At the end of January 2010, UK government debt stood at £848bn and around 60% of GDP. The European Commission says ‘additional fiscal tightening measures’ are required. The Tories warn that investors are getting anxious and that the ratings agencies (who also certified the security of mortgage-backed derivatives) are about to downgrade the UK government’s debt, with the likely consequence of increased interest rates to pacify bond-holders.
Two-thirds of Treasury bonds are held by UK citizens and institutions – mainly banks and pension funds – that rely on them as secure and predictable basic assets. This is UK government money owed to UK citizens by the UK government. It is a purely internal redistribution of claims that cannot be compared, as it sometimes is, to household debt. The one-third of Treasury bonds held by foreign investors, such as other central banks and financial institutions, is a rather different story. Clearly these bond-holders have less direct interest in the long-run health of the UK economy, and so may and sometimes do, exert pressure on governments to increase the rates of return on the new bonds they issue. Were these rates of return to exceed a reasonable expectation of the political and economic tax revenue capacity of the UK government, then there would be difficulty in continuing to fund the current level of debt in the same way. In fact this situation seems a long way off. Currently interest rates are low, UK debt is not particularly high relative to other countries, and the UK has strong social and economic assets to back its liabilities. This makes UK government debt a particularly safe form of wealth in a time of economic turbulence and one that tightening capital regulations are likely to create even more demand for. The real question about the UK’s debt is not so much whether it is sustainable, but whether it is fair. Continue reading Debt and Deficits – Sustainable but Unfair