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UK debt hasn’t hit £1 trillion – mostly because of QE

3:56 pm - January 25th 2012

by Richard Murphy    

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Stories abound on the fact that the UK supposedly has state debt of £1 trillion for the first time. This however is not true.

Over the last few years the UK has issued debt as shown below totalling about £560 billion.

I have based all my data on the national accounts for the third quarter of 2011 unless otherwise noted. It’s the borrowing since 2008 that has supposedly given rise to the debt of £1 trillion.

UK net borrowings
Annually per UK government accounts, table A51
Year Net borrowing QE Net
£bn £bn £bn
2005 35,736 35,736
2006 35,543 35,543
2007 37,182 37,182
2008 66,368 66,368
2009 147,878 200,000 -52,122
2010 147,686 147,686
2011 (to Q3) 89,571 75,000 14,571
Average (6.75 yrs) 42,216
Average borrowing as a proprtion of current GDP 2.91%

Through the quantitative easing programme the Bank of England has repurchased or will be soon repurchasing near enough £275 billion of that debt.

Now the Bank of England is owned by the UK government so if, in accounting terms, a consolidated set of accounts were to be prepared the £275bn owed by the Treasury to the Bank of England would simply be crossed out, or ignored. The actual debt would be £725 billion.

And in this case that would be absolutely the right point of view. There is no hope at all that this debt will ever be sold back into the markets: there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff.

We have a lot of misinformation about how big the debt is and about how much we’re borrowing. Tell the truth, as I have here, and you get a very different picture indeed.

And that would also lead to very different economic policies too. Because tell this story and the focus need not be on cuts that we do not need but on growth that we do need. False accounting is forcing the national political agenda in a direction in which it need not go.

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About the author
Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Now the Bank of England is owned by the UK government so if, in accounting terms, a consolidated set of accounts were to be prepared the £275bn owed by the Treasury to the Bank of England would simply be crossed out, or ignored. The actual debt would be £725 billion.

And in this case that would be absolutely the right point of view. There is no hope at all that this debt will ever be sold back into the markets: there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff.

That’s brilliant!!!!

I am so relieved.

Could we not just buy the rest back and then we’d have no debt at all!!!!

Why has nobody thought of it?

Wow, R. Murphy shows his TOTAL lack of understanding of debt finance once again.

Firstly, he confuses NEW debt since 2005 (560bn) with existing debt (in 2005, 424bn).

£424bn (EoY 2005) + £560bn = £984. Add in Jan 2012 new debt and you are near enough at £1tr.

Next, he does not understand QE.

QE has meant the BoE has bought 275bn of bonds, but that DOES NOT mean they can be wiped off the balance sheet with no effect as Murphy says.

To unwind QE they either have to buy back the bonds, and thus reduce the money supply


When the bonds mature they have to issue NEW bonds to market, and find buyers for them. So at some point this debt DOES have to be sold back to the markets.

Why anyone listens to this guy, who knows nothing about finance and financial markets, is truly beyond me.

“Tell the truth, as I have here”

Truly hysterical.

4. Luis Enrique

… yes well there’s some truth in this (some proportion of the government debt will be held on by the CB and rolled-over in perpetuity, effectively never being repaid) however the whole reason why the BoE conducts QE via the purchase of gilts is that when it needs to suck money out of the economy again, in an attempt to control inflation should we ever start growing again and find ourselves with excessive money supply, it can sell the gilts back into the private market where they will once again constitute genuine debt obligations.

So this bit “There is no hope at all that this debt will ever be sold back into the markets: there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff,” isn’t quite on point.

How much of this debt the BoE will end up selling and how much it will keep on the balance sheet, long term, is an interesting question.

To the extent that it keeps it on the balance sheet, we will ex-post have seen monetising of government debt of the sort over excitable MMT types advocate.

[if the government conducted QE by buying other assets, it could theoretically sell them again to get the money back, but gilts are by far the easiest asset to sell. If QE was conducted by just mailing everybody a cheque – a lovely idea I know – the only way the BoE could get it back would be to persuade the government to run a fiscal surplus and send it banknotes which it could tear up, or something like that. But the BoE can’t force governments to do that, which is why it doesn’t do QE like that.]

5. Luis Enrique

“there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff”

this bit is also rather dim. So long as investors are confident of real returns (i.e. they expect inflation to stay under control and the government not to default) the demand for UK debt will increase if the (nominal) yield increases. It doesn’t make any sense to say “market demand” is satisfied per se, demand responds to yield. If UK bonds were offering 5% yield right now because the BoE was dumping bonds, and investor confidence in our ability to repay was unchanged, we would find willing buyers queuing up for “safe” high yield like that. The BoE could flog the lot.

Now, what would happen to yields (interest rates) if the BoE started trying to sell all those bonds – ah yes, yields and interest rates would have to rise, to generate demand. And what would the BoE have to do to maintain investors’ confidence that it will keep inflation under countrol? ah yes, raise interest rates if inflation expectations start to rise, and start selling bonds. See how it all fits together!

Murphy should be warned; necrophilia is a crime and Keynes is well and truly dead.

@1 to 6

But but but …. Murphy is always right – he says so in the only bit if his ‘book’ anyone has read i.e. ‘give me your money – I know best’.

The fact that he can’t add up, left his economics course and is a retired accountant from Wandsworth who advised people on minimising their tax bill etc etc is just forgotten. Why does anyone, particularly the BBC, give this guy a platform?

8. Biffy Dunderdale

At what point will LC readers conclude that RM does not have a clue about what he professes to know about? This article is a new low in his fantasy-based writing.

” Why anyone listens to this guy, who knows nothing about finance and financial markets, is truly beyond me.”

Well seeing as the mess we are in was created by overpaid, non tax paying arsewipe in the financial industry it is probably a good idea to the opinion of someone who know nothing about the financial markets. Because the morons in that industry know even less.

Trooper: “Murphy should be warned; necrophilia is a crime and Keynes is well and truly dead.”

But Keynes’s influence on economics lives on and on as shown in the mainstream macroeconomics texts such as Olivier Blanchard et al: Macroeconomics – A European perspective (Financial Times P/B, 2011) and Rudi Dornbusch et al Macroeconomics (McGraw-Hill P/B). Charlie Bean, deputy governor of the BoE, has a prominent endorsement of Blanchard’s text on the front cover – btw Olivier Blanchard is currently chief economist at the IMF.

Try this op-ed from John Kay in the FT:

The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead. [FT, 13 April 2010]

For an insightful analysis of the current continuing financial crisis, try Nuriel Roubini: Crisis Economics (Penguin Books, 2011)

If you are interested in conspiracy, pick up a copy of a free book at my site.

12. Flowerpower

I have a suggestion that could spare all of us a lot of time.

I propose Richard Murphy runs a draft of each of his posts past Luis Enrique and Tim Worstall for peer review before posting them here.

That would at least fillet out the Econ 101 howlers and we could all then get on with debating what he really means to say.

“There is no hope at all that this debt will ever be sold back into the markets: there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff.”

That’s really fascinating. As Luis says, it’s not quite like that.

But let us assume, as Richard intends us to, that it is true.

So, we’re already going to be selling enough debt to meet market demand for govt debt. That’s with the current economic policies.

Erm, is Richard unaware that this means that we cannot borrow to have stimulus then? Because we’re already selling all the debt that the market wants thus we cannot sell more to finance the stimulus? Or the Green New Deal?

Or, in fact, any of the various plans and programs that Richard has proposed over the past couple of years?

I, and I might be alone in this, find this highly amusing. In Richard’s proof that we don’t owe as much as everyone thinks we find Richard’s proof that every other economic policy that Richard has proposed is impossible.

At which point I’d really just like to say “Well done Richard, very well done indeed”.

The problem for the nay-sayers above is that Mr Murphy is right.

You can’t have a liability with yourself. Simple as that really.

So trying to say we have £1 trillion national debt (on govt’s preferred measure) is wrong.

15. Luis Enrique

Ben M you have either failed to read or understand the explanation why RM is (mostly) wrong: the BoE will (is likely to) sell (most of) those bonds to private investors, in due course.

@ Ben M

The BoE is NOT the government DMO, so firstly that argument goes out the window.

Secondly, that debt the BoE holds through QE either needs to be rolled when it matures, which means a large new issuance of bonds, pushing interest rates higher, or it needs to be sold to the market, again pushing rates higher, or the cash created by QE needs to be removed from the system, reducing money supply and guess what, pushing interest rates higher.

17. Frances_coppola

Murphy not only doesn’t understand QE, he’s forgotten how to do group consolidation. You have to consolidate the liabilities as well as the assets – which in this case means the additional base money created to purchase the gilts. The only way the purchased gilts could be regarded as “off” the national balance sheet would be if the increase in the money supply were also eliminated. I don’t know about you, but I feel fundamentally uncomfortable with this piece of pretence. The increased money supply is due to monetization of part of the national debt. If we consolidate it out of existence, goodbye to any chance of predicting or managing inflation, I’d say.

@9. Sally: “Well seeing as the mess we are in was created by overpaid, non tax paying arsewipe in the financial industry…”

I believe that the financial collapse in recent years is a wee bit complicated. So when you rant about the “overpaid, non tax paying arsewipe in the financial industry”, are you limiting the definition to mortgage traders and mortgage providers?

Note that most mortgage providers in the UK were never directly threatened by this problem on the US scale. I have no doubt that some UK lenders turned a blind eye, declining to check the evidence of mortgage applicants’ income, but they didn’t play around in mortgage dealing. The exceptions are the banks who went under and were refloated.

Perhaps financial managers at our institutions are overpaid arsewhipes. But there are a lot of overpaid arsewhipes who work at institutions that did not capsize and who managed assets sensibly.

19. Frances_coppola

In fact, having looked at that consolidation a bit more closely, it’s fundamentally flawed for the reason that I gave above. It ignores the liability side. Base money was created to purchase the gilts, and this is shown as a liability on the BoE balance sheet. But there is no matching asset on the Government side, so this would not cancel out. Therefore, after consolidation, that base money amount would be taken on to the national balance sheet as a liability of exactly the same size as the issued debt it purchased. The debt liability would not have diminished at all – it would simply have changed form. Murphy’s accounting is wrong.

20. Leon Wolfeson

@6 – Yes, and so is Galton. Never stops…

The mind boggles with how many offences Mr Accountant wishes to be committed here. Hey, they are all breaches of accountancy laws so he is obviously well practiced.

Recently the national debt exceeding £1 trillion is a load of bollocks. We exceeded £1 trillion December 2010. The UK press can’t add up so they did not count the £100 billion National Savings & Investments liability and the £50 billion of Treasury bills. The UK is unique in not counting bills as national debt. Just one of those UK anomalies that they have probably forgotten why they do things that way. However, the point is that debt securities liabilities of the government are well in excess of £1 trillion.

Just cancelling the gilts purchased through the asset purchasing facility would bankrupt the BoE as that would wipe out the BoE capital (£4 billion). The Treasury could cancel the gilts and recapitalise the bankrupt BoE, which of course would only be possible by issuing gilts for the exact same number that had been cancelled. A bit pointless.

The gilts do not appear on the BoE balance sheet. The Asset Purchase Facility is a separate legally constituted company wholly-owned as a subsidiary of the BoE. The money to purchase the gilts is a loan made by the BoE with central bank money to the subsidiary. The gilts are an asset of the subsidiary and their BoE loan is their liability to the BoE. Cancelling the gilts would bankrupt the BoE as the subsidiary would lose their assets. As a legal company they are bound by company law and International Financial Reporting Standards. One would expect Mr Murphy to understand IFRS. The company can neither make a profit or a loss because they have an HM Treasury Indemnity. The Indemnity is worth exactly whatever operating surplus they generate that year from coupon payments. Receive £5 billion in coupon payments and that is the price of the Indemnity, £3 billion and so on. The Indemnity also works the other way if there was a collapse in gilt prices and the APF was suffering mark-to-market losses.

Whatever way you want to consolidate the subsidiary and say the BoE is owned by the Treasury still leaves the BoE with a large liability for the central bank money if you cancelled their offsetting assets. You can’t just cancel the central bank money which is now the reserves of the commercial banks. Therefore, to unwind QE still requires some assets to be sold back to the market. It will take many years but is not such as big a deal as the media suggest. Some gilts will mature while still held by the APF and the Treasury will pay the principal to the APF, they will then discharge some of their loan to the BoE. The Treasury will fund those redemption by issuing gilts to the private sector. If they were worried about too much liquidity in the system and at the same time worried about causing a collapse in gilt prices through dumping too many gilts on the market, they can always issue central bank bills to soak up liquidity.

22. Frances_coppola

Richard W

I don’t think Murphy was suggesting actually cancelling the gilts purchased by the BoE. He’s suggesting eliminating them from the national consolidated balance sheet. This would leave them as BoE assets, so no effect on the BoE’s balance sheet (unconsolidated). If the gilts were actually cancelled I agree there would be a solvency problem at the BoE, but that isn’t what he’s suggesting.

The issue I have with his accounting is that he ignores the base money that funds the asset purchases. This, as you point out, is a large BoE cash liability which would become a Treasury liability if the balance sheets were consolidated as Murphy suggests. Hence my comment that the debt wouldn’t disappear, it would change form. The only way the debt would disappear as he suggests would be if the base money liability were treated as off balance sheet. That must break every accounting rule in the book.

I agree with Frances Coppola – the debt has changed form into some sort of cash credit liability (or whatever name they want to give the account).

Although you can then still argue whether this new liability is “national debt” in the common parlance.

Because can’t this “liability” just be left there in perpetuity in effect giving rise to extra cash in the economy?

And thus, doesn’t Mr Murphy remain correct? Because the call on the government from 3rd parties would be for only £725bn not £1trn?

Just noticed this…

As usual Frances Coppola et al are wrong

Creating money should be the BoE’s job. That’s what central banks should do and not commercial ones. This is simply ‘money’ and despite that fact M4 is falling

It has the duty to create this cash

My consolidation is absolutely right: the cash does noit need cancelling – it is out there where needed in the economy

On the other hand, some of this at least would make sense if the Bank of England were regarded as a third party, distinct and separate from the body of England as a whole. Not nationalised, in other words. Any thoughts?

26. sweetness_light


The £274 billion sitting in theAsset Purcahse Facility is not included in those numbers. THeya re a count of debt issued in each of the years and do not include the colunt of debt bought up by the APF.

and your wrong about the gilts not retiring. They all have maturity dates (many of them short term at 3 – 5 years). At the moment they are sittign in the APF. The Treasury is paying interest on the gilts to the wholly owned APF.

If the gilts sit in there past their maturity dates they are cancelled and retired.

27. sweetness_light

Tim Worstall

You are (I believe intentionally) geting this the wrong way round.

In 1991, when unemployment hit 3 million, Norman Lamont said, in what was widely considered a gaffe,

“Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying. Even if unemployment reaches 3 million, that still leaves 90% in secure jobs. Most people will suffer not at all in this recession: on the contrary they will do well as prices fall and the real value of their earnings rises”

Running the clock forward twenty years, the Coalition and other western governments are beseeching us to believe that There Is No Alternative to what standard macroeconomic theory would regard as the polices of the madhouse – radical fiscal tightening in the teeth of a recession. George Osborne’s 2010 Budget announced fiscal tightening of £113bn over the next five years. This was madness and we can all now see the results of this policy.

But There Is An Alternative. Sitting in a wholly publicly owned subsidiary of the Bank Of England called the Asset Purchase Facility (APF) is over a third of the UK government public debt. That debt can be cancelled, monetised, retired or whatever other term you want to use in the blink of an eye. The interesting question is why isn’t this option being considered.

How did it come about that the government now owns a third of its debt you might ask. The money used by the government to buy its own debt was created through Quantitative Easing; a process that so much inaccuracy is written about still that it is worth reviewing again how it works.

QE in the UK works through the Bank of England creating money electronically. Just as the 1844 Bank Charter Act doesn’t forbid and therefore allows private banks to widen the money supply (up to the liquidity ratio set by UK financial regulators) through credit creation, the Bank is allowed to credit its reserves with as much money as it likes. Since 2009 the Bank has created over £200 billion in this way.

Plenty more is planned – £75 billion more as a starter over the next 4 months.
So over the next few months the Bank will lend this newly created £75 billion to a Special Purpose Vehicle – a wholly government owned PLC- called the Asset Purchase Facility. The APF then buys, through auctions, outstanding government gilts worth £75 billion from private banks, pension funds and other institutional investors. The banks and other recipients make huge profits from the sales and get £75 billion credited on their central bank reserves. The APF takes ownership of £75 billion of government gilts. So far so good – no money created or destroyed anywhere. All that has happened is that banks have swapped £75 billion of
Government debt that they own for £75 billion of reserve credits.

The interesting thing that has happened though is that the APF will own another £75 billion of outstanding government debt that used to be owned by private sector investors. What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.

This is because there are really only two possible futures for the debt sitting in the APF.

In future 1 the wholly owned by the government APF just retires the government debts it has bought up by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence. No impacts on the money supply anywhere, past those hypothecated by the initial QE which the Bank says will be non inflationary and is necessary to ensure the UK money supply widens at a rate sufficient to prevent the economy collapsing further.

This would be the honest thing to do. The £200 billion of gilts in the AFP will have to be monetised anyway, just on practical grounds.

The only way not to monetise the debt is for the APF to opt for future 2 – to sell the gilts it is sitting on back into the private sector at some point in the future and then cancel the cash it receives for selling them. This would nullify the £200 billion lent to it from the Bank of England initially to buy the gilts in the first place.

With the Bank sitting on £200 billion (and some estimating this will rise over the next few years to half the total government debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its future normal gilt issues when the Bank was simultaneously dumping an additional £200 or potentially £500 billion worth of gilts from the APF onto the market?

The APF certainly won’t be able to dump its stock of bought up gilts whilst the UK government is still running a deficit (forecast to be at least 2016 and likely to be a lot, lot further into the future than that given this estimate was made last year when the economy was still predicted to actually grow). Much of the gilts, for example 5 year maturities, bought will have expired before then anyway.

So if it can’t happen whilst the UK government will still need to borrow can it happen in a hypothetical future when the deficit is paid off (if it ever is)? No, it certainly can’t happen when the economy has recovered. At the point when the economy has recovered the private banks will be creating enough lending to allow the money supply to widen at its normal rate. Sucking an additional £200-500 billion of liquidity out on the market at this point will cause a massive crash.

Until then we are left with a ridiculous situation where the Tories are moaning about the huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. To add to the hilarity the Treasury, through a wholly government owned agency called the Debt Management Office pays interest on the £200 billion in the APF to the wholly government owned APF. This money is just building up and will eventually (as all profits for the Bank are) be returned to the taxpayer. You couldn’t make this up.

So what do the Bank indicate they are going to do and why? The Bank of course emphasises again and again that it is not being forced to create money in order to cover the gap between the government’s tax income and its spending commitments. Very sensible of the Bank to emphasise this as if this was what was happening, it would be a violation of Article 123 of the Treaty on the Functioning of the European Union. Rather, the Bank promises us it will choose future 2 for us – that it is undertaking quantitative easing in order to meet the inflation target (e.g. not to undershoot it) and will sell the government debt back to the private sector once the economy recovers, thus unwinding the original increase in the money supply.
Is this the future you want – where the Bank sells debt back to the private sector at some point in the future, causing excess inflation, and then simply rips up any cash it receives in order to demonstrate a point of principle?

It’s not as if anyone would advocate doing this type of QE to allow above trend government spending routinely. BUT if as we are being told QE has been undertaken only in the extremis of a liquidity trap in order to ensure growth and that the money supply doesn’t grow so slowly that the economy stalls shouldn’t the QE process, as it has already happened, be used to some advantage – clearing government debt by “magic” and thereby allowing fiscal loosening to stimulate demand?

28. sweetness_light

Look, all of you who are arguing QE will cause inflation. Just look at this graph:-

Without the £200 Billion of QE and the UK government undertaking deficit spending the UK money supply would be contracting. Banks, households and the private sector have all been deleveraging since 2008. There just simply isn’t enough money being created to sustain slow economic contraction let alone growth.

Even with £275 billion of QE plus £130 billion of deficit spending the money supply is contracting to the point growth is barely possible.

What do you think would actually happen if the money supply actually is allowed to contract? What do you think will happen to unemployment, living standards, growth, inflation, tax receipts etc?

The answer is what happened in the 1930s. You will enter a very deep depression that it is very difficult to get out of. Aggregate demand will decrease further.

Companies will stop producing goods or service as households will not be able to afford to buy. this causes companies to constrain wages of workers and lay them off. this further suppresses demand. and repeat.

Eventually you will get hyperinflation as in Weimar Germany. People will hoard goods as they are now more valuable. less money means the value of hoarded goods increases. The hoarding further increases scarcity and cases the prices to rise encouraging more hoarding.

These two effects -inflation and massive unemployment and falling living standards are nearly impossible to get out of. the last time we were here it took WW2 to artificially increase aggregate demand.

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