I wrote this Twitter thread today to respond to the drivel being put out by the Tories on wrong-footing Labour on the national debt, which neither party seems to understand.
The Telegraph is saying the Tories are going to change the UK's fiscal rules to catch Labour out in the run-up to the general election. This is because they think that we're all terrified of the national debt. We shouldn't be, and what they're proposing is bonkers. A thread...
First of all, although the government claims that the national debt is nearly £2.7 trillion, it isn't. It's actually only a bit over £1.6 trillion. The rest is created by what I think to be false accounting. I explain why and what this means here.
I stress that I say that £1 trillion of the national debt does not exist either because a) the government owns it, and you can't owe yourself money, or b) it isn't on the Bank of England's balance sheet, despite which the Office for National Statistics claims it is, or c) this supposed debt is new money created by the government during the 2008 and 2020 economic crises, and that new money should not and cannot be counted as debt. So, the accounting really is wrong. But our politicians really do not understand that.
Nor come to that do most economists. The two things in life that they really don't understand are money and taxes - which almost never feature properly in their economic models or teaching as a result. No wonder they get all their forecasts wrong.
Nor should we worry about the remaining national debt of £1.6 trillion because that debt plays an essential role in the UK economy. It's our money supply, the basis of our pension savings, and it's crucial to the functioning of the City of London and our international trade.
What is more, it's also fundamental to our wealth. Just recall that in Jane Austen's 'Pride and Prejudice, ' Mrs Bennett could appraise the value of potential sons-in-law based on their holdings in the so-called 4 per cent's. They were part of the national debt.
Jane Austen knew at the beginning of the nineteenth century what we have forgotten since then, which is that the national debt represents the private wealth of the country saved with the government, which is the safest institution to deposit money with because they never go bust.
So, the obsession with the national debt is crazy. It's a great thing. The only three things wrong with the national debt are 1) the government falsely states how much we owe 2) the government claims it's a problem when it isn't and 3) they overstate the cost of it.
I've already corrected the overstatement. If Labour were wise, they would demand that the Office for National Statistics change its basis of accounting for the national debt when they're in office. Then we'd end this false obsession, and the need for austerity would go away.
So, let me turn instead to the supposed cost of the national debt. According to the Office for National Statistics, this cost has been just under £100 billion for each of the last two years. Of that, more than half is supposed interest due on what are called index-linked bonds.
Index-linked bonds actually only pay quite small amounts of interest each year. But, the amount repayable in these bonds goes up if there is inflation in a year, which in the past two years there has been.
The Office for National Statistics treats this extra cost of repayment as interest, so the supposed interest cost of these bonds - which are about 1/4 of the UK national debt - has been high. More than £50 billion a year, supposedly.
Except, that is not true because the average index-linked bond is not repayable for around 15 years and this inflation-linked payment is only due when the bond is repaid at the end of its life. But if you believe the government, this money is being paid out now. Except it is not.
What is more, they say the full cost must be accounted for now, but I challenge that in accounting terms: this is not an interest cost. It is an increase in the cost of repaying this debt, and that should not be accounted for in one go, but in instalments.
Those instalments should logically be spread over the remaining life of the bond. Given that this overstated cost has been £50bn a year for the last two years the impact of this is massive. The actual cost should have been no more than about £10 billion in the last year.
So, the cost of the already overstated national debt is also overstated - by maybe £40 billion a year. And the reason why the UK's national debt is also rising so fast compared to other countries is that this overstated cost is being added to the national debt each year.
So, over the last two years, about £80 billion has been added to the national debt to represent interest costs not payable for about 15 years where that cost should actually have been spread over those 15 years.
It's very hard to make up accounting misrepresentation of reality on this scale. But it's happening.
Now, one final thing. For reasons that are utterly bizarre, the UK government pays the UK's commercial banks interest on new money that the government creates and spends into issue via those banks, even though they do nothing to earn those interest payments.
The interest payments in question are around £40 billion a year. We could cut this by a) cutting the Bank of England interest rate (which is necessary anyway to prevent an economic crash) and b) not paying interest on some or all of this new money the government has created.
There is no legal reason to pay interest on these balances the banks have with the Bank of England. None was paid until 2006. The European Central Bank and Bank of Japan do not pay on all their balances of this sort. We can change our rules, without even changing the law.
Simply changing the rules on this issue could save £25 billion or more a year. That's enough to pay what labour thinks a Green New Deal would cost a year. Literally, that's solved the problem of paying for that.
But instead of getting our accounting for interest payments and debt right, we have a national obsession with imposing austerity and destroying our schools, the NHS, and other public services instead.
What would you prefer? Honest accounting and having money available for public services, or the current situation where politicians talk gibberish whilst running around like headless chickens and bankers laugh themselves all the way to their own banks? It's not hard, is it?
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The National Debt is a great “meme”, but completely wrong. By definition debts are bad, and the National Debt has been in existence for over 300 years. We all know that it is not good to be in debt since we are told that the government budget is like a household budget. It is nearly all incorrect.
The National Debt is not a debt, it is equivalent to the wealth of the nation, representing our savings. The only way to “pay off” the national debt is for everyone to return their savings to the government. The day the debt is repaid, is the day that the nation is bankrupt, because everyone will be devoid of wealth.
The government’s budget is nothing like a household budget. There are too many sources verifying this fact.
That National Debt is used by politicians to gaslight the public into defunding public services with the aim of privatising them, and profiting from them.
The National Debt should be renamed. It is a statistic, nothing more.
Sources
☑️History of the British national debt, Wikipedia, https://en.wikipedia.org/wiki/History_of_the_British_national_debt
☑️A Government is not a household, https://positivemoney.org/2018/10/a-government-is-not-a-household/
☑️The economy is not like a household budget, https://www.bevanfoundation.org/views/the-economy-is-not-like-a-household-budget/
☑️Government-Household analogy, https://en.wikipedia.org/wiki/Government-Household_analogy
Thanks
Sarcasm warning.
Considering the debt is our saving, the way to reduce the debt is to tax it at 100%.
No debt.
We tax income, not capital
So even at the level of sarcasm, this does not work
“We tax income, not capital”.
Undeniable, but I think Ben may feel entitled to being cut a little slack on this; while it is true we tax income, not capital it remains true that in our constitution, Parliament’s power is absolute, and under its sovereign power (‘Crown in Parliament’ in the overblown terminology); Parliament may tax anything it deems appropriate. Of course it doesn’t; but technically, that is merely contingent.
OK
Point taken…..
The reasons for the obsession are historic, and originate in the 18th century when the Commissioners for the Reduction of the National Debt (National Debt Commissioners – NDC) was set up by Act of Parliament. The NDC is now run by the Debt Management Office (implying that it is an important responsibility of the DMO to reduce the national debt; presumably, no matter what). Go to the DMO website and here is the pantomime displayed, in costume:
“The National Debt Commissioners have always been appointed on an ex-officio basis; the original six Commissioners were:
The Chancellor of the Exchequer
The Governor and Deputy Governor of the Bank of England
The Speaker of the House of Commons
The Master of the Rolls
The Accountant General of the Court of Chancery
The Life Annuities Act 1808 added the Chief Baron of the Exchequer, but that office was abolished in 1880 and the Lord Chief Justice was substituted by virtue of the Supreme Court of Judicature Act 1881. Similarly in 1872 the Paymaster General succeeded the Accountant General of the Court of Chancery, but was in turn replaced by the Accountant General of the Supreme Court under the terms of the Supreme Court of Judicature (Consolidation) Act 1925. The Bank of England Act 1998 added provision for additional Deputy Governors of the Bank of England and consequently, there are now 10 National Debt Commissioners, namely:
The Chancellor of the Exchequer
The Governor and Deputy Governors of the Bank of England
The Speaker of the House of Commons
The Master of the Rolls
The Accountant General of the Senior Courts
The Lord Chief Justice
The National Debt Commissioners Act 1818 provides that any three or more Commissioners acting together can exercise all of the Commissioners’ powers.
Records show that meetings of the Commissioners were at first held regularly, usually at the home of the Chancellor, but that the last recorded business meeting took place on 12 October 1860. The reason for the sudden cessation is unknown, no hint being obtainable from the minutes, but since then the day to day decisions have been delegated to the Comptroller General and the Assistant Comptroller, who are civil servants, but are appointed by and act on behalf of the Commissioners. On the comparatively rare occasions when it is necessary for a fundamental policy matter to be put to the Commissioners for a decision it is referred to the Chancellor of the Exchequer, the Governor and the Deputy Governors of the Bank of England, who together constitute a quorum and are sometimes referred to as the “active” Commissioners. In practice the only references made to them are when it is necessary to make formal appointments, for example of Attorneys at the Bank of England and of the Comptroller General and the Assistant Comptroller.
However, the Commissioners did reconvene recently, at the Chancellor’s invitation, on 15 February 2016, on which occasion the DMO’s Chief Executive was officially appointed as the Government Broker, a formal title previously conferred on the senior partner of the stockbrokers Mullens & Co, up until 1986.
The Commissioners’ powers and functions are laid down in the Acts dealing with the individual funds or accounts and there is no statutory provision requiring the production of an annual report or other published information about their activities. However, annual report and accounts are produced for the various funds and many of these are eventually published in White Paper form and are available from either The Stationery Office shop for the Northern Ireland Courts & Tribunals Service Investment Account or on http://www.gov.uk for the remainder of the investment accounts and the Government Annuities Investment Fund. The remainder of the miscellaneous accounts are published on this website. The Comptroller General, who is responsible to Parliament for the sums administered by the Commissioners, signs these accounts”.
The main purpose of the Commissioners can only be to ensure the whole country is permanently in an acute state of advanced paranoia about the national debt; in spite of the fact most people understand little, or nothing about it; and that, in a nutshell, is how British politics operates (a British, exceptionalist example of the circular firing squad).
I can remember long, long ago British politics was permanently paranoid about the Balance of Payments. Remember that? You never hear about it now, although it is probably a more serious problem for Britain now, than the national debt (because the balance of payments is far more dependent on externalities than the national debt, and the balance of payments is far more difficult for Britain to do much about than the national debt). The Neoliberals thought the City of London would somehow fix the balance of payments problem with its magic wand and invisibility cloak, back in the 80s. No such luck. You never hear about the balance of payments now. Ever wondered why? It is because the balance of payments is an endemic mess, largely ignored because neither Treasury or neoliberal politicians have a clue clue what to do about it in a global world where Britain’s financial power no longer counts for much (it is shrinking faster than the ice caps in climate change); and the likes of India and China are pushing us into the sidelines of the mainstream global world.
So the usual British Treasury answer is deployed for real external problems; ignore it and pretend the real problem is the national debt, and they are just the people to fix it.
You are being governed by people who are far, far out of their depth in a fast changing 21st century world.
Many thanks for that
Thank you for this Mr Warren and Happy New Year to you.
Thoughts?
I’m not so generous as you as to say that these people are out of their depth.
I suspect – strongly I might add – that what you really have is puppets, well paid and looked after to say and do the most outrageous things in order to maintain the status quo.
Mr Warren – very good points about the balance of payments – I recall the 1960s & it was a regular feature on the news, with lots of hand wringing ref £ devaluation (“the pound in your pocket” etc etc). More recently: Steve Keen, ….”main danger the trade deficit – the most important deficit you have to control”
(@ 19.50 ) https://www.bbc.co.uk/programmes/b07p4sg4
I agree that the usual suspects (Treasury and the City casino) are clueless & the politicians are in “lets pretend” mode ref deficit, which will only get worse. Most (+90%) of the electrcial equipment needed for power networks (and renewable genration) is not made in the UK. What could possibly go wrong?
“the pound in your pocket”.
In the vernacular of Raymond Chandler and the great American Film Noir: there’s a busted flush if ever I saw one …..
DMO.Gov.UK website shows £382 Billion of ‘face’ vale index linked gilts at issue & £617 Billion as figure including ‘inflation uplift’.
How they ‘amortise’ this cost including inflation is the supposed grey area.
Just ‘kicking the can down the road’ by rolling up the inflation uplift cost for each year, to the final redemption date, isn’t right !
https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D1D
Since it is a capital payment due on redemption it needs provisioning over remaining life
John, it seems to me there are essentially three ways to deal with the increased redemption amount on index linked bonds (due to inflation being higher than the rate assumed when the bond was issued in one or more years during the term of the bond).
1) We could book all of that increased amount in the year it arises. That is what the national accounts do: we treat the whole amount as payable in full today, because the international accounting standard requires it – but can anyone explain why?
2) We could ignore that amount until redemption. In effect, that is what we always do anyway: we “repay” maturing bonds using other debt instruments – either issuing more bonds, or creating cash.
3) We could recognise part of the increased redemption amount each year until redemption. This is what I understand by an accruals basis – lump sums (such as increased capital amounts payable on redemption) are spread over the period to which they relate. That could be a simple straight line basis or something a bit more complicated, such as amortisation. It is what we do with the premium or discount over par value on issue. If a 10 year bond is issued at 90p in the £ then in simple terms we would recognise 1p per year for ten years until the full 10p is provided for at redemption. And then we repay using more debt instruments. But for some reason we don’t do that if the 10 year bond is index linked, and there is a 9p increase in the redemption amount at the end of year 1. We treat that 9p as a cost of “interest payable” straight away, rather than recognising 1p per year for the next 9 years until the full amount is provided for.
You summarise the options well, even if slightly simplistically. The third is logically right. The second is pragmatic. What we do makes no sense.
The problem with explanation 1) in Andrew’s crisp summary, is that it is a fundamental contradiction of the whole purpose of Government borrowing; which is for government to take advantage of the time value of money, in conditions where the Government alone has a unique market edge; the assumption of the perpetuity of sovereign government itself, combined with the security the sovereign issuer of the currency in which the bond is denominated, alone can provide.
Government can spend money now, for the annual cost of serving the interest cost alone and deferring the redemption of the capital sum far into the future. The time value of money ensures the redemption value declines in capital value and economic importance. That is the point of the whole exercise.
Allow me to take a historically important example. In 1833 the British Government legislated to offer one of the largest bond issues in history; for £20m (in comparative terms a colossal endeavour – it represented 40% of the Government of the day’s total annual expenditure). The £20m was used to compensate slave owners (broadly in the sugar plantations of the Caribbean) at computed market price for the emancipation of their slaves. The slave owners received cash (the funding of the enterprise was a major privatisation of public resources).
The Bonds were not finally redeemed until 2015. Most of the readers of the Blog will have helped to fund the emancipation of slavery, and compensate slave owners (albeit somewhat tenuously! That is, after all the whole point). Notably, when that was first announced (a TJN FOI I think; it came as a shock to the public – the economic historians didn’t discovered it……….).
The original bond was long gone; incorporated in other bonds, rolled up and rolled over; until it was redeemed almost 180 years later – as a relatively trifling sum in the margins of 21st century government £Bn financing. That is perhaps a rather extreme example; but I think it usefully describes how the system actually works.
It follows that it is perverse to pay redemption costs early, when the point of the bond is to defer large costs as redemption capital. It both defeats the whole purpose of deferring redemption, and reveals the absurdity of both the ‘international standard’ and bringing forward to today a redemption that should be deferred to redemption, or at least expensed over the unexpired life of the bond. This means, of course fluctuating future redemption values; but that reflects on the absurdity of issuing hydra-headed, index-linked bonds in the first place, which means over-complicating an already unknown future on which too may foolish financial bets using complex derivatives with literally incalculable outcomes will surely be made in what are, after all, our inherently unstable financial markets (Minsky).
Christine Desan’s paper makes the same point
You are right
In a simple world where I borrowed from Richard £100 at 2% interest for 5 years it is very straightforward. Interest is £2 a year and my debt is £100. The complications come from a few things…..
First, I could have borrowed £90 with no interest and agreed to repay £100 in 5 years time – they are (roughly) equivalent.
Second, with interest rates now much higher than 2% the market value of this loan is no longer £100 it is much lower.
Third, we can ask “what must I pay back when the bond matures?” for an individual bond but this has no meaning for the National Debt which is (mainly) a whole portfolio of gilts with differing maturity dates that are continually refinanced by the issuance of new bonds as old are redeemed.
Fourth, inflation linked bonds have an unknown future redemption amount (in cash terms). (Equally, it is true that conventional gilts have an unknown future redemption amount in real terms!!).
If I have time over the next few days I might develop this and write something for you and Andrew to kick around.
Please do – this is essential stuff
One point I would ask Clive to take into account; the declining maturity duration of the debt stock. I make the point because it plays into the hands of the obsessors about debt reduction; which begs the question. Originally Government bonds were perpetuities. Now we are shrinking them toward an overdraft. That changes the dynamics. Even Clive’s example seductively refers to 5 years. Governments should not be thinking in terms of 5, or even ten years. Bonds 20 years+ I can understand. That is not where we are going, and I think maturity duration is as critical as rates. the mathematics, however becomes more difficult the further out the maturity – because a 20+ future is very difficult to predict with any accuracy at all. Keep it short and you are in the hands of the margin makers.
Here are some facts on declining bond maturity duration from the DMO Debt management report 2022-23 (https://assets.publishing.service.gov.uk/media/623a22078fa8f540ecc60532/DMR_2022-23.pdf):
“By end-December 2021, the average maturity of the total stock of gilts was15.1 years, as shown in Chart A.4. The average maturity of the stock of conventional gilts is unchanged from end-2020 to end-2021, at 14.0 years, with the average maturity of index-linked gilts falling from 19.2 to 18.4
years. The average maturity of the government’s wholesale marketable debt remains consistently longer than the average across the G7 group of advanced economies, as shown in Chart A.5” (DMO Report, p.20).
I hypothesise that bond maturity durations have been shrinking for decades, whch of course suits the City, finance sector, commercial banking and Neoliberal ideology; but is bad for government.
Data on this is published quarterly. At December 2002 average conventional gilt maturity was 7.04 years and index linked 11.29 years so the average age has increased.
Under DMO Publications I found it difficult to peruse over the long term. As far as I could see the annual report only began to be published in 1998-99; and without clear maturity duration data. I am looking for a longer time frame to prove the point; but in the 1998-99 DMO Report there is no easily decipherable maturity duration averages given. The principle now for conventional gilts is, I think short (up to 7 years), medium (7-15), long (15+). I am not comforted by the standards of 2002 (five years before the Crash). Since we are talking about long term Government debt I would wish to see a much longer trend; i suggest the last twenty years are not a very good example of Government/Treasury/BoE financial wisdom, on any measure – at least prima facie.
If I may borrow from the ‘household analogy’, if banks lend on houses to individuals over 25 years, or pensions are built up on supposed investment over perhaps 40 years, I find it bizarre that Britain is funding Government spending on everything (including major infrastructure, nuclear plants and so on) on an average gilt portfolio of 14/15 years, and a declining trend – to 5-7 years again (more hollowing out of British infrastructure)? If we are going to transform the country (water, railways, renewables), with the Green New Deal is that the investment return timetable? Investment Redemption in 5-7 years? That will not work for pension investors; and i am struggling to understand the principle for government. No doubt everyone is doing it; but that I put down to hard neoliberalism and the assault of profit now, over public investment.
The data is quarterly reports John, but annual reports.
I am not sure what is wrong with the comparison. It seems we have considerably extended average maturity dates. Why are you suggesting otherwise? The quarterly reports are also available from 1998, amply long enough I would suggest. The evidence is we could increase maturities further if we wished, but nit right now,I suggest.
Allow me to add this. Checkin Statista, ‘Public sector net debt expressed as a percentage of GDP in the United Kingdom from 1900/01 to 2028/29’; Debt/GDP in 2001-2 was 28.1%. If you have effectively drastically reduced relative debt (largely by not investing, especially in infrastructure – as we can now see revealed in the decaying infrastructure, with no redundancy built in), then it is quite easy to reduce maturity durations by retiring old debt, and taking a casual view of short-termism, no doubt encouraged by the margin seeking financial sector.
I confess I do not follow your logic, or even what you are trying to prove John
Hi, John,
I have just fired off a few thoughts to Richard about National Debt Accounting so too late to change it. I have only considered the narrow accounting issues that, if changed, would deliver something that had more meaning.
Your point about duration of the debt is important but I would make two points.
First, Long duration delivers certainty of interest costs and (often missed) eliminates the risk of not being able to borrow at all (as Northern Rock found out the hard way). Both of these are crucial to private borrowers… but far less so to Sovereign borrowers. They have control over interest rates and can always roll over maturing debt by money creation.
Second the UK has the longest debt profile of any major sovereign borrower.
I will get back to you Clive…
I agree your other points
“Long duration delivers certainty of interest costs …. crucial to private borrowers… but far less so to Sovereign borrowers. They have control over interest rates and can always roll over maturing debt by money creation”.
I suggest, not if the quantum of debt, and debt reduction are critical driving forces of monetary, economic and even political policy, followed closely in parliament and under the close scrutiny from all quarters in obsessive public debate; or if the bias is toward larger and larger quantities of shorter and shorter term debt, requiring constant reworking. Such a calculatedly short-termist programme seems to me inherently unstable, and builds in an expectation of continuing instability and volatility into the fabric of the process.
The control over interest rates, in the sense of setting them is one thing; but not necessarily the same thing as being in control of the consequences of setting them. Certainty is surely not inherently a bad thing, if it is available, even for a sovereign borrower; and I suspect shorter term borrowing is also inherently riskier in the unintended economic consequences that may unfold, fast. I think, in sum that short-termism is a problem in monetary policy, not just in economic policy. The certainty of prediction, after all is the Holy Grail of science.
But where is the evidence of this increasing short termism, John?
The problem is the time-frame. If I take your time-frame I can’t prove it; but I think the last twenty years is on a historic frame, a little anomalous. I can’t easily extract the data for the longer time-frame I want, back into the 1980s, before the period the debt/GDP ratio was falling to around 30% (and that is anomalous in the three hundred years of data, where Britain is typically much closer to 100%, or more – for long periods). The limited data I could see for the mid 1980s, suggested less emphasis on short-term debt, but not sufficiently large to rest an argument on it (and of course British finances were floating on much higher oil revenues).
Given that the terms of shorter term debt is likely to be less certain and predictable (unless you can show this proposition is wrong), what are the advantages of shorter term debt; especially for large capital investment/infrastructure projects. There are advantages in pushing redemption into the far future, at least in many cases (I accept not all). In monetary policy I just don’t think the planning frame should be the same for Government as corporate institutions. Think of Hinkley Point. Only government can underwrite such large scale projects. The old Hinkley Point B began in 1976, and is closing down in 2028 (initial cost estimated at £140m). That will not be the end of the waste storage and shutdown story. Hinkley Point C is estimated to cost £22Bn-£23Bn and subject to increase. The government has signed a complex contract with EDF, and passed a Finance Act in 2022; “New nuclear power stations financed through the RAB [Regulated Asset Base], would be funded by a charge on electricity suppliers, who are expected to pass the cost on to consumers”. That is one way to fix the debt problem; already high energy prices will no doubt increase for consumers, given the Hinkley Point C solution. This began a project idea around 2007, and will not open until perhaps 2026? I would have thought that such a project should be funded by Government through a long term bond (a GND style deal if you think Nuclear is ‘green’); unless, of course it is just so bad a deal it can only sensibly be done by dumping the cost onto the consumer (already sinking under the cost of domestic energy), directly.
That is the best I can do without sufficient data, but I struggle to see the logic of Governments using substantial amounts of short term debt; just because, unlike the private sector, whatever the circumstances, they just can. I am not advocating solely long term debt, but a balanced portfolio. I am open to persuasion that I am completely wrong, but without a powerful case being presented, remain doubtful.
I am still struggling to get your point when average maturities are rising.
And why issue short term debt? Because when rates are high issuing loing t6erm debt makes little sense. I think it is as obvious as that.
Plus, markets want it and the goverbment is servicing saver’s needs. Remember, that all it operates is a savings bank.
Richard,
I shall not exhaust everyone further. In closing:
1) I think the time-frame of a sovereign borrower should be much longer than corporate financial frameworks.
2) I am not proposing long debt at high interest rates. As Clive has said, sovereign borrowers control interest rates. Of course Clive neatly segues the fact that the BoE is “independent” (if you believe it); which would test his proposition, if it were. If sovereign borrowers are in control they can balance their portfolios, that is my argument.
3) I am saying that with rates on the floor for ‘n’ years, then was a time to create long term debt.
4) My point more generally is in a historical context. It is only with a long term picture of debt that you can see what is really happening. I think your time frame is too short, too implicated in the neoliberal picture and manipulation and distortion of the data (including the current problems with inflation indexed gilts). I want a much longer timeframe of data than you suggest is sufficient.
5) Long term investment should have long term financing. 7-14 years isn’t long term in a sovereign perspective. Meanwhile, there is hand wringing that Britain’s borrowing at typically 7-14 years is ruining the lives of everyone’s grandchildren. It would be reasonable if their grandchildren paid something for the infrastructure provided for their use; rather than relying on the infrastructure bought by their great-great-great-great-great grandfather.
6) In sum, over a long time frame (I would prefer to go back to pre-neoliberal periods), I think the desire has been to shorten borrowing maturity durations. I haven’t ever seen a comprehensive, persuasive argument why that is obviously a ‘good thing’. Sovereign borrowers should think in bigger timeframes.
I will not attempt to continue the debate from here.
John
You misunderstand the debt.
It does not finance capital spending – because that is not its nature and it is not linked to it. Insteaad it is just a savings facility as it stands at present. Look at it that way and this is ong maturity savings products.
Richard
Richard,
I shall not continue the debate, I reply merely to say I do not think I misunderstand it; it just isn’t hypothecated. I am thinking of such as the UK Guarantees scheme for infrastructure; for example, investors in government guaranteed debt, at a rate 0.5% above Gilts (a few years ago); or the PSNFL ex (public sector net financial liabilities excluding public sector banks), with a broader range of financial assets and liabilities in “non-financial assets, such as buildings, infrastructure and vehicles, as well as financial assets such as shares (for example, the Government’s 43% holding in the NatWest Group) and money that is owed to it” (NAO).
Perhaps, however I misunderstand the nature of this funding in the government borrowing context.
NB. I think the Government still owns around 39% of NatWest(RBS); almost 16 years after taking over the company, and not out of yet, and nothing is certain. The average gilt maturation duration is 14 years. This is a function of the burdens and risks, the unlooked for, unintended consequences of sovereign commitments that arise in an unstable world.
Plus the “fiscal rules” aren’t laws of nature, they are arbitrary codes invented by chancellors of the exchequer. There is no reason Labour should feel bound by “rules” newly invented by the Conservative Party in the knowledge they themselves won’t have to live with them.
Agreed
But I bet they will follow them
Starmer and his shadow cabinet certainly do seem to put a heck of a lot of effort into failing to understand the problems within the country and, therefore, the possible (and necessary) solutions to them.
I’m not a fan of conspiracy theories but, sometimes, you really do have to wonder just quite how we could have got ourselves into this situation by chance.
I suspect that some of the movers and shakers understand the reality but are happy with the status quo because it benefits them, but there are way too many people in positions of power who are simply ignorant (and therefore inept). Andrew Bailey, for instance.
This time of year many are conscious of their credit card debt and the ignorant? unscrupulous ? politicians and journalists play on that. As Ian says, they can then privatise.
Will Hutton today in the Observer writes that investment in the real economy of goods and services is much reduced and much of shareholders’ dividends go abroad. He argues for pension funds being used for investment. He argues this is something Labour should do. I noticed in the last paragraph ” some of the smarter in the City are on the side of reform. ”
There might be more support out there than we know.
https://www.theguardian.com/commentisfree/2023/dec/31/britain-stuck-in-doom-loop-system-rigged-against-growth-that-needs-to-change
Just to think you for all your work on our behalf and a happy -and healthier-new year.
Richard, I read with great interest you article on how the UK national debt is miscalculated by around £1trillion and found this article to also be very interesting. Why do you think politicians haven’t leaped at the opportunity to dramatically reduce the national debt and free up vast amounts of money for public spending?
My theory is that many politicians are essentially passive creatures who are unable or unwilling to challenge established narratives on the need to ‘manage the national debt’ but this still doesn’t explain why they wouldn’t use a simple change in accountancy to free up money.
What are your thoughts?
Many thanks!
Money is not freed up by what I am suggesting.
Money is freely available, anyway.
Understanding is made available by what I am saying.
Thanks for your response Richard and happy new year to you!
I agree that the narrative around the availability of money is false. I was interested to read your thoughts on why you think politicians rigidly stick to this absurd narrative about national debt being like household debt and the need to ‘balance the budget’ and reduce the deficit.
You can imagine that Labour’s 20 point lead would evaporate in an instance if the Tories could convince the electorate that they had halved the national debt so why don’t they do it?
As you mention in this article, simply changing the way that interest rate repayments are calculated would save 25 billion a year which, as you point out is enough to finance Labour’s flagship green policy without borrowing a penny so why don’t they do it?
Is it ignorance, incompetence, malice or something else?
Thanks!
But the Tories have nit halved the national debt – they will still have massively increased it
Why does it continue? Because our politicians cannot get over their Oxford economics degrees that taught them all value is created by the private sector and is wasted by the state. They believe that and so want to limit the scope of the state.
Joe, can I suggest vested financial and banking interests have sufficient pull in the media to silence or impede the careers of politicians who might wish to raise inconvenient facts?
Unfortunately, there is pretty much no way that any of the financial and political classes can, or will, admit that they have been selling the electorate a lie for decades. Same goes for academia which has been indoctrinating students with this neoliberal guff for way too long. A handful of dissenting voices can’t possibly get any traction in the right-wing dominated media, regardless of how clear the reality is when you spend 5 minutes to look beyond ‘conventional economic wisdom’.
I suspect the only way it could happen in the current climate would be for a billionaire with control of a social media outlet to spend lots of effort pushing dissenting voices to point out the nonsense. Unfortunately, billionaire tech bros don’t tend to have any interest in changing the status quo. Except for the worse, of course.
Hopefully, the efforts of people such as Richard can continue to chip away at the neolib narrative, but it’s going to be a long road with much suffering endured by the poorest in society before there is much of a chance of change.
I’m not sure how false accounting of the national debt benefits the financial services sector though. Of course The City is hugely powerful and influential but that doesn’t seem to explain why politicians would persist with these false narratives around the national debt.
They wish to push the state sector downwards
Their economics tells them it is an aberration to be limited in size
This narrative helps that
It also affords them power
Well said. The powers that be haven’t a clue about this.
But why go along with their, similarly clueless, position that national debt interest payments are a “cost”? A cost to whom exactly? It can’t be the UK government and its keyboard. Unless you mean the longer term ‘opportunity cost’ that the UK government might suffer over real resources. That is, by handing over billions of spending power to the private sector, the government will find it has to compete with those private sector beneficiaries for said real resources.
The current fiscal rules use ‘Public Sector Net Debt excluding the net debt of the Bank of England’ which ( I think) treats the balance technically due by HMT to the Asset Purchase Facility as debt. Does this not support the OBR calculation of PSND Ex BoE?
That is not true
The figure is not mentioned in debt calculations, as I showed recently
When John Warren writes in his first piece about “our constitution” it is apparent he is writing about the “British”, in fact the English, constitution which holds that sovereignty resides in the Westminster Parliament. I think John comes from Scotland in which case he should know that “our constitution” is quite different. It says sovereignty lies with the people. It was a condition of the Treaty of Union that the Scottish constitution must be upheld but as soon as the new UK Parliament came into existence it chose to suppress what had been written in the Treaty, and has done so ever since. Unfortunately, 300+ years on, people in Scotland, and in the wider UK, have become conditioned to believe that only the English constitutional principle should apply. That is likely to be formally challenged in 2024.
Nice idea, but erroneous. We are in the Union, whatever you think; and the Treaty of Union brought us here; but can’t help us now. I suggest you read Crawford and Boyle’s (leading international lawyers, and Scots incidentally) legal Appendix to the British Government’s case in ‘Referendum on the Independence of Scotland: International Law Aspects’. You are harbouring an illusion if you think your interpretation of the treaty of Union offers a secret way out. It doesn’t. This romantic notion is a dead end. Think politics.
There is one way out of the Union, and its is simple. The Scots just need to stop voting Unionist, and the electoral tipping point is already not very far away. Simple.
There are problematics with the Union and the Treaty, but not where you are looking. When both Parliaments dissolved they terminated their capacities to effect anything, including the Treaty. There is no leverage in your approach. Politics is your only way out. The new British Parliament of 1707 then rose from the ashes of both dissolutions; but while the Scottish Parliament disappeared altogether (when the Equivalent was delivered to Edinburgh the Scottish Parliament (as representative of ‘the people’ in your vision) that had demanded it; no longer existed to receive it, a conundrum that remains something of an elusive mystery that few historians pursue); for Britain, and for Scotland the real effect of the Treaty (ineffective in modern international law), was as if the English Parliament was resurrected, and continued in every respect as if nothing had happened (save for the Scots represented now in both houses of Parliament); to ALL intents and purposes effectively the English Parliament’s dissolution was a purely legal technicality, and de facto a fiction. The new British Parliament then effected the provisions of the Treaty, and controlled them. The Scots Presbyterians found out the real implications soon enough in 1710, and much to their shock and surprise, in the Patronage Act.
Your second para is a very neat summary of the situation.
Julian
Didn’t quite get that
Do you agree or not with Richard that it would be wise for Labour to ” demand that the ONS change its basis of accounting for the national debt” to …”end this false obsession?”
Yes of course we should all expect the ONS to account correctly but I also think international comparisons are important and I think the ONS would say they are using internationally agreed bases of accounting.
They already do six versions – all wrong – so they can keep doing the internationally comparable wrong one and a direct version. Your argument does not stack.
My best read over the last year was Mattei “Capital Order”.
The motto of the BOE is “never explain, never apologise and never regret”.
Their job is to ensure the capital order remains in power.
The tragedy is the Labour Party goes along with this.
After all it was Gordon Brown who gave them their “independence”.
The truth is that the financial services industry is failing the country. Resources are being misallocated, wrongly invested and risks are being dumped on the public.
And the BOE trained Rachel Reeves will be more of the same.
It is an excellent book
ery interesting and if correct a most important view for parties in Paliament to consider.
May I ask you to write something along the same lines for the US economy, or is the state of affairs there very different?
I do not have the expertise of US data to do that