My favourite BBC article has been rewritten again for the current era and has introduced a new set of material inaccuracies. Let’s go through this version and separate fact from fiction.
Why does the government have to borrow?
The government borrows because that’s how double entry accounting works. Every penny the government spends is borrowed, but the borrowing is nothing more than a ‘balancing item’ in the accounting and is both unlimited and costless. Borrowing shouldn’t get the column inches it does. Instead those columns should be asking what the government is buying at what price and why they are buying it. That’s where the source of inflation lies.
Cutting taxes means the government receives less money.
Cutting taxes may mean less money is collected, or it may mean that more money is collected. That’s because the total amount collected isn’t related to the tax rate, but the level of spending and saving in the economy.
Money doesn’t stop at its first use. Your spending is my income and vice versa.
If taxes are cut, then people have more to spend which increases the number of spending transactions in the economy. Taxation quantity is a geometric series, not a simple sum. It behaves like a stone skipping across a pond. Lowering taxes just means more hops before the stone sinks. The total collected, however, will be much the same as before unless there is a material change in the amount of saving.
We want the government to receive less money from the tax cuts. The less the government receives, the more people will have saved and the lower inflation will be from the changes.
The money governments borrow has to be paid back eventually with interest - which is also increasing. This means taxpayers ultimately pay.
This is so completely wrong I’ve raised a complaint about it. Here’s what I’ve sent:
This isn’t the case. By default HM Government borrows from the Bank of England with any shortfall covered by the Ways and Means accounts (DMO Annual Review 2021-22, p32 - “Automatic transfers from the government Ways and Means (II) account at the Bank of England would offset any negative end-of-day balances, though it is an objective to minimise such transfers”)
Interest payments and ‘paying back’ debt instruments are a policy choice by government (Debt Management Report 2022-23, “The full funding rule”, 2.13 et seq, pp5-6) . The rule even states “the government believes”.
Money governments borrow has no need to be ‘paid back’ nor does it need to attract interest. It is entirely a function of this government’s policy choice to sell Gilts rather than use the Ways and Means accounts.
A more accurate wording would be:
The UK government has adopted a ‘full funding’ rule. Due to this rule money the government has borrowed has to be paid back eventually with interest - which is also increasing. This means taxpayers ultimately pay.
Let’s see how they wriggle out of that one.
Does it matter that the national debt is going up?
Does it matter that non-government sector savings are going up? Not particularly. What the government decides to pay to people holding ‘national debt’ is a matter of government policy. However even with the ‘full funding’ rule in place, the government can alway pay the interest and redeem the Gilts.
However, the larger the national debt gets, the more interest the government has to pay on the money it has borrowed.
Only because of the ‘full funding’ rule that the government has decided to adopt. Government can change the policy which will reduce or eliminate the interest paid.
But investors, worried by the scale of borrowing, are asking for higher interest rates.
What investors are actually doing is guessing that the government and the Bank of England will give them higher rates, therefore they are abandoning instruments with higher duration. Why take the risk on a long Gilt when you can get a higher rate overnight?
If the Bank of England announced a permanent zero interest rate and HM Treasury announced it was abandoning the full funding rule, then the price of existing Gilts would sky rocket and the yields collapse.
The recent squeeze on pension funds was stopped by the Bank of England. How many more Bank of England interventions do we need before what actually happens is reported accurately? The rates The Market(TM) get from the government sector are the ones decided by policy.
Will the national debt ever be paid off?
No it won’t. To pay off the national debt would require confiscating the financial savings of the non-government sector - quite a lot of which are in pension funds.
You can’t reduce debt without reducing assets by an equal amount. Balance sheets have to balance.
How does the government borrow money?
By buying things and accounting for those purchases properly.
The government borrows money by selling bonds.
The government refinances its borrowing by selling bonds - replacing zero-rated borrowing with borrowing paying a much higher interest rate.
Why? Don’t know.
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