How the UK debt works

owlo

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I'm making this post because there's been a lot of talk on related threads lately about the deficit, the deficit during latter Labour years, etc.

This will attempt to clarify in laymans terms how our sovereign debt functions. It's a little bit complex so please don't take it as patronising if I repeat certain things. Please help to correct me if I get anything materially wrong or miss anything important.

It may be a little long, so will be worked on in parts and will likely also be subject to my personal bias.

Headline Facts:

- Most government debt is held and issued in what's called 'government bonds.' This is where the government sells bonds, to individuals institutions etc, and pays an interest rate or 'yield' on it. When people are referring to 'bond yields,' this is what it means, the interest you pay on a bond. There are different types of government bonds. We'll use the real world example of the US March 2019 bond issues.

There was a 30 year bond at 3% and a 10 year bond at 2.65%. This means that investors could choose to invest $1000 and receive $30 a year (getting their $1000 back in 30 years), or receive $26.50 a year and getting their $1000 back in 10 years.

Sovereign bonds are usually pretty safe, especially from large countries. This is why other countries buy them (you've all heard the saying 'China owns US debt'), as well as multinationals and pension funds.

That's not to say they are risk free, you have inflation and currency concerns, reinvestment/interest rate problems (If the interest rate goes up and your capital is stuck, nobody is likely to buy your US 3% bond on the secondary market when there are 5% available on the primary market)

- Talking of currency, all UK government debt is held in GBP. And subject to English law. Nifty aye? This means we can control our own inflation and are not subject to external pressures in relation to government borrowing.

- UK government debt is very safe. Like really safe. This means that when markets crash, more people want to buy UK debt. And the interest rates fall. Meaning we don't pay much. This also means we have a really low interest rate now, as our debt is so safe.

- Our private sector debt is a different story. It's huge at around 390% of GDP.

- The assets we hold (government + private sector) are also huge, at around 520% of GDP.


The deficit and the CAB (Current Account Balance): What are they?

Our CAB is made up of the following:

Government Debt, Private/Institutional Debt and related interest. Imports - Our exports and profits from the debt we hold.

When people refer to our deficit this is the number they mean. It means the UK is buying more than they are selling.

So how do we unpack this?

Our current assets and liabilities are as follows:

Government Debt: Around 85% of GDP
Consumer Debt: Around 400% of GDP
Other: Around 25% of GDP

Assets: Around 509% of GBP

This leaves a 1% hole, which is discussed in this article: https://blog.ons.gov.uk/2017/10/23/has-500-billion-really-gone-missing/
It's around £500Bn for those interested (Out of a total of around 97Tn in assets/liabilities)

However, important as the 'differences' or 'deficits' are, the more concerning part is the sheer size of our investments and risk. In the event of a crash, our financial system will hurt. I'll simply quote from an excellent article here as it's easier:

This estimate led to headlines of “Britain’s missing £490 billion.” However, the real problem is not whether there is a small deficit or surplus, but the huge scale of the UK’s external assets and liabilities, such that re-estimates can lead to changes of the magnitude of £490 billion. For example, if we imagine there was a 20% fall in the value of external assets held by all the G7 economies, this would leave the UK with net liabilities of 121% of GDP. France’s would be 85%, the US’s 75%, Italy 34% and Canada 17%. Germany and Japan would still have net assets of 11% and 27% respectively.This makes the UK uniquely vulnerable to financial changes elsewhere in the world.
https://jubileedebt.org.uk/wp-conte...-key-facts-on-debt-in-the-UK_Update_11.19.pdf

The government role in the deficit, and why productivity matters:

So the obvious question is, if 400%+ of our debt is privately held what can the government do about it? And why was 'Austerity' and cutting back government spending an option? Did austerity drive up consumer debt and make the deficit worse? How does 'productivity' fit in? And what is the outtake? Did the Labour government get something horribly wrong by not running a surplus when we were prosperous?

(Coming soon as I can't spend hours on this!)

ps. Many thanks to the article linked above as it's really helped me unpack thoughts in a meaningful way.
 
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Skills

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What the feck, you can't leave now just when it was about to get juicy.

Good post btw.
 

owlo

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berbatrick said:
What are the UK's external assets/liabilities?
Click to expand...
I posted it here, but will expand somewhat.

Government Debt: Around 85% of GDP (This is actually wrong, as a lot of government debt is owed to either the BOE/Internal consumers, but basically it talks of the bonds that they issue to raise £££)
Consumer Debt: Around 400% of GDP (Credit cards, mortgages, business debts, all sorts of stuff. If you owe £80k on your new boat, its in this column)
Other: Around 25% of GDP (Much of this is fx/asset related, and how we account for import/export and 'value' of assets)

Assets: Around 509% of GBP (For example, the government holds around $500Bn of US bonds (Real figure in USD) and Barclays may hold $250Bn (made up figure).. We may own a lovely hotel or island in Canada etc. We have gold, platinum, etc.

It kinda encroaches on the next part, as for example if the USD falls by 10%, that wipes billions off our assets. We obviously diversify and hold in other areas too.
 

owlo

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Skills said:
What the feck, you can't leave now just when it was about to get juicy.

Good post btw.
Click to expand...
I was going to continue, then realised I should take a break and do it properly as I'm quite anti-tory especially in regards to their post 2010 economic management so wanted time to make it fairly neutral.

But for example, the government controls both fiscal (directly) and monetary (indirectly) policy, so after a resession can do things like:

- Borrow money (issue bonds) to invest in housing or transport and create infrastructure jobs (fiscal)
- Lower interest rates to encourage spending (monetary policy)

Or if David Cameron: Introduce policies that cut government spending (bedroom tax, lower welfare, less nurses)

Each each of these actions affect the deficit.
 

rcoobc

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Where does my credit card debt fit in?

I pay for things on a credit card.

I then use a 0% fee balance transfer card to pay off that credit card.

I then use another credit card to pay that one off once it has a high balance.
 

11101

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owlo said:
I posted it here, but will expand somewhat.

Government Debt: Around 85% of GDP (This is actually wrong, as a lot of government debt is owed to either the BOE/Internal consumers, but basically it talks of the bonds that they issue to raise £££)
Consumer Debt: Around 400% of GDP (Credit cards, mortgages, business debts, all sorts of stuff. If you owe £80k on your new boat, its in this column)
Other: Around 25% of GDP (Much of this is fx/asset related, and how we account for import/export and 'value' of assets)

Assets: Around 509% of GBP (For example, the government holds around $500Bn of US bonds (Real figure in USD) and Barclays may hold $250Bn (made up figure).. We may own a lovely hotel or island in Canada etc. We have gold, platinum, etc.

It kinda encroaches on the next part, as for example if the USD falls by 10%, that wipes billions off our assets. We obviously diversify and hold in other areas too.
Click to expand...
Currently 28% of gilts are owned by foreign investors.

Most are owned by UK pension and insurance funds, but they still have the same obligations to their shareholders etc. Its not like being UK owned means the debt doesn't count.
 

owlo

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11101 said:
Currently 28% of gilts are owned by foreign investors.

Most are owned by UK pension and insurance funds, but they still have the same obligations to their shareholders etc. Its not like being UK owned means the debt doesn't count.
Click to expand...
BOE owns around 24% from QE. Anything paid back to them stays on the balance sheet but is diversified. (Making that 24% appear worse than it is for a few reasons) Funds with foreign shareholders are included in the CAB. Our effective government debt is around 60%. It's very healthy.

Calculating CAB correctly is way beyond the scope of this and notoriously complex.
 

owlo

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rcoobc said:
Where does my credit card debt fit in?

I pay for things on a credit card.

I then use a 0% fee balance transfer card to pay off that credit card.

I then use another credit card to pay that one off once it has a high balance.
Click to expand...
Consumer debt. Same as mortgages etc.
 

Classical Mechanic

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So what's the moral of the story here @owlo ? We need more taxation across the board to solve this issue or we go low tax low regulation and shrink the state even further through things like privatisation of the NHS etc? How do we reduce private debt, is this the responsibility of the Tory government because of austerity and for not taking any measures to bring it under control during their terms?
 
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Buster15

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owlo said:
I was going to continue, then realised I should take a break and do it properly as I'm quite anti-tory especially in regards to their post 2010 economic management so wanted time to make it fairly neutral.

But for example, the government controls both fiscal (directly) and monetary (indirectly) policy, so after a resession can do things like:

- Borrow money (issue bonds) to invest in housing or transport and create infrastructure jobs (fiscal)
- Lower interest rates to encourage spending (monetary policy)

Or if David Cameron: Introduce policies that cut government spending (bedroom tax, lower welfare, less nurses)

Each each of these actions affect the deficit.
Click to expand...
Are you sure that the government controls monetary policy.
Is that not the responsibility of the Bank of England ?
 

11101

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Buster15 said:
Are you sure that the government controls monetary policy.
Is that not the responsibility of the Bank of England ?
Click to expand...
They BoE controls monetary policy independently, but its' target of 2% inflation is set by the Government. The Government cannot change interest rates on its own.
 
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Buster15

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MTF

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You don't get to control your inflation, you get to control your money supply which is a main factor of inflation. But you can still see inflation from other sources.

If I may move on to the debate part, one of my main thoughts that relates not so specifically to the UK because I'm not a close follower of your economy, but to developed countries in general:

We're now 10 years past the 2009 recession. I understand and believe in Keynesian theory on fiscal policy to counter economic cycles. I also believe in the possibility of government spending having a positive return when it is investments that will accelerate economic activity and wouldn't be done or would take too long if left to the private sector, which is most commonly infrastructure spending. But is there really a need to run deficits in 2019? Because I think that we've just gotten bad at making productivity gains, populations are aging, but we won't tolerate recessions anymore politically, so we just run fiscal deficits and expand the money supply (low interest rates) to barely eek out some growth.

A healthy management of government finances would see you swing from surpluses to deficits, ideally counter to the economic cycles. But there doesn't seem to be a large developed country on earth bar Germany that has actually had a surplus in recent years.
 

PedroMendez

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MTF said:
You don't get to control your inflation, you get to control your money supply which is a main factor of inflation. But you can still see inflation from other sources.

If I may move on to the debate part, one of my main thoughts that relates not so specifically to the UK because I'm not a close follower of your economy, but to developed countries in general:

We're now 10 years past the 2009 recession. I understand and believe in Keynesian theory on fiscal policy to counter economic cycles. I also believe in the possibility of government spending having a positive return when it is investments that will accelerate economic activity and wouldn't be done or would take too long if left to the private sector, which is most commonly infrastructure spending. But is there really a need to run deficits in 2019? Because I think that we've just gotten bad at making productivity gains, populations are aging, but we won't tolerate recessions anymore politically, so we just run fiscal deficits and expand the money supply (low interest rates) to barely eek out some growth.

A healthy management of government finances would see you swing from surpluses to deficits, ideally counter to the economic cycles. But there doesn't seem to be a large developed country on earth bar Germany that has actually had a surplus in recent years.
Click to expand...
The argument everyone seems to pivot towards is, that most economies aren't at their capacity and we don't witness troubling rates of inflation. Consequently running deficits does have little/no costs compared to the benefits.
There is also the argument that low rates are the consequence of factors like demographics, high savings and technological development. Central banks might simply follow this trend. Absolute interest rates might tell us very little if monetary policy is actually tight or loose. I know a surprising amount of economists who think monetary policy has been too tight.
There is the idea of a shortage of save assets, that are in high demand. Governments, that can issue save bonds should increase debt to supply enough of these assets. This combines on some level with the idea, that decreasing government debt leads to increases in privat debt (an idea that the opener seems to agree with).

These aren't my opinions and I hardly do them justice by repeating them in one liners. Nonetheless, deficits/surpluses are probably not and end in itself, so whats the problem of running a deficit in the current environment? People who warned about inflation have been wrong for ~10 years now, so maybe its time to question the validity of this line of reasoning.
 

owlo

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PedroMendez said:
The argument everyone seems to pivot towards is, that most economies aren't at their capacity and we don't witness troubling rates of inflation. Consequently running deficits does have little/no costs compared to the benefits.
There is also the argument that low rates are the consequence of factors like demographics, high savings and technological development. Central banks might simply follow this trend. Absolute interest rates might tell us very little if monetary policy is actually tight or loose. I know a surprising amount of economists who think monetary policy has been too tight.
There is the idea of a shortage of save assets, that are in high demand. Governments, that can issue save bonds should increase debt to supply enough of these assets. This combines on some level with the idea, that decreasing government debt leads to increases in privat debt (an idea that the opener seems to agree with).

These aren't my opinions and I hardly do them justice by repeating them in one liners. Nonetheless, deficits/surpluses are probably not and end in itself, so whats the problem of running a deficit in the current environment? People who warned about inflation have been wrong for ~10 years now, so maybe its time to question the validity of this line of reasoning.
Click to expand...
Aye, absolutely. It's a little more nuanced than that, but for the UK it seems a no brainer. [We're into opinion not fact territory now folks]

The argument goes something like this, in no particular order:

- Austerity and cutting back government debt disproportionately affects the poor/more vulnerable, so drives up private and small business debt
- Our government debt is the 2nd lowest in the G7 [after Germany] and doesn't matter much anyway. Interest rates and repayment are at their lowest ever levels
- Government debt in general aren't a big issue in the big economies.
- The main dangers to the UK economy are our private debt and financial assets. (see image below)
- Our aging population and crappy tax receipts are factors.
- Austerity was a catastrophic and failed policy, in large part based on a flawed and discredited analysis. (It has been known to be flawed for years at this point)
- We need more regulation, not less.
- TLDR: We need to tax more and spend more. Not worry about government debt. We need to regulate in and diversify from finance, and fund large initiatives to cut consumer debt.

 
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sincher

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I do agree with the main thrust of the above. Need to tax and spend more.

Private sector debt is very high, but there doesn't seem to be good data on the level of risk associated with it.

A lot of this debt is carried with virtually no risk at all by individuals or businesses that could readily have no debt at all if they really wanted, because rates are low.
 
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