UK government debt has reached its lowest price, in interest terms, ever. This week the government will borrow money at 1%. For all practical purposes we can now say that government borrowing is, in effect, costless.
In any normal circumstance this would result in rational politicians working out what to do with the opportunity that this presents them with. We do not, of course, live in normal circumstances but since this crash in interest rates is not peculiar to the UK ( where rates are, in fact, above those for countries like Switzerland where, overall, government debt is now subject to negative interest rates) then we can safely say that these rates would be available irrespective of the current UK political turmoil.
So what should be done to exploit this opportunity? I will explore some ideas in different blogs: in this first one I suggest that this is the perfect moment to wrote off PFI debt.
It is widely thought that PFI debt runs to hundreds of billions of pounds, and in some methods of counting that could be true, but that is most definitely not what it would cost to repay the debt. According to the most recent Whole of Government Accounts PFI debt looks like this:
The critical figure here is £41.1 billion. This is the current value of the loans actually outstanding to PFI companies. They might eventually be paid £190.3 billion (£81.5 billion plus £108.8 billion) but most of that is for interest not yet earned and services not yet supplied.
Let's put this £41.1 billion in context. This country has already done £375 billion of quantitative easing to bail out banks from 2009 to 2012. The Governor of the Bank of England is now talking about another £250 billion of QE. All of this will be pumped into the finance sector to enhance liquidity.
Let's also be clear: paying off that £41 billion of PFI debt now owing would have the same effect. Absolutely the same effect.
I have to say though that I am aware that more than £41 billion will have to be paid: the debt in question will carry a commercial premium right now because it has such good rates paid on it and market rates are low.
And there would also be the issue of loss of profits to consider as well, but that would be a great deal less than the £108.8 billion of value to be settled on the contracts.
How much would the precise cost be? I have to be realistic: I cannot say for sure. But is it massively less than £250 billion? Very definitely yes.
And at 1% interest rates it would be worth borrowing to pay off PFI debt now even if we were not likely to be doing QE that could better achieve this goal.
Taking the burden of PFI debt off the schools, hospitals and local authorities who suffer most of this cost would liberate them to deliver vital services now and in the future: the impact would be enormous.
There is a term for governments who do not take opportunities like this. I think that, to use technical language, it's 'bonkers'.
In that case it is time to get on with it.
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I agree fully with the blog post. The problem being that companies “enjoying” PFI are likely to be Tory-party contributors (directly or indirectly). Why would the Tory gov’ penalise its funders? Hopefully, a coalition gov will see this in a different light (and not be taking money from such companies).
Any chance at all of a Tory Govt casting aside one of the pillars of the neoliberal project ? Surely their ideology will require more sell offs?
‘here is a term for governments who do not take opportunities like this. I think that, to use technical language, it’s ‘bonkers’.
Don’t you mean: It’s ‘bankers’! It’s all about the primacy of finance capitalism:
“The UK owes more than £222bn to banks and businesses as a result of Private Finance Initiatives (PFIs) — “buy now, pay later” agreements between the government and private companies on major projects. The startling figure — described by experts as a “financial disaster” — has been calculated as part of an Independent on Sunday analysis of Treasury data on more than 720 PFIs. The analysis has been verified by the National Audit Office (NAO).”
http://www.independent.co.uk/money/loans-credit/crippling-pfi-deals-leave-britain-222bn-in-debt-10170214.html
Isn’t this the core of the problem -that cancellation of this debt will destroy future income streams for the banking sector? That’s why it won’t happen, surely.
What I am saying is that is choice
@Richard Murphy – 1) Is this interest rate the one provided by the Bank of England or the private markets?
2) If the private markets, what are your reasons for borrowing from them?
A question I have answered many times
We cannot do without gilts
‘We cannot do without gilts’
I think you state that too categorically Richard -other arrangements are possible -if you mean that ‘we can’t do without gilts, given the present accounting system’ then I accept that.
This is not the right blog to go into it but I’m never happy when something is presented as metaphysical truth!
You know better than me that there is a body of theory going back to Abba Lerner (1940’s on) which describes things differently -readers of this blog should at least have the option to consider the alternatives.
You entirely miss the point, as does MMT
Repo – which is how banks obtain security in overnight lending – is not possible without gilts and nor is most saving, which invariably when done collectively includes an element of gilts
Wiping out the most used financial product is not about Lerner or not, it’s about how markets and pensions work
You cannot consider one without the consequences for the others
A gilt is of course an abbreviation of ‘gilt-edged’ stock, but what the ‘stock’ represents in terms of financial instruments has been long forgotten.
There were two types of split tally stick (split into the ‘stock’ and the ‘counter-stock’) accounting records – which pre-dated double entry book-keeping.
The Memorandum Tally represented a proof of payment/past value transfer, and a reinforcement of title. The ‘Loan Tally’ represented a promise of future value transfer.
UK sovereigns routinely resorted to funding themselves through prepayment of taxation at a discount, and would receive money (or money’s worth of goods and services) from tax/rant payers in advance of the due date.
This fact remains embedded in the language: eg the ‘Tax Return’ was the accounting event which represented the physical return of the stock to the Exchequer to be matched against the counter-stock. And of course the ‘Rate of Return’ was the rate over time at which the instrument could be returned and the profit from the discount realised.
There was no compound interest involved in this funding: it was essentially a swap of goods & services provided by the sovereign over time for goods & services provided by the prepaying funding tax-payer over time.
The original ‘stock’ obligations were not (prior to the advent of the banking system) originally known as Debt, but were in fact Annuities whereby the sovereign received a payment in return for a lifetime income. Naturally, these Annuities came to be gamed, and to be superseded by what became known as Consolidated Annuities or ‘Consols’.
The point is that a Credit Instrument may be defined as a promise issued in exchange for value and which is returnable by the (ultimate) Acceptor in payment for goods & service provided by the Promissor.
This credit instrument is not a debt instrument (there is no obligation to pay money); it is not a forward (derivative) instrument (no obligation to deliver) and is not an equity (‘Joint Stock’) instrument (no ownership/dividend entitlement).
Acceptance of a credit instrument/promise requires trust in the Promissor directly; via a trust intermediary (aka a bank or government) or P2P within a trust framework (eg a Protection & Indemnity – P&I – Club) in order to be accepted.
So in conclusion, I think we can re-imagine gilts by removing the repayment obligation and creating a single class of undated credit instrument – a National Equity if you like.
This FT letter a while ago is relevant
http://www.ft.com/cms/s/0/17b84c0a-b321-11e0-9af2-00144feabdc0.html#axzz4DNDZVIiB
Can you please point to a blog post? Would be interested to read it.
Sorry in what?
I do not see your comments in context when I moderate them
What was this about?
@Richard Murphy – You said – A question I have answered many times
We cannot do without gilts
I’m asking, can you please point to your blog post where you have explained it in detail, as to why we cannot do without gilts?
We cannot do without gilts because savings markets are dependent on them
As are pension markets
As is banking for repo which underpins its stability now
I could write at much more length
That’s a summary
Why would the government have to borrow the money and pay any interest to pay off the PFI’s at all? The Treasury and BoE are in essence working together anyway, so why does the Government have to borrow through the private sector (thus paying a corporate subsidy – the interest) when it can just get the money directly from the BoE interest free?
If there are legal reasons for not being able to do this, the government can change the law so it can.
As has been noted by other commentators, the Tories won’t do this. This is definitely another platform to build on in any progressive lefts battle.
As for the fact the BoE is going to pump more QE into the finance sector. Why? Banks don’t need more money to be able to loan, they need more people who are willing to gets loans, and they are already heavily indebted. The QE needs to be pumped directly into the economy via Government spending.
It would seem the people who run our country do not understand that investment requires you spend money first. The benefits come later, and good investment pays for itself many times over.
The phrase ‘the lunatics are running the asylum’ never seems more apt than now.
To date the EU has not allowed a direct relationship
Brexit will change that
But whilst PFI makes no sense at any level gilts do: the financial markets could not survive without them. Banking is utterly dependent on them to operate and so are pension funds
So we need Brexit to overcome the direct relationship (along with the EU’s directives that you can’t renationalise privatised state industries.) More reason for Brexit then if the progressive left is to pursue its goals.
So, it’s the Governments job to keep the financial markets in business then, whilst cutting finance to basic living standards for the poorest/disadvantaged in society? If the finance industry is so dependant on gilts to survive, then there is obviously something seriously wrong with the economy as a whole that it can’t get chase better returns elsewhere.
Also, things must be REALLY bad if they are buying gilts that give little or no investment return, and in a lot of countries actually COSTS them investment money.
That’s some pretty massive distortions of things I did not say and which I can’t be bothered to take time on
The financial markets are dependent on the Government in a number of vital ways. For instance, I think one calculation (though perhaps for the US) showed that the implicit annual State subsidy to big banks which are considered “too big to fail” (which reduces their cost of borrowing) was approximately equal to the banks’ annual profits – implying that they are only profitable due to public subsidy. This is a reason to treat banks as a public utility, i.e. to insist they are run in the public interest. Finance needs to be reformed, not allowed to fail (even if the latter would neatly demonstrate its dependence on the Government).
Brexit would allow (P)QE to be done in a less roundabout way – i.e. the BoE could fund the treasury directly, instead of buying back gilts which the treasury has previously sold to the commercial banks. That’s only a small saving on the transaction costs, but let’s take what slim pickings we can. It might also help to reframe how people look at money.
In previous blogs, it’s been argued that a return to SERPS would be a better way of funding retirement than the current move towards private defined-contribution pensions. This would also reduce the need to issue new gilts. So there may be ways of moving in the direction of issuing fewer gilts; but this is hardly urgent, given such low interest rates.
Going back to the original point of this blog – using a relatively small slice of QE to buy out all PFI projects – I think a key argument to make is that this is about prudent use of public money. If you want to reduce waste in Government, whether your priority is to improve public services or to reduce taxes, you should want to put an end to PFI. This should be persuasive to Conservatives, too.
Whole heartedly agree with this post – very sensible proposition of ‘spend to save’.
PFI seems to have put an intolerable strain on the NHS – never mind those who claim that immigration is doing this.
PFI has been a very bad idea from day one. Brought in as part of numbers cut and shuffle and to fiddle the figures it has cost fortunes and will go on costing. This has been one of the major disasters of public financing in history.
Of course this is an eminently sensible idea. PFI was a bad idea and often negotiated at a local level where the hospital management team was totally out of its depth in negotiating with the private sector sharks. Many of the deals were dreadful.
Sadly not a “snowball’s chance in hell” of a Tory government running with this (I hope I am wrong). It should become a cornerstone of a progressive alliance however
I think snowballs may vote for Christmas
See the blog on QE coming this morning