Time and again, we hear people saying that government debt must be repaid. They are fundamentally wrong. Repaying that debt would create economic nightmares.
This is the audio version:
This is the transcript:
Government debt need never be repaid.
That's not what you hear from the newspapers.
That's not what you hear people say on the television, but what I've just told you is the truth.
Not only does government debt never need to be repaid, meaning that it is never a burden on our grandchildren, which is the favourite phrase of right-wing politicians, but actually repaying it would be an outright disaster.
So let me explain just what government debt is.
Government debt is very simply the difference between the total cumulative spending by government into the economy to date less the total cumulative taxation claimed by the government to date.
It isn't a figure that has arisen in one year. That's the deficit. It is a cumulative total that has arisen over a period of more than 325 years now. And the consequence of that debt is that we have outstanding at this point of time, something in excess of 2 trillion pounds of net difference between total government spending to date and total government taxation to date, meaning that overall we have been undertaxed by more than 2 trillion pounds as a result, which most people would probably think is quite good news.
To put that figure in context, that's roughly speaking a year's total income for the UK that has over the last 300 years not been taxed.
So why would we want to reclaim that money, which is just simply a balance between government income and expenditure and nothing more or less than that?
Well, we might want to reclaim it if we are a really mad enthusiast for taxation who thinks that we must and should reclaim it so that the government's books balance.
That appears to be the position of an awful lot of right-wing MPs. They believe that we are going to hell in a handcart unless we do actually make that cumulative equation balance but that is just stupid. I can't use a nicer term. It just shows a complete lack of understanding on the part of those who are saying this. I could even call it ignorance. I think you're beginning to get my message.
I really do think those who suggest that somehow or other we've got to make good this difference are talking nonsense. And why are they talking nonsense? That's because the money that is left by the government in the economy performs a number of absolutely fundamental roles within it.
Firstly, that money is our money supply. How do I know? Look at a five-pound note. It has written upon it the words ‘I promise to pay the bearer on demand the sum of five pounds'. If you go and ask the Bank of England for your five pounds, they'll give you another five-pound note in exchange. There is no value behind that, but if you want to go and offer the Bank of England five pounds to help pay your tax bill, they will very willingly take it because that is what the value of your money is. It can be used to pay your tax, and that's it. And that's what the government debt represents. It's the money that is available to pay tax. It is no more than that.
It is literally the money that's put into circulation, which gets its value because it could be used to pay tax.
So, if we removed the government debt, there would be no government-created money in use to actually pay our tax, which means it would have to come out of our private incomes and be lent to us by our commercial banks with a significant interest charge probably added on top.
There would be no government money supply, which is free of charge.
And we'd all be dependent upon the commercial banks to create our money supply. And they are notoriously unreliable at doing so, particularly in times of recession. So, we need government debt and government money supply to provide the stability to the economy upon which we're all dependent.
But there's a little more to it even than that.
Our private pensions are dependent upon the existence of this government debt, because government debt is represented by bonds issued by the government, and large quantities of those are owned by pension funds to underpin the promise that they make to pay pensioners when they reach old age, because there is nothing more secure than a government bond when it comes to a guarantee to make payment, which is what a pension fund does do to its pensioners. It guarantees to make a payment to them when they retire.
The other industry that is utterly dependent upon this is the life assurance industry. They want to make sure that they have sufficient funds to pay out the claims made against them. They therefore also hold significant values of government bonds to guarantee that process works. They, too, would have enormous difficulties if there wasn't a government debt in existence that they could own in part.
The banking system is in the same situation. It uses government bonds to operate what is called the overnight banking market, the technical details of which I won't go into now, but without the existence of government bonds to facilitate that market then the very large-scale banking operations that are run by the City of London on behalf of the UK's largest companies simply could not work.
So, do we need to repay the government's debts? Yes, if we want to pay a lot more tax entirely voluntarily for absolutely no gain, yes, we do.
If we actually want to remove government created money from circulation and be entirely dependent upon commercial bank created money to ensure that we can manage the economy at significant extra cost and also volatility in the event of a recession so that things might get very worse if there's ever an economic downside, which as we know can happen, then yes, we do.
If we want to destroy the private pensions industry and the private life assurance industry and commercial banking, if you want to do all those things, certainly be in favour of repaying the government debt.
But if you want the government to create our money, and if you do not want to pay excessive tax, and if you want to have functioning pension funds, life insurance companies and banks, you really, really do not want government debt to be repaid.
So, whenever you hear a politician saying that we must repay the government debt, which is a burden on future generations to come, do ask two things.
First of all, ask them why is it a burden? Because actually repaying it is the burden, its existence is not the burden, because its existence implies that we've been undertaxed, which is normally something those same people are very keen on.
And secondly, ask them, why aren't you arguing that the interest rate on that debt be reduced because it's excessive at moment? Isn't that the real problem? Just cut the interest rate, which the government can do, and then everything would be running just fine.
Then there is no problem with UK government debt. It's absolutely fundamental to the operation of the UK economy. We can't do without it and repaying it would be a nightmare. So please ignore all those who talk about it as if it's a problem, because it really isn't.
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The balancing books analogy is of course a handy tool for hoodwinking the less-clued up into accepting their inhumane austerity politics.
Imagine if the truth were reported in the press:
“The chancellor today showed her petty and outright evil side by taking away winter payments for the most vulnerable in society, despite this representing a drop in the ocean in terms of the nation’s economic power.
When asked why she was willing to accept up to 10,000 avoidable extra deaths, there was an eery silence from the government.”
A very trenchant summary (if I may say so), why the Government and Treasury are nothing like a household. It follows from the fact that money is an IOU, that it isn’t “taxpayer’s money” either; it is the person or institution’s money that issued or authorised the IOU; and that for nation-states, is the Government or Treasury.
And what does that mean fir real nation-states in the world? It means that the current US Debt-GDP ratio (the Labour and Conservative Parties economic obsession, to the exclusion of all else) is around the following for:
US 123%
Japan 263%
France 111%
UK 101%
Germany 62% (around 90% when Germany spends the €1Trn Chancellor Merz has committed to defence and infrastructure).
China 84%
The range is vast, all for different complex reasons. Conclusion? There is no Magic Debt Level (the Reinhart-Rogoff Fallacy). But the one thing you don’t do is place your nation’s debt in the hands of the money markets. In other words, you don’t do what the UK insists on doing, to the exclusion of everything else; because its economy is entirely in the hands of the City of London, and the City exclusively looks after only itself, and certainly not the UK, or you and me. And that is why ordinary UK people are becoming poorer and poorer, and cutting an increasingly absurd and forlorn figure in the world.
Much to agree with.
This can’t be said enough, and said enough, well.
All I would add is the sovereignty element provided by Exchequer and Audit Departments Act 1866 and BoE Act 1998. These Acts make it clear that the Government cannot impose on itself or accept a debtor position from institutions under its control issuing the pound – that the BoE is subordinate to Parliament.
Parliament is the highest court in our land, and also the originator and guarantor of all legal tender.
It is the source of political order.
Labour please note.
Tony Benn, who would have been 100 this week, had to remind the House that it was the highest court in the land when he wanted to raise the issue of the book”Spycatcher” at the time of the notorious court case in the 1980s.
Our average parliamentarian is quite an abject figure when compared to such giants as Benn.
Agreed
I liked Tony, and remember once going on a quest for tea with him. We found it. I enjoyed the conversation.
People only need know that our savings are the National Debt (money that has not yet been taxed back)
To repay the National Debt would mean a 100% tax on the wealth owned by everyone.
And Corporate Debt is around £1,400 billion, compared to Personal Debt at around £2.
So per person, billionaires have the greatest proportion of the National Debt.
Sources:
2021 Bank of England https://tinyurl.com/4mfh8fns
2022 MoneyNerd https://tinyurl.com/345befaw
That’s quite confusing data, I think Ian.
There were only a handful of years in the last century when the UK has managed to have a negative public sector net borrowing requirement (that is, to repay more public debt than we have issued). Even in good economic times, as the economy grows (even if just inflation), the absolute amount of debt each year goes up to maintain it as a percentage of GDP. Because that public “debt” is someone else’s asset – the money in your pocket, premium bonds, gilts held by pension funds, etc – and demand for that asset grows year on year.
And yet there is a politician on the radio this morning fear mongering by talking about the government spending on a credit card. It is just financial illiteracy as best, but I fear deliberately misleading.
I think they are stupid.
I do think they actually believe the nonsense that they talk.
But that is even more worrying.
Yes, I heard that politician this morning. The presenter did her best but I did wish she’d had Richard Murphy in the studio too. (And I’m not sure the politician does believe what he was saying – I doubt if he understood it well enough to believe it.)
Also in that interview, the description of Starmer vis-a-vis Trump made it seem just like Chamberlain’s response to Hitler.
This all makes sense to me.
Reframing it as ‘325 year old government debt’ just shows chicken-licken that we survived for for 325 years and the sky didn’t fall in.
There is no meaning without context.
Name it to tame it.
I have no real idea what that comment means
Sorry…
Sorry maybe too oblique and bonkers
Chicken licken falsely believed the sky was about to fall in, a belief based on information without sufficient context, he then spread panic in the farmyard.
the discourse around government debt…maxing out UK credit card etc similarly catastrophises, and anxiety.
Framing it as something we’ve lived with for a long time might challenge assumptions and change people’s perception of government debt.
Ok
I get it now
Thanks richard It needs repeating again and again
We have had 45 years of neoliberal household economics from goverments and MSM the counter narrative needs to be repeated over and over.
Haviing said that I think it would be a lot easier to persuade people if it were not called Government debt and likewise government borrowing in the first place.
The word debt implies something owed to someome and as for borrowing again the implication is that it will be repaid.
I think a new discription is needed if we are to change the perception that people have.
Just a thought.
Noted.
I don’t suppose, Richard, there is any possibility of you having a discussion about this on air with Jeremy Vine, one of the great proponents of debt for grandchildren, and we can’t afford it?
I have tried it
I think some of the sentiment comes from this analysis of how a fiat money system enables inequality because it is the better off who are able to work the system. https://www.youtube.com/watch?v=gAipoqRmDW4
The Big Print: What Happened to America and How Sound Money Will Fix It. https://www.goodreads.com/en/book/show/227804284-the-big-print
Even if one supports fiat currency, it does seem to have benefited the better off so I suspect many will find this argument persuasive
The ‘Debt existence –> We’re undertaxed!’ argument is a good one.
However, with zero £s of reserves to make interbank payments, I don’t see how private banks could even function. The system would collapse, as would the value of commercial bank £s.
No (tax-backed) central bank £s = No banking system = Empty pockets across the land
Agreed
Why might the teaching of socio-economics, not least a history of socio-economic theory/theories, be minimal to non existent in the state curriculum/curricula?
Might a decent history of socio-economic theories convey the message that socio-economic theories, and their contexts, change and, so far, no socio-economic theory seems to have been permanent/final, with the consequence that all need, at least, informed questioning?
Might public socio-economic ignorance suit those with “deep power” and those with “delivery power”, not least so many M. P.s and so much of the main stream media?
“It is strange the way the ignorant and inexperienced so often, and so undeservedly, succeed when the informed and experienced fail.” (Mark Twain)
“Nothing in this world is more dangerous than sincere ignorance and conscientious stupidity.” (Martin Luther King, Jr)
Much to note
Sorry this is a rather late response.
An excellent post thank you.
Sadly the “country is like a household/company” is very deeply ingrained. It think it will be difficult to dislodge, even though there are excellent expositions, such as this one. 🙁
It seems to me that it may help to have one or two very simple narrative points. Trying to get folks to change their understanding in one go might just be too much.
My favourite narrative is that the government can always borrow as much as it likes from the Bank of England.
(Aside: getting the Bank of England to create money has always been possible since we have had fiat currency. I think it was against the Mastrict Treaty, but that doesn’t apply any more. But it may be a step to far for people to accept outright money creation, at least in one step. But borrowing money from a bank anyone can understand).
Then, the argument goes ” how does that help, we still have to pay it back with interest?” To which the answer is that the government owns the bank, so any interest it pays is paid back to it; it is effectively impossible for the government to pay net interest to the BoE. Perhaps that might let people see that there is no limit on money, or at least it may make them, including politicians, think.
Thanks Tim
I keep trying to develop this
#Tim Kent
As Richard said in the blog piece, the Bank of England creates money by issuing credit under the terms of the Exchequer and Audit Departments Act 1866.
https://www.legislation.gov.uk/ukpga/Vict/29-30/39/introduction
The government does have a constraint on its money creation: *credit* can only be spent on resources (goods, services and labour) that are available to purchase, and priced in pounds. The constraint is not of money, but of resources.
Suggesting that the government can “borrow as much as it likes” can be a false friend, because it opens the way for cries of “… but Zimbabwe …”
I’m not sure I’m clear on the mechanism by which the government can reduce what it pays on that debt, aren’t they bonds already issued with a fixed return coupon? And the consequences, would that be considered internationally as a form of default and devalue GBP?
They can reduce the rate on central bank reserve accounts by cutting bank bae rate.
That also cuts the cost of new issues by changing prevailing market rates.
That is what happens all the time. I am not sure where default comes into it.
Ok so that implies redefining the role of the Bank of England MPC to override their base rate setting or is there a provision for this?
Section 19 of the Bank of England Act permits this
But you could just amend the Act. It’s really not hard. Givernments change laws all the time.
Thanks for this explanation which I find totally convincing. I realise that I am naïve and that this is probably a silly question but what do politicians mean when they say that every week we have to pay millions in interest? To whom are they paying it? Or is this just another fiction?
Many thanks,
Tony
Billions is paid to those who own government bonds.
Roughly 30% are owned by the Bank of England.
30% by people outside the U.K.
And 40% by Uk financial institutions like pension funds, banks and life assurance companies. A small part is individuals.
Is it too simplistic to rebrand the national debt as the national savings?
Daily Express:
“National savings rose by 5% in 2024 – Conservative MPs say “not high enough!””
That’s what they are.
Why not tell the truth?
It’s a really radical idea.
Hi Richard,
Which economics text-books would you recommend for the first year of undergraduate economics degree?
I bought a second-hand copy of Mankiw’s ‘Macroeconomics’, sometime ago, but having read Steve Keen’s demolition of several parts of it can’t see the point in reading much more of it.
Anybody else could suggest recommendations I would be most grateful.
Thanks in advance
CH
There is none.
But I would not recommend studying economics. As now taught it is a very poor maths degree.
And you don’t even need a maths degree to understand economics. Point in hand: my son’s a partner at Slaughter and May and so involved in lots of complicated financial transactions. He was lined up for a Cambridge maths degree until he was part of the GB Maths Olympic team at the international maths Olympiad when he was 16. He came back determined not to be stuck with mathematicians for the years of his degree. He studied music and is a much better man for that! No economics training. Just intelligence
Agreed
And music is, anyway, intensely mathematical in a great many ways.