The House of Lords Economic Affairs Committee has published a report today. They concluded:

The Government must overhaul the existing fiscal framework to make public debt more sustainable and resilient to external shocks. While a government has to contend with the economic cycle, its long-term fiscal ambition should be to reduce debt steadily as a proportion of GDP over time.

A new fiscal framework should set out credible tax and spending plans covering five years.

Rather than have a continually moving target to reduce debt, the framework should set out how debt as a proportion of GDP will be lower on a given date in the fifth year, unless there are exceptional reasons. To provide accountability, the target for the fifth year should remain fixed until reached. A further year's target should be added at each yearly update and this new target should not normally be higher than the year preceding it.

This, very politely, is the nonsense I expected. It assumes the government is a microeconomic entity buffeted by markets that hold it in their power when the reality is that government is the creator of money and the provider of the deposit facility on which markets are utterly dependent.

If their Lordships so wildly misunderstand the true nature of what they call the national debt, which in reality is nothing more than an optional savings facility made available by the government, on which it is not in any way dependent since it can always borrow from the Bank of England, unsurprisingly they come to totally false conclusions.

They stress that credibility is at the core of their concern over what they call debt management. The fact that their own assumptions lack credibility does not seem to concern them.

In the circumstances, my evidence submitted to the committee is, I suggest, more interesting than the Report they produced. This may now be published and was as follows:

PROFESSOR RICHARD MURPHY – WRITTEN EVIDENCE SND0016 – SUSTAINABILITY OF THE UK'S NATIONAL DEBT INQUIRY

Introduction

1. This submission is made in response to the UK parliament's House of Lords Economic Affairs Committee call for evidence, asking the question ‘How sustainable is our national debt?' https://committees.parliament.uk/committee/175/economic-affairs-committee/news/198891/economic-affairs-committee-launches-new-inquiry-on-the-sustainability-of-the-uks-national-debt/
2. This evidence is submitted by Professor Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and director of both Tax Research LLP and Finance for the Future LLP. In all those roles I have worked on the accounting for and sustainability of the UK's so-called national debt.

Summary

3. In its early paragraphs, the Committee notes that the UK's Office for Budget Responsibility stated in 2023 that “the 2020s are turning out to be a very risky era for public finance”. In this submission I argue otherwise, suggesting that:

1. The UK does not have a national debt but does instead offer a range of very popular national savings products and also hasnational equity that is not yet recognised in the nation's accounts.
2. All of these are sustainable in their current forms and the holders of national savings products from gilts to premium bonds and NS&I accounts most definitely do not wish for the return of their funds to them.
3. The cost of servicing these savings accounts and the national equity is under the control of the government and if it is currently considered excessive then that is as a result of its choice to make it so as a result of the imposition of artificially high interest rates in an unnecessary attempt to control inflation.
4. The so-called national debt as stated by the Office for National Statistics is overstated in value by approximately £1 trillion.
5. National equity capital exceeds £700 billion.
6. The ratio of so-called national debt to GDP is not useful as a tool for economic management, not least because the figure for national debt now used is seriously overstated as a result of mismeasurement by the Office for National Statistics.
7. As a result, what is required is that we properly understand the nature of the nation's finances, its income and expenditure and balance sheet and to then use that understanding to attract the additional funding required to fund the investment in the UK that is now required which can only be delivered by action on the part of the government.

Submission

4. Although the call for evidence refers to the sustainability of the UK's so-called national debt this is inappropriate. The UK government does not have a national debt. Instead, it provides savings facilities for banks, pension companies, life assurancecompanies, foreign governments, and, if they wish, individuals. Those savings facilities include Treasury bonds, or gilts, Treasury Bills and the products offered by National Savings and Investments (NS&I). The balances on NS&I accounts have risen as follows since 1998, providing evidence in support of the suggestion that these facilities are attractive to consumers:

Source: Office for National Statistics public finances databank

5. Government provided savings facilities have increased in significance since 2000, when the management of the so-called national debt and government cash requirement was transferred from HM Treasury to the quasi-independent Debt Management Office[1].
6. There is no reason why the arrangements in use to manage cash requirements prior to 2008, when it was normal for the government to borrow from the Bank of England using its Ways and Means Account facility rather than to necessarily borrow from financial markets to balance cash flow requirements, cannot now be used again. This is most especially the case since Brexit and the removal of Maastricht Treaty restrictions on the use of his arrangement[2].
7. It is, as a result, apparent that the scale of the UK's so-called borrowing from financial markets is a matter for it to now decide upon, and not for markets to determine. The question of the UK's debt sustainability is not relevant as a result.
8. Importantly, the UK government can, instead of accepting liability to third parties for funds deposited with it (which is how the existing so-called national debt might be most appropriately described), choose to create money to fund its own activities, leaving these balances on loan account with the Bank of England whenever it wishes. This is, in effect, what the quantitative easing process has done, although to meet the requirements of the Maastricht Treaty[3] that process has been heavily disguised[4].
9. The interest cost of the savings products that the government supplies is under the government's own control. This is clearly the case with NS&I products, but all its other savings products are also heavily influenced by the Bank of England base ratewhich the government could take control of at any point of time if it so wishes by changing the provisions of the Bank of England Act, 1998[5]. Brexit also provides it with the freedom to do this. The cost of interest on the central bank reserve accounts could also be brought under central government control in the same way.
10. The U.K.'s national debt has been sustainable since 1694 when it was first created[6], and barring the issue of 3% War Bonds in 1914[7] has never suffered a problem with product placement, with all redemptions also always being rolled over without difficulty, meaning that questions about sustainability of the debt appear to be somewhat misplaced. Anything that has lasted that long, and often at supposed ratios to GDP much in excess of those now recorded, is not a matter of concern.
11. The current ratio of so-called debt to GDP is in historical terms low:

Source: https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html

The current level of so-called national debt, despite what is being claimed, is not unsustainable as the evidence from history makes clear.

12. The ratio of national debt to GDP as reported by the ONS is, in any event, meaningless and not comparable with data in the time series noted above for periods prior to 2010 because of the impact of quantitative easing. This is because it remains the case that more than £700 billion[8] of UK government bonds are still owned by a notional subsidiary of the Bank of England[9] that is actually under the effective beneficial control of HM Treasury[10]. Similar gilts in existence, but not in circulation, owned by the Treasury's Debt Management Office are excluded from all figures for national debt[11], but those beneficially owned by the Treasury via the Bank of England, and so similarly out of circulation in the economy are included in the figure for the national debt. The disparity is glaring, obvious, and irreconcilable. The national debt is overstated by more than £700 billion or more as a result because as a matter of fact, the government cannot owe itself money, which cancellation is confirmed by this accounting being adopted within the UK Whole of Government Accounts[12] which are prepared in accordance with International Financial Reporting Standards.
13. The national debt is also overstated by almost £300 billion because of the Office for National Statistics' claim that there is aso-called Bank of England contribution towards that debt for which no matching liability exists in the audited account of the Bank of England. The figure in question represents assets that the ONS arbitrarily refuses to accept the existence of when estimating the national debt. The total sum in question cannot be categorised as debt because there is no identifiable person to whom it is owing. The problem arises because the Office for National Statistics does not use double-entry accounting when estimating the national debt.
14. In combination, the matters referred to in the last two paragraphs suggest that the so-called national debt is £1 trillion less than the Office for National Statistics currently estimate as a consequence[13].
15. The biggest threat to the so-called sustainability of the UK's national debt is the notional resale of bonds bought by the Bank of England during the course of the quantitative easing era by that Bank. They are doing this with the aim of supporting the high interest rates that have been artificially imposed upon the UK economy in an unnecessary attempt to tackle inflation which has instead given rise to a risk of recession. This programme, the detail of which was announced[14] the day before Kwasi Kwarteng's ill-fated budget[15] in September 2022, was the actual cause of the pension liquidity crisis that emerged over the following weekend, which in turn required the creation of emergency additional quantitative easing to solve the problem[16], but which incidentally helped bring down the government of Liz Truss. It was not Kwarteng's budget but the Bank of England's hasty implementation of quantitative tightening that actually created that crisis. The continuing sale of more than £80 billion of excess bonds a year as a result of quantitative tightening operations is what is contributing to the current record levels of bond sales in the UK, resulting in the risk of the market being over-stressed in a way that normal levels of sale would not do[17]. If, as is now necessary, Bank of England base rates are reduced dramatically to avoid the risk of deflation and recession then those bond sales could cease and as a result there would be no threat to market capacity to buy bonds inthe UK.
16. There are serious problems with the structuring of the UK's supposed national debt. In particular, it is extremely difficult for most people to acquire a part of this debt and yet it is apparent that most people would wish to save in government backed bank accounts if they could. The evidence of that is clear from the fact that an £85,000 deposit guarantee has to be supplied by the government to induce people to save elsewhere. They will only bank with commercial banks because the government has provided that guarantee. It is likely that if the government provided access through a state bank to a full range of deposit facilities, current account banking, and (maybe) limited credit facilities, the demand would be significant, and the amount placed on deposit with the government would rise dramatically and any stress on the so-called national debt would totally disappear.
17. This would be particularly appropriate when there is an obvious need for increased state investment in the UK, which could only be funded by debt. Social housing, the NHS, education, flood defences, transport, energy transformation as a result ofclimate change, and much else demand funding and no business would pay for this out of revenue: they would borrow. So should the government. To attract the necessary funds for this investment. The government should:

1. Change ISA rules so that existing ISA arrangements are suspended henceforth and all tax-free savings opportunities provided by the government are made available on the basis that the funds saved be used for the purposes of funding national infrastructure development. At present £70 billion of funds go into ISAs a year with an annual cost subsidy in terms of tax foregone of £5 billion.
2. Change rules on pension tax relief, so that in consideration of that relief being granted, 25% of all new pension contributions should similarly be required to be invested in bonds, shares, or other structures that fund national infrastructure development, whether in the state or private sectors, subject to a strict taxonomy being in use. Nothing is more important to pensioners than having a future where they can draw down their pension.

18. It is suggested that these two changes to pension to tax incentivised savings rules could raise £100 billion a year for the government by attracting new savings into government accounts to fund the transformation of the UK economy[18].
19. The boost in economic activity that the investment funded in the fashion noted in the previous paragraph would be sufficient to fuel growth within the UK economy sufficient to more than fund the cost of any resulting interest charge payable by the government out of taxes raised. Fiscal multiplier effects arising from the investment made would deliver this outcome. This integration of fiscal and monetary policy is essential in the future.
20. There should be a re-definition of the national debt. It should no longer be called the national debt, because that is not what it is. It should, instead, be called national savings, because that is what those parts owing to persons who save with the government actually are.
21. Finally, those liabilities shown as owing on the Whole of Government Accounts[19] to commercial banks as a consequence of the creation of central bank reserve account balances by the Bank of England, on the instruction of the government, should now be properly described as national equity, because only the government has this right to create and inject money into the economy and without it doing so there would be no economy that could function. What is more, since that sum could only ever be repaid using money newly created by the government, which would be instantly re-deposited with it, these balances cannot be debt and must therefore be distinguished from anything approximating to that description elsewhere in the national accounts by calling them national equity.

I shall be happy to provide the Committee with further evidence in support of these suggestions if they wish for it and to appear in person before the Committee if that is the members' wish.

Finally, for a fuller explanation of the national debt and issues arising from it, please seehttps://www.taxresearch.org.uk/Blog/wp-content/uploads/2024/02/National-debt-an-explanation-published.pdf which explores the issues raised here in more but accessible depth.

8 February 2024