4. Government “borrowing”
As an accountant I was reasonably cautious in advising clients over their finances, but was anything but cautious with my own. I spent several years accumulating maximum balances on credit cards and overdrafts only to resort to what were known as “consolidation loans” in which various banks would lend me the money to pay off all the expensive debts, so that I could start the process all over again.
Similarly, as mentioned above, the government works out its deficit for the month, represented by what it’s spent less what it’s taxed, and borrows money to settle its overdraft with the BoE. This is why the terms “government deficit” and “borrowing/debt” are often interchanged in the news whereas it’s important to appreciate how monthly deficits create a monthly overdraft with the BoE, which is then paid off by adding to accumulating government borrowing/debt.
The government borrows, partly because that’s what it used to do before 1971, when there were outside limits on the number of pounds the government could have in circulation, and partly because, like tax, borrowing is another way for the government to control money circulating in the economy. By offering somewhere safe for people and organisations to save their spare money, ie by them “lending” it to the government, money is effectively clawed back out of circulation.
Think of it this way: when you or I save with our bank we know that about £85,000 in any one banking group is safe, because it’s covered by a government guarantee, and the government can always pay its sterling debts, it can’t go bust. Corporations, banks, financial institutions and pension funds have much more than £85,000 needing a safe home and so they go straight to the horse’s mouth and invest in government debt, in the form of bonds called “Gilts”. They know that this is the safest place for their money, they know the government can never default when it comes time to repay, plus they get some interest on their savings.
Technically this looks like government “borrowing” but, changing spectacles, maybe it’s more realistic these days to see it as others’ savings. In effect all the government is doing is taking back the original pounds it spent into the economy, or authorised the banks to create, swapping them for Gilts, carrying a gold border, a repayment date and interest. In other words, the government is just taking back one form of money it created and exchanging it for another it created.
And when those Gilts fall due in say 10 years time? The BoE creates new money to redeem (repay) them, increasing the government’s overdraft, resulting again in the government creating new Gilts to pay it off. And so it goes on, a constant recycling of debt with the outstanding balance at any time representing the total sum of money that’s been pumped into the economy, and not taxed back, since records began.
So when politicians talk about having to reduce government debt, they are thinking in terms that are now 50 years out of date. The bailiffs will never knock at the door and, even if they did, the government can just create more money to pay them off. Reducing the debt can be seen as paying back the savings that institutions rely upon or, at the extreme, paying back my Premium Bonds and National Savings Certificates.
Rather than the level of debt being a problem, it’s more important to concentrate on the levels of interest the government pays on that debt. For many years now this has not been a concern as interest rates have been at record lows. In some cases, government debt has even been issued at negative interest rates. This is a difficult concept to grasp but, for the purpose of having somewhere safe to save its money, an institution is prepared to pay the government for the privilege.
4. Government “borrowing”