There 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 UK could never go bust. That was because, as a matter of fact, the UK government could always create the sterling currency required to repay the UK's national debt whenever it wished.
Those responses made me think that those commenting clearly did not understand the consequences of the debt repayment that they are so keen on, or what that repayment might mean if it were to happen.
The objections
To explain this, let me summarise those objections first. Those seemingly shouting loudest suggest that:
- The UK could not repay national debt in the way that I suggest.
- Alternatively, if it were to do so, then the country would be so awash with cash that hyperinflation would result.
- Thirdly, they are quite sure that this debt, and the interest paid upon it, is threatening our national well-being, without quite being able to explain why. They do, therefore, want it to be reduced, although what mechanism they desire for this purpose is not clear.
So, let me look at the available mechanisms for reducing government debt. There are, in essence, only two.
The mechanisms
Firstly, the government can repay the debt in the way I have suggested.
The mechanism is, in essence, identical to quantitative easing, so we know it works. The government creates new money, or reserves, at the Bank of England and uses that facility to purchase government debt currently in issue at market prices.
In accounting terms, as shown by the UK government's Whole of Government Accounts, this does effectively cancel the debt in question. In its place, there are the central bank reserve account balances created to facilitate this repurchase, which would be held by UK banks and other financial institutions that previously owned this debt and would now instead hold deposits with the Bank of England. In net terms, there would still be debt, but its nature would have changed from being long-term bonds to short-term deposits.
Secondly, the government could repay the debt by running perpetual fiscal surpluses. In other words, the government would tax more than it spends, taking both current and investment expenditure into account, and use the surplus to make a net repayment of what is called debt, but which are actually deposits placed with the government acting as a banker.
You can play around with alternatives on these themes, but in essence, these are the options available.
Appraisal: Repaying the debt
The first of these options is technically entirely feasible. All that takes place is an asset swap. Government bonds are replaced by balances with the Bank of England held by banks and other financial institutions.
This is the indisputable consequence of this approach. After all, if debt is repaid with newly created sterling, people will have to deposit the funds they receive, because the government will make the payments for the bonds they buy electronically via the Bank of England and its central bank reserve account facility, and the only safe place in which any bank or other financial institution could deposit the sums in question is back with the Bank of England, who are the only people capable of guaranteeing repayment of the sums in question.
In other words, all this ‘repayment' does is switch the profile of the government's debt from being on a long-term, fixed-interest, guaranteed repayment and cost basis to being on a very short-term, highly liquid (but actually non-repayable, as far as the financial sector in aggregate is concerned) basis on which the amount of interest to be paid would be determined by the Bank of England.
Given there would be, in this scenario, no long-term interest rates over which the Bank would seek to have influence, the reason for it to pay interest on reserves on most of these balances would in that case disappear, and a Japanese approach would emerge, where most such central bank reserve account balances would not be subject to interest payment, massively reducing the level of overall government debt interest payment, which would, in that sense, achieve the objective of those who are obsessing about levels of government debt and the cost of it.
On the other hand, the slight problem would be that, as a consequence:
- Banks would lack the bonds needed to operate the overnight repo market in the City of London, which would have the net effect of both undermining the credibility of much of the UK banking system and considerably increasing risk for private-sector companies.
- Pension funds would not have the assets needed to underpin the long-term income guarantees they provide to those who have saved with them upon retirement.
- Life assurance companies would lack the investments needed to underpin their liability funding requirements.
- Overseas governments and those outside the UK who wish to save in sterling would lack the mechanisms needed to hold sterling as a reserve asset, significantly imperilling the terms of UK trade.
UK debt could, then, be repaid in this way, and the cost of interest on it could be dramatically reduced, but the consequence would be that the UK financial services sector would be effectively destroyed because it could not provide the services it presently makes available, whilst financial risk in the private sector would increase dramatically.
Would anyone want to do that? No, of course they would not. But what thinking this through shows is just how much the UK government does, at present, provide by way of subsidy to that sector. The payment of interest on this debt is, effectively, a subsidy to the financial services industry, and that is a very good reason why it should be taxed more heavily. The thinking exercise is not a waste of time in that case.
Running government surpluses
Looking at the second alternative to reduce debt, running persistent and long-term government surpluses would be necessary to achieve this goal. That is potentially more disastrous than repaying the debt.
What this would require is that the government extract more money from the economy through taxes than it injects through spending each year, meaning the government would effectively act as a perpetual brake on economic activity in this country. Income, growth, investment, and the size of the UK economy would all shrink annually under this policy.
That would be the inevitable consequence of effectively imposing such a policy on the economy. In addition, all the consequences of reducing the availability of UK debt, noted previously, would be incurred as well, with the impact being spread over a longer period, but nonetheless resulting in the same net long-term outcome.
Repaying supposed government debt would, then, be a wholly destructive activity as far as the UK economy, the UK financial services sector, UK income and UK financial security are concerned. There is literally no other possible conclusion that can be reached with regard to any such plan, meaning that the only question that needs to be asked as a consequence is why anybody would wish to put this idea forward as an economic policy:
- What are they trying to achieve?
- Why are they trying to achieve it?
- Why do they think the only plausible outcomes are desirable?
- Have they thought through what they are proposing?
I cannot answer these questions because I cannot imagine why anybody would want to promote something as destructive as reducing the so-called UK national debt, but it would appear that some seek to do so, and I would be interested to know what they really think.
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I think that people think option two is the answer because it links in with the household analogy. They would say we have to ‘tighten our belts’ – meaning those receiving benefits or the state pension would tighten their belts. Supporters of this approach basically lack any understanding of how the government is financed and how the economy works. Politicians and the media reinforce the view that the government relies on taxes, borrowing or cutting spending to reduce the debt so its hardly surprising that people do not know what the reality is.
Much to agree with.
From reading such comments online, and speaking with people, I think this is their train of thought –
1. Debt is inherently bad, therefore surely it should be repaid.
2. OK, even if the absolute amount of debt is benign, the interest payments are harmful (you could fund X new hospitals instead, etc).
3. A general misconception that the debt is repaying foreign governments (or some big bank in the sky which MUST be repaid).
4. The way to ‘solve’ this is to slash government spending (and it’s usually pinned on welfare, with some net zero mixed in).
It’s almost as if people wake up in the morning, and the first thing they do is read some material published by non-dom billionaires looking to protect their narrow financial interests…
What I can never understand is how “experts” can go into hysterics over Public Debt, without even mentioning Private Debt.
You are right: their obsession with public debt is nonsense; their concern with private debt is absent, and it is the latter which threatens the economy.
Correct.
Even countries that have no net debt (eg. Singapore) choose to issue bonds for the reasons you give.
Also, even the architects of the Euro (who were extreme budgetary hawks and tried to make it in the image of the old Deutschemark) recognised that modest budget deficits were needed (as set out in the Maastricht Treaty).
If we assume 3% nominal GDP growth (2 to 2.5% inflation plus 0.5 to 1% real) then we should, over the cycle, run this sort of deficit in order to keep Reserve account balances increasing in line with the economy. Now, we could quibble about where we are in the cycle, what is the correct level of Reserves at present, etc…. but, in the broad sweep of things, governments must run deficits.
Persistent large deficits can create problems…. if governments are unwilling to tax in order to drain money from the system it will deliver inflation eventually – but this not about “we must repay the National Debt”, rather it is about fine tuning the macro economy.
Finally, if the deficit is not a problem then neither is the size of the interest payments in the budget…. except that it is, by and large a transfer of money to the already wealthy. This, of course, could be addressed by taxation (along the lines of the Taxing Wealth report).
A great deal to agree with.
@CLIVE PARRY
Your last comment is at least partially redressed by the issue of retail bonds which can be bought by the general public as Richard has suggested. The interest is then paid to the people rather than large institutions. Obviously it is those with the most money to save who benefit but it’s an improvement on the current situation.
Agreed
I’ve just been on a golf trip (yes I know) with a bunch of old mostly finance mates. We did have a discussion about the “household analogy” fallacy and despite their obvious above average knowledge of finance nearly all of these guys buy into it. The problem is, as we are all aware, it suits the narrative of the better off. They actually don’t want to hear the arguments set out above, although I will post the link in the WhatsApp group. I’m afraid this is what we are up against. We need a high profile champion who can burst this balloon.
Thanks.
Who?
Zack buys in but has no real credibility on economic matters. New Chancellor Milliband? He’s starting from zero and intelligent enough. He could do a week’s course in MMT
Thanks, again, for these explanations Richard. I can’t tell you how often i keep getting told, “…but our children and grandchildren will have to pay it back…” whenever govt debt discussions come up.
Thanks for saying so.
As Bill Mitchell has pointed out, here in Australia there was huge deficit spending in the 1950s and 60s to build infrastructure and create a country fit for heroes. We are the children and grandchildren of that generation but tax rates are lower now than they were then.
It’s also worth noting that up until 1966 there were no Australian dollars in circulation. According to Margaret Thatcher’s thinking, the government in 1966 would have had to wait for the people to start paying their taxes in $AUD before they could spend any into the economy. Where did the people get them from? A printing press in every back yard? Obviously not, government spending in the new currency had to begin before anybody had any of it to pay their taxes with.
This country is obsessed with storing wealth, whilst its infrastructures deteriorate and its people go hungry.
I think that money has become dislocated in value. Having it is a goal; expending it on something useful seems beyond us at the moment.
We want a store of money for security whilst not using/investing it properly undermines that security. Bizarre! It makes no sense at all and is exacerbated by stupid, ill-informed government political managers thinking like a household does.
So what we have is a closed loop of self reinforcing misery and self-destruction, because we have governments in denial of their power to create money. Money does not grow on trees. It is does not come from God or the universe.
Money is man made and can be used to fix our problems whilst acknowledging other restraints. And it is governments that made that money and gave it a legal validity and power which as a citizen everyone has the right to benefit from. It’s what people do with that money that creates an economy. The lies we are told about money are killing us and transferring collective power to individuals who should not have such power. You are right to bring this issue up time and time again.
Thank you
Your last sentence answers the question – they don’t think – that’s much too much like hard work!
Might a more accurate term for “National Debt” be National Banking Facilty?
Might ditto for “Artificial Intelligence” be Machine Precis of Human Information”?
Might our society be better informed if the power of emotional responses to language/the affective domain were part of the curriculum?
Maybe, yes.
Or “National Savings.” In essence, are not government bonds “just” interest bearing term deposits with the unusual property of being tradable?
The Government could of course cut out the ‘middle man’
Including an improved State Pension and/or the opportunity to buy ‘extra’ state pension via National Savings
Better benefits, death and ill health via National Insurance
We have both discussed various forms of ‘State Funded’ mortgages that logically would some form of life/health insurance
As I think you know, I agree.
Thanks for explaining so clearly the options and consequences of paying off the “national debt” (i.e. paying off deposits with the government). I’d note, in passing, that anyone that suggested a commercial bank paid off all their deposits would be ignored and treated as an idiot – but I digress.
I suggest there is a second way of reducing the “debt” through taxation, which would not degrade the economy and would be beneficial. That would be to tax the richest in society more. Why would this not this degrade the economy? Because the wealthier you are the less of your savings you spend (the clue is in the name, they are savings and not money that is spent and recycled in the economy). I’m saying that wealthy people have a lower propensity to spend and that their savings are, in large part, “dead money”.
Taxing the wealthy more is beneficial for a couple of reasons. First, it tends to reduce their disproportionate political influence. This would lead to a fairer society Second, it would reduce the money they have to invest in assets like stocks and shares. Doing so would tend to reduce financial instability due to financial bubbles.
Generally, reducing excessive inequality through taxation is a good thing. And the byproduct is to reduce the debt. But I doubt the wealthy want to do it that way!
I think there is merit in what you say, but I would frame it slightly differently.
It is certainly true that those with the highest incomes and wealth tend to have the lowest propensity to spend additional income. As a result, taxing them is likely to have much less impact on current demand than equivalent taxes on those with lower incomes.
I also agree that excessive wealth concentration creates economic and political problems. Wealth brings power, influence and the ability to shape markets and public policy in ways that are often not in the interests of wider society.
Where I would differ slightly is on the question of “dead money”. Some savings are indeed channelled into speculative assets and can contribute to financial instability and asset bubbles. But savings can also be used productively if appropriate investment opportunities exist.
The real issue is therefore not saving itself, but what savings are used for.
And on the national debt point, there is an irony. Many of the same people who insist government debt must be reduced would be horrified if the government actually removed the safe savings assets in which much private wealth is held.
That suggests the debate is often less about economics than it is about political preferences.
What is true is that a more equal society is usually a more stable society, and taxation has an important role in achieving that objective. If, as a consequence, government liabilities are reduced, that is an accounting outcome. The more important issue is the distribution of wealth, power and opportunity that results.
For 99.9 % of the population simply calling this amount of money a ‘debt’ is all the justification they need for saying it must be repaid. It’s a component of the household analogy and the thinking stops there.
Then we have to persuade them otherwise.
What would you do?
If I had the creative/performance genius of the likes of Rowan Atkinson, Mel Smith, Ben Elton and several other great British writers, I’d have a wildly popular comedy TV show that used satire to ridicule the status quo and present the alternatives with audience-grabbing humour.
“Comedy and a bit with a dog. That’s what they want!” (From the film Shakespeare In Love)
Where are they?
The Australian satirical youtube channel thejuicemedia needs to be persuaded to do a series on the economy. They are quite good 🙂
https://youtu.be/euE8eZTyQQg?is=T0aMLzyQkORd346B
I like them
You might be interested in this doctor who is standing up to Big Pharma
He also talks about a politics of care: https://davidhealy.org/politics-of-care/
He very much identifies neoliberalism as the problem
Thanks
I believe that UK legislation actually states that there is no artificial limit to how much debt the government is allowed to create because ‘it can always be paid off by future tax revenue’. Of course it can.
Profound wording.
If you want to write nonsense, might you do it elsewhere?
Thank you Richard!
Here’s a pertinent article by Yanis Varoufakis on US based speculators who borrow to acquire UK Bonds. https://johnmenadue.com/post/2026/06/the-uks-financial-dependence-on-us-speculators/
I recently joined a politics group and as usual they talk about the economy and immediately the “We can’t afford it”, “There’s no money” and “Pensions are a ponzi scheme fuelled by our taxes” came up.
I pointed out the government isn’t funded by our taxes, just look at what happened in COVID, we all went on furlough and the government simply created the money for it, they didn’t tax for it, they just did it.
No rebuttal except that we ended up with inflation after.
I point out that you get inflation when you print money and do not buy up capacity or there isn’t capacity to buy AND you don’t tax that money back destroying it in the process.
No rebuttal except dismissiveness of MMT as being a dangerous ideology that would upend our entire economy on a bet and gamble it’s right.
I point out it’s a theory and description of how money actual works in the economy, it’s not an ideology, you follow it regardless of your belief.
No Rebuttal, just silence.
Conversations brought up later, they dismiss any argument you make as fantasy money tree economics. This is what 40 years of idiocy and illiteracy, wilfully ignored by politicians and propagated by the media has given us. A complete lack of understand about even the basic principles of spending which if anyone stopped and thought logically about, they would realise is right. Most still believe that the difference between taxes and government spend is covered by borrowing from financial institutions and pension funds.
You/we have an uphill struggle and your opponents are entrenched ideas and a horrendously unregulated media, thank you for the MMT source book.
I am aware how hard the task is. But it’s worth the effort. Thank you.
The weird thing is – they know about MMT – but only as something to be dismissed.
To demonstrate your point re media blind allegiance to the economic orthodoxy: https://www.theguardian.com/politics/2026/jun/21/andy-burnham-leadership-labour-makerfield-no-10-tax-spooking-bond-markets
Same old tripe repeated ad nauseum.
Has the country become ungovernable? Success measured on growth above everything, yet any discussion of investment receives howls of “how are you going to pay for it”.
To use a topical analogy it’s like hiring an England football manager and telling them that anything less than winning a major tournament is seen as complete failure, BUT, that we cannot afford to have a full team on the pitch, and actually the 6 players that we are currently fielding is too many, and needs to be reduced further.
Completely delusional!
The daft thing is measuring success by growth or wealth exclusively while not on happiness, fulfilment and health. Relationships make us happy, long term relationships, good support networks and seeing people. If I remember they asked people in the study below what made them happiest towards the end of their lives, not one of them mentioned material possessions, it was the good they did for others and the relationships they had if I remember correctly.
https://news.harvard.edu/gazette/story/2017/04/over-nearly-80-years-harvard-study-has-been-showing-how-to-live-a-healthy-and-happy-life/
When I worked as a senior manager in a middle-sized cultural institution, my boss and I were constantly astonished by the almost total lack of strategic thinking in the organisation. In fact, hardly anyone seemed able to think at all, beyond achieving their immediate objectives, and they were quite unable to think “big picture”.
I think the problem with the household analogy is that it chimes so exactly with most people’s ordinary experience: money saved good; debt bad. Everyone wants in the end to live free of personal debt, with savings to spend. It takes a lot of mental effort to move from here and think about money in the big picture.
Money is debt. It’s always just one side of a transaction. And if we se money as IOUs, representing a dense network of debt obligations, we might realise that if all the debts were reckoned up and settled, all the money would disappear, leaving only real capital assets like land and buildings and people. The idea that all the world’s money might add up to nothing is unthinkable for most people. I guess paying off the so-called national debt by jacking up taxes would amount to that: cancelling off all the debts.
It’s only the temporary unequal distribution of money that makes some rich and some poor. I’m not wholly against some such inequality: some people really do add more value to society than others. But not all riches are earned by the individual that holds them.
The one thing that really bothers me is interest. Increasingly I wonder why, given that modern fiat money is just numbers in a computer, anyone should pay or receive it. A simple flat fee for banking services would perhaps be more realistic…
[…] By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future […]