An easy £10 bn of deficit reduction and £200 bn off the National Debt

I praise the Coalition government for their first brave attempt to tackle the £156 bn deficit with their £6 bn of net cuts. This, as we know, is scratching the surface of the problem.

I was speaking to a back bencher who used to have a senior role as an advisor to a current Cabinet member: he told me that their main objective was to cut the “structural deficit.” This is estimated to be about £70 bn. I get worried when the ambition is so low and assumes that growth will build up substantially this year, enough to bring in an extra £80 bn of tax revenue to “plug the gap.”

So I believe we will finish the year with £900 bn of national debt. This is forecast to cost £40 bn a year in interest service costs. This is nearly 30% of all income tax revenue. This is more than what we pay for the education of our children. What a shocking waste of our resources and a desperately onerous burden on the taxpayer.

If you follow this link to the Debt Management Office, you will see the perplexing sight that our very own Bank of England, part of the apparatus of the state, owns £190 bn of all outstanding debt. This is shown on the very first page, bottom left hand chart.

I say perplexing as it may have dawned upon you now that one side of the government issues new debt while the other part “buys” it with newly minted money. We the taxpayers get the privilege of paying the interest on this newly minted money that is now owed to the government!

Currently at the end of Q4 2009 the national debt was £796 bn, so £200 bn is 25% of this debt. Suffice it to say, I would think it reasonable to assume that ¼ of the £40 bn debt interest service is then totally unnecessary!

Our Chief Secretary to the Treasury, David Laws, is involved in the papers today with a £40k personal expenses scandal. This makes the front page of all major papers. This is nothing compared with this £200 thousand million debt problem and the £10 thousand million interest bill problem that this oddity generates! Yet no mention of this on the front pages!

This means £10 bn could be saved at a flick of a switch on a key board, with no economic consequences other than to relieve the burden of the taxpayer of having to pony up £10 bn in cold-blooded tax extractions. This savings could also be the equivalent of a 7% cut in income tax.

Now that would be popular.

I wonder if the real reason why one arm of Government must “buy” so much of the debt of another arm is to keep the illusion going that there is a market for UK debt. This then begs the question, “Did a bond strike happen a long time ago?”

Readers to this site know that I favour a solution that would totally eliminate the national debt as mentioned in these two articles:

However, today, this modest “pressing the button” reform could be done and should be done with no debate, and yet it is not!

The general lack of economic knowledge does concern me more and more. A timely reminder of this was in yesterday’s letter section of the FT, May the 28th .

‘Reminder of repressive US gold rush

Sir, Martin Wolf asks “How likely is financial repression?” (May 25). Based on the historical record, as he suggests, it’s pretty likely.

‘He does not mention a most egregious case of financial repression: the confiscation of all their gold from American citizens by their government in the 1930s, so they could be forced to hold depreciated fiat dollars. (The Federal Reserve Banks had their gold confiscated, too, and still own none.)

‘This was followed by default on the gold bonds of the US. For its citizens to own gold was made criminal by the American government, an outrageous and oppressive act that remained in force for decades.

‘Yes, when pushing comes to shoving, never underestimate what coercive measures governments will undertake. Mr Wolf’s reminder is timely.

Alex J. Pollock, Resident Fellow, American Enterprise Institute, Washington, DC, US’

I could not put this better myself.

We should all remember the following:

  1. The crisis always starts by Public Spending in excess of what we can afford.
  2. Deficit Spending then occurs, with no understanding that this risks the collapse of the economy.
  3. Denial of Any Problem is writ large amongst the incumbent ruling politicians.
  4. There follows a Lack of Political Will to do what needs to be done.
  5. Finally, Monetisation of the Debt. This always means your purchasing power goes down and a wealth transfer takes place from you to any of the programmes that the government is funding at the time. This is the best we can realistically hope for.

At the other extreme, we must hope the repressive measures of the Depression-era US authorities are not considered by modern British and European governments. But if the government lacks either the will or the knowledge to bag this easy £10 bn of savings, then it is hard not to infer that they actually want that money from the taxpayer in interest.

You then have to start wondering: where is this going to end up?

Further reading

The Crack-up Boom, a review of Mises’ The Causes of the Economic Crisis and Other Essays Before and After the Great Depression.

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13 replies on “An easy £10 bn of deficit reduction and £200 bn off the National Debt”
  1. says: Current

    It’s not so easy. If it were it would have been done long ago. These institutional splits have their purposes.

    The government and the central bank must keep reasonably separate account books. The bond market must be convinced that the only creator of new money is the central bank, and that it can’t *direct* that new money. The bond market must know reasonably well that the money creation is directed towards the commercial banks.

    For this reason, in the current system, the BoE need to hold bonds so they can alter the money supply through open-market operations. The discount window isn’t sufficient for this purpose in modern monetary systems.

    The government should not mix the accounts of the central bank and it’s own too much. If that happens then the possibility that the government can create large amount of money and spend it directly itself. Bond markets (quite rightly) consider states that work like this to be poorer investments than states where the direction of money creation is only indirectly affected by government.

      1. says: Current

        Certainly the government control the central bank.

        The argument that “central bank independence is a myth” is related to monetary policy. The government can lean on the central bank this way or that to affect the policy on interest rates and the quantity of money. I agree with the “independence myth” view here.

        However, the existence of a set of separate central bank accounts is useful. It can tell the markets, to some degree, exactly what money creation is going on. And, the current setup ensure that when new money is created it is create through the commercial banks.

        If the state could print new money *directly* and spend it then the temptation to do so would be greater than it is currently.

        1. Underlying this conversation is perhaps the Monetarist assumption that there should be an authority in place to control the quantity of money in circulation. This is one of the great errors of our time.

          I will publish an article on the subject this week but in the meantime, I recommend Hayek’s Prices and Production which sets out the robust capital theory which renders Monetarism at best unhelpful. Please see our Primer.

          1. says: Current

            I know about Austrian Economics, I know about Hayek & Mises capital theory and business cycle theory. I agree that there is no need for the Bank of England and that we would be much better off with Free banking.

            But, my point here is separate and about the second or third best case. If the central bank does exist then it’s better for it to have reasonably separate accounts to the government. It’s best if there is only one avenue for inflation and that this avenue doesn’t directly benefit the government of the day by allowing them to directly buy voters.

  2. says: Bruno Prior

    In theory (as I understand it), the presence of the £190bn of gilts on the BoE’s books assists them in withdrawing the liquidity they injected, should price-inflation reach a level where it shakes even the BoE’s current, relaxed mood. They can sell the bonds back into the market, taking back some of the liquidity they injected.

    The trouble with the plan, it seems to me, is that at the point that inflation is so far above its current level that the BoE think they need to withdraw liquidity, gilt yields will be much higher than they were in the panic conditions in which these gilts were issued. They could therefore sell all the gilts back into the market and yet leave a decent chunk of the liquidity they injected still in the market.

    What this illustrates is that cancelling £190bn of our national debt without gradually paying it off involves creating money, as would the cancellation of all £900bn. The money may already have been created, but the cancellation of the corresponding asset on the BoE’s books (and the liability on the government’s books) makes all of that money a permanent rather than a temporary creation.

    If there is really no consequence to this, the BoE might as well create another £710bn and write off all the government’s obligations. And carry on doing so as governments continue to run deficits.

    1. To Bruno

      So, the BoE holds £190bn of UK government debt i.e. debt of itself. It will then decide its “exit” strategy when it sees inflation moving to high, it will sell these bonds it owns and with the money it receives , retire that from the market place and thus reduce purchasing power.

      This sounds like something that happens in Alice in Wonderland.

      At any point in time the government can issue a bond and try to sell it to drain liquidity from the market., should it be so decided.

      It does not need to have £190 bn “up its sleeve” to do this.

      We as taxpayers are having £10 bn extracted from us in interest payments when we do not need to have this being done.

      Delete the £190 bn and stop charging is £10 bn in interest when you do not need to HMG.

  3. says: Tyler

    DMO and BoE are not the same thing.

    Selling bonds to the market does not add or remove liquidity. The liquidity added through QE was the BoE buying government bonds, effectively on government credit. QE is, in effect, forward starting debt.

    Lets assume that the BoE bought 10y Gilts. When those Gilts mature, it recieves cash for them, and either has to retire that cash (removing the liquidity QE provided) or buy more bonds, thus rolling the debt. It still has to be repaind at some point, unless you tacitly move to a system of monetizing all debts.

    The split between BoE and DMO, as Current so correctly asserts, is for accounting reasons and to stop governments simply printing money without proper checks and balances.

  4. says: Rob Havard

    The trouble is that it then makes it easier for the the Govt. to borrow money in the future, so you would have to abolish the BoE the day after you pressed the button.

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