with the (budget) distortions that result from FFB transactions." 29 This seems an a priori case for eliminating the ffB since the Treasury possesses its major advantage and avoids its disadvantage. Curiously, reform efforts have centered on whether to make the FFB an on-budget agen.cy or on changing budgetary treatment of transactions with an off-budget FFB. Elimination of the FFB entirely is a little disuussed proposition. The disadvantage of budget distortion is an advantage to agencies able to reduce budget outlays or conduct direct loan programmes by offering "guarantees 11 which escape budget scrutiny. Budgetary reforms have political implications even when the idea is simply to create a "neutrel financial conduit." The debate about reforming or eliminatin~ the FFB properly should be seen as concerned about how FFB' s transactions are reflected in the budget, rather than the borrowing channel. There is a temptation to simplify our earlier model of agency borrowing to two alternatives. Either a encies borrow directiy in the financial market or through the Treasury (channels A and T). The UK and US experience have provided no practical justification for an intermediate channel, though If interest eiists in explanations might be found in other countries. The FFB is an ~entralising borrowing, it will be done through the Treasury. intermediate channel only in name since it conducts its borrowing exclusively through the Treasury. Perhaps the bufget distortions it allows explains hhe continuing existence of the FFB. It is not because of any demonstaated inherent advantage of an intermediate over a Treasury channel. Tr~~~'urx Re}.~tions.hip
Different names - a bank in the on.e inatance an.d a hudget fund on Both have the other -can obscure basic similarities of the FFB and the NLF. the same functional relationship to their respective Treasury departments once the "legal fiction" of the FFB is recognised.
- 26 ...
The legal fiction is this:· While the FFB is a wholly-owned govermnent corporation. its board of directors consists entirely o£ Treasury Department officials with the Secretary of the Treasury serving as chairman of the board. The FFB staff is physically housed within the Treasury Department. On its part., the Treasury.
Nu•
is administered by the Home Finance Group of HM
The FFB and NtF are both functional parts of Treasury departments which share common responsibilities for managing the national debt. The Treasury departments differ in other important aspects. but in this regard they are the ume. Loan Criteria
If any agency is eligible and no borrowing limitation has been exceeded, neither the NLF and FFB will refuse to make a loan. Both serve instrumental ends of handling agency loans and their discretion is limited to such things as the timing of debt issues• loan maturity dates and repayment schedules. Neither makes policy judgements on how the loan proceeds will be used. This needs some qualification in the UK since other divisions of the Treasury will have some influence and control over the extent of agency
In the us. Congress went to great efforts to assure that the FFB or the President could not block loans of particular agencies it might dislike. These reflect Congressional concern over the impounding of funds at the time. The Senate version of the FFB legislation allowed the President to limit agency guaranteed loan programmes. however the provision was dropped in conference committee.
borrowing and financial pro5ramm.es.
Agen,c y Eligi bi,l,i t)" Different approac~es determine which agencies can use the NLF or the FFB. The UK approach has been to e~merate theaagencies. Thus when the NLF was created• agency borrowing authorities were amended to require them to use the NU' onl.y. The US practice has identified t:x:2e~ of financial instruments and not spe.cific agencies. ~1}%
The FFB is authorised to purchase
"obligation" .... bond, note, debenture - or guaranteed loan offered by a
federal agency .• Differences in implementation rfiflect history and the differences in the programmes funded.
It is easy to name the eligible agencies in the UK
where the number of nationalised industries and local authorities is fairly fixed.
- 27 ...
more are created, they are easily added to the list. Also when the UK government started co-ordinating agency borrowing in 1956 , only fixed interest stocks were used for long•term agency loans.
As
Agency borrowing was diverse in the financial markets prior to the creation of the FFB. In order to be inclusive, the FFB legislation specified types of financial instruments it hoped to redirect out of the financial markets e It has also meant an open commitment by the FFB to purchase any eligible securities as Congress gave the FFB an affirmative obligation to meet agency requests. As Congress has tried to control direct spending prog1'rlmllles , this has been an incentive to design less visible loan programmes as substitutes which can take advantage of the FFB's off•budget status and budget accounting of guaranteed loans. In the absence of effective controls, this may have a perverse effect. The FFB effectively eliminates agency borrowing from the financial markets, but other features of the FFB encourage more overall boroowing. making co-ordination all the more essential. The pressures of havin.g to raise more funds may push interest rate~ higher though the eo-ordination of the increased borrowing assures the lowest interest rate is obtained given financial market conditions. Thus the number of agencies involved in centralised borrowing is not as significant as their cumulative borrowing requirements , though the two usually are positively related. Enumeration of agencies is no assurance , per se, against increasingly larger borrowing requests .. Control The extent of control over agencyborrowing request is easily the most striking difference between the NLF and the FFB. This partly reflects differing abilities to control tae programmes being funded and also the different budgetary roles played by the respective Treasury Departments in Rigid control is exercised by lM Treasury public expenditure decisions . over NLF borrowing . Since 1976 , external financing limits have been established for all UK nationalised industries as part of an overall scheme to control public expenditures through ucash limits." The EFL limits nationalised industry borrowing from the National Loans Fund . The annual figure is set after con sultations between the Treasury, the nationalised industry and its sponsoring:
- 28 ...
The EFL takes into account the nationalised industries expected financial perform.anee and also eapi tal investment progrannnes. The EFt is the difference between total financial requirements minus internally generated funds such as profits 1 depreciation and other receipts. This figure establishes the maximum amount which a nationalised industry will be able to borrow through the National Loans Fund . ministerial department.
The EFL , as a recent Treasury and Civil Service report noted, "can be restrictive either because they are made so deliberately or because 30 unexpected events makes them so." Assumptions made in the initial forecasts may prove inaccurate such as a down~turn in the economy which reduces internally generated resources. In that event, two major options are available : 1) reduce total expenditures, usually by curtailing capital investtuent programmes, or 2) raise the EFL to allow increased borrowing. EFLs are not immutable, though upward adjustments are made only reluctantly when stringent monetary policy requires firm ceilings on overall government borrowing . The EFLs are aggratate e.o ntrols in that they set an overall figure for. nationalised industry borrowin and also allocate individual totals. Through persistent complaints, the nationalised industries initiated a major policy debate this past summer on financing the nationalised industries. The debate is not taken up here, but one major point should be made. The loneensus opinion was that annual EFLs made it diffcult for nationalised industries to carry out long-tet'm capital improvement projects. Tight restriction on their borrowing has prompted the nationalised industries, with the government's encouragement, to raise prices to generate more internal finances. Overall control over 30vernment borrowing is quite tight. Besides the EFLs, .the government exercises some control over capital spending by local authorities. Through its role in monitoring and approving public expenditure, the Treasury is the institutional centre for control. Little borrowing can be carried out without its approval, though the Treasury can be overriden by the Cabinet. As wi.tb most controls, insenious ways cen be found around borrowing limitatiuns though exaples are exceptiona1. 31 The controls have restrained agency borrowing to Treasury..determined levels. agencies lack any real self•determinancy over their total borrowinge c:oneurrence is nec•usary.
- 29 ...
The
Treasury
Control of US agency borrowing stands in sharp contrast.
There
is some control over agency debt issues in the form of statutory ceilings on outstanding loans.
However , there is ineffectual or no control on loan
assets or guaranteed loans.
The difficulty has been how to include credit
programmes in the budgetary process.in order to gauge their overall economic impact and to make iredit programmes compete equally with direct programmes for financial resources.
spet\rli·;~
The common complaint has been that the
budget has become "less useful in planning for, controlling, and measuring 32 the impact of federal credit." Of the $159.4 Billion of federal and federally sponsored credit activity in fiscal year 197t, only $4 . 3 Billion , the net dit;ect lending • was included in the budget totals. 33 Congress tried to remedy the situation by initiating a separate credit budget in fiscal year 1981 covering federal agencies.
Recommended
ceilings were established for new direct loans, loan guaranteed and offbudget loans.
However , actual enforcement powers are uncertain since the
present budgeting system, set out in the 1974 Congressional Budget Act , made no provisions for credit budgets and spe€ifically had excluded guaranteed and insured loans from the new budgetary procedures. The matter is unsettled and different control mechanisms are still being considered.
The generally agreed objective af any control syetem is, as
put by one partieipant 1 to assure "that the scope and seale of Federal credit • d ec:t.sl.on-mat<.J.ng • • t.. programmes sh. ou ld resu 1 t f rom a systetnat1c process. 34
Merits of various control mechanisms are debateable, but the recognition of their need underscores a fundamental point whieh needs to be reiterated.
Co-ord:i.nation of agency borrowing must be accompanied by some
control mechanism if the agency borrowing is not to have a potentially disruptive impact on the financial markets .
The need for controls• however,
does not resolve the secondary debate as to how rigid or flexible they can or must be. Given the need for some kind of aggregate control, it can either be exercised by pla.cing limitations on the individual agencies or on the financial conduits.
The consensus in both countries is to put the limitat•
ions directly on the agencies.
If the limitation is on the financial conduit,
the NLF and the FFB would effectively become banking-like institutions approving and denying loan requests.
Who is to be funded and how the money is spent
are policy decisions the NLF or the FFB were not designed to fulfill.
- 30 -
Bontrolling agency borrowing has assumed greater importance with the adoption of monetarism and its attendant concerns about how deficit finance can adversely affect interest rates and inflation.
This is developed
further in the brief discussion on "crowding out'' in the next chapter. Summary Before proceeding , it would be beneficial to summarise key ppints : a) Both the NLF and the FFB are functional parts of their Treasury Departments , even though the FFB is a wholly•owned Government Corporation. b) Whether it is legally specified or optional, agency borrowing was directed through the Treasury because of lower interest rates. c) The means of co- ordination has been the same. Both the NLF and the FFB advance funds to agencies so that they do not offer their O\Yn securities directly in the financial markets. d) There is firm control over agency borrowing requests in the UK and loose control in the us . The programmes funded and the individual Treasury Departments budgetary role help explain some of these differences.
- 31 -
CHAPTER
TWO
IV
ISSUES
The language of agency boraowing is economics.
This has
meant that some salient political questions escape full recognition because they are presented in "technical" terms and deference is given to the academic discipline.
This chapter tries to develop some of the political aspects of two topics associated with agency borrowing.
The topics considered
briefly are "crowfil.ng out" at1.d the interest rate charged agency borrowers.
This requires some shifting through economic data and arguments,
but the emphasis is on showing how presenting an issue as simple straight-forward eeonomics will disguise or dominate relevant political considerations.
.. 32 -
CHAPTER IV
A)
CROWDING OUT Surely when the government borrows more, somebody else must be
able to borrow less.
That is the powerful intuitive proposition of an
economic idea known as "crowding out." 35
is a recent phrase which has found its way i.nto the language of economic and polities. As used in economics, "crowding out" is descript... ive, but in politics it has acquired strong normati.ve connotations . It
"Crowding oue' occurs o~ly if financing an increase in government expenditure causes a -reduction in private sector demand, especially investment demand. However, any increase in government expenditure is not, ipso facto .. "crowding out" though it is sometimes taken to be. Increased government ~xpenditure can, in certain circumstances, actually result in higher private sector demand and investment. "Crowding out", in the political context, can become an emblematic debate over the relative size and role of the public and private sectors . Attitudes about the growth of government will weigh heavily in such a debate , particularly when the empirica1evidence on the extent of "crowding o'.lt" is inconclusive or contradictory ... a point. returned to later. As lharkansky P,Ut it:
"Discus&ion about economic and political issues are marked by citation of beliefs and desires, rather than by any claar truths that 36 tl!'anslate easily into policy deeisions . n Consider this point in the following statement by Buchanan and
Wagner : ... "In the modern political climate• the funds secured throu h ~ublie borrowin~ would probably be utilised largely for financing of budgetary shortfalls , with the lion's share of outlay being made on consumption directly or indirectly • • • • The crowding out that would actually occur , then , would be one in which private capital investment was replaced by increased consumption, mostly transfer payments : Ploughs, generating plants, and fertilisers would be sacrificed for TV dinners purchased by food stamps." 37 Such prescient forecasts are advanced by two respected economists on a reasonable theory, carried along on conjectures and cinched with evocative rhetoric.
... 33 -
The argument owes i.ts persuasiveness as much to current political predilictions as to the citation of any empirical evidence. reflects
e~onom:i. c
The argument
and political concerns about the failure to make
sufficient capital investment in the economy and sluggish economic growth.
The need for investment is not a new argument, though it can be argued in different terms . John Kenneth Galbraith put the matter just the other way around in his influential books The Affluent S~aee .
So~iety
and 'fhe New Industrial
He argued that too little public sector investment was made because
advertising encouraged too much private consumption.
These contrasting
arguments, partially reflective of the time they were made; puts the "crowding out" debate into a broader framework. The debate takes on different dLnensions depending on whether the issue is looked at in terms o£ consumption v. investment or private sector v. public sector expenditures.
The choice of consumption or investment and
in what sector it should occur are fundamental questions in a political economy. The desired mix of the economy will depend on economic, political and social preferences. The "crowding out" debate is usually presented in the terms used by Buchanan and Wagner - public consumption v. private intestment.
But the
debate can equally be between public investment v. private investment .
This
is the point that the Nationalised Industries' Chairman's Group stressed in this past summer's debate on nationalised industry finance . They wanted to know whether "crowding out of private sector investment must invariably be undesirable on policy grounds • whatever the nature and profit potential of the public sector investment which might have to be frustrated in order to • rlL"; avo1.'CI
•t 1 •
n38
Increased government borrowing does not establish that "crowding out" of private investments will inevitably occur . Economists have turned to econometric models of the economy to determine the extent of "crowding out".
In a recent survey of the empirical
evidence, the National Economic Development Council concluded:
"The actual
evidence for the UK on the effect of increases in government spending financed by borrowing is sketchy, "
though it was thought some "partial crowding out" 39 of private expenditure might occur in the short term. This summer , the Treasury and Civil Service Committee sought its
- 34 -
own econometric evidence on the extent of "crowding out" for a once•for .. all Three econometric models
increase in nationalised industry investments. t~ere
used:
the Treasury, the IonO.on
~\t~iness
Institute for Economic and Social Re search.
School and the National Tvm models found that 31-36%
of the increased nationalised indu!:'try i.nvestment would be obtained by "crowding out" prbrate investment. opposite results.
But the third model yielded just the
Increased nationalised investment would actually increase
private investment by 18... 27% of the total nettr public investment. l<tould be "crowding out."
40
~i
-
There
of private investment• rather than any "erowding
The findings are contradictory.
~fuen
macro-economic evidence is
"sketchy" or even contradictory, generally held economic beliefs and political attitudes will shape the debate about
11
crowdfng out".
Because "crowding out"
is an empirical question, a.p.pearance of proficiency in economics can be used to gain leverage in a political argument.
Also the intuitive strength of
"crowd5.ng out" - more for the public sector must mean less for the private sector - will have great sway. is not to run the risk;
The surest way to prevent "crowding out"
restrict increasing government borrowing and avoid
the feared effects on private sector demand.
Arguments about "crowding out"
will involve a series of inter-related propositions, some of an economic nature• and some of a political nature, reflecting attitudes about how the economy works and the role of the state. Monetarism has made "crowding out." a more salient issue.
There are
two options in financing a deficit - expand the money supply or borrow more money.
Under a stringent monetary policy., expansion of the money supply is
restricted meaning the deficit must be financed by increased £overnmental borrowing in the financial markets.
Increased borrowing means greater com-
petition with the private sector in securing funds in the financial markets. This may drive up interest rate.s or absorb funds so that private borrowers are "crowded out" .
To reduce possible "crowding out", the government
attempts to limit its borrowing including that done by government asencies .
By co-ordinating the agency borrowing, the government can exercise greater influence on when and how the government borrows in the financial markets by directing the borrowing of one of its potential competitors, the agen£ies. The government plays a dominant role in the financial markets. Inceeased deficits, financed almost exclusively by borrowing. has made this
... 35 -
only the more true.
The UK case illustrates this.
The PSBR has increased
as a percentage of GDP as has the portion of the PS:SR financed by government securities.
During l968/72; the PDDll -w·as 1.6 7. of the GDP but had increased
to .6.8A in 1979.
Correspondingly, government securities increaved from .9% 41 to 5.5% of GDP for the same periods. The UK Government has relied more heavily on financing the PSBR through government securities since 1978/79.
securities were 1980/81 .
6~.8%
of the total PSBR;
That financial year 1 governtllent
91 .5 % in 1979/80;
The larger percentage is of a larger PSBR.
and 99.2% in
In 1978/79; the govern-
ment went to the finanaial markets to sell £6 .14 Billion in government securities more than doubling its borrowing two years later when it sold £13.2 Billion in 1980/81. 42 The figures show government's increased borrowing, but that is only a partial picture.
As
the Wilson Committee noted:
"The ease of funding
depends on the size of the PSBR, on the volume of the long•term savings flowing into the capital market and on the strength of other demands for finance." 43 "Crowding out" is not just increased government expenditure, but includes these other factors as well. Similar concerns about "crowding outn are voiced in the
us.
One
of the most frequently cited statistics is the percentage of total funds faised by the federal government.
Be~een
1970/78, the average figure was 26% though 44 it ranged between 12.5% and 39.4% in any given year. Perhaps the debate
has not been as well-defined or pursued with as much political gusto in
th~US
as in the UK. First, the Congressional Budget deficit does not carry the same political and economic significance as the PSBR.
The Congressional Budget
deficit excludes borrowing carried out for off-budget agencies like the FFB. This has meant the full extent of federal borrowing requirements often have not been fully appreciated by the financial markets .
Secodd , federal borrow-
ing accounts for about 70% of total government borrowing with state and local government accounting for the remainder.
This makes for a three""'Way compet-
ition for funds between the federal government . state and local government and the private sector and variation of the "crowding out" debate in that federal government can "crowd out'' state and local government .
45
Third, a
tight monetary policy has not been pursued in the US as long as in the UK. Finally, the relatively lar ger UK public sector and the highly visible borrow-
- 36 ...
ing requirements of nationalised industries has encouraged greater political debate in the UK over the size of the public and private sectors.
B)
INTEREST RATE SUBSIDIES Votin~ cash subsidies may be one of the most politicaliJrvocative
acts that legislatures are regularly asked to consider. sought for some
parti~ular.
group , programme or region.
The subsidy is Usually, the onus
i .s on those favouring the subsidy to make the case why preferential treat-
if
ment is justified. Political debate is most .likely are clearly recognisable to the public or politicians.
the subsidy aspects
Other means of conferring a subsidy fail to focus attention the way a cash subsidy can, though they are just as real.
Some systematic
efforts have identified subsidies granted through the tax system by the 1
cataloguing and quantifyinR. where possible 1 ntax expenditures. '' • 6
These
are tax concessions and reliefs granted through the tax structure which reduce government tax receipts and are roughly equivalent to a direct government expenditure.
Altering other financial rules or administrative
proced~
ures can grant a subsidy as easily as a legislative appropriation and generally will attract less attention. is involved or not.
Judgements will often vary on whether a subsidy
!hat determination will potentially affect budget
decisions if the subsidy is included when overall budget allocations are made . This can be seen in centralised agency borrowing where the UK and US have different conceptions of interest rate subsidy. The US position. stated :in its budget• is that an element of subsidy is involved in any borrowing for Federal credit programmes "since assistance is given on terms or conditions more favour~ble than would have occurred in 47 private capital markets. n (Emphasis added) This can include lOl-'er interest rates, longer maturities or greater liqiidity that what toTould have been available in the financial markets. appendix states! "Interest subsidies are 48 borrower. " (Emphasis added)
ln unequivocal terms, a budget ~suivt;lent
,to
c~h
.&Fap.t.s , to the
The UK Treasury • borrowing on behalf of the NLF • is able to secure more favourable loan terms than the individual agencies could. However, no In fact• the purpose of the NLF subsidy element is explicitly recognised. was to distinguish between subsidised and unsubsidised loans.
- 37 ...
John Diamond•
Chief Secretary to the Treasury, during thta 1968 NLF debate, informed Parliament : "It is essential that (the National Loans Fund},if it is to deal truly with the position of government as intermediary in borrowing and lending, should not contain any subsidy element." 49 Two different definitions of subsidy are being used. ion can be made between direct and implicit subsidies :•
A distinct ...
Direct Subsidy: Money is loaned out at interest rates lower than what the funds were borrowed. Implicit $ubsidy: The difference that government assistance or guarantees make in enabling a borrow~ er to secure more favourable terms than what otherwise would have been available in the financial markets. Only direct subsidies are recognised in the UK budget. In both the US and the UK, the net figure for direct subsidy is included in the general budget and requires legislative approval. Spurred by concerns about proliferating loan guarantees, the US has devoted inereasing attention t:o estimating credit programme subsidies. A GAO Study for l?Y 1975 estimated interest subsidies* on federal credit programmes at $6.4 Billion - $2.9 Billion on direct subsidies and $3.4 on implicit subsidies. 50 Another reason for greater US interest in implicit subsidies is that the benefits are going almost exclusively to private sector borrowers. In the UK, implicit subsidies accrue to other governmental entities, and are viewed. as a saving to the government rather than a subsidy to itself. The finaneial markets determine the interest rates at which agencies There is another unavoidable conclusion which often goes ean obtain funds. unmade: that rate will be affected by what is at heart a political decision. The political choice is who actually borrows the money - the individual agency or the central government.
*
Interest subsidy is defined as the difference between the present value of interest payments with government assistance and the present value of interest payments on a compar• able private loan. Discounted present values reflect that interest subsidies occur throughout the life of the loan.
- 38 -
Different political values lead to different conclusions.
The
prevailing argument is that centralised borrowing saves the agency, the government and eventually the taxpayers from additional interest charges. The opposing position is that agencies are able to get money on "artifically cheap terms," giving them unjustifiable subsidies or competitive advantages particularly where nationalised industries are competing against commercial concerns.
The fear also is that the tower interest rate encourages greater
growth of the public sector. When the financial m.a rkets are seen as determining the interest rates at which the money is eventually borrowed, political aspects are obscured.
Both the NLF and the FFB have made it a practice to loan the
money to the individual agencies at the same interest rates the Treasury was able to borrow it.
However, the difference between interest costs of
direct and indirect agency borrowing represents a range of posiible implicit subsidies.
By charging the agencies the Treasury interest rate, the decision
has been made to grant the full implicit subsidy.
This also simplifies
administration beeause otherwise the interest rates would be negotiable.
An
intermediate rate between those established by the financial markets is difficult to justify politically. centralising
borrowin~.
If the government can save money through
it will want to save the greatest amount possible.
Those who objeet to "artificially cheap terms" will be satisfied only if the agencies borrow in their own names and accept the market-determined interest rate.
... 39 -
CHAPTER V CONCLUSION
to tax.
Every citizen has some appreciation of the government's ability Few outside the financial community have the same appreciation
for the government's "pre-emptive power to borrow" money from its own citizens and others. The government's ability to borrow is a tremendous power which has received too little attention in budgeting literature . It is not an unlimited power• for government borrowing can be restrained by the legislature , administrative departments and ultimately by the willingness and capability of the financial markets to provide the funds . With greater attention to public deficits has come more analysis of government borrowing . That analysis , mostly economic , has conc.entrated on total government borrowing and has tried to discern the causes and effects of continuing deficit finance . Most analysis does not distinguish between borrowing done by central government for general purposes and that done by individual agencies for specific programmes. The exceptions to this are occasional analyses of nationalised industry finance . This Paper has tried to cast agency borrowing into a broader framework by focusing on process and not programmes associated with agency boroowing . There is merit to this for it can isolate issues and direct attention to policy questions related primarily to the process , and little affected by the actual programmes funded. The NLF provides loans to public sector nationalised industries while FFB funding goes primarily to federal credit assistance programmes aimed mostly at the private sector. As a process , however, both are related with respect to how they co- ordinated and controlled agency borrowing . This Paper considered the basic proposition that issues about the process could be presented as "technical" questions which obscured political aspects. This idea was developed initially by looking at the selection of channels and the difference that made. The ease of the FFB is a classic case of how a "technical" change can have serious and largely unforeseen consequences . A related concern was how agency borrowing was treated in budgets. The point about political aspects of the process might be conceded
- 40 -
and then its significance ignored if it were not for the implications of agency borrowing on overall economic policy . The legislative histories of the FFB and the NLF showed that central government was not concerned about independent agency borrowing until such point that it appeared to have serious effects on government economic policies.
At that point , the government sought to co-ordinate
and control how agency borrowing was conducted.
The tenets of monetarism and grave concerns about deficit financing has only made agency borrowing a more salient issue. At least that was the finding for the US and the UK. This may not be the case in other countries , however the analytical framework developed in this Paper can be used to evaluate their borrowing practices.
Almost eveJY government will have some sub-unit with legal
authority to borrow money from its financial markets. cases , it is possible to ask :
In each of those
Is agency borrowing being co-ordinated?
How, if at all• is it being controlled? The simple model of various channels provides an initial point for evaluation.
In the US and the UK , the borrowing was centralised to
take advantage of lower interest rates and controlled , though not very successfully in the US , because of macro-economic policy objectives.
The
findings for the US and UK seemed to indicate the attraction of lower interest rates made centralisation irresistible. that it is not .
Other countries indicate
For example; in France • agencies borrow in their own names
without government guarantees though government approval is needed .
In
Canada . the government wants Crown corporations to borrow directly in the financial ma!'kets .
West Ge.rmany lets its two nadonalised industries
borrow in their own name , but timing and terms of the borrowing are handled by the central hank . Centralising their borrowing might be resisted by agencies as a threat to their independence or opposed by those who think direct borrowing eXposes the agencies to some kind of needed "market discipline . " These arguments were not developed in this Paper, but do show that other consideration aside from lower interest rates can affect decisions on how agency borrowing is conducted .
It would be important to determine if the argument
about financial independence and "market discipline" is affected by the relationahip of the agency borrower to central government .
The strength
of the argument may vary depending on whether the agency is a commercially
- 41 -
competitive nationalised industry or a government department borrowing money to carry out some programme objective. It might be that a broader study would show that almost all central agency borrowing is done in conjunction with financing nationalised industries and that the US presents an interesting though anomalous case . That does not weaken the analytical framework for the basic question still remains:
Does the agency - nationa.l ised industry or otherwise - borrow
funds in its own name or through central government? This question is applicable not only to central government . It can be asked. sometimes with interesting results , in any ease where dispersed government borrowing is or could potentially be centralised. For example, it might be possible in federal states to centralise .loc-al government borrowing at the state or provincial level with the Hkely result that lower interest rates could be obtained by being able to borrow in the name of the state or poovince .
Aggregating several local government bond issues would
also reduce the administrative expense of marketing them individually . Presented in more familiar terms , the questions can be asked instances where the state government can borrow the capital for a special purpose authority it has created or to require the authority to
borrol~
funds in its own name .
Questions of oo-ordination with macro- economic policy is not involved at levels below central government .
The analysis is limited to the advantages
of lower interest costs through centralisation compared to the disadvantages of doing so .. legal , political , economic or otherwise. What makes the choice of channels for apncy borrowing significant is the preferred position afforded to central government borrowing by the financial markets.
This preferred position can be used to obtain loans at
lower interest rates not only for other government entities , but for the private sectot' also . Government loan guarantees , even when there is nothing like the FFB involved , can accompi:ish this. If it were not for government loan guarantees , Chrysler Corporation in the US may have gone bankrupt two years ago • and the UK Computer Corporation ICL taken over by foreign investors this spr ing .
The guarantees can be as small as an individual housing
loan to monumental projects.
Construction of a ÂŁ2 . 7 Billion North Sea
Gas- gathering line may depend on the willingness of the UK Government to guarantee private loans.
... 42 ...
Loan guarantees and agency borrowing are separale issues. However, both demonstrate the significance of the government's position as a preferred borrower. It means that government ¢an borrow money at lower interest rates for itself, other agencies and any private sector borrowers it chooses to assist. That borrowing, in turn, will have potential implications for important economic variable such as interest rates, inflation and private sector investment. This Paper grew out of an initial interest in the off-budget status of the FFB., however, se.r endipidi ty led from there to the topic of agency borrowing.
The first topic would have been far easier.
The
second has been far too ambitious for the topic is hard to narrow and ranges widely over mo.r e than one academic discipline.
In developing the
background, economie eoncepts and institutional descriptions, not enough attention has been given over to analysis here. Proper analysis requires more time, more effort, more space and a defined set of research questions.
This Paper hoped to show that
economic analysis alone is not sufficient, and that the political institutions through which public finance decisions are implemented must be considered. Here public administration and policy studies can make a contribution. Others have.
I have tried.
References Buchanan and Wagner, 1977, p. 93. 2) G.W. Jones makes this argument. 3) For an assessment which emphasises the political aspects, see Richard . Rose and Guy Peter's Can Governme:nt Go Bankrupt 1 especially Chap. 3 where they discuss 11 an overloaded political economy." 1)
4)
5) 6)
7)
See Herbert Stein, "The Decline of the Budget-Balancing Doctrine'' in Fiscal Responsibility in Constitutional l?iflllOC~,a,~tt 1978 • . P• 196. Charles Lindblom makes the same point in more general terms when he talks about the "privileged position of business" in Politics and Markets, 1978, esp. Chap. 13. Within the government this has included the Wilson Report , Cmnd . 7937 1 June 1980 1 which reviewed the functioning of the financial institutions. Fears about the financial market power were put recently in Manifesto; a Radical Strategy for Britain's Future by academics Cripps, Griffith, Morrell, Reid, Townsend · and Weir . "The immediate obstacle to a Labour Government 's attempting to restore full eiilployment through high public spending and investment is thevirtual certainty of. a fullscale financial crisis • • • • Unwillingness of the City to lend to the government would cause a collapse of the market for government securities and send interest rates sky high." The Guard,iaa, 24th August , 1981 1 p. 7.
11) 12)
Logically a four possibility exists - no agency borrowing at all. A prohibition of agency borrowing would make its co-ordination and controii a moot point. See Stigum, 1978,. Chap. 7; and testimony by Roger Altman, Asst. Sec. for Domestic Finance, US Department of Treasury to Special Sub-Committee on Contriil of Federal Credit ; 1980, p. 28. There were a few exceptions. The National Coal Board had been directed to borrow money through the Treasury and the Post Office to finance some capital expenditures the same way. Radcliffe Report , 1959, p .30. Ibid, p. 30. HC Debate, Vol. 554, Col . 526.
13) 14)
Ibid., Col. 531. Ibid., Col. 498.
8)
9)
10)
14* Pringle, 1973. 15) (Cmnd. 2162,Local Authority Borrowing , Oct . 1963, p .3).
16) 17) 18}
Standing Committee E, 1968, Col. 61. HC Paper 348 - Vol. I, p .xxvii Ibid., P• nv.
.
.. 1 ..
References (continued)
19)
Stigum, 1978, Chap. 7.
20)
Treasury officials had expected there initially to be a difference between the interest rate on · a FFB compared to a Treasury · security but that it would reduce as the market became more familiar with FFB operation~. Molefsky, p. 312).
21)
New loan transactions have increased yearly from 151 in fiscal year 1975 . to 1,043 in fiscal year 1979. US Feb. 28, 1980. (GGD-80-42).
22)
The five agencies are Export-Import Bank, Tennessee Vallep Authority, Postal Service ~nd the more recent additions of US Railway Association and National Credit Union Central Liquidity Facility .
23)
"Control of Federal Credit," op. cit., pp. 95/96.
24)
A fuller and very informative explanation is contained in Loan Guarantee_ s: Cur'f,el;lt, GoJ;u::ex;ns and At,ternativef for, Co'r\tr9l , Cong~esinonal Bt_tdget
5d:u~e, January, 1979. In parttcular see the work1ng paper tltled "The Federal Financing Bank: A Primer," pp. 111/141.
us, FY
25)
Special Analysis E, Budiet . of, the
26)
Table 3, Loan Guarantees. op. cit., p . 124. Review• Voi. 13, No. 1, p.38.
27)
Quoted in Loan GuaranJ:;~est _ Currep.t Con(!e(r ns and Contre>i, op. cit., p. 127.
28)
For a fuller explanation see T..oan Gllarantees, p . 128.
29)
Testimon' to the Special Sub•Committee on Control of Federal Credit. US Senate. Hearings , June-July 1980, p.91.
30)
"Financing the Nationalised Industries," House of Commons Treasury and Civil Service Committee, August , 1981• P• xiii.
31)
A new £32M. international conference centre to be built across from
1980, p. 130. Internatio11a~ ,eur~e.11Q.,X Alternat~ves
for
Parliament hes been able to "dodge" limits on public borrowing by having the centre built by an assurance company which will lease the centre back to the government for an annual rent. The Economi~ which ad•ocated the unique financial arrangement commented: "In theory, the government could finance construction for less by borrowing on its own gilt4edged account. But the tougher contracting skills of the private sector should more than make up for the extra cost of borrowing ." The Economist , 31st July, 1981, p.27. 32)
~.S:n , GuaranttJes,
33}
Ibid., p.21. The total figures includes several government-sponsored ----but privately-owned credit institutions which provide extensive credit for housing and agriculture.
34)
Testimony by w. Bowman Cutter, Executive Associate Director of the Budget, Office of Managem.e nt and Budget to the hearings on Control of Fe4eral Credit , op. cit., 16.
35)
The phrase is not included in the comprehensive listings in the 1977 edition of A Dictionary . of Economics and Comme,rce by J. I. Hanson .
op. cit., p .2o .
- i i ..
'References (continued)
#"
.
-
36)
Sharkansky, 1969, p.lS.
37)
Buchanan and Wagner, 1977, p.67.
38)
Memorandum by the Nationalised Industries• Chairman's .Group to the Treasury and Civil Service Select Comhittee, 8th July, 1981 1 hearings.
39)
National Economic Development Council, "Interdependence of the Public and Private Sectors in the UK"• p. 28.
40)
Treasury lind Civil Service Committee, l:iC Paper 348 - Vol. I, pp. xvii...xix.
41)
Wilson Committee.- Cnmd. 7937, Table 14, p.64.
42)
Economic Progress Report, August 198l 1
43)
Wilson Report, op. cit., p.181.
44)
Special Analysis F, US Sudget FY 1980, Table F•l •• p.135.
45)
US cities found it difficult to sell their bond issues during a period when the US Government offered record interest rates on two-year Treasury notes. The city of Chicago, for ona, had to -withdraw a $140 Billion bond issue for its public transportation system from the market. The Guardian, 24th August, 1981.
46)
The Congressional Budget Act of 1974 required the listing of tax expenditures in the annual budget. Tax expenditures in the UK have been listed the government's expenditure plans since 1978. For example• see Cmnd. 7439.
47)
Special Analysis F, US Budget for FY 1980, p. 132.
48)
-
49) 50)
pr~l-2.
Ibid. , p. 133 •
D ebate HC• Vol. 746 1 Col. 37.
Government Accounting Office Study cited in hearings on Federal Credit Control, op. cit • ., p. 92.
- iii ..
GI.OSSARY
Words are defined as gener.ally used in the text. For more technical definitions of the economic words, refer to A Dictionary of EconQtllics · and Cotmnerce (1977), J .L. Hanson. Used generally to mean any government department, public corporation. quango or other entity for whihh the government exerciesa some formal legal power. Bonds:
See Securitie.s .
-
Debt:
Financial liabilities incurred from borrowing still remaining to be repaid.
Financial
Any place where government securities are traded
M~rketu:
in an organised market. Also generally used to refer to the investors • underwriters and stock• brokers involved in the actual buying and selling.
Gua-ranteed
Legal commitment by a third party to repay the lender any capital and interest due if the borrower defaults.
-
Loant
A
financial instrument sold in the financial markets
at a specified face value when first issued and
(larrying a fixed•interest return which is paid annually. The nominal amount is repaid at maturity. Securities can be bought and sold on secondary Securities can markets prior to reaching maturity. be issued both by the government and also private borrowers such as corporations. Government securities in the UK are often called "gilts". The main type of government securities in the US are Treasury Notes and Bonds. Stocks:
See securities.
Yield;
Return on a security based on its current earnings in relation to its current price on the stock exchange •
... iv •
GENERAL
1.
BIBLIOGRAPHY
Books
Buchanan, James and Flowers, Marilyn, Th~ Public Fin4nees, (US, 1975). Buchanan, James and Wagner,. Richard, D'tu()ct'acy in Deficit, (London 1977). Burkhead, Jesse• Government . ~ud;~ting• (New York, 1955). Coombes, P. and Waikland 1 s.A., eds., Pa:rJiament and Economic Affairs, (London, 1981). Due, .John, ~over.nme~t F,i'llance.c . Eco,p,omi~_s _ of~ the ~~blif ~ector.t. (US, 1968). Foster! C.D:, Ji'oilt:t,CS,t _ Fil'l8-t1<:~ 1 and the Role of _E_conomf-CB; tL?nde,>n! 1971). Golemb1ewsk1, Robert, ed. t Pu%ben ~ud!edn1 an4 Finane~: Re~d1.nss 1n ~e?rz and Pr.act:.,ce, 19 §). Keegan, lhlham and Pennant•Rea, R.upel't, v1ho Run~ _the Econolll%~• (London, 1979). Lee, Robert and Johnson, Ronald, P"blic Bud~~ting Sy;stem~t, (Baltimore, 1973)., Lindblom• Charles, poli,tic.si .ati4. t-laltke~s, (us, l978). · tong, James, Inside the Stock Exc~aP.&~-• (London, 1978). Lord, o,y, The Fl'ench Budgetary Process, (US, 1973). Posner, M.V. and Woolf, S.J •• Italian'Pub~ie _ Ente't£rise. (London, 1967). Pringle, Robin, Ba~ing .~n Britain, (London, 't973~· . Rose, Richard and Peters! ~uy, ~npovex;nmeq~ Go Bank-ru¥U' (us, ~978). _ Sharkansky, IX" a, The, Pol,l tJ.cs ~f. ';taxing catid Saend{ng, ( ndianapolu, 1969). Sha•• E .. R•• '}h~ r.,ondon . ¥o~y Mar'*e~, (toiia'on, 19785. Stigum. Mue1.a, The Monez M&r~et: Mzt:h, Realitz and P;raedce, (New York, 19785. · Sehliekeisen, Rodger, ,The _Fed,ral Fin,anei Bank:
lus,
EvaluaFlo~ .fr~m
a
lu4,et:ar.x}~e~J;Jpeet1ve
unpublished d:t.ssertat on. Walsh, A.M., '.(he !PubJi_e 's .l3J1~~nes.s, (Boston, 19?8). Wildavsky. Aaron, How: to L!m1..t j;()venment Spendut,g, (US, 1980). W!ldavsky, Aaron, ~e ~stJ,tlcs of t:h.e.!Budzetan: Proees~. (Boa ton, 1914). W1.ldavsky, Aa'!'on and Redo, Hugh, The Private Gover'l.'llt\ent of Public }'toney, (London, 1974). 2.
Artie.l es
Boster, Ron, ncredit PrGgrams'', it1 Agenda for Progresss _ Exrun~nins Pede~a}, Spel\di~!\h1 McAllister,. Eugene., e'd., (Wash{ngton. 1981) pp.. 3477375. Cameron, David, "The Expansion of the Public Economy: A Comparative Analysis"-, ~'id,cap . P9l,itica1 Sc~enc~ Re'Yiie~,. Dec., 1978. International Currency Review• nOff-Budget Federal F1.nancing in the · ::-nited States/' l,D;t,ern,at~on~l Currency _Review. Vol.13, No. 1, 1981 PP• 35/42. . I . . 11 International Currency Review, The Federal Financing Bank: A Department of the Treasury," tntert1ational _ Cur,.-e'l)cz_p.e~i~w. Vol. 12 1 No. 5 1 1980, PP• 14/2~ • . Molefsky, Barry, ''The Federal Financing Banks Background, Operations, and :Budget Status", in Studies i~ t•ation1 Public. Fin,ane~ and Rela,ted su~ie~tt,, Vol. 3 (US• 1979) • PP• 310/320. Mor~n, Micliael 1 ''Monetary Policy and the Machinery of Government," P,ublic Administ:ratiQp, Spring, 1981• Pih 47/61. Newton, K., 0The Polle!es 'Ol ijPublie Expe11diture Studies," Political Studies, March, 1977.
- 1-
Resler, David and Lang, Richard, "FeJeral Agency Debt: Another Side of Federal Borrowing'', Federal Reserve Bank of St. Lou•s Bulletin, Nov.; 1979, pp. 10719. Stein., Herbert, "The Decline of the Budget Balancing Doctrine" in Fiscal R~s .o.dbilit in Constitutional t>emocrae Buchanan, ames and Wagn.er, 1h.chard, us, 1976J. Stevens, Neil,. "Government Debt Financing: Its Effects. in View of Tax Discounting", Federf!l Res~rve Ba~ of St •. Louis Bull~ tin, July, 1919. ··
3.
Goveri\ment Documents
Cmnd. 827, Committee on. the Working ot the Monetary System (Radcliffe Report), August, 1959. Cmud6 2162 1 Local Authority Borrowing• October, 1963. Cmnd. 7131• The Nationalised !ndustri.es., March 1978,.
Cmnd. 7439; The Government Expendit.u re Plans 1979/80, 1982/83. Cmnd. 7937; Committee to Review the Functioning of Finaneial Institutions (Wilson Report), June, 1980,. House of House of House of House of
Commons Commons Commons Commons
Debat e, Vol. 554, Debate, Vol. 755 1 Debate, Vol. 756, Debate. Vol. 759,.
12 June, 1956. Col. 542/.552, 26 November 1967. Col. 37/93• 11 December 1967. Col. 146/86, 19 February 1968.
Standing Committee E1 Iiouse of Coillluons:1 Vol. VI, 1967/68, 23 January,
1968 and subsequent dates. HC 163 • Vol .. I,.
"':i.-Ionetary Policy."
Treasury and Civil Service
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"Financing o£ the .Nationalised Treasury and Civil Service Committee.
August 1981 .. Civil Se1;vice College, Caah! Limits and Externa.l Financins Limits, Li.kierman1 Andrews, (London~ i9ai).. ··
National Economic Development Cottneil!1 "Interdependence of the Public and Private Sectors in the United Kingdon"• NEDC (81)25.
Unite.d
Sta~es
Congressional Budgeting Office, Loan Guarantees: ,cu~re1;1,~ Con_ee;rns, ,an(} Alternat.i ves f~~ . Co~tro,h January, 1919. Cengressional Budgeting Ofhe~• ~~dE\ia~ ,q;•dit Ac'iV16des.t An ~n;9.l;zs.i! o.f SJ!e .Pres.Lc\eln t 1.s C;ted~t;Ji1J4get fer J9S~. Feb. 1981. Government Accounting Office, nG0vernment Agency Transactions with the Federal financing Bank Should be Included on the Budget"
(PAD 77/70). August 3., 1977. Government Accounting office• ~ Improving Management Controls at the Federal Finaneing Bank" (GGD-80-42) • Feb. 28• 1980.
1
Unitad States (continued)
. .
.
.
.
'.
Office of Management and Budget• US
u.s ..
Goy~rnment _ F~
.s.P~~i,a,l Ar..,a:ly~isc , ~udg~t: ..of
.t.p.e
_19.80.
Senate, Report of the Committee on Banking, Housing and Urban
Affairs, June 12, 1972.
u.s.
Senate, Report of the Committee en Banking, Housing and Urban Affairs, May 21• 1973.
U.S. SEnate. Special Sub~Committee on Control of Federal Credit, Committee on the Budget of the us, Hearings. June-July, 1980.