The Daily Telegraph claims that Britain's £3 trillion national debt could lead to an IMF bailout. That sounds alarming. There's just one problem with that claim. It is total nonsense. The UK cannot go bust.
In this video, I explain why Britain is fundamentally different from a household, why governments that issue their own currency cannot run out of money, and why comparisons with the IMF crisis of the 1970s are deeply misleading.
Back then, Britain faced a very different set of circumstances, including foreign currency obligations that no longer exist.
Today, UK government debt is overwhelmingly denominated in sterling, and sterling is a currency that the UK government, working through the Bank of England and the banking system, can always create. The idea that the government might somehow run out of pounds is simply wrong.
I also explain how government spending actually works, why taxes do not fund spending in the way most people imagine, and why government borrowing serves a very different purpose from the one usually described in newspaper headlines. The conventional story about government finance is not just incomplete; in many respects it gets the sequence of events completely the wrong way round.
The video also explores the role of gilts, or government bonds, in the UK economy. Far from being a dangerous burden, as the Daily Telegraph claims, government debt provides the safe assets on which pension funds, insurance companies, banks and financial markets depend and on which they build their businesses. Without government debt, much of the financial system would struggle to function as it does today.
I also ask why these realities are so often ignored. Why are debt scares repeatedly promoted? Why are claims of national bankruptcy used to dominate political debate? And who benefits when people are persuaded that government cannot afford to support public services, invest in the economy, or help those most in need?
The truth is simple. The claim that a debt crisis is looming is not serious economic analysis. It is a scare story designed to create fear about government spending and to justify a particular political agenda.
If you are tired of hearing politicians, newspapers, and commentators compare the UK government to a household with a maxed-out credit card, this video explains why that analogy is wrong and why understanding government debt matters to everyone of us.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
The Daily Telegraph is claiming that the UK will soon have £3 trillion worth of government debt, and they say, as a consequence, that we might have to go to the International Monetary Fund - the IMF, that is based in Washington D.C. - for a bailout as a result. They say that this happened in the 1970s, and that it was a Labour government at that time which caused the problem, and we have another Labour government now, and they're saying it's all going to happen again.
There's just one problem with this story. It's totally wrong. It's complete and utter bunkum, and that's the nicest possible word I can think of, and everything The Daily Telegraph is saying is designed to create a false alarm about the state of our government's finances. It's presenting debt as evidence of national insolvency, and that is total nonsense.
The UK is not and cannot be insolvent. And the truth is that The Telegraph has found a big number and is deliberately scaremongering, utterly inappropriately for all its own worth and in pursuit of its own anti-Labour agenda and in pursuit of its own agenda against government and what it can do for people.
An IMF bailout will never be needed by the UK for one very simple reason. The UK borrows, if that's what you want to call national debt, and I don't, in sterling. That is our own currency. And the UK government can always create sterling to repay its debts as a result, because it is ultimately the only agency permitted to do so.
Sterling can only be created by banks, and all of our banks are regulated by the Bank of England, which ultimately, as a result, creates all our money. As a consequence, the UK can always pay its debts. The idea that it can't is now nonsense.
This was not understood in the 1970s, which is why, at that time, we thought we needed to go to the IMF for a bailout. And at that time, we also had debts denominated in dollars. They arose from the Second World War. Well, we haven't got those anymore.
So, there is at this moment no chance at all of the UK running out of pounds. It is a technical impossibility. And we also happen to have really quite good reserves of foreign currency as well, so we're not going to run out of them either.
The idea of an IMF bailout is then not only wrong, such a thing would never be necessary, and it's just not going to happen. The Daily Telegraph is delivering to its readers a great big pile of... you fill in the gap.
The reality is that UK government spending works in a very particular way. UK government spending is always funded on the instruction of the government by the Bank of England. There's been a law in place since 1866, which means that if the UK government has passed a legal budget, which is what the whole budget process is all about, by the way, then the Bank of England cannot refuse an instruction from the government to make a payment if that's what it gets.
And it does employ somebody whose job it is to check that when an instruction from the government to make a payment is received, there is money available in a budget to permit that legal spending to take place. This is the check and control that exists within our system to ensure that overspending does not take place and to ensure that the Bank of England does only make legal payments.
But the point is that the government does not need to have money in its bank account at the Bank of England to let that spending take place any more than you do if you spend on an overdraft with your bank, or if you spend on a credit card and begin to eat into your credit limit. The fact is, the payment creates new money. That's what happens when you spend on an overdraft. That's what happens when you spend on a credit card. You create new money, and that's what the government does day in, day out by spending with the Bank of England.
Now, as a matter of fact, the government does seek to balance its books in a cash flow sense. So, it does collect back the money that it is spent by way of taxation, and it does that to control inflation. But tax does not fund the spending.
And nor does borrowing. The government, by convention, and it's a very well-established convention, does tend to leave around 3% of the money it spends each year in the economy. And that money needs a safe place to be deposited, and the safest place to deposit large quantities of money in the UK, and we are talking about hundreds of millions here, is with the government. And the government issues gilts, or treasury bonds, to provide that safe place of deposit for those who own very large sums of money, large companies and banks in the main, plus pension funds. These are a facility to save money with the government. They do not fund government spending.
All of this is ignored by The Daily Telegraph. Every single iota of this reality is ignored by what they have to say. They pretend, as neoliberals like to, that the government is dependent upon taxation revenues and borrowing to be able to spend, which is utterly untrue. They pretend that the cycle of government spending works the other way round to that which really applies. That's their ignorance being exposed by their claim.
Instead, the reality is that government debt, which they claim to be so worried about, actually supports the operation of the whole UK private sector financial system. It is fundamental to the way in which our whole economy works. Government bonds, or gilts as we call them in the UK, because once upon a time they were printed on paper and they had a golden edge, play a vital role in our financial markets.
Pension funds are utterly dependent upon them to provide a secure income for those in old age who have purchased a pension annuity, and quite a lot of people have; you're looking at one right now.
Life insurance companies depend upon them as well because they provide a secure income stream to protect them against one of the many risks they face, and this risk is the one that they won't be able to pay out.
And banks are utterly dependent upon bonds as well, because the whole of the London overnight banking market uses government bonds as the security involved to let that market operate.
In other words, government debt is the foundation of modern finance, and the last thing that the City of London wants is for this debt to be repaid, but that is what The Daily Telegraph is claiming we must do.
So, in that case, the question is, why doesn't The Daily Telegraph acknowledge the facts with regard to government debt? And why doesn't it acknowledge that financial markets are utterly dependent upon this safe place that the government provides for them to deposit money?
This is something The Daily Telegraph never admits. Why not? Is it that they prefer to mislead rather than inform? I think that's true. And why don't they acknowledge the risk in the whole thing that they're demanding, which is that the scale of government debt be reduced?
Reducing government debt would remove safe assets for saving from our financial markets. Fewer gilts in existence would mean there would be fewer safe investments available for banks, pension funds, life insurance companies, and others who use them. Financial institutions would then need substitutes. Private or foreign debt would fill the gap. But those are very much riskier than government bonds.
The financial system would become much more fragile as a result of what The Daily Telegraph is asking for, and risk would increase rather than fall. Is that what The Telegraph wants? Do they want to put our financial system at risk? Because that's what they're asking for.
And let me just be very clear about what that risk is. Private debt is the real danger because private borrowers can fail. Companies, which make up a large part of private debt, can default on their debts, and so can householders. Mortgages do fail, and they will, in particular in a situation that we are now facing, where there is going to be a credit crisis, and I'm still expecting that to happen.
Governments that issue their own currency can never default. And therefore, if you have a choice between safety with the government or insecurity with the private sector, people who are looking for security, banks, pension companies, life insurance companies, are always going to choose government debt. They're never going to choose private debt by preference unless they think that the world is very secure at a particular point in time, and the private debt is paying a greater rate of interest. Private debt is always riskier than public debt. And at the same time, foreign debt also involves an exchange rate risk, something which UK government debt does not.
And yet The Daily Telegraph ignores all of this. Why, I ask again, and what is the real issue in play here? That real issue is very clear. The politics behind this are those of a scare story. It's very clear that is what The Daily Telegraph is promoting. Debt panic is being used by The Telegraph to demand spending cuts. Support for those in need is portrayed as unaffordable, and public services are presented by papers like The Telegraph, The Mail, and others, as being unaffordable and a problem, although defence spending, of course, is always treated quite differently and is always essential.
And the supposed economics, or false economics, that they put forward are being used to advance a political agenda. The political agenda is "cut the government". And misinformation is being used, and facts are being ignored when this agenda is being promoted.
Debt myths are being repeated by The Telegraph as if they are true.
Fear is replacing economic analysis, and the public are being encouraged to misunderstand government finance.
The political message is presented as economic expertise, and the quality of debate is damaged as a result, and all because The Telegraph hates the government and those who it might help in the UK.
Prejudice is driving this misinformation. And the truth about government debt is quite straightforward. I'll say it again.
The UK can never run out of sterling; it can never default on its debt.
The government debt supports the financial system.
There is no IMF crisis on the horizon.
The Telegraph's claim is scaremongering disguised as economics. And I don't just call that failed journalism because failed journalism at this scale is scandalous. It is something much more than that because they really know what they're saying is wrong, and they are delivering falsehoods.
That's my belief. I think they understand the truth. They must do. Anybody with any sense could work this stuff out. The City of London knows what's going on. The City of London knows how valuable debt is, and yet The Telegraph is ignoring that fact by putting out these stories. They want people to believe something that is not true for their political purposes, which is to crush government for the benefit of you and me and everyone else.
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I wish that this was “true”… I mean, it is not a “lie”, it is a good explanation of how government funding and borrowing works, but it fails to acknowledge reality.
While the government, through the Bank of England, can indeed “print pounds” to pay any debt it acrues, that would only be a solution if the UK was absolutely self-sufficient. The fact is that the UK needs to buy lots of essential goods from other countries, in other currencies… oil and gas being the most obvious ones. Widespread, uncontrolled printing of pounds to “pay” debt would inevitably devalue the pound and lead to hyper inflation.
This is what many countries did in the 1970s, with no success. That is the real reason no rational person would consider this a solution… nothing to do with countries not knowing they could just print money to pay debt.
If this was possible, why print only enough to scrape by? Why don’t we make everyone a trillionaire and just enjoy life?
You are arguing against a position that I have not taken.
I have never suggested that governments can spend without limit, nor that they can create money without consequence. The whole point is that there are real constraints. The question is what those constraints are.
You are right that exchange rates matter. You are right that imports matter. You are right that inflation matters.
What does not follow is that the UK can become insolvent in its own currency.
That is the issue under discussion.
The UK cannot run out of pounds any more than a sport can run out of points to award. That does not mean it can award points without regard to the rules of the game. Equally, the government can create pounds, but must consider the consequences of doing so.
As for the 1970s, that period was not characterised by governments simply “printing money”. It was characterised by oil price shocks, industrial restructuring, exchange rate changes and geopolitical upheaval. To reduce all of that to money creation is to ignore most of the story.
And the “why not make everyone a trillionaire?” argument misses the point entirely. Wealth is not money. Wealth is access to real goods and services.
If everyone had a trillion pounds tomorrow, there would still be the same number of houses, doctors, teachers, power stations, engineers and tonnes of wheat. The money claims would have increased, but the real resources would not.
That is precisely why inflation, and not insolvency, is the relevant constraint.
The real question is never “can the government create money?” It plainly can.
The real question is “what can the economy actually produce with the resources available?” That is where the limits lie.
Okay… can you clarify the point you were trying to make then?
While it is undeniable that the UK (or any currency issuing country) can never become insolvent in its own currency, it is a pointless argument because countries can undoubtedly make their currencies worthless (and trying to cheat their way out of debt is the best way of achieving that). For all purposes and effects that is bankruptcy. Many countries have tried this (Argentina, Brazil, Germany, Venezuela, Zimbabwe, just to name a few) – not necessarily in the 1970s – but not a single one ever succeeded.
The one point we are in total agreement is the fact that money is not wealth. Money is just a tool to facilitate the exchange of natural resources, labour and products, and those constitute the real wealth of any country.
And that is precisely why the UK must not be blasé about debt and must urgently reduce (or eliminate) it.
Debt is essentially a promise to provide resources, labour and products in the future, in exchange for something now. We are hypothecating the next generation’s (and our own) natural resources, hard labour and products in exchange for an easier (or, allegedly, free) ride now (and only for some!).
Any debt that does not lead to gains in productivity (i.e., the transformation of natural resources into products with less labour), is therefore a waste… and that is precisely what the UK (and many other “western” countries) is doing too much of nowadays.
It is precisely like private debt, like maxing out credit cards to pay for holidays or luxury goods. It may boost dopamine for an instant, but it is a recipe for disaster.
I think you are still conflating three different issues: insolvency, inflation and economic competence.
My point was never that governments should create unlimited amounts of money, nor that debt does not matter. My point is that insolvency is not the relevant risk for a government that issues its own currency.
Making a currency worthless is not the same thing as bankruptcy. They are different phenomena with different causes. The examples you cite — Zimbabwe, Venezuela and Weimar Germany and others — were not simply cases of governments creating money. They involved collapsing productive capacity, political instability, war, foreign-currency obligations, sanctions, or combinations of these factors.
More importantly, government debt is not analogous to household debt. You make the mistake of thinking it is.
A household’s debt is a claim on its future income. Government debt is largely a financial asset held by the private sector. One person’s government bond is another person’s pension asset, savings vehicle or reserve holding.
Nor does government debt automatically burden future generations. They cannot send real goods and services back through time to us as you imply. What matters is the inheritance we leave them: infrastructure, housing, education, technology, environmental quality and productive capacity.
If borrowing today creates those assets, future generations may be better off, not worse off.
So I agree with you in part, but perhaps not in the way you intend. Debt used to fuel speculation, asset bubbles and rent extraction is problematic. That is a private sector activity. Debt used by a government to create productive assets and support its financial services secret can be beneficial.
The real issue is not the quantity of debt. It is what we do with the resources that debt mobilises.
I think we are reaching some common ground! 🙂
The real issue is not the quantity of debt. It is what we do with the resources that debt mobilises. (Agree 100%)
Government debt is indeed a financial asset held by the private sector. A government bond is indeed someone’s pension asset, savings vehicle, etc… but only once it is redeemed (with interest). It is not charity (far from it!). As noted in the original video, taxation is how the government raises funds to redeem bonds (with interest).
As it happens, all forms of taxation are, directly or indirectly, levied on resources, labour or products. Government debt is therefore an advance on our future resources, labour and products. It can and will burden future generations (or our future selves). Call it time travel if you like.
Indeed, this burden could be alleviated by what we leave behind: infrastructure, housing, education, environmental quality and productive capacity.
I think we can all agree that for a long, long time, and various successive governments (irrespective of the colour of their ties) we have been exceling at accruing huge and unsustainable amounts of debt while at the same time leaving behind crumbling infrastructure and housing, a failing educational system, a disgusting and rotten natural environment and an ever plunging productivity… a good job that is!
I’d say both the private and public sector are to blame… when too many people are out for a “free ride” and taking care of themselves (exclusively), no political system or ideology can survive.
Might it be that a submerged prime purpose of the Daily Telegraph is to undermine democracy and promote plutocracy?
Yes
The Reforms say they’re going to cut taxes, collect less inheritance tax, personal allowance increased to full time minimum wage etc. They will also cut spending but not by as much. Now I for one want something of importance guided by reality telling them that blowing out a deficit is a bad idea. If that’s the bond markets or the IMF so be it.
I think you are saying that you want the IMF or bond markets to constrain Reform. But Reform are arch-neoliberals and so I can’t see either doing that.
[…] The video that this Debate Ammunition supports is available here. […]
Talk about ‘doing Britain down’ – never mind moaning about those who complain about how the country is ran and get accused of this – what the Telegraph is doing is how you make a country, its democracy and its people actually look weak – by saying that shadowy private capital and faceless international finance are in charge and that the UK has no sovereign power. And then people will say, what use is democracy, politics etc.
Next stop – authoritarianism, and leaders for life – their life.
It’s true that UK foreign exchange reserves are historically high although they have been coming down by around $3bn a month or so since February.
What needs explaining though is why they can’t run out. That is the claim but I can’t see a mechanism that says emptying the tank can’t be done.
I think the simple answer is that Richard has not said our foreign currency reserves “CAN’T” run out, merely that they are at a level currently, where that is not an issue we need to worry about.
He has also said that, unlike in the 1970’s, foreign currency debt is not an issue for the UK.
If you want a discussion of what might reduce UK foreign currency reserves to a dangerous level, I plead total ignorance.
Now every so often my Building Society would be very pleased to announce record levels of savings deposited in its accounts so why doesnt HM Govt?
I think the reason for the article has a lot to do with corporate influence, power and control. The Daily Telegraph is now owned by the right wing German Media Group Axel Springer, but the controlling share of Axel Springer is owned by KKR, with a fund of over £750bn in multiple asset classes including private equity.
Where ever you look in our world, in whatever sector the only winners seem to be corporations. In media, in health, in defense, in politics, food production and governance. Our government may still have a voice that effects change but to what degree? Who really is in charge of what we read, what we hear, what we see, eat or consume? Let alone how we are governed.
Meanwhile, in The Guardian, Polly Toynbee arguing for removal of triple lock to pay for defence…sigh
Just recently listened to a podcast where a professor talked, very proficiently, about Russia and Ukraine.
He was competent except for 2 minutes.
In these 2 minutes they came to the topic of government debt.
The moderator stated that “taxing comes before spending” is a neoliberal lie and therefore government debt is a perfectly normal thing to have.
This professor said that “this debt needs to be payed back at some point” and that a state “can go broke like Greece”, to which the moderator replied: “Only because they had no sovereign currency”.
TIARA seemed to be a new thing for that professor.
The moderator didn’t dwell on the topic afterwards, also made sense as he wanted to talk about Russia and Ukraine.
This simply baffles me every time anew:
Smart, critical people who don’t know how government debt works still think they know it very well without questioning what they’re being told.
This once again proves that falling for lies is not a matter of intelligence.
It’s a matter of constant repetition of TINA.
When you put money into a bank account, then the bank owes you money. It’s never labelled that way; it’s your savings When you buy bonds, that becomes part of govt debt, according to the label. It’s not labelled as your savings. This asymmetry is peculiar.
Well put. Good explainer, I will store that for use later. 🙂
The real problem is not what the Daily Telegraph publishes but that a senior government minister is not on the BBC News telling us that this is not true.
I have a very twisty mind and came up with this. I like looking at things from the other side so if the debt is so bad there is a very good way of reducing it and that is to tax it. That would certainly fix both the debt and arguments (sarcasm).
Stephen V
And as an additional antidote to the Telegraph’s nonsense, Steven Hail of Modern Money Lab (Aus.) fame is back in the UK (Brighton) on the 20th June with a one-day workshop covering these themes mentioned by Richard. I attended the workshop last year in London and found it extremely informative and uplifting. Worth attending if you are based in, or near, Brighton:
https://events.humanitix.com/anti-austerity-economics-brighton
[…] were quite a lot of heated, and sometimes furious responses on LinkedIn to my suggestion in a recent video that concerns about the level of the national debt in the UK were completely misplaced because the […]