We published this short video on YouTube and many other channels last night. If you like it, please share it far and wide - because that helps get the message out.
This is the transcript:
We're constantly told that the national debt must one day be paid off.
Politicians repeat this claim endlessly. They warn that our children and grandchildren will somehow have to repay this debt, but there is a simple problem with this story. It has never happened.
In modern British history, the national debt has never been paid off, and when I say modern, I mean since 1694, and there is a very good reason why.
Britain has carried its national debt for centuries. Large debts emerged after the Napoleonic Wars, the First World War and the Second World War, unsurprisingly perhaps. At the time, the national debt was far larger in proportion to our national income than it is today.
After the Second World War, for example, it exceeded 250% of our national income, and yet Britain did not collapse. Instead, the economy grew, the welfare state was created, and public services were expanded. The debt was not paid off. It was simply managed over time.
And let's be clear how that happens. Government debt is not like household debt. Governments do not clear their debt and make it disappear. Instead, they normally do something very simple. When old government bonds mature, and government bonds are what makes up most of government debt, the government simply repays them and then issues new bonds to replace them. This is called ‘rolling over the debt', and it has been standard practice in the UK for centuries.
So the national debt is not something that must be eliminated. It is simply part of how the financial system works.
So when politicians say the national debt must be paid off, two possibilities arise. Either they do not understand how public finances work, or they are using the claim to justify austerity and cuts to public services, because the real issue is not eliminating the debt. The real issue is whether the government is spending enough to support the economy, to maintain public services and invest in the future.
The national debt does not need to be paid off; what matters is whether the economy and society are working well together, and the government's job is to facilitate that.
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I cannot see the video (iPhone safari).
I have added a link. Sorry. WordPress sometimes does this.
Richard I was just thinking of the government debt it must be balanced by credit. If so I suggest that the credit is savings, i.e. it would be the savings by the rich, our savings and pension pots. Would it include houses and built infrastructure?
Correct
Very soon now, it will become only too apparent that it needs to go up a lot.
The “national debt” includes the debt implicit in the issue of bearer instruments such as banknotes and coins; the holding of savings such as Premium Bonds and other NS&I investments; and gilts – sterling debt instruments that are widely held by anyone wanting a secure and stable income stream, including private investors, banks and other financial institutions, such as life insurance companies, pension providers, and many others.
Do the proponents of eliminating the “national debt” really want to get rid of all of these useful instruments? It would be madness.
Agreed
When Rachel Reeves talks about the national debt she implies it’s a constant drain on govt resources (10pc of GDP or whatever being ‘spent’ paying interest on it). This argument feels intuitive (like the incorrect household budget analogy). Can anyone tell me if this is essentially just interest on bonds? I’m trying to understand how to have this conversation with others.
What Rachel Reeves is referring to is essentially interest paid on government bonds (gilts), although the way it is presented is often misleading.
When the government runs a deficit it usually issues gilts through the Debt Management Office. These are savings products: investors, pension funds, banks and others buy them and receive interest in return. The “cost of the national debt” is largely the interest paid on those gilts.
But two points are often ignored.
First, that interest is not money disappearing from the economy. It is income paid largely to UK savers — pension funds, insurance companies and banks — so it remains within the domestic economy.
Second, the government could structure things differently if it wished. Gilts are issued mainly to help manage interest rates and provide safe assets for financial markets, not because the government must borrow before it can spend.
So while interest payments are real expenditures, presenting them as a drain comparable to a household paying off a loan is misleading. They are better understood as a policy choice about how the financial system is organised.
Thank you, a very helpful and much appreciated explanation.
Thanks