We're told that government debt is spiralling out of control. Commentators scream “fiscal crisis!” and “record borrowing!” But the truth is very different. High government debt is not a sign of collapse—it's a sign of trust. People and institutions are desperate for the safety that only the government can provide. Debt is not a danger—it's a deposit facility. Let's cut through the panic and face the facts.
This is the audio version:
This is the transcript:
In the last week, we have seen economic commentators going into meltdown.
They are claiming that government debt is going through the roof because more money was borrowed in August 2025 than in any previous August, except, of course, August 2020, when we were right in the middle of the COVID crisis. And as a consequence, they're talking about record borrowing, and panic is everywhere. And they are suggesting that Rachel Reeves is facing a fiscal crisis, and maybe the government will go bust. And all of this is complete and utter nonsense.
The actual truth is so different from what these people are saying is almost unbelievable.
Let's just set the context. The government spent what it had to spend in August this year. It had commitments. It fulfilled its commitments, and people wanted those commitments to be met.
It also recorded some long-term liabilities, which were included in this figure for increased borrowing, but which won't be settled for many years, like interest owing on some of its debt. That's a technicality, but worth noting.
In the meantime, tax receipts were lower than the markets would've hoped for, and that's for one very good reason. People don't want to pay more tax. They yell and scream if they're asked to. The government isn't sure how to ask people to pay more tax, even though my Taxing Wealth Report lays out in detail how they could very easily raise a lot more tax from the wealthy in this country without ever having to resort to wealth taxation. The combination of high spending and low tax receipts means that commentators are claiming our government is on the verge of collapse.
But the truth is, people want the government to spend. In fact, they want the government to spend more. They want more to be spent on the NHS, on schools, on social care and a great deal else. They want the migration backlog to be cleared. They want the climate crisis to be tackled. They want new housing to be built. They want an energy transition. They want better transport systems.
The reality is that, as far as people are concerned, the government is actually spending too little, and not too much. The public is demanding state action, and yet at the same time, they're not paying enough to supposedly balance the books.
But let's stand back for a moment. The government is borrowing because it says it has to, to make that equation balance, although that factually is not true: it doesn't have to, it only borrows by convention. But the Bank of England is, at the same time that the government might be borrowing well in excess of £100 billion this year, saying that markets are actually so hungry for government debt that they can sell back into those markets over the next 12 months at least £70 billion worth of bonds which it acquired during the 2008 financial crisis or the COVID crisis.
In other words, they think that the market for government bonds is much bigger than that required to fill the gap between government income and expenditure.
So what is the message that markets are really sending?
They aren't saying that the government is in a mess.
They aren't saying they think that the government is in meltdown.
They're actually saying something incredibly different.
They're saying, "Can we have some more debt, please?"
That is the message that markets are sending.
They are willing to buy almost as many bonds as the government can manage to push into their hands, albeit at a cost of high interest rates, which I would prefer were much lower.
And this is unsurprising. Government bonds are the only safe place for many institutions to put their money. They can see what's going on in the rest of the markets. They can see excessive stock market valuations at, or very close to, record highs of all time.
They can see the speculative bubble that is building.
They can anticipate the fact that there will be a burst.
They want somewhere to go where they can protect funds on behalf of the people who are saving with them. And the only place where they can do that is with the government. The government is the one and only safe place for deposits right now.
And it isn't just the institutional investors, the pension funds, the life insurance companies, the banks and so on who are seeing that they need government bonds. There's something else going on as well, which indicates that other people are also losing faith in the markets and are looking for security. And that is, there's a flood of money into cash, Individual Savings Accounts, or ISAs, this year.
It's thought that £103 billion, a record sum for a year, has been put into cash ISAs so far this year, and that's because people - individuals - are also looking for safety.
ISAs provide safety in two ways. One, they don't require tax to be paid and people like that, because that might mean safety from a tax investigation. And secondly, it's providing safety because most people who have cash ISAs make sure that they have no more than £85,000 in any one savings institution and therefore, they are relying upon the government's guarantee that they will always have their savings returned to them if anything goes wrong. They don't get that guarantee unless the money is in cash.
Savers - individual savers - and savers in institutions are sending out the same message as a result. What they're saying is "We trust the government and we don't trust very many other things in these financial markets." The instability of markets, the overvaluation of markets, and the uncertainty - all of those mean that people are fleeing for safety, and the government is the provider of real security in the economic world in which we now live.
But what that means is, there is no crisis with the government's finances. In fact, people are saying, "Please, run bigger deficits, if that means there are more bonds for us to buy."
The crisis that we've got is not of government finances. The crisis is of a lack of understanding by commentators who can't stand back and pick up the messages that are really being sent by individuals and market players who are saying, "We have confidence in the government and nobody else."
They want debt, and they want the government's guarantees, and that's the real point that I'm making. High government debt actually is equivalent to high public trust in the government. They couldn't exist without each other.
There's no reason why somebody has to buy government bonds, but they are. They're buying every bond that is available. So let's stop the panic headlines. They're just noise - people and institutions are voting with their money. And we should be following the money. We should be taking note.
There are some very clear conclusions. Deficits in this sense are not failures. They are actually enabling the deposit-taking that people want to make with the government. And that's because people understand implicitly, whether they can say it or not, that the government is the safest banker in the UK; the borrower of last resort, to use economic jargon. Because, of course, as far as a bank is concerned, a deposit is a loan that they take. They borrow other people's money when they take a deposit.
High debt is therefore proof of trust and not of collapse. And therefore, we need bigger deficits and not smaller ones because otherwise we are not going to meet market demand for government bonds.
But what that really means is that we should be talking about what government debt really is. It's just a safe deposit facility.
And it's time that we send all these market commentators who are saying, "We're going to hell in a handcart," when we're not, back to where they belong. I don't know where that is, but we don't want them on our televisions. We don't need them in our media. We don't even need them in our social media, because they're talking nonsense.
Government finances are working as people want them to because they're taking the deposits that people want to place in places of security, which the government is guaranteeing will be repaid to them, and that's what matters.
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There’s a way to measure the demand for government bonds and that is to look at the real interest rate being offered. A high number indicates people are willing to buy but only for a higher reward and that reflects a perceived higher risk. Reduce the real interest rate being offered on gilts and remove the compulsion on some sectors to buy them and we’ll see reduced demand.
Incredibly there are hundreds making a living on fees and margins on sales and purchases of gilts and I’d rather see these financial engineers not doing that so much and working for example as policemen instead. I haven’t seen a police round here for a long time.
I disagree re the orice.
The prcie is set by the Bank of England through the base rate and its quantitative tightening stategy. It is not set by markets, except at the periphery.
But why do we want reduced demand? You don’t explain that. What is wrong with the government being a banker?
What is wrong is base rates.
One needs to be careful when thinking about “real yield”. Real yields on Index linked gilts have risen sharply from zero to about 2.5% (for 20 year paper). I would argue this is not some loss of confidence in the UK, merely a consequence of the rise in conventional gilt yields…. which in turn was driven Base rates (and expectations for Base rate) and a reversal of the extreme levels driven by a poorly conceived QE programme (ie.. “at any price”).
Better to look at “break-even” inflation – the inflation rate implied by the difference between I/L and conventional gilts. This has risen to above 3% across the curve suggesting we DO have an inflation issue (as the UK has long had) rather than a debt problem.
Firstly the government, through the treasury and Bank of England, can totally control the price of bonds. It can control the whole yield curve. One only needs to look at Japan to see this is true. Nick Leeson and others disagreed, it didn’t work out so well for them. Now that the UK is not constrained by the Maastricht Treaty it could do the same – if it choose to.
Why worry about the demand for bonds? The government doesn’t need them, it can borrow, without limit, at zero effective interest rate, from the Bank of England. The government should set the rate it is prepared to pay on bonds (by government buying and selling as few or as many as required to set that rate) and then sell them to those who want them. There would be plenty of buyers, even at low rates, because, as Richard says, borrowers need security (there is zero risk in gilts), and that’s the only place they can get security.
Then those stuck in the gold standard past (dead for 50 years), with a neoliberal mindset, will say, “Oh no, you can’t do that, it would cause unbridled inflation. Look what happened in the the Weimar Republic, Zimbabwe, Greece blah, blah, blah. We’d get hyperinflation”. No we wouldn’t. That is utter, utter, rubbish.
Government borrowing via gilts, rather than from the Bank of England, does not control inflation. Yes, such borrowing, does take money from the private sector. But doing so does not reduce demand. Why? Because money from savings was not going to be spent. That’s the whole point of saving. After “borrowing” via gilts sales the government then spends that money. It takes inactive savings and spends them into the economy reactivating that money. Therefore the risk of inflation is just the same as if the government had “borrowed” from the Bank of England.
It’s government spending that could, potentially, cause inflation. It doesn’t matter whether that spending is sourced from the Bank of England or from gilts, the result is the same. Inflation does need to be controlled, and this is done via taxation. Borrowing via gilts does reduce the inflation risk.
My bad;
“Borrowing via gilts does NOT reduce the inflation risk”.
So sorry for the typo. 🙁
better deposited with The Government that placed on schemes about as reliable as a bet on Laughing Boy on the 3.30 at Catford
I agree, there is no fiscal crisis. Long dated gilt yields are higher than other major countries but this reflects an inflation problem rather than a debt problem (inflation IS an important but separate issue). On the contrary, the UK’s debt position is better an most G7 countries. Besides, if there was a problem, there are ways to resolve it; first by switching issuance to shorter dates, second, by raising taxes in ways you have already outlined.
Does the market “want” more gilts?
The BoE has chosen to reduce the pace of sales of gilts from its holdings to £70bn for fear that its original pace (£100bn) was not going to be taken by the market without an unwanted rise in yields. So, no, the BoE does not think the market wants more gilts.
On the other hand, that fact they are selling gilts at all from their portfolio (when other Central Banks are merely letting their holding mature without replacement) suggests either there IS appetite for more gilts or that the BoE is more obsessed with debt orthodoxy than others.
In the end, the market can always take more gilts – it is just a question of yield relative to interest paid on cash (and expectations of that rate over time).
There seems (are?) to be two mechs @ work here.
A. Somebody wants a safe place for money, that ain’t a bank (ref 2008). There seems to be quite a demand (hmm wonder why?)
B. How govs’ are funded: a) central banks (“gizz the money”) b) through bond sales & the size of the deficit (= how much the gov has expanded the money supply).
This leaves how to balance the two/three (more bonds, more BoE, & the size of the deficit wrt the desire to grow the economy).
What is clear is that existing gov narratives (reduce the deficit (it’s bad), expand the economy (its good), we worship @ the feet of bond markets (because?)) are incoherent and in opposition (reduce deficit & expand economy … erm how?).
The spat between Burnham (Manch Mayor) and LINO apparatchiks over bonds show that fantasy thinking still (always?) rules in the LINO gov. Perhaps that suits bond markets?
Note ref above: tax is +/- irrelevant in these discussions (pace: inflation control) – apart from its role as +/- a gov spending reclaim mech.
If the next 10 yr gilt auction is at a yield of 5% then it is massively oversubscribed If it is offered at 4% then demand is zero. It is all on the terms offered.
It has to be 4.7%
Base rate + QT demand that
Let’s get real – the BoE determines this
Technically, the £70bn is expiring and sold assets, not £70bn being sold. However, this will still be a larger amount sold onto the market than last year despite £100bn reduction last year, because the amount of expiries is low this year. The Bank of England would also have the option of replacing expiring bonds if it chose.
I have less of an issue with the idea of letting some expire to make it easier to do QE in the future if required. But we should be very clear that the BoE would not be selling off bonds at a loss (which it expects to) if it had to carry that loss – it would only make sense to let them expire then. It is only because the government has underwritten those losses that it is doing so.
This lets it take the stupid approach of deliberately incurring a loss without any particular need to do so, not only creating £10bn+ of losses which the government pays, but also reducing demand for any bonds the government wishes to issue, pushing up yields.
Commentators need to understand that since the BoE has been selling bonds at a loss with this effect for 2 years now, this is a major reason why government finances have been so stretched and simultaneously also why the yield curves market watchers are exclaiming about are elevated. Who gains? That would be the banks and other financial institutions invested in government bonds, who secure higher interest rates on their long-term investments and cheaper asset purchases. So it’s also why the banks have been making bumper profits.
Hmmm
Markets will want a bailout soon as well.
And they’ll get it.
Paul Johnson ‘The bond markets are simply the people and institutions who lend government money. We can avoid being “in hock” to them by reducing borrowing. We struggle now because our borrowing and debt are extremely high. Mr Burnham wants to increase borrowing.’
https://x.com/PJTheEconomist/status/1971127418665734300
Whether PJ is neoliberal or an ‘authoritative voice’ ‘respected economist’ Its a pity he never shows the remotest interest in why the economy and public services have been wrecked over the last 14 years – and whether doing more of the same ‘no money’ strategy is going to make things better.
Agreed.
But let’s be absolutely clear about this. What his comment shows is that he has not the slightest idea about what government debt really is or why it exists.
Richard, you’ve mentioned that the government will be able to push more bonds into the money market, albeit at the cost of a high interest rate. Doesn’t that put a binding constraint on the amount the government wishes to spend on public services, as most of the governments fiscal deficit, which would otherwise have funded this, goes towards interest payments to domestic and foreign financial institutions ? For example, UK’s projected fiscal deficit for 2024-25 is 137.3 billion ( 4.8% of GDP) while the interest payment on govt. debt is projected at 105.2 billion ( 3.6% of GDP). So about three fourths of the fiscal deficit is going as payments to financial institutions. If the govt. were not to treat these interest payments as a kind of binding constraint, should they have gone in for higher spending on public services, and hence a higher fiscal deficit?
You said:
“Richard, you’ve mentioned that the government will be able to push more bonds into the money market, albeit at the cost of a high interest rate.”
I did not say that, and never have. There is no reason for the government to borrow, is what I said, and there is no debt constraint to what the government might do: the constraint is the actual resources available within our economy, and far too many of them are going unused at present because people like you think as you do at cost to the vast majority in the UK.
Please don’t misquote me again.
And whilst you’re about it, why not learn some real economics?
Apologies, I misunderstood the import of your sentence ‘They are willing to buy almost as many bonds as the government can manage to push into their hands, albeit at a cost of high interest rates, which I would prefer were much lower.’
The government only needs Parliamentary approval for its expenditure and fiscal deficit, which it gets through the passage of the Budget in Parliament. This deficit does not need to be backed by bonds, as it is a straight expenditure from the Consolidated Fund. But, historically, government, as part of its debt management policy fully finances its fiscal deficit through the sale of debt – the ‘full funding rule.’ So, unless governments move away from this self-formulated ‘necessity’ of providing bonds, they, and the interest which the government pays on them, will continue to be part of the public discourse.
Its in that background that my question was, how does the interest payment on govt. bonds ( 3.6% of GDP) link up with the fiscal deficit ( 4.8% of GDP), given that both are mentioned in the government’s Budget.
Maybe one could explore alternative govt. accounting to bring out the importance of physical and human resources, instead of bonds for government budgets and accounting. There is a website ‘Positive Money’ which covers some this. You might like to invite its founder Ben Dyson ( author of ‘MODERNISING MONEY – Why our Monetary System is broken and how it can be fixed’ ) for a chat.
So, you know some of this.
The answers on interest are to be found on this site, many times. Please use Google.
And as for Positive Money they never have known what money is and are a complete htreat to any left wing thinking as a result: their prescription would take us back to the 1930s, or worse. See http://www.taxresearch.org.uk/Blog/2018/05/06/why-positive-money-is-wrong/ I would rather have Farage on than Ben Dyson, he is that wrong.
A thought:
Since the government only needs Parliamentary approval for its expenditure and fiscal deficit, which it gets through the passage of the Budget in Parliament, its deficit does not need to be backed by bonds. But, historically, government, as part of its debt management policy, fully finances its fiscal deficit through the sale of debt – the ‘full funding rule.’ So if the govts fiscal deficit was projected at 4.8% of GDP (which includes interest payment at 3.6% of GDP), then following the ‘full funding rule’ it will be obligated to issue fresh bonds to the extent of 4.8% of GDP ? So, all the new purchasing power entering the economy through government spending will need to be ‘backed up’ by the same amount of funds to be invested by financial institutions to buy these new bonds? For government to tread down the path you’ve been advocating, should they scrap the ‘full funding rule’ as a first step? That could reduce their ‘self-created’ obligation to issue new debt equal to the fiscal deficit and consequently reduce the interest payments on the ‘debt’, going forward? I understand that these are serious dilemma’s. Is there any change to govt. accounting and bond issuance you would advocate so that the govt. isn’t seemingly ‘constrained’ in its public infrastructure expenditure by the fiscal deficit number.
I am baffled
Why are you wasting my time telling me what I know?
I think you are trolling.
Some might find this article depressing…
https://www.theguardian.com/politics/2025/sep/25/labour-internal-warfare-breaks-open-as-keir-starmer-and-ministers-criticise-andy-burnham
It is packed full of neoliberal austerity economics drivel and Macsweeney smears.
But I see it as great news. It puts “the cost of borrowing” and other neoliberal shibboleths into mainstream debate at a time when the neoliberal consensus, and all those who uphold it, is looking distinctly wobbly, and for the first time, those opposing the consensus are attracting positive media interest and considerable public support.
The smears will intensify (I hear Zack Polanski’s teeth are a hindrance to high office, and Burnham is now due for demolition by MacTeam) but Starmer is on the ropes and we have a chance to put austerity (and fascism) on the ropes with him.
I now have a short-term goal. Starmer gone, Reeves gone. A Labour replacement under heavy pressure from the left. A united progressive consensus against fascism and austerity. Real economics being asserted so money gets spent on priorities. A progressive alliance towards a very different 2029 government committed to PR, climate rescue, and an end to austerity. Perhaps a minority Labour government, forced to listen to the left, the greens and the SNP. Reform withered on the vine, killed off by progressive hope and real change on the streets.
We can live in hope
I went for the video with this one; excellent and shareable.
Thanks
It might be illustrative of the main points if we imagined what might happen to the country if the government decided to drastically cut all spending while refusing at the same time to provide a safe haven for the accumulated savings of the people by not issuing any new bonds and paying off the existing ones. Isn’t that what some of the idiots are calling for.
I know it is a ‘reduction ad absurdum’ scenario, but sometimes people cannot fathom the actuality of the economy unless you spell out what it might be like if we had the (obviously absurd) opposite.
Since government debt reduces demand yet the government wants growth, which requires demand, what on Earth is the point of trying to finance the government’s increase in demand (which for some crazy reason is called a deficit) by issuing government debt? The answer has to be in all logic the majority of people in this country couldn’t run the proverbial whelk shop!
They just do not understand economics.
Here’s a sound bite, Richard, prompted by your article: Bank of England, “debt is not a danger; it’s a deposit facility.”
As Out-rage knows, a soundbite is a winner.
I just tweeted it.