This article reviews the way in which the public sector borrowing requirement (PSBR) has been financed over most of the post-war period, concentrating on the implications of that financing for the banking system and monetary developments more widely. Since the adoption of targets for broad money in 1976, funding policy has assumed particular importance. Associated with this, certain developments, notably the occurrence in some periods of sales of debt to the non-bank private sector in excess of the PSBR, ie 'overfunding', and the potential implications of this for the liquidity of the banking system, have attracted much attention. This article seeks to set these developments in a longer historical context.
The various transactions by which the PSBR may be financed are described, together with the evolution of the pattern of financing, and the implications of funding for the monetary aggregates are examined. Overfunding is not a new phenomenon, although the influences which have given rise to it have changed over time. A number of factors have recently contributed to pressures on the liquidity of the banking system, so that ovetfunding has not been the sole, or even the dominant, influence underlying the accumulation of commercial bills by the Issue Department of the Bank.