How to do a heli drop

Purpose of this piece

This piece proposes and illustrates a scheme whereby helicopter money can be delivered within existing legal and accounting constraints. It shows that it is legally and technically feasible to deliver.

Legal constraints

The chief legal constraint is on the UK government which is forbidden to borrow from its banker, the Bank of England. This means the UK government is restricted to raising funds either from taxation or by borrowing from private investors. Neither method is currently popular with the government or its voters.

Accounting constraints

All organisations must follow the rules of double entry. Accounting concepts and standards must also be adopted and complied with. Even the Bank of England must comply with these accounting constraints. The Bank of England’s accounts are audited and where departures are detected they will be reported upon. Serious consequences could potentially arise from an adverse auditor’s report.

Assumptions of the scheme

  1. The government would issue bonds to private investors to fund the helicopter drop.
  2. HMRC would deliver the helicopter drop via tax rebates.
  3. Bonds in issue held by the private sector would be purchased using QE.
  4. The government would not overdraw on its deposits held at the Bank of England.

Procedure

  1. The government issues bonds to the private sector in the sum of the proposed helicopter drop.
  2. The government then uses the proceeds from the bond issue to give fixed sum tax rebates to household and firms.
  3. The central bank does QE for an amount equal to the bond issue.

The scheme in double entry form

The government issues bonds to private investors

Books of the Government £bn
Debit Deposit at Bank of England (asset increase) 30
Credit Bonds (liability increase) 30
Books of Commercial banks £bn
Debit Deposits by investors (liability decrease) 30
Credit Deposits at Bank of England (asset decrease) 30
Books of Investors £bn
Debit Bonds (asset increase)) 30
Credit Deposits at Commercial banks’ (asset decrease) 30
Books of the Bank of England £bn
Debit Deposits by Commercial banks (liability decrease) 30
Credit Deposits by government (liability increase) 30

The government gives a tax rebate of £30bn

Books of the Government £bn
Debit Income statement (expense) 30
Credit Deposit at Bank of England (asset decrease) 30
Books of Households and Firms £bn
Debit Deposits at Commercial banks (asset increase) 30
Credit Income statement (income) 30
Books of Commercial banks £bn
Debit Deposits at Bank of England (asset increase) 30
Credit Deposits by Households and Firms (liability increase) 30
Books of Bank of England £bn
Debit Deposits by Government (liability decrease) 30
Credit Deposits by Commercial banks (liability increase) 30
  1. Bank of England does QE for £30bn

Books of Bank of England £bn
Debit Bonds (asset increase) 30
Credit Deposits by Commercial banks (liability increase) 30
Books of Investors £bn
Debit Deposits at Commercial Banks (asset increase) 30
Credit Bonds (asset decrease) 30
Books of Commercial banks £bn
Debit Deposits at Bank of England (asset increase) 30
Credit Deposits by Investors (liability increase) 30

Summary

Here is a snapshot of the net changes to the respective balance sheets once all the transactions have been completed.  A table for Investors does not exist because the net changes amount to zero between their starting and end positions.

Heli money summary

Reversing QE

Because QE has effectively been used to fund the helicopter money (the tax rebates), at some point in the future the tax rebates must be reversed alongside the QE.  To defer this day far ino the future, long dated bonds could be used in both the bond issue and in the QE “buy back”. Long dating should eliminate the scuppering potential of Ricardian Equivalence.

Post Script

I have stuck to the technical aspects of making a helicopter drop. My intention has been to show that it is technically and legally possible within current constraints. Whether it would be successful in pulling the UK out of its current economic quagmire is moot and resolving that question is beyond my pay grade.

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