DIRK HELMER EHNTS – WRITTEN EVIDENCE SND0038 – SUSTAINABILITY OF THE UK’S NATIONAL DEBT INQUIRY

 

  1. What is meant by a “sustainable” national debt? Does the metric of debt as a percentage of GDP adequately capture sustainability? A: The national debt is defined by the OBR (2023, p. 8) as follows: “Generally speaking, if the public sector runs a deficit in a particular year, debt will rise in cash terms.” The headline deficit is defined as “the difference between total receipts and total spending” (ibid, p.7). The national debt is a statistical value that is calculated ex-post. The essential question is how the Government actually spends. Berkeley et al. (2022) have described the process in detail. When the Government spends, the Bank of England created money on its behalf. There are no alternative ways to spend money, so the idea that the Government has to finance its spending by tax revenues or bonds revenues is not correct. As the word “revenue” already hints, the Government’s money flows back to it via taxes and bond sales. There should not be any doubt that the Government cannot run out of money ever as long as supported by the Bank of England, an institution created by law. The Bank of England is the monopoly supplier of currency. The institutional setup has been created to ensure that the Government never runs out of money. The question of what is meant by “sustainable public debt“ can be answered in the following way: “Sustainable public debt” is the result of the current institutional workings of HM Treasury and the Bank of England ensuring that the Government can always execute payments of any amount. The metric of public debt as a percentage of GDP does not capture sustainability at all. It does not add any useful statistical information to an observer of the British economy. This is why the peak of public debt at the end of WWII did not cause any problem of “debt sustainability” (Lanskey and O´Loughnan 2023). Figure 1 shows that historically, the UK’s current level of public debt is relatively low.

Figure 1: Government borrowing and debt since 1700

Source: https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html

 

  1. The Government’s target is for public sector net debt (excluding the Bank of England) to be falling, as a percentage of GDP, by the fifth year of the OBR’s forecast. How meaningful is this target; and how does it inform an evaluation of the sustainability of our national debt? A: The target is not meaningful and dies not inform an evaluation of the sustainability of the UK’s national debt at all.
  2. How robust are the assumptions used by the Office for Budget Responsibility when forecasting our national debt? A: The assumptions are very likely quite reasonable.
  3. What implications does the structure of the UK’s national debt have for its short and longer-term funding? A: The interest rate set by the Bank of England is clearly a policy variable (Fullwiler 2020). In order to sell government bonds, their rate of return has to exceed the interest rate (the “bank rate”) the Bank of England pays to the banks that hold deposits there. If the Government issues more (less) longer-term bonds, its interest rate payments will be less (more) sensitive to changes in the bank rate.
  4. What are the market risks created by high levels of public debt; and what factors will influence the market’s appetite for this debt? A: There are no market risks created by high levels of public debt. The Bank of England can always buy government bonds and thus ensure that market prices and hence yields are at the target level. If the market forgets this, a communication from the Bank of England that it might consider targeting government bond yields should be enough to subdue an unruly bond market.
  5. What levels of productivity and growth are required to ensure our national debt is sustainable? A: National debt sustainability is compatible with all levels of productivity and growth.
  6. If we are to ensure our national debt is sustainable, what might this mean for fiscal policy? A: Fiscal policy should be executed in a way that ensures the ongoing cooperation of HM Treasury and the Government. It is hard to imagine a situation in which this is not the case. After all, three centuries of public debt seem to indicate that there are no problems with the sustainability of public debt. As extreme cases, the Government should avoid increasing government spending when at or near full employment. It should not fix its currency to that of another country or issue public debt in foreign currency. The UK shall avoid wars and civil wars and, as much as possible, natural disasters by investing in reducing its carbon footprint and in climate mitigation. Fiscal policy should be geared towards a sustainable economy, full employment, price stability, the eradication of poverty and other targets. This will strengthen the UK and its institutions, including its monetary system.
  7. Should the definition of the national debt differentiate between debt incurred for investments (which generate revenue for the Government), and other areas of spending? A: I shall not think so.

 

Dr. Dirk Ehnts, Torrens University, Adelaide, Australia and Steinbeis University, Berlin, Germany

 

 

Literature

 

Berkeley, Andrew, Josh Ryan-Collins, Richard Tye, Asker Voldsgaard and Neil Wilson (2022). The self-financing state: An institutional analysis of government expenditure, revenue collection and debt issuance operations in the UK, UCL IIPP working paper 2022/08

 

Fullwiler, Scott (2020). When the Interest Rate on the National Debt Is a Policy Variable (and “Printing Money” Does Not Apply), Public Budgeting & Finance 40(3), p. 72-94

 

OBR (2023). Brief guide to the public finances. Accessed on February 9, 2024: https://obr.uk/forecasts-in-depth/brief-guides-and-explainers/public-finances/

 

Lanskey, Luke and Conor O´Loughnan (2023). 300 years of UK public finance data. Accessed on February 9, 2024: https://articles.obr.uk/300-years-of-uk-public-finance-data/index.html

 

9 February 2024