The ONS is massively misaccounting for the cost of Index Linked Bonds – providing excuses for those who want to claim the public finances are out of control when that is completely untrue

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As regular readers of this blog will know, how the Office for National Statistics accounts for the UK’s national debt has been a long-running concern of mine.

I still suggest that the ONS get the accounting for quantitative easing hopelessly, and deliberately, wrong. Curiously, Jacob Rees-Mogg revealed more understanding of the issue than they do, very recently.

I also happen to believe that they double count £200 billion (or thereabouts) of supposed debt in their estimations because their treatment of what they call the ‘Bank of England’ contribution to the national debt cannot be justified on any rational basis.

However, of late much of my focus has been on the accounting treatment that the ONS uses for Index Linked Bonds. I last discussed this in detail here. On July 18 the ONS published a methodology note on this issue, at least in part (based on correspondence received) in response to these concerns.

I have now reviewed that note and the ONS public sector finances bulletin for June 2022. As a result I am more concerned than ever that the ONS is seriously misstating the public accounts with regard to Index Linked Bonds, where some very basic errors appear to occur, whilst the presentation of data is also profoundly unhelpful.

I have now written to the ONS with further questions on this issue. As I say in the introduction to that letter:

I have read the methodology note that you published on 18 July and the related note from the Debt Management Office (DMO) that you linked on the calculation of interest due on index-linked bonds (ILBs). I have also downloaded your spreadsheets although as they are all mathematically dead, in the sense that all formulas have been removed from them, they do not, unfortunately, add anything to understanding.

I regret that having read this material I feel that the accounting for ILBs by the ONS is still misleading. My reason for saying so is that the data you are publishing is likely to do three things:

  1. Lead to incorrect impressions being formed as to the nature of current public expenditure;
  2. Lead to an incorrect impression being formed as to the current extent of public debt and the timing of it falling due;
  3. Lead to decisions being taken within government based on the assumption that there is a shortage of public funding for necessary expenditure at present when this is very definitely not the case.

To give some indication of the scale of the misleading impression that I think you are providing, I note that in June 2022 you suggest that the interest expense payable by the government might exceed £19 billion, making it the single largest expense incurred by the government during the course of that month. As explained later in this note, I very much doubt that the actual expense in the month in question exceeded £3 billion, which is a sum only a little in excess of the accrued cash charge.

Precisely why it would seem that you have so materially overstated the charge in question is hard to determine. However, as I note below, this is partly because your methodology note does not answer almost any of the reasonable questions that might be asked as to why or how you estimate the liabilities that you claim to be currently owing, and it does instead, if anything, give rise to more questions than it answers. However, the fundamental problems are that:

  1. You provide no indication as to how you estimate the redemption value of ILBs;
  2. You provide no indication of the scale of the issues arising with regard to premiums and discounts on the issue of ILBs, when it seems likely that they are material;
  3. There is no indication given as to how the time value of money is accounted for by you, but it would appear obvious that it should be, despite which discounting does not appear to feature in your calculations;
  4. The accrual for redemption of ILBs appears to be taken wholly, and inappropriately, in the period when there is a change in RPI when it should be accrued over the remaining life of a bond in issue given that these bonds were deliberately chosen to be long-life financial products, but no indication of this is given in your data;
  5. No indication of the timing of settlement of any of the liabilities arising from ILBs is provided by your methodology, resulting in the impression being given that these liabilities might be current when it appears that this is very far from the case.

The difficulty arising from this is that politicians are exploiting your data to imply that public services are unaffordable and are as a result under threat. This is very hard to justify when the liabilities that you note might be seriously overstated and when they do not, in the vast majority of cases, fall due for many years hence, with opportunity for reasonable accumulation of the sums due to be both made and to be accounted for in the meantime, as normal accounting conventions would suggest appropriate. It would seem that you should be correcting your presentation precisely because your data is being misused in this way, not least because the risk is that as a result of the abuse of your data real people might suffer actual adverse consequences deeply detrimental to their well-being. It is for this reason that I am returning to this issue with further questions on issues that really do require clarification if this matter is to be properly understood by any reasonably informed lay user of this data, into which category I would place almost all ministers and other elected politicians as well as most financial journalists.

The letter itself is here. It is fourteen pages long. I have published it now for the reasons I note in the concluding comments:

I am aware that some of the tone in this note is quite direct but in my opinion the first duty of any government is to protect its citizens and in my opinion the data that you are producing and the form in which you are publishing it exposes millions of people in this country to significant risk of harm as a consequence of the austerity that it might encourage government decision makers to inappropriately adopt without any economic cause to do so.

I am suggesting that there is an inappropriate use of statistics here when the claim is, as I note in the latter, that there has been an interest cost in the year to date of £33.7 billion when the actual cash spend this year is down £0.3 billion to £7.5 billion and when other, accounting justified, factors are taken into account the actual accrued cost of interest due for the year to date may be not much more than £9 billion, for reasons that I note in my letter.

I hope the ONS will respond more fully this time: their last offering was well wide of the mark and helped no one.