Monday, 8 December 2014

When is a debt not a debt?

The Chancellor proudly told us last week that the UK was finally going to pay off the debts incurred in order to pay for the First World War.  But it was, in reality, more of a headline than a fact.
It’s certainly true that the particular bonds issued retrospectively to pay for the war are to be repaid.  But the money to repay them is coming from new loans, and taking out a new loan to pay off an old one isn’t exactly what most of us mean by “paying off debts”.  It may not even involve switching lenders; it’s perfectly possible that at least some of those lending the ‘new’ money to the government will be the same people to whom the government has ‘repaid’ the old debt.
That doesn’t mean that it’s necessarily a bad move.  Taking out a new loan at a lower rate of interest to pay off an old loan at a higher rate is a very sensible approach.  And with interest rates at record lows, it makes a great deal of sense for the government to borrow while it can, even if that isn’t what they say.  And it’s worth noting one small point which the Chancellor somehow omitted – interest rates remain at a record low precisely because the economy is in poor health.  He’s merely taking advantage of the silver cloud.
It’s also worth noting that accountancy rules being what they are, for someone to benefit from switching from a high interest loan to a low interest one, someone else has to be the loser.  In this case, that would be the holders of the bonds which are being repaid.  To the extent that those holders are fat cats and foreign governments, most people will not be unduly concerned.  We shouldn’t forget, though, than an awful lot of bonds are held as the ‘safe’ part of the investments made by life insurance and pensions funds in which most of us have a stake.
“We” through the UK government may well owe a vast sum of money, but much of it is owed to “us” as current or future pensioners.  The debate about government debt isn’t as simple as it sometimes appears.


Anonymous said...

'To the extent that those holders are fat cats ............. , most people will not be unduly concerned. '

Conveniently forgetting of course that it precisely such 'fat cats' that pay for all our health services and schools and most of the other things that poorer people regard as 'free' and 'rightful'.

John Dixon said...

"it precisely such 'fat cats' that pay for all our health services and schools"

Well, no, actually it isn't. I think you need to revisit whatever sums you did that got you to that conclusion. Assuming that you did any arithmetic at all, of course.