UK National Debt = £5,000,000,000,000

Is the government purposefully hiding this figure from us?

How big is the UK national debt? My guess is that you don’t know. Most people are unaware.

Bloggers don’t know: this chap thinks we bailed out the banks by “borrowing from the banks”.

Celebrities haven’t a clue – here’s the team of Have I Got News For You, featuring rock musician Noddy Holder, getting into an awful tangle:

Noddy Holder: But who do we owe this money to?

Alexander Armstrong: Well, the future, I suppose, don’t we? Our children.

Noddy Holder: We owe it to the future?

Paul Merton: We don’t have to pay it back then do we?

Noddy Holder: No!

Paul Merton: Let the future come to us!

But worse of all, politicians don’t know. Just watch this footage of MPs trying to guess the size of the National Debt (from about 7:30 minutes in). At the time, Alan Johnson was shadow chancellor. For politicians not to know the size of the National Debt is unforgivable. They deserve whipping with their own entrails. But I’ll offer an excuse for HIGNFY regulars, bloggers and bemused citizens.

The reason nobody knows how big the National Debt is because it is so hard to find out.

Under Labour the figures were a mess. Projections of National Debt growth were concealed to avoid alarming the public. In December 2009, Alistair Darling was asked by the Treasury Select Committee why the interest payment forecasts were never published. He couldn’t answer. Both Michael Fallon MP (Conservative, Sevenoaks) and John McFall MP (Labour, West Dunbartonshire) excoriated Darling for his inability to answer.

What is the answer?

It would be nice to be able to tell confused individuals such as MPs, bloggers and HIGNFY regulars what the National Debt comes to. But where to look?

The Treasury, Bank of England, the Office of National Statistics (ONS) and the Debt Management Office all fail to present the total National Debt in a simple format. Instead we have to trawl through the websites of these institutions to come up with a total figure.

The Debt Management Office sorts out government borrowing. When the government wants to borrow a few billion quid, the chancellor rings up the DMO and asks them to issue bonds (known as gilts, because they used to be beautiful paper certificates with a shiny gold-leaf border) that are bought by pension and insurance funds plus foreign countries. Explore the DMO website and you’ll eventually discover the figure for Gilts in Issue, which today stands at £1,102.17bn.

These gilts are, in laymen’s terms, the IOUs the government has issued. One day the government will have to buy back all of these IOUs.

We also borrow money through the National Savings & Investment scheme. Set up by Lord Palmerston in 1861, NS&I is a cheap way for the government to borrow. £103bn is lodged at NS&I, so we can add that to the gilt debt.

But the government owns assets too, such as gold, foreign currency reserves and bonds, so we should subtract that from the amount owing. After all, if we have assets as valuable as our debts then we wouldn’t think of ourselves as being in debt at all. On the asset side we will only count liquid assets, such as foreign cash and gold, rather than illiquid ones. Illiquid assets include things such as the British Library or the M1 motorway, and we are not ever going to sell assets like those, so they don’t really count. Other illiquid assets include lending to businesses.

The result is the Public Sector Net Debt: this is the figure to use. The ONS has the figureand it is… £940.1bn as of July 2011. Note that this figure excludes some of the cost of bailing out the banks.

Before we come to the bank issue – there’s one quirk which baffles pretty much everyone.

During the credit crunch the Bank of England printed money – the so-called quantitative easing. Precisely £200bn was electronically created by the Bank of England, and it used this money to buy gilts. So today the Bank of England owns £200bn of UK gilts. But the Treasury owns the Bank of England – so in what sense does the British taxpayer really owe that money?

I’ve heard it said that we should not count this money as part of the National Debt for this very reason. As Noddy Holder said: “We owe it to ourselves”.

In fact, when we redeem gilts held by the Bank of England, the money we pay will be destroyed (a process known as “unwinding” the quantitative easing). Which means the taxpayer won’t get that money back. So, yes, we are liable for the gilts owned by the Bank of England, just as surely as if we owed the money to a private organisation.

Does the Bank of England explain that anywhere on their website? No they don’t. Neither do the DMO nor ONS. I had to talk to a senior wonk to confirm that it is indeed the case. He admitted most people wouldn’t have the faintest idea.

So what about the bank bail-outs?

Remember the untold billions we poured into banks such as RBS, Northern Rock and Lloyds TSB at the height of the financial crisis? Now, you might think that the money we borrowed to bail out the banks would show up in the National Debt figures. After all, they are partly to blame for the mess we are in.

But no! The Public Sector Net Debt figure excludes the banking crisis, as though it never happened. The reason for this is that the banking crisis was messy. We don’t know how much the banks are worth. We don’t know what their potential liabilities are. So the ONS draws a big line around the whole mess and deals with it separately.

On rare occasions the ONS does try to put a figure on the cost of bailing out the banks. The ONS claims that if we add in the banks we may have to add roughly between £1,000bn to £1,500bn to the National Debt. This gives a total figure of “unadjusted measure of Public Sector Net Debt Public Sector Net Debt” of about £2,000bn to £2,500bn.

But the “unadjusted” National Debt figure is misleading. For accounting reasons, the main assets of the banks – mortgages and corporate bonds – are not counted. Only the debts. So the “unadjusted” figure is lopsided. In truth, the assets of the banks almost precisely match liabilities. In the real world the direct cost to the taxpayer of bailing out the banks will be between zero to minus £50bn. We might even make a profit, if the market is favourable when we sell the nation’s shares in the banks.

Because of these uncertainties, we’ll stick with our original Public Sector Net Debt figure of £940.1bn, known as PSND ex (as it “excludes” the cost of financial intervention).

Actually, PSND ex does include some of the cash costs of the bank bailouts, such as the £12.4bn we spent on RBS and Lloyds, £1.4bn injection into Northern Rock and £2.7bn depositor compensation for Bradford & Bingley. For more detail on the composition of PSND ex see page 8 of the Office of National Statistics, Statistical Bulletin: Public sector finances, March 2010.

Even more debt to add

There are other debts that the taxpayer owes, which it seems only honest to include in our total National Debt, on top of gilts and NS&I. These are:

  • PFI debts
  • State pensions
  • Public sector pensions
  • Network Rail debt

Let’s start with Private Finance Initiative debts. When Labour wanted to spend on NHS hospitals and new school buildings neither Tony or Gordon wanted to raise taxes to pay for this largesse. Taxpayers hate tax rises. And they didn’t want to borrow the money directly – as that too would have looked bad. So they used PFI deals.

PFI is simply a way to borrow indirectly. The building contractor spends the money to build a hospital and the government signs a fixed contact, lasting decades, to pay the contractor to use the building. It is borrowing by another name. For that reason it seems only honest to include PFI as part of the National Debt.

PFI is hard to calculate, as deals are still being done. An official recent figure is £35bn.

Now we need to take a look the money owed to future pensioners. It sometimes gets asked why these would ever be included. We don’t include, for, example, future policeman’s salaries. Why worry about pension payments falling many years from now? The answer is that the money for these pension payments has already been raised in tax, and instead of saved for the purpose it was intended, has been spent.

By contrast, in Japan, money raised through tax for pensions is squirreled away in the Government Pension Investment Fund. That’s $1,400bn managed to pay for future pensions. In Ireland too there is the National Pension Reserve Fund with €24.4bn in it.

The UK has no such fund. State pension liabilities add on £2,700bn. Then there are the pensions for former and present public sector workers. So how much do we owe for those? Pensions analyst Towers Watson calculates the figure using methodology used in the private sector.

The Towers Watson figure is £1,176bn.

This is a legitimate figure to be added on to our growing debt mountain. “Members of public sector pension schemes have a bigger claim on future taxpayers than the investors holding government bonds do,” explains John Ball, head of defined benefit pension consulting at Towers Watson. Ball adds: “The Government has been borrowing off its own employees by promising them pensions in the future in return for work carried out in the past.”

Last up: Network Rail. This is a government owned body, but its debt is not included in official figures (not yet anyway, though there is a move to change this). Since taxpayers are liable for the money owed by Network Rail it seems honest to include Network Rail debt in our total pile of debt. A final £25bn.

Now we have a total figure for the real National Debt.

  • Public Sector Net Debt:                       £940.1bn
  • PFI liabilities                                       £35bn
  • National Savings & Investments         £103bn
  • Public sector pensions                        £2,700bn
  • State pensions                                   £1,176bn
  • Network Rail debt                              £25bn

Total                                                    £4,979.1bn

That’s the figure to quote as our National Debt: £4,979.1bn. It is still growing. By November it will have shot past five trillion pounds.

Who do we owe this money to?

Finally, we might want to ask whom does the taxpayer owe all this money to. That depends on the debt. The state pension debt is owed to current and future recipients of the state pension; the PFI debt is owed to private sector firms, Network Rail to a consortium of banks, NS&I to depositors.

Gilts are bit different: this ONS data tell us who holds our gilts.

Graph

As for the red segment - debt owned by overseas entities - it would be nice to know if we owe it to China, Peru or North Korea. The answer is the taxpayer will never know. Nor will the government.

The Debt Management Office does not have access to gilt ownership data. And, as the DMO press officer Steve Whiting said to me, most of the deals are done through nominees anyway, so we wouldn’t have a clear picture even if the ownership data were publicly available.

“We have no idea who holds what” he said. The ONS gathers the information in the chart above using surveys and examining publicly published reports by major institutions. The chart above might, therefore, be inaccurate.

We should be told

The National Debt is a matter of vital importance to our country. We’ll soon be spending twice as much on the interest on the National Debt as we spend on defence. These figures ought to be front-page news.

They are not, partly because neither the Treasury nor the Office for National Statistics has made an effort to explain the problem in a clear manner. The closest attempt I can see is this report by David Hobbs of the ONS. Even he pleads for “greater transparency”. Naturally his figures, as they are part of a report written in 2010, are out of date.

Until we get the facts presented in a straightforward manner, ordinary citizens won’t know whether to panic or stay calm.

Even worse – nor will our politicians.

Readers' comments (3)

  • Anonymous

    Great! I feel so much better now I know that!

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  • Anonymous

    This seems like 3 times the GDP. Is there a problem with this? Can somebody suggest a solution? Is there a solution at all?

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  • Good article, but please don't claim that Japan or Ireland (or the USA, for that matter) have 'funded' their future state pension obligations. Two thirds of the Japan Government Pension Fund is 'invested' in bonds issued by the Japanese Government (Japan's equivalent of gilts). Guess who pays the interest, and will repay the capital? Why, Japanese taxpayers.

    Ireland's National Pension Reserve Fund is even worse - the majority of it has been 'invested' in Ireland's bust banks (3.5bn euro's in March 2009, followed by a further 12.5bn euro's in November 2010 - from a fund with a total value of 25bn euro's).

    Sadly, the political misdirection of the assets of the national pension funds of Japan and Ireland is no better understood by the voters of those countries than is the fiscal prestidigitation of UK politicians by voters in this country.
    Viewed over the very long term, the future costs of servicing these colossal obligations represent huge millstones around the necks of 'western' (ie high cost) economies.
    It is the implications of this that should be of concern - not the relative deviousness of politicians of various nationalities.

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