What is wrong with government borrowing?

[Maggot]

Government borrowing and government debt is generally viewed as a bad thing, to be reduced as much as possible. Why is this?

When I studied Economics A level (admitedly about 40 years ago) I remember my teacher saying that it wasn't neccesarily bad, and could be good. If the government borrowed to fund say, public sector pay rises, or infrastructure projects or a scheme to create jobs in a deprived area, then this would boost the economy. Then they would recoup much of the borrowing in increased tax revenue and a reduction in welfare payments.

 

[farmerbarleymow]

Nothing wrong with it in my view. All governments do it after all.

Right wingers often say its saddling our grandchildren with debt, but as I don't have any kids I don't care.

 

[LakieLady]

I'm even older, and remember being told by a tutor that it didn't really matter, because it was very long-term borrowing and the true value of the debt would be eroded by inflation.

 

[cupid_stunt]

In June 2024, the interest payable on central government debt was £7.4 billion. This was the lowest interest payable in any June since 2020 and a third of that of June 2022, which was the highest interest payable in any month since records began (for this component) in 1997. LINK

That's a lot of money on bloody interest payments, considering we spend only about £15bn a month on the NHS.

 

[brogdale]

Government borrowing and government debt is generally viewed as a bad thing, to be reduced as much as possible. Why is this?

When I studied Economics A level (admitedly about 40 years ago) I remember my teacher saying that it wasn't neccesarily bad, and could be good. If the government borrowed to fund say, public sector pay rises, or infrastructure projects or a scheme to create jobs in a deprived area, then this would boost the economy. Then they would recoup much of the borrowing in increased tax revenue and a reduction in welfare payments.

In terms of economics theory, yes...agree with your A level memory. But, there is a valid 'left' critique of the role of public debt in the development of the neoliberal consolidator state. That is, that public debt is being used to substitute for tax on capital; that way financialised capital not only gets to retain it's accumulated wealth but, better still, can then loan it to the state to earn guaranteed income. This, of course, represents a very straightforward regressive transfer of wealth from taxes on earned income (labour) to unearned income (interest) to capital.

People sometimes express surprise that administrations that publicly espouse anti-public debt sentiment (for electoral political purposes and to justify their consolidator/austerity programmes) actually allow public debt to balloon. There's a a reason for this, the state actors are the political wing of financialised capital.

 

[Whagwan]

Richard Murphy claims that public debt is more technically a national savings facility, as who does the Government owe money to but people, banks and pension funds...

 

[rasputin]

Richard Murphy claims that public debt is more technically a national savings facility

It's both. Government bonds are an asset to the holder and a liability to the Government. The same for National Savings investments.

The point of concern is not the fact the debt exists but the cost of servicing it - i.e. the interest payments. The UK is particularly exposed in this respect because around a quarter of its debt is index linked to inflation, which meant servicing costs surged during the recent period of relatively higher inflation. As inflation is now more controlled, so the servicing costs have come down.

 

[littlebabyjesus]

That's a lot of money on bloody interest payments, considering we spend only about £15bn a month on the NHS.

And who is that money paid to? A big chunk of it goes to pension funds and insurance companies, which would be buggered without govt borrowing.

Governments can borrow money more cheaply than any private entity. It makes sense for the goverment to borrow so that we don't have to. Without borrowing, there can be no saving. Without borrowing, the money supply collapses. So someone has to do it. By far the best institution to be doing the borrowing is the state. It means less wealth gets siphoned up to the rich, which is the net effect of private investment.

 

[nino_savatte]

The thing to bear in mind is that public finances and household finances aren't analogous. When most of the public hear the words "debt" and "borrowing", they relate it to their own finances and assume the worst. We have Thatcher to thank for that.

 

[littlebabyjesus]

Also, debts have two aspects: the amount and the time left to maturity. In terms of the latter, the UK's debt has a very healthy 14-year average.

The UK could easily afford to take out new debt over 25 or 30 years' maturity to, eg, pay for new housing. That debt would be entirely sustainable, paid back with the rents from the people who live in the housing, so at the end of the 30 years, you have the debt repaid, new housing built with people living in it and workers paid for building the homes in the first place, plus pension funds etc would get an income from the interest. It's a quadruple win with no downside.

 

[littlebabyjesus]

The thing to bear in mind is that public finances and household finances aren't analogous. When most of the public hear the words "debt" and "borrowing", they relate it to their own finances and assume the worst. We have Thatcher to thank for that.

And since Thatcher, no government has been properly prepared to make the case for govt borrowing. It's pathetic as they know full well that they're not the same.

 

[Dystopiary]

Government borrowing and government debt is generally viewed as a bad thing, to be reduced as much as possible. Why is this?

When I studied Economics A level (admitedly about 40 years ago) I remember my teacher saying that it wasn't neccesarily bad, and could be good. If the government borrowed to fund say, public sector pay rises, or infrastructure projects or a scheme to create jobs in a deprived area, then this would boost the economy. Then they would recoup much of the borrowing in increased tax revenue and a reduction in welfare payments.

A reduction in "welfare payments" is a terrible thing.

 

[newme]

A reduction in "welfare payments" is a terrible thing.

I was thinking the same but looking at the post again I think this was supposed to be as a result of economic activity increasing jobs available so people can then get into them instead of needing to claim. There's definitely some places where theres pretty much fuck all available locally, combined with bad transport links can make it very difficult to get anything.
If they could leave people alone who are unable to work for whatever reason that seems it would save a huge amount of messing about by everyone. Hassling someone with something that is not going to get better repeatedly helps no one and wastes a lot of resources.

 

[maomao]

The UK could easily afford to take out new debt over 25 or 30 years' maturity to, eg, pay for new housing. That debt would be entirely sustainable, paid back with the rents from the people who live in the housing, so at the end of the 30 years, you have the debt repaid, new housing built with people living in it and workers paid for building the homes in the first place, plus pension funds etc would get an income from the interest. It's a quadruple win with no downside.

This obviously won't happen as there's no cream for the financial services sector which our whole economy is run for the benefit of. Instead, social housing rents will go up to pay bungs for the housing sector to do what was their job anyway.

 

[rasputin]

The thing to bear in mind is that public finances and household finances aren't analogous. When most of the public hear the words "debt" and "borrowing", they relate it to their own finances and assume the worst. We have Thatcher to thank for that.

Both involve interest payments to service the debt.

 

[gosub]

I'm even older, and remember being told by a tutor that it didn't really matter, because it was very long-term borrowing and the true value of the debt would be eroded by inflation.

The eroded by inflation thing...

2008 and it all went tits up they basically printed a load of money to cover it all and inflated away the debt. 2 things on that ...the bonds that did that were at a much lower intrest rate than current ones (and inflation)..so all the holders of it have been stiffed and its sitting on their books at a face value it wouldn't make if they tried selling it on.
2008 print also came with talk of trickle down economics...This trickle if it ended up anywhere ended up in house prices and other assets..this is fine if you are on the property ladder...if you ain't things just get more unobtainable.

 

[rasputin]

And who is that money paid to? A big chunk of it goes to pension funds and insurance companies, which would be buggered without govt borrowing.

Debatable. They could lend their money to someone else, such as another sovereign government.

 

[gosub]

Debatable. They could lend their money to someone else, such as another sovereign government.

Only if said sovereign government keeps their credit rating at BBB or above

 

[cupid_stunt]

And who is that money paid to? A big chunk of it goes to pension funds and insurance companies, which would be buggered without govt borrowing.

Governments can borrow money more cheaply than any private entity. It makes sense for the goverment to borrow so that we don't have to. Without borrowing, there can be no saving. Without borrowing, the money supply collapses. So someone has to do it. By far the best institution to be doing the borrowing is the state. It means less wealth gets siphoned up to the rich, which is the net effect of private investment.

Pension funds and insurance companies have plenty of other options to invest or loan their money too.

Are you seriously defending the fact that we are currently paying around half the funding of the NHS in interest on the national debt, when that could be spent on, err <checks notes>, the NHS and other public services?

Borrowing for long term investment, such as social housing, makes sense, borrowing for day-to-day spending does not, that should be paid by tax reforms targeting the rich.

 

[LakieLady]

The UK could easily afford to take out new debt over 25 or 30 years' maturity to, eg, pay for new housing. That debt would be entirely sustainable, paid back with the rents from the people who live in the housing, so at the end of the 30 years, you have the debt repaid, new housing built with people living in it and workers paid for building the homes in the first place, plus pension funds etc would get an income from the interest. It's a quadruple win with no downside.

I bang on about this with monotonous regularity. Social housing is entirely self-financing in the medium-long term, especially council housing.* Councils can borrow on very favourable terms, especially over longer periods. Over time, rental income repays the borrowing and, once that's done, the subsequent rental income, after deducting management and maintenance costs, is a bonus. This income can then be used to pay down the costs of the next tranche of new housing. It's like a Ponzi scheme in reverse.

The lower rents in social housing would ultimately lead to a reduction in benefit payments for those who were able to move from the private rental sector, leading to further savings, and, if there was enough of it, reduced demand may be enough to halt the rise in PRS rents. I can't see it as anything other than a win/win (unless you're a PRS landlord, in which case, tough shit).

Thatcher's tightening of local authority borrowing and right-to-buy bribes fucked up social housing for several generations and Blair/Brown did nothing to un-fuck it. I hope Rayner will do better, although she'll probably have to do some serious arm twisting.

*Caveat: historically, councils have been able to borrow on far more favourable terms than housing associations. I've been out of local government for a long time, and this may no longer be the case.

 

[rasputin]

2008 and it all went tits up they basically printed a load of money to cover it all and inflated away the debt. 2 things on that ...the bonds that did that were at a much lower intrest rate than current ones (and inflation)..so all the holders of it have been stiffed and its sitting on their books at a face value it wouldn't make if they tried selling it on.

I disagree with some of that. The cash outlay to recapitalise banks in 2008 was around £137 billion (give or take), most of which has since been recovered. The outstanding loss to the government is around £33 billion, comprising a loss of £35 billion on RBS/NatWest, offset by some net gains elsewhere. This was not funded by printing money (government spending is never funded that way) but by issuing bonds. The prevailing rate at the time was indeed lower than now. But it was the lenders choice to buy the bonds - nobody forced them to do so.

 

[gosub]

I disagree with some of that. The cash outlay to recapitalise banks in 2008 was around £137 billion (give or take), most of which has since been recovered. The outstanding loss to the government is around £33 billion, comprising a loss of £35 billion on RBS/NatWest, offset by some net gains elsewhere. This was not funded by printing money (government spending is never funded that way) but by issuing bonds. The prevailing rate at the time was indeed lower than now. But it was the lenders choice to buy the bonds - nobody forced them to do so.

That's just UK stats..US did same...bonds/gilts come in 1,2,5,10,20,30 year. ..so there's still debt in play now from then AND it's the underwater stuff. If they weren't forced then, they'll be more weary of doing same again should there need arise.

 

[littlebabyjesus]

Are you seriously defending the fact that we are currently paying around half the funding of the NHS in interest on the national debt, when that could be spent on, err <checks notes>, the NHS and other public services?

Yes.

 

[gosub]

And since Thatcher, no government has been properly prepared to make the case for govt borrowing. It's pathetic as they know full well that they're not the same.

Thatcher was doing what the IMF were telling her to do. By the time we got to Blair/Brown and the third way we had even stricter constraints prescribed by the Maastrict treaty ...third way was the work around where the annual repayment were calculated as government spend rather than the full loan amount

Defford a difference in what the debt is for ..if its a bridge / motorway / Dock its an investment that will help up GDP...servicing existing debt not so much

 

[rasputin]

That's just UK stats..US did same...bonds/gilts come in 1,2,5,10,20,30 year. ..so there's still debt in play now from then AND it's the underwater stuff. If they weren't forced then, they'll be more weary of doing same again should there need arise.

But that's always been the case. The current UK government bond portfolio includes issues that redeem in 2073 for instance, and others that were first issued in 2000.

Gilts in Issue

www.dmo.gov.uk

Not sure what you mean by the "underwater stuff?"

 

[Dystopiary]

I was thinking the same but looking at the post again I think this was supposed to be as a result of economic activity increasing jobs available so people can then get into them instead of needing to claim. There's definitely some places where theres pretty much fuck all available locally, combined with bad transport links can make it very difficult to get anything.
If they could leave people alone who are unable to work for whatever reason that seems it would save a huge amount of messing about by everyone. Hassling someone with something that is not going to get better repeatedly helps no one and wastes a lot of resources.

Bit I've bolded - I wish but that's just not going to happen.

 

[gosub]

But that's always been the case. The current UK government bond portfolio includes issues that redeem in 2073 for instance, and others that were first issued in 2000.

Not sure what you mean by the "underwater stuff?"

If you bought an 20 year bond in 2009, when interest rate was 0.5% you can (and they are) keep it on your books til 2029 as being worth the value it says it is...if anything pops up in the meantime giving you a liquidity squeeze and you need to sell... good luck with that - how underwater difference between face value and price you can find a buyer

 

[rasputin]

Only if said sovereign government keeps their credit rating at BBB or above

No shortage of those.

Credit Rating - Countries - List

This page includes the sovereign debt credit rating for a list of countries as reported by major credit rating agencies.

tradingeconomics.com

 

[rasputin]

If you bought an 20 year bond in 2009, when interest rate was 0.5% you can (and they are) keep it on your books til 2029 as being worth the value it says it is...if anything pops up in the meantime giving you a liquidity squeeze and you need to sell... good luck with that - how underwater difference between face value and price you can find a buyer

Got it. Thanks.

 

[gosub]

No shortage of those.

Credit Rating - Countries - List

This page includes the sovereign debt credit rating for a list of countries as reported by major credit rating agencies.

tradingeconomics.com

Indeed. And all sorts of shenanigans. Was a period where Portugal only had Investment grade coz of one rating ..by DBRS where John Major was/(is?) on the board ..Portuguese with that prop then went against the prevailing wisdom of International Finance and their balance sheet improved