Don't worry about the National Debt ...

Don’t worry about the level of national debt, like old soldiers, much of the debt will just fade away … the Bank of England holdings may never be repaid ... according to the latest update from The Saturday Economist ...

According to the latest borrowing figures, the national debt in the UK has exceeded the level of GDP for the first time since 1961. The National Debt has risen to just over £2 trillion pounds. It is the first time the debt to GDP ratio has been so high since 1961.

Should we be worried about the level of debt?
The Bank of England has pointed out the debt to GDP ratio has exceeded unity, in over 100 of the last 300 years. Thrift, it would appear, is a post war phenomenon.

The cost of borrowing means the cost of funding the deficit remains extremely low. The Bank of England has reduced the base rate to just 0.1%. The cost of ten year gilts has fallen to just 0.3%.

No worries about a gilt strike. The pretence of QE abandoned. The Old Lady of Threadneedle Street is on standby as the buyer of last resort. Almost £1 trillion of gilts could end up in the bank’s coffers, if the spending spree continues.

The OBR are projecting debt to rise to £2.2 trillion this year. The Bank have committed to £745 billion or 34% of total issuance The OBR projection is for debt to rise to £2.6 trillion by 2023/2024. The Bank share would fall to 29%. It would take just another £100 billion to maintain the plug at current levels! The £1 trillion Bank note, would not be that much of a step to make. The £1 trillion Bank note is coming …

So should we worry about debt repayment?
Government borrowing is financed by the issue of “gilts” from the Debt Management Office. Much of the debt issued is acquired by UK and overseas institutions.  According to the latest published data from the DMO (Q1 2020)*, 30% of debt issued was owed overseas.  32% was in the hands of UK insurance companies and pension funds. A further 13% was held by UK financial institutions.

The Bank of England holdings were approximately 25% of total debt at the end of the first quarter, valued at just over £500 billion pounds. According to latest commitments from the MPC, the total amount is set to rise to £745 billion by the end of the year,. The level may rise to £1 trillion if the spending spree continues.

The gifts purchased by the Bank of England from the Debt Management Office are underwritten by Treasury. Coupons paid by the DMO to the Bank are remitted to HM Treasury, it is their debt after all.

We call this “Dire Straits Economics … Money for Nothing Gilts for free.”
The Debt Management Office is also a wholly owned by the UK government. The parent organization is HM Treasury. It is an executive agency of HM Treasury responsible for debt and cash management for the UK Government.

The Bank of England is wholly owned by the UK Government. The capital of the Bank is held by the Treasury Solicitor on behalf of HM Treasury.

The gilt assets held by The Bank of England are a liability owned by the Treasury. Both the Bank of England and the Treasury are subsidiaries of government. No need for formal repayment. The debt will simply fade away at some suitable stage in the future. Rollover dates will lapse. The two sides of the balance sheet will be reconciled.

No need to worry about paying back the debt, over 30% of the national debt, almost £ 1 trillion pounds, will just fade away ...

About The Author ...
John Ashcroft PhD BSc.(Econ) FRSA is a specialist in economics, strategy and financial markets. He is the author of The Saturday Economist and The Saturday Economist Live. Educated at the London School of Economics, London Business School and with a PhD in economics, John is based in Manchester, UK.