Today I want to concentrate on the narrower definition of the nation’s debts – the £1300 billion of official borrowing in the name of the nation that gets measured in the international comparisons, some 80% of GDP. This excludes the public sector pension deficits, the semi nationalised bank liabilities and the private finance guarantees.
80% of GDP is a comparable level of indebtedness to Germany, the USA and France, and well below Japan. Markets are getting used to highly leveraged states these days.
29% of this state debt is now owned by the state. We have bought it back from the people who originally lent it, using created electronic money from the Bank of England. It means as of today we only owe 57% of our national income in this core borrowing.
I raise this because we have ahead of us a decision to make about what we do with this self owned debt. Currently we pay ourselves interest on it, and recoup much of that one way or another. The Bank tops up the amount of government debt it owes as repayments come due. There are three main options from here:
1. Sell the debt back to the private sector, destroying the created money as we do so. This would drive interest rates higher, improve the position of savers and worsen the position of borrowers, and would lead to a monetary tightening. This seems an unlikely course of action for the authorities to pursue any time soon.
2. Stop replacing the debt we owe as debt is repaid. Over a period the state holdings of debt would be run down, and the Bank of England balance sheet gradually deflated as this happens.
3. Cancel the debt as we owe it to ourselves, creating an accounting transaction to sort out the Bank of England balance sheet when this happens.
Which of these would you like to see happen?