Wednesday, 8 July 2015

What if they don't want their money back?

Implicit in what many politicians say about eliminating the deficit and reducing debt is that they want the government to repay the money it has borrowed.  But I wonder if they’ve thought through the consequences of that – what are the consequences for others of a government surplus?
There are two obvious consequences of a current account surplus in the public sector.  The first is that the ‘rest’ of the economy – the private sector, in essence – has to run a corresponding deficit.  Whether that’s a good thing or not is a matter of opinion, and depends on the economic circumstances at the time.  But the fact of it is inescapable.
The second is that it means that government debts would be repaid.  But what if those to whom the debt is owed don’t actually want to be repaid?  The outcome of repaying debt might not be as positive overall as some seem to assume.
The UK is not in a position where it is scrabbling around at the end of every month to borrow more money to pay the month’s bills, although I suspect that is not far off the image which many have.  On the contrary, people are queueing up to lend money to the government.  One person’s debt is another person’s investment, and UK government ‘debt’ is seen as a very worthwhile investment by the lenders.
Much of the government’s debt is held by institutional investors, including the pension funds of those of us who’ve been contributing over the years.  And pension funds like the safety and security of government debt, even if the rewards are low, because it enables them to commit with certainty to paying pensions.  (And, as an aside, it also means that much of our pension funds are already being invested in public projects, just not as directly and obviously as some might like.)
But if the government insisted on redeeming its bonds and paying down its debts, then those institutions might find that they either have to invest more abroad, or else invest in riskier ways.  That might not be the best outcome for the population as a whole, never mind current and future pensioners.
I accept, of course, that not everyone is in the same position (although recent changes to pension rules mean that an increasing proportion of us are going to be dependent at least in part on investments for our pensions rather than current tax revenue).  And I’ll accept that some might see advantage in a trade-off which reduces government interest payments even if it leads to less secure pension arrangements.  But my point is simply this: most of the UK’s public debt is actually owed to the citizens of the UK in one way or another, and most of those to whom the money is owed are not only not demanding repayment any time soon, they’re lining up to lend the government more.
Government budgets are not at all like household ones, and talking as though they are is less than helpful.  Reducing debt isn’t always the right thing to do.


karen said...

'There are two obvious consequences of a current account surplus in the public sector. The first is that the ‘rest’ of the economy – the private sector, in essence – has to run a corresponding deficit.'

Please explain (and contrast with countries such as Germany, Switzerland or Singapore to strengthen your argument).

'And pension funds like the safety and security of government debt'.

Again, you might like to explain this statement in relation to how other more successful countries such as Singapore or Germany handle their pension liabilities.

John Dixon said...

Of necessity, short blog posts simplify what are complex situations. And in response to your first point, I'll repeat that sin. If we divide any closed economy into two parts, A and B, then if A runs a current account deficit it means that B has to run a corresponding surplus which A can borrow. That's nothing to do with any comparisons between countries, it's very simple economics. Now, in reality, it's not a closed economy and dividing it into 2 is oversimplified - but the underlying point still holds - that for anyone to borrow, someone else has to lend; all current account surpluses have to be matched by corresponding deficits elsewhere. And in the UK, the government's deficit is financed largely by borrowing from those parts of the economy in current account surplus. It follows that running a surplus reverses the flow; other parts of the economy would be in deficit.

On the second point, again, I don't see the relevance of an international comparison to the basic point I made, which was that UK pensions companies invest in UK Government bonds, and do so heavily. They do so as part of a mix of investment which includes some riskier elements and some safer elements, giving a combination of growth and security. It doesn't matter what happens in other countries in this context; I was making a statement about what currently happens. Are alternatives possible? Yes, of course they are - but alternative investments are likely to be either riskier or abroad, and the point that I was making was simply that making such alternative investments might not be in the best interests of UK pensioners and prospective pensioners.

To reiterate the basic point of the post - The money we 'owe' through UK government debt is largely 'owed' to ourselves in the form of investments made on our behalf by financial institutions, and acting on our behalf, those institutions are not only not demanding repayment, they're actually looking to 'invest' more of 'our' money in buying 'our' debt. There's a lot of generalisation in there, of course, 'we' is a broad term, and not everyone benefits from 'our' investments. But the underlying point still stands - seeing repayment of government debt as an axiomatically 'good' thing is taking a very narrow view of the situation.

G Horton-Jones said...

I go along with this but I have no idea exactly what is the Welsh share of the UK National Debt or if in fact there is any debt at all

Talking to fellow citizens they seem to have swallowed the bait hook line and sinker that the Uk debt means that we in Wales are welded in perpetuity to Westminster and English control in so far as we in Wales will never be able to repay this debt in full primarily as the debt is driven by English actions not our own
??? will the Germans allow Greece to repay its debts to the Eurozone

John Dixon said...

"I have no idea exactly what is the Welsh share of the UK National Debt or if in fact there is any debt at all"

There are several different answers to that, depending on your starting point. Some might argue that Wales should accept no part of a debt built up fighting wars, for instance. Personally, I think an independent Wales should accept a 'fair' share of the UK debt - but how to define 'fair'?

A simple division on the basis of population share is easy to do, of course. A share based on relative GDP is also straightforward, and would produce a smaller answer. On the other hand, some might argue that the 'poorest' parts should take a greater share, on the basis that borrowing has been used for redistribution. Personally, I go for a split based on GDP, but there is no single agreed 'right' answer; any assessment of the implications needs to be based on some sort of assumption. Those arguing that Wales is 'too poor' to be independent tend to assume the worst case; those taking the other view tend to assume the best case.