My evidence to the House of Lords Economic Affairs committee on the sustainability of the UK's national debt is now available on the parliamentary website;
The evidence is as follows:
PROFESSOR RICHARD MURPHY – WRITTEN EVIDENCE SND0016 – SUSTAINABILITY OF THE UK'S NATIONAL DEBT INQUIRY
Introduction
- This submission is made in response to the UK parliament's House of Lords Economic Affairs Committee call for evidence, asking the question ‘How sustainable is our national debt?' https://committees.parliament.uk/committee/175/economic-affairs-committee/news/198891/economic-affairs-committee-launches-new-inquiry-on-the-sustainability-of-the-uks-national-debt/
- This evidence is submitted by Professor Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and director of both Tax Research LLP and Finance for the Future LLP. In all those roles I have worked on the accounting for and sustainability of the UK's so-called national debt.
Summary
- In its early paragraphs, the Committee notes that the UK's Office for Budget Responsibility stated in 2023 that “the 2020s are turning out to be a very risky era for public finance”. In this submission I argue otherwise, suggesting that:
- The UK does not have a national debt but does instead offer a range of very popular national savings products and also has national equity that is not yet recognised in the nation's accounts.
- All of these are sustainable in their current forms and the holders of national savings products from gilts to premium bonds and NS&I accounts most definitely do not wish for the return of their funds to them.
- The cost of servicing these savings accounts and the national equity is under the control of the government and if it is currently considered excessive then that is as a result of its choice to make it so as a result of the imposition of artificially high interest rates in an unnecessary attempt to control inflation.
- The so-called national debt as stated by the Office for National Statistics is overstated in value by approximately £1 trillion.
- National equity capital exceeds £700 billion.
- The ratio of so-called national debt to GDP is not useful as a tool for economic management, not least because the figure for national debt now used is seriously overstated as a result of mismeasurement by the Office for National Statistics.
- As a result, what is required is that we properly understand the nature of the nation's finances, its income and expenditure and balance sheet and to then use that understanding to attract the additional funding required to fund the investment in the UK that is now required which can only be delivered by action on the part of the government.
Submission
- Although the call for evidence refers to the sustainability of the UK's so-called national debt this is inappropriate. The UK government does not have a national debt. Instead, it provides savings facilities for banks, pension companies, life assurancecompanies, foreign governments, and, if they wish, individuals. Those savings facilities include Treasury bonds, or gilts, Treasury Bills and the products offered by National Savings and Investments (NS&I). The balances on NS&I accounts have risen as follows since 1998, providing evidence in support of the suggestion that these facilities are attractive to consumers:
Source: Office for National Statistics public finances databank
- Government provided savings facilities have increased in significance since 2000, when the management of the so-called national debt and government cash requirement was transferred from HM Treasury to the quasi-independent Debt Management Office[1].
- There is no reason why the arrangements in use to manage cash requirements prior to 2008, when it was normal for the government to borrow from the Bank of England using its Ways and Means Account facility rather than to necessarily borrow from financial markets to balance cash flow requirements, cannot now be used again. This is most especially the case since Brexit and the removal of Maastricht Treaty restrictions on the use of his arrangement[2].
- It is, as a result, apparent that the scale of the UK's so-called borrowing from financial markets is a matter for it to now decide upon, and not for markets to determine. The question of the UK's debt sustainability is not relevant as a result.
- Importantly, the UK government can, instead of accepting liability to third parties for funds deposited with it (which is how the existing so-called national debt might be most appropriately described), choose to create money to fund its own activities, leaving these balances on loan account with the Bank of England whenever it wishes. This is, in effect, what the quantitative easing process has done, although to meet the requirements of the Maastricht Treaty[3] that process has been heavily disguised[4].
- The interest cost of the savings products that the government supplies is under the government's own control. This is clearly the case with NS&I products, but all its other savings products are also heavily influenced by the Bank of England base ratewhich the government could take control of at any point of time if it so wishes by changing the provisions of the Bank of England Act, 1998[5]. Brexit also provides it with the freedom to do this. The cost of interest on the central bank reserve accounts could also be brought under central government control in the same way.
- The U.K.'s national debt has been sustainable since 1694 when it was first created[6], and barring the issue of 3% War Bonds in 1914[7] has never suffered a problem with product placement, with all redemptions also always being rolled over without difficulty, meaning that questions about sustainability of the debt appear to be somewhat misplaced. Anything that has lasted that long, and often at supposed ratios to GDP much in excess of those now recorded, is not a matter of concern.
- The current ratio of so-called debt to GDP is in historical terms low. The current level of so-called national debt, despite what is being claimed, is not unsustainable as the evidence from history makes clear.
Source: https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html
- The ratio of national debt to GDP as reported by the ONS is, in any event, meaningless and not comparable with data in the time series noted above for periods prior to 2010 because of the impact of quantitative easing. This is because it remains the case that more than £700 billion[8] of UK government bonds are still owned by a notional subsidiary of the Bank of England[9] that is actually under the effective beneficial control of HM Treasury[10]. Similar gilts in existence, but not in circulation, owned by the Treasury's Debt Management Office are excluded from all figures for national debt[11], but those beneficially owned by the Treasury via the Bank of England, and so similarly out of circulation in the economy are included in the figure for the national debt. The disparity is glaring, obvious, and irreconcilable. The national debt is overstated by more than £700 billion or more as a result because as a matter of fact, the government cannot owe itself money, which cancellation is confirmed by this accounting being adopted within the UK Whole of Government Accounts[12] which are prepared in accordance with International Financial Reporting Standards.
- The national debt is also overstated by almost £300 billion because of the Office for National Statistics' claim that there is aso-called Bank of England contribution towards that debt for which no matching liability exists in the audited account of the Bank of England. The figure in question represents assets that the ONS arbitrarily refuses to accept the existence of when estimating the national debt. The total sum in question cannot be categorised as debt because there is no identifiable person to whom it is owing. The problem arises because the Office for National Statistics does not use double-entry accounting when estimating the national debt.
- In combination, the matters referred to in the last two paragraphs suggest that the so-called national debt is £1 trillion less than the Office for National Statistics currently estimate as a consequence[13].
- The biggest threat to the so-called sustainability of the UK's national debt is the notional resale of bonds bought by the Bank of England during the course of the quantitative easing era by that Bank. They are doing this with the aim of supporting the high interest rates that have been artificially imposed upon the UK economy in an unnecessary attempt to tackle inflation which has instead given rise to a risk of recession. This programme, the detail of which was announced[14] the day before Kwasi Kwarteng's ill-fated budget[15] in September 2022, was the actual cause of the pension liquidity crisis that emerged over the following weekend, which in turn required the creation of emergency additional quantitative easing to solve the problem[16], but which incidentally helped bring down the government of Liz Truss. It was not Kwarteng's budget but the Bank of England's hasty implementation of quantitative tightening that actually created that crisis. The continuing sale of more than £80 billion of excess bonds a year as a result of quantitative tightening operations is what is contributing to the current record levels of bond sales in the UK, resulting in the risk of the market being over-stressed in a way that normal levels of sale would not do[17]. If, as is now necessary, Bank of England base rates are reduced dramatically to avoid the risk of deflation and recession then those bond sales could cease and as a result there would be no threat to market capacity to buy bonds inthe UK.
- There are serious problems with the structuring of the UK's supposed national debt. In particular, it is extremely difficult for most people to acquire a part of this debt and yet it is apparent that most people would wish to save in government backed bank accounts if they could. The evidence of that is clear from the fact that an £85,000 deposit guarantee has to be supplied by the government to induce people to save elsewhere. They will only bank with commercial banks because the government has provided that guarantee. It is likely that if the government provided access through a state bank to a full range of deposit facilities, current account banking, and (maybe) limited credit facilities, the demand would be significant, and the amount placed on deposit with the government would rise dramatically and any stress on the so-called national debt would totally disappear.
- This would be particularly appropriate when there is an obvious need for increased state investment in the UK, which could only be funded by debt. Social housing, the NHS, education, flood defences, transport, energy transformation as a result ofclimate change, and much else demand funding and no business would pay for this out of revenue: they would borrow. So should the government. To attract the necessary funds for this investment. The government should:
-
- Change ISA rules so that existing ISA arrangements are suspended henceforth and all tax-free savings opportunities provided by the government are made available on the basis that the funds saved be used for the purposes of funding national infrastructure development. At present £70 billion of funds go into ISAs a year with an annual cost subsidy in terms of tax foregone of £5 billion.
- Change rules on pension tax relief, so that in consideration of that relief being granted, 25% of all new pension contributions should similarly be required to be invested in bonds, shares, or other structures that fund national infrastructure development, whether in the state or private sectors, subject to a strict taxonomy being in use. Nothing is more important to pensioners than having a future where they can draw down their pension.
- It is suggested that these two changes to pension to tax incentivised savings rules could raise £100 billion a year for the government by attracting new savings into government accounts to fund the transformation of the UK economy[18].
- The boost in economic activity that the investment funded in the fashion noted in the previous paragraph would be sufficient to fuel growth within the UK economy sufficient to more than fund the cost of any resulting interest charge payable by the government out of taxes raised. Fiscal multiplier effects arising from the investment made would deliver this outcome. This integration of fiscal and monetary policy is essential in the future.
- There should be a re-definition of the national debt. It should no longer be called the national debt, because that is not what it is. It should, instead, be called national savings, because that is what those parts owing to persons who save with the government actually are.
- Finally, those liabilities shown as owing on the Whole of Government Accounts[19] to commercial banks as a consequence of the creation of central bank reserve account balances by the Bank of England, on the instruction of the government, should now be properly described as national equity, because only the government has this right to create and inject money into the economy and without it doing so there would be no economy that could function. What is more, since that sum could only ever be repaid using money newly created by the government, which would be instantly re-deposited with it, these balances cannot be debt and must therefore be distinguished from anything approximating to that description elsewhere in the national accounts by calling them national equity.
I shall be happy to provide the Committee with further evidence in support of these suggestions if they wish for it and to appear in person before the Committee if that is the members' wish.
Finally, for a fuller explanation of the national debt and issues arising from it, please seehttps://www.taxresearch.org.uk/Blog/wp-content/uploads/2024/02/National-debt-an-explanation-published.pdf which explores the issues raised here in more but accessible depth.
8 February 2024
[1] https://assets.publishing.service.gov.uk/media/623a22078fa8f540ecc60532/DMR_2022-23.pdf provides evidence that the previous mechanisms for manging cash requirements still exists. The government overdraft, or so-called Ways and Means account used for this purpose until 2008 was temporarily expanded to include a £20 billion facility in April 2020. Its previous use was faded out after 2008. See https://www.dmo.gov.uk/media/10808/sa240108.pdf. Any suggestion that the current way of managing debt by always seeking to borrow to make good shortfalls is normal is, as a result, wrong: it is a recent innovation.
[2] Article 104(1) of the Maastricht Treaty, supported by Article 21.1 of the Protocol sought to limit use of such arrangements but can no longer apply if the UK chooses that it should not do so.
[3] ibid
[4] See https://www.taxresearch.org.uk/Blog/glossary/Q/#quantitative-easing and https://www.taxresearch.org.uk/Blog/glossary/T/#the-qe-process for an explanation of the QE process, which is rarely properly understood.
[5] See most especially section 19 https://www.legislation.gov.uk/ukpga/1998/11/section/19
[6] https://www.bankofengland.co.uk/freedom-of-information/2020/details-of-the-bank-of-england-loan-to-the-government-in-1694#:~:text=When%20the%20Bank%20of%20England,loan%20in%201694%20was%208%25.
[7] See https://www.ft.com/content/1ffa3bb6-ae87-3b6c-aa5c-7a48ca1fc2e2
[8] https://www.bankofengland.co.uk/asset-purchase-facility/2023/2023-q3
[9] The Bank of England Asset Purchase Finance Facility Limited (APF)
[10] See the letter establishing the APF in which it was made clear that a) the Bank of England would act under direction from the Chancellor of the Exchequerand b) the Bank of England would be indemnified for any gains and losses that it made as a result of undertaking activity on behalf of HM Treasury and c) note the fact that as a consequence the accounts of the APF are not consolidated into those of the Bank of England because it isw not a subsidiary under its control.https://www.bankofengland.co.uk/-/media/boe/files/letter/2009/chancellor-letter-290109
[11] https://www.dmo.gov.uk/media/xl5bo4as/jul-sep-2023.pdf provides evidence of this.
[12] https://www.gov.uk/government/collections/whole-of-government-accounts
[13] See https://www.taxresearch.org.uk/Blog/2023/12/24/the-good-news-this-is-christmas-is-that-trillion-of-the-uks-national-debt-does-not-exist/ for further explanation.
[14] https://www.bankofengland.co.uk/markets/market-notices/2022/september/apf-gilt-sales-22-september
[15] https://www.theguardian.com/uk-news/2022/sep/23/kwasi-kwarteng-mini-budget-key-points-at-a-glance
[16] https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation
[17] See https://www.ftadviser.com/investments/2023/09/08/is-now-a-good-time-to-buy-gilts/ for a discussion of this issue.
[18] See https://www.taxresearch.org.uk/Blog/wp-content/uploads/2021/10/The-QuEST-for-a-Green-New-Deal.pdf
[19] https://www.gov.uk/government/collections/whole-of-government-accounts
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There are some other good submissions to the Parliamentary Committee on “How sustainable is our national debt?”. For example, that from the GOWER INITIATIVE FOR MODERN MONEY STUDIES, and others at https://committees.parliament.uk/work/8090/how-sustainable-is-our-national-debt/publications/written-evidence/
I have seen theirs
Which others are worth looking at?
The Gower group are very good
At the very least, the UK government owes multi trillions of pounds to individuals for future State pensions which have been accrued but not yet paid out and for future payments to those already in retirement.
Likewise, the UK government owes multi trillions of pounds to public sector workers for final salary pensions to be paid out in the future, for those who have already retired and for those who have accrued pensions to be paid out in the future.
By any credible definition these are debt!ms.
They are in the whole of government accounts but not national debt calculations.
Please explain instead of moaning.
Then explain the problem, precisely.
I hope the economic correspondents of the BBC, Sky News, Channel 4 and others, read and inwardly digest.
We might get some better questions when they interview politicians.
We live in hope.
But I suspect their Lordships will take more note of submissions such as that of Stiglitz which almost entirely parroted the mainstream narrative. The transcript of the video submission is available on https://committees.parliament.uk/event/20897/formal-meeting-oral-evidence-session/.
I may cover that tomorrow
Stiglitz seems to suggest that the ‘MMT idea’ that ‘debt doesnt matter’ came from the 2008 QE which was massive but didnt produce inflation because it was used to bale out the banks and ‘wasnt spent’.
He then seems to say that debt ‘does matter’ – but there is no simple debt to GDP rule that works because its what you invest with the ‘borrowing’ that matters – and the subsequent returns and growth in productivity. So he is sort of steering a middle way between ‘debt doesnt matter’ and ‘it should have a clearly defined ceiling’.
But he talks about UK maybe having to borrow more from other jurisdictions because it isnt a huge relatively closed eocnomy like the US .
He doesnt address directly that all central banks now state that they create money and that there are ways of ensuring money creation doesnt cause inflation – eg through taxation. And he doesnt look at this in an accounting sense – setting ‘debt’ against assets.
I would be surprised if the HoL committee really take your analysis fully on board – as you are taking on the ONS, Treasury and BoE etc etc , but it may be worth trying to at least get them to ask how muchm of the ‘debt; is really ‘borrowing’ and that 30% at least is ‘borrowed’ from govt itself and that the ‘debt’ is far lower than the official statistics suggest.
I may post on this today if I get time – but that is pressing even if I am starting early.
Thanks for your comment.
This is quite brilliant Richard: thank you so much!
Perhaps this should be the topic of your next book?
I particularly like your reference to 1694 and separately the fact that we could borrow direct from the BoE. Paying the interest using tax is clearly not sustainable in the sense that our so-called fiscal rules mean that this has to result in reduced public spending and an overall diminishing of our real national wealth.
Hi Richard. I’d always understood from your writings, and those of the MMT community, that the government spends money into existence from the ways and means account and recovers it from tax and gilts but point 6 seems ti imply that this has not been the case since 2008. Have I misunderstood something? Thanks
They government changed its arrangements for managing debt in 2006, but in ways that became apparent from 2008. That is to what I was referring.
Ah ok. So it’s not the mechanism by which the money is created that changed, just the policy about how the overdraft is managed. Thank you
Correct
Perfect Richard at least that should educate some people near positions of power about how exactly management of our economy is handled
this section is the best part for me. I have commented before on your blog that we need a new narrative for the so called ‘national debt’
Excellent
‘There should be a re-definition of the national debt. It should no longer be called the national debt, because that is not what it is. It should, instead, be called national savings, because that is what those parts owing to persons who save with the government actually are.
Thanks
Fantastically clear.
I wonder what brought this whole initiative to bear in the first place?
Fear, and the desire to crush the state I suspect
Should be sent to every student studying politics/economics in the country and the Local Government Association.
I read somewhere the national debt should not be thought as a “debt” but merely a “record of pounds injected into the economy”. Obviously an over simplified explanation. Luckily the UK controls it’s own currency, so debt servicing will not be a problem, unlike third world countries borrowing in dollars or EU countries beholden to the Euro central bank.
Thank you for the clarification of debt to GDP ratio. Over used metric, which makes sense but obviously not grounded by evidence.
Concerning the recent British ISA and suggestion in the written evidence to use 25% tax relief on UK stocks/bonds directly invested in UK, I prefer a global portfolio instead of a home bias when investing. Research shows home bias reduces returns. If UK economy was that good, it will be reflected in global index fund percentage invested.
https://corporate.vanguard.com/content/dam/corp/research/pdf/Global-equity-investing-The-benefits-of-diversification-and-sizing-your-allocation-US-ISGGEB_042021_Online.pdf
I would abolish all ISAs but those linked to Green New Deal investment.
Sadly we still live in feudal times where most UK voters and politicians can’t get their heads around the idea money is not a thing despite the fact they now live in a world full of computers and increasingly don’t use minted money or banknotes but virtual money!
Well you cannot do much more than present this report to the HoL Economic Affairs Committee, Richard. It will be very interesting to see what response, if any, is generated.
Thank you for putting so much effort into this presentation.
Thank you Richard. A trenchant examination of Treasury accounting; such as it is. Some excellent points made about the anomalies and inconsistencies.
Incidentally the WGA is a bizarre creature. The latest WGA seems to be for 2020-21 (what would happen if BP or a major bank tried to take three years to produce a set of qualified accounts?); it is very odd creature for the Treasury to be crowing about transparency for this ramshackle operation. Are they trying to make the Government look like a household. It wouldn’t even pass British building regulations, and that is sinking fairly low. Things seem to float in the accounts and float out again, without any specific explanation of what, when, how; or how much. There is a reference to a PPE inventory that is so bad they can’t even determine its existence: Dept. of Environment offered “insufficient evidence that the value of property, plant and equipment consolidated into the Department from the Environment Agency was not materially misstated.”. The lack of detail is relentless, but if there was a decent set of accounts, this is where we would find where all the disasters this Government has created are buried: deep. What we lack is the right spade.
The WGA is littered with audit qualifications: “the 2020-21 WGA audit opinion has been qualified as a result of
qualifications in underlying accounts and as a result of issues relating to the boundary, non-coterminous year ends and accounting policies applied by the Treasury when carrying out the WGA consolidation.” (there are dozens; see especially pp.102-8). The Accounting Officer concludes: “I am conscious that the scale of qualifications in WGA is very unusual and not something seen in many sets of financial accounts”.
The balance sheet has an item of £366Bn for provisions, that turns out to be “Provisions are liabilities of uncertain time or amount. Key provisions in WGA are those for nuclear decommissioning and clinical negligence. Changes this year in total provisions have been driven by new provisions and increases in expected future pay-outs.” We are being encouraged to advance nuclear energy, but the real costs are in the build, subsidised by Government, or at the back-end, when they sit in government Balance sheet provisions; without any explanation of the forward assumptions of decommissioning.
There is a reference to PVs for the biggest liability (Pensions) in the balance sheet; but I couldn’t find any reference to the basis (PV, historic cost, inflation-adjusted or whatever) for other balance sheet items. They may be set out somewhere, but eluded my quick search.
This crude summary doesn’t even scratch the surface.
The Treasury; transparent? They have chutzpah.
All correct, John, and all capable of correction if there was a will to do so
There seems to be no such will.
Wherever there is a debt there is always an asset. What to call it really depends on what you’re trying to achieve. I guess those in charge want to call it debt because that suits their agenda.
Agreed
I must admit to always being rather bemused when reading these pieces. For someone like me who has no finance experience or training they are invaluable. This piece whilst complex was easy to follow.
What gets me is why would anybody do things differently? Why inflict so much pain on ordinary people and why deny the public side the resources it needs to improve lives and the environment.
How is it, then, that the alternative strategy(s) have gained such traction? Not only the Bank of England, banks in general and the wider financial industry but also journalists, talk show hosts and so on seem so invested in the ‘reduce the debt’ mantra.
All I can assume is that the current approach is being supported and pushed purely out of self interest.
The 80’s mini-series Threads starts with the following lines
‘In an urban society, everything connects. Each person’s needs are fed by the skills of many others. Our lives are woven together in a fabric. But the connections that make society strong also make it vulnerable.’
It seems to me that these threads are out of balance and that there are those whose activities are designed only to harvest the work of others without contributing to the whole.
Good questions
Great submission, Richard: your clarity is commendable; and as per another comment, looks like a book outline – something like “The Debt that Isn’t: exploding the myths of UK central banking and government finance.” (Not feeling very creative today )
@Nicholas:
“those whose activities are designed only to harvest the work of others without contributing to the whole.” In a word, parasites!
+6
Thanks
Debt can turn ugly, and ‘national debt’ is somewhat pejorative, implying a bad thing .
It therefore wouldn’t suit the neo-liberals agenda, re-naming the ‘national debt’ as ‘national savings’ and becoming a good thing .
But re-naming and re-framing it as the ‘national risk-free debt’ should/could change the perception .
Debt –- bad
Savings –- good
national debt –- bad
national savings –- good
risk-free debt – good
national risk-free debt – very good
This is the – difficult to find – link to all the submissions to the House of Lords Economic Affairs committee – which does include some familiar names…
(The number of written submissions is though, to me, remarkable for its paucity.)
https://committees.parliament.uk/work/8090/how-sustainable-is-our-national-debt/publications/written-evidence/?page=2
Thanks Peter