Government debt question - basic

[ChevronB19]

Bear with me, as I know nothing about this, as will no doubt become evident.

Apparently government debt to GDP has reached 98.6%, and we borrowed £22Bn last month.

Firstly, how is this sustainable? Surely we are just borrowing to service earlier borrowing?

Secondly, why is this apparently ‘ok’(ish)? If the UK public were at a similar debt to income ratio we’d all get a severe telling off (ok, I’m ignoring mortgage debt here, which is probably unfair), and we certainly wouldn’t be allowed to borrow month on month subsequently.

Thirdly, why is the measure debt to GDP? Surely a better measure would be debt to tax income? GDP does not all go to government?

Thanks in advance, sorry if this is basic economics (which as you can now tell, I’ve never studied).

[jamiedimonBTClover]

Debt to GDP is a very basic but easy way to compare countries against each other. France (probably our most "like" comparable) has a debt to GDP ratio around 120% (114% in 2021). Italy, Belgium, Spain, Greece all way above that. The US is 135%ish and Japan somewhere north of 250%.

If you looked at NET debt (so making it all to all) the ratio's are even scarier. The US is something like 800% total debt to GDP.

Generally there are some basic assumptions around economic functioning and fiscal / monetary policy operation. The UK shot itself in the face with this in the mini budget with the govt going off reservation. It generally informs how safe a country or economy is to invest in or park money. Despite political stupidity here, the Eurozone has structural issues that are possibly way more serious - not least they keep breaking every prudence and bailout rule possible. Japan has been running a monetary expansion experiment like nothing ever seen, and that's about to pivot sending some pretty big shockwaves across the system. AUD tanked 4% yesterday, and carry trades in BRICs could be coming off.

It's a data point used to assess financial soundness or credit quality (if you like it helps explain the spread of cost between Italy and Germany debt - which if that falls too far out of whack could lead to Euro fragmentation).

To answer your questions, really requires a book. NOT a forum post.

But anyhow, couple of basic answers.

Yes a lot of borrowing is simply to pay for maturing debt. There is no cash in the bank to pay it off, so more is borrowed. Persistent deficit's grow the debt pile AND can be compounding (you don't want to run multi year deficits). Budget surplus is generally used to pay down.

How much debt is a good thing, arguably depends on your ability to service it. Low interest rates, mean higher NET debt burden is possible (low interest payments to find from your budget). High servicing costs, the greater the fiscal drag (or allocation of taxes in debt servicing). And if you have a very high proportion of inflation linked debt (UK again) it's a double whammy. It's very likely to inform the upper limit or terminal rates you can hit (so the UK's predicted terminal or high is expected around 4.5% base).

It's sustainable as long as you 1) raise enough tax revenue you to pay it off / service it - that's why you always seek growth 2) can inflate it away

[ChevronB19]

jamiedimonBTClover said:

Debt to GDP is a very basic but easy way to compare countries against each other.

Thanks for the detailed reply, much appreciated (and a lot of it above my level, lol), but again, debt to GDP is basic, yes, and I understand it can be easily comparable, but surely what matters to a government is how much tax income (as well as various investments) they get to service that debt, so surely debt to tax income is more sensible and equally comparable?

[Dr Jekyll]

ChevronB19 said:

Thanks for the detailed reply, much appreciated (and a lot of it above my level, lol), but again, debt to GDP is basic, yes, and I understand it can be easily comparable, but surely what matters to a government is how much tax income (as well as various investments) they get to service that debt, so surely debt to tax income is more sensible and equally comparable?

Ultimately your maximum tax income is a proportion of GDP, though exactly what proportion the govt can get away with is arguable. If you want to evaluate how the current tax income compares with debt, use the yearly deficit figure. If you want to evaluate the govt's room for manoeuvre, look at GDP.

[Scootersp]

Some interesting info in this link, particularly the previous ratio levels "Figure 1 shows that gross debt-to-GDP ratios were, even before the pandemic, exceeding the 77% that the World Bank estimated is a ‘tipping point’, after which growth starts to be held back as every additional percentage point of debt-to-GDP clips annual GDP by 0.02 percentage points(World Bank, June 2013)."

https://www.omfif.org/2022/04/sweeping-ever-growin...


https://www.stlouisfed.org/open-vault/2020/october...

The uk got it's knuckles rapped when the Truss budget was tried, so indiscriminate borrowing won't wash, but our standard (current and recent history) deficits seem too? Is it all a confidence game?

So can it go on forever? are we in control of whether it can? do we have the means and motivation to reduce our debt if we had too? why haven't we ever run a surplus in recent times? should we have? could we have? what would the country look like without the deficits of the past? we wouldn't have had as good a time would we?

But we are not alone in our situation, far from it, so again why does it matter?

[Condi]

ChevronB19 said:

Firstly, how is this sustainable? Surely we are just borrowing to service earlier borrowing?

It isn't sustainable, but the message seems to be that "we have lower debt to GDP than other developed countries", and "future growth will help pay for it", as if either of those make it fine. In reality, we are borrowing today against the tax receipts of our children, who may well end up borrowing against the tax receipts of their children unless something changes.

Even before the latest rise in interest rates the government interest bill alone (not paying back debt, but just the interest) was forecast to be £80bn this year. That £80bn is equivalent to 2/3rds of the NHS budget, or more than the police, fire, courts, prison and defence budgets combined. This is money the government has to find but isn't used for public services, but instead (on the whole), simply vanishes.

Governments (Labour and Conservative) have been working against a lot of headwinds over the last 15 years, which has seen debt balloon. Things were not great before Covid as we hadn't quite righted the ship from 2008, but then the amount of money spent during covid (much of it wasted - vast PPE profits, support scheme fraud, questionable track and trace ROI, etc), has been incredible.

In the longer term I'm not sure what the answer is. We already have the biggest tax burden in 70 years thanks to lower growth from Brexit, reduced economic migration and older workers leaving the workforce early the government's tax take is already lower than it was forecast to be, and the debt burden is falling on fewer working age people. When Labour get in they'll end up spending more, but without much room to increase taxes and so much of that money will come from borrowing.



In short I don't think there is any long term plan to balance the books or pay it back. Politicians can't see further than the 4 year election cycle and this means buying votes from whatever demographic will vote for you (working and younger age people for Labour, pensioners for the Tories), with everyone seemingly quite happy as long as there is enough money to pay the interest bill and enough people willing to lend more money to refinance the debt. Personally I would rather see the £80bn being spent on interest payments this year spent on things which matter - the NHS, social care, a train network which works and investment in nuclear energy.

[Dr Jekyll]

Scootersp said:

Some interesting info in this link, particularly the previous ratio levels "Figure 1 shows that gross debt-to-GDP ratios were, even before the pandemic, exceeding the 77% that the World Bank estimated is a ‘tipping point’, after which growth starts to be held back as every additional percentage point of debt-to-GDP clips annual GDP by 0.02 percentage points(World Bank, June 2013)."

https://www.omfif.org/2022/04/sweeping-ever-growin...


https://www.stlouisfed.org/open-vault/2020/october...

The uk got it's knuckles rapped when the Truss budget was tried, so indiscriminate borrowing won't wash, but our standard (current and recent history) deficits seem too? Is it all a confidence game?

So can it go on forever? are we in control of whether it can? do we have the means and motivation to reduce our debt if we had too? why haven't we ever run a surplus in recent times? should we have? could we have? what would the country look like without the deficits of the past? we wouldn't have had as good a time would we?

But we are not alone in our situation, far from it, so again why does it matter?

This is the crux of the issue. It's hard to grow GDP because taxes are historically high, but GDP is too low compared with spending for taxes to be reduced without yet more debt.

The relevance of debt GDP ratio not yet being as high as some other countries is that in principle lowering taxes to allow growth to pick up is an option, even though debt to GDP would increase in the short term. Of course this would mean other pro growth measures as well and probably some spending limits.

To give credit where due this is what Liz and Kwasi were trying to do, they did at least recognise that finding a way to grow GDP is the only way out if it. But they went over the top on the tax reduction bit, so never got as far as the growth promoting bit or the spending restraint.

[MarcelM6]

'Governments (Labour and Conservative) have been working against a lot of headwinds over the last 15 years, which has seen debt balloon. Things were not great before Covid as we hadn't quite righted the ship from 2008, but then the amount of money spent during covid (much of it wasted - vast PPE profits, support scheme fraud, questionable track and trace ROI, etc), has been incredible. '

I find it quite galling to see the frothing at the mouth about the Covid spend, when nothing was done about the hundreds of billions the banks cost us 2008-date. Government (taxpayers) bailed out a corrupt industry who continued to operate in the same way. At least with PPE you've got some public health benefit.

The headwinds the governemnts have been facing is not being honest about our poor economic growth. Strip Quantitive easing (gov debt) out of the last 15 years and we've effectively been in a recession for 15 years. Gov debt has been funding poor productivity for too long.

We have to grow our GDP in real terms, everything else is a doomsday game

[jamiedimonBTClover]

MarcelM6 said:

I find it quite galling to see the frothing at the mouth about the Covid spend, when nothing was done about the hundreds of billions the banks cost us 2008-date. Government (taxpayers) bailed out a corrupt industry who continued to operate in the same way. At least with PPE you've got some public health benefit.

The headwinds the governemnts have been facing is not being honest about our poor economic growth. Strip Quantitive easing (gov debt) out of the last 15 years and we've effectively been in a recession for 15 years. Gov debt has been funding poor productivity for too long.

We have to grow our GDP in real terms, everything else is a doomsday game

Frothing? You might want to get your facts straight before you get your knickers in a twist.

The total cost of bank bailouts in the UK was 32-33bn SINCE 2008. That's a relative drop in the ocean compared to COVID spend and PPE nonsense.

If you don't have a banking system, you don't have an economy. Period. So it's not the worst value ever.

And if you want that into some more relevant perspective than any Covid conkers. Uniper is about to get a 50bn bailout; with Germany having to find EUR500billion over the next 2 years due to dependence on Russian energy crack.

As for Govt's not being honest with people - is that Govt or firms and shareholders? Loose Monetary Policy was used to supplement poor wage inflation.

[MarcelM6]

Cost of quantitive easing £895bn - all given to banks to 'lend' to companies to stimulate the economy. Biggest chunk has probably gone to dodgy VC/PE inititatives Another massive chunk will be in bank profits. Both of which will make the economy look like it's growing, when it really isn't. It's paper growth that doesn't trickle down to the lowest paid.

And yes, I agree, putting the minimum wage up over 5% per year is inflationary.

Edited: Yes, we need a retail banking system, but do we really need investment banks where CEO's pay themselves hundreds of millions every year? (Yes I know that shareholders hold a vote on remuneration every year at an AGM but it's really a farce)

Edited by MarcelM6 on Thursday 22 December 11:35

[jamiedimonBTClover]

MarcelM6 said:

Cost of quantitive easing £895bn - all given to banks to 'lend' to companies to stimulate the economy. Biggest chunk has probably gone to dodgy VC/PE inititatives Another massive chunk will be in bank profits. Both of which will make the economy look like it's growing, when it really isn't. It's paper growth that doesn't trickle down to the lowest paid.

And yes, I agree, putting the minimum wage up over 5% per year is inflationary.

Edited: Yes, we need a retail banking system, but do we really need investment banks where CEO's pay themselves hundreds of millions every year? (Yes I know that shareholders hold a vote on remuneration every year at an AGM but it's really a farce)

Edited by MarcelM6 on Thursday 22 December 11:35

That's not giving to the banks..... the banks cost the UK taxpayer 32billion. QE is something else entirely. And QE doesn't stay in banks, it multipliers up through the economy. Asset inflation is multiples of QE. Another poster with an axe to grind who doesn't understand what a bank IS or DOES.

To loop this back to the OP and away from Mr Angry Pants...

Debt to GDP ratio is likely to stay elevated for decades. If the interest cost is kept low, and inflation in check - servicing a large pile is feasible (Japan does it with 250%). My personal view, we probably need to go to 125-130% and do £500billion of infratsructure / fiscal investments (outside London). That's a starter of "Level Up" policy, not anything like the peanuts in the Govts plans.

[MarcelM6]

Relevance of QE is that it lands up as gov debt (bonds). Out of the 895bn, 875bn is gov debt. About 35% of our current total debt of 2.4trillion

If the government had stopped at 35ish bn that it took to bail out the retail banks, then it's a drop in the ocean. It's the sunsequent 860bn that enriched the financial system.

The money has to be distribued somehow, so it goes to large financial institutions to lend to business for infrastructure work or other investments that are mean to grow the economy, thereby making everyone better off, raising more tax income and repay the debt (sort of)

There is a long chain of financial institutions between the government and the company building the road though, all taking very generous percentages for 'administration & risk management' So only a portion of the 860bn lands up with where it is emant to go, the rest makes bankers very wealthy.

And that's before you go into the quality of investment decisions made by financial institutions. FTX anyone?

[Condi]

Maybe go on the BOE website and see why they ran so many rounds of QE before getting all excited by it. Also compare the amount of bank profit (small) with the amount of QE (large), and work out what percentage is taken as profit. QE wasn't, on the whole, a bailout for the banks, it was a bailout for the whole economy.

Anyway, QE is being reversed at the moment, and so that outstanding amount will fall. It's all a large distraction from the point the OP was trying to make, that the government has been running a structural deficit for years and has little or no plan to change that, meanwhile an increasingly large share of the tax take goes towards paying interest rather than paying for public services, at a time when public services are falling apart.

[jamiedimonBTClover]

MarcelM6 said:

Relevance of QE is that it lands up as gov debt (bonds). Out of the 895bn, 875bn is gov debt. About 35% of our current total debt of 2.4trillion

If the government had stopped at 35ish bn that it took to bail out the retail banks, then it's a drop in the ocean. It's the sunsequent 860bn that enriched the financial system.

The money has to be distribued somehow, so it goes to large financial institutions to lend to business for infrastructure work or other investments that are mean to grow the economy, thereby making everyone better off, raising more tax income and repay the debt (sort of)

There is a long chain of financial institutions between the government and the company building the road though, all taking very generous percentages for 'administration & risk management' So only a portion of the 860bn lands up with where it is emant to go, the rest makes bankers very wealthy.

And that's before you go into the quality of investment decisions made by financial institutions. FTX anyone?

It didn't enrich the banks, it benefitted everyone. Well mainly those with assets or shock horror pension savings....

The benefit to the economy is multiples of QE. The easiest way to see that is value of S&P500 Vs the Feds QE. It's multiples off. QE is multiplied up by the banks, using it to create leverage. Which is 50% of what a bank does, the other 50% is maturity transformation.

Thinking banks operate like FTX is quite humorous. FTX, crypto etc is a mugs game. Even when banks play in that space, it requires so much capital / loss buffer; they won't be losing your money.

Debt is now a growth generator, you or I don't have to like it - but it is. High debt to GDP ratio's are here to stay.

[MarcelM6]

I think that was my point - QE was bailing out the economy, when it really shouldn't have once the banking system was stabilised.

The continuing QE has increased government debt so now we have to pay 80billion per annum in interest. If we had just acknowledged that the economy was stuffed 12 years ago we could have made the structural changes required. Instead we made a political choice to have sham growth funded by our grandchildren's tax revenues.

[MarcelM6]

Just for clarity, when I say banks, I include Goldman, Citigroup etc. I don't mean the retail arm of Barclays. Could also include Softbank, Blackrock etc, arguable.

If FTX & crypto is a mugs game, why have these banks put billions into it? Are bankers all mugs?

As for the BOE article about QE - what a load of retrospective justification twaddle. All they did was postpone the inevitable. 'Control inflation' -didn't end well; 'increase asset values' - didn't end well either.

It's 2008 and CDS all over again - too much 'financial engineering'

[jamiedimonBTClover]

MarcelM6 said:

Just for clarity, when I say banks, I include Goldman, Citigroup etc. I don't mean the retail arm of Barclays. Could also include Softbank, Blackrock etc, arguable.

If FTX & crypto is a mugs game, why have these banks put billions into it? Are bankers all mugs?

As for the BOE article about QE - what a load of retrospective justification twaddle. All they did was postpone the inevitable. 'Control inflation' -didn't end well; 'increase asset values' - didn't end well either.

It's 2008 and CDS all over again - too much 'financial engineering'

Blackrock isn't a bank. It doesn't enjoy the protections off; nor the financial resource requirements. Goldman wasn't a "bank" pre 2008, they had to become one to enjoy Fed access. And if you look at what the US bank's did, they paid back the support quickly. You are conflating separate issues.

The only way to get QE into the economy and provide the support was through the banking system as a conduit or better yet, viewed as a utility function.

As for bank's in the Crypto space. They are, but looking at it for elimination of friction - which is adding the spread costs you imply. IF they are providing leverage for Crypto - its 1) well capitalised (given the market risk is off the scale - that's a huge sum) 2) they are not punting it. Since Volcker rule, banks simply do not prop trade.

Bank's are only relevant in the OPs thrust, as they are the mechanism to get Govt debt into the system and into the Central Bank. Remove banks and you have monetary financing, then you have no CB credibility. Yes, it's basically a wash (as everyone can see in Italy's case). For every £ of additional Govt debt issued and purchased by the BoE; you have multiples of asset value added. That the QE has had a poor return here (in GDP terms), is probably closer to the OPs point (but GDP isn't capturing asset inflation well). It's HAS had a NET positive GDP effect, but lower than you would expect (fiscal multiplier).

Doing a bit of a thumb suck here, but using 2008 as a baseline

In 2008, UK GDP was about £1.9trillion. Today, it's £2.2 trillion. That 900billion of QE, has actually generated a cumulative increase in activity of near 1.5trillion over the period. Before looking at asset values. It's already paid off, albeit poorly (but we've had the utter st shows of Brexit and Covid). As much as politicians are utter plumbs, it's not as though private sector investment has been helping much as cost / shareholder pressures have nailed investment to the floor. It's not the QE that is the UK problem or even debt to GDP it's the utter clusterfk of Brexit and poor policies that have failed to open the UK up to private sector investment. Debt is the cost of people who think the politicians will save them. Basically the entire political class have failed the UK as they are still fighting Brexit - like the nutters in NPE. Guy Fawkes had the right idea.

[Condi]

MarcelM6 said:

Just for clarity, when I say banks, I include Goldman, Citigroup etc. I don't mean the retail arm of Barclays. Could also include Softbank, Blackrock etc, arguable.

Please learn what a bank is then, before commenting...

Blackrock and Softbank are investment funds, not banks. Goldman and Citi are investment banks, and could be left to go bust in the same way Lehman Brothers did. All very different propositions to the consumer banks which were supported/nationalised in 2008, you know, the ones which held ordinary people's money.

[Scootersp]

jamiedimonBTClover said:

It didn't enrich the banks, it benefitted everyone. Well mainly those with assets or shock horror pension savings....

The benefit to the economy is multiples of QE. The easiest way to see that is value of S&P500 Vs the Feds QE. It's multiples off. QE is multiplied up by the banks, using it to create leverage. Which is 50% of what a bank does, the other 50% is maturity transformation.

Thinking banks operate like FTX is quite humorous. FTX, crypto etc is a mugs game. Even when banks play in that space, it requires so much capital / loss buffer; they won't be losing your money.

Debt is now a growth generator, you or I don't have to like it - but it is. High debt to GDP ratio's are here to stay.

It benefitted everyone, so why tighten? why not more QE? we can pay the nurses and do these large infrastructure projects, have zero unemployment subsidise energy endlessly and just catch up to the 250% Japan levels and then maybe worry? It's a win win no? In fact is there anything to actually worry about at 250% or 350%?

I'd suggest much of what is in this link (from 2015) is why
https://mises.org/library/how-money-disappears-fra...

FTX took money in and promised to not use clients funds but it lied and didn't have any third party security for investors deposits
2008 banks had taken on too much junk credit, it would have meant the same for investor deposits and so we got protected
Now Banks take your money in and there is zero reserve requirement and so again they can use it as they wish and we are only now protected to £85K

Interestingly the FSCS that provides the protection has maybe £400,000M in cash and cash equivalents in it's balance sheet which equates to less than 5,000 peoples full £85K protected, so in the event of just one bank failing the government would likely be called to bail us out again? if that's the case are we truly protected or are we in essence protecting ourselves? Especially as were are told how globally interconnected all the banks are now and that one significant failure could lead to contagion?

Feels to me like it all runs on confidence and "whatever it takes to try and maintain the status quo"?

[MarcelM6]

Condi said:

Please learn what a bank is then, before commenting...

Blackrock and Softbank are investment funds, not banks. Goldman and Citi are investment banks, and could be left to go bust in the same way Lehman Brothers did. All very different propositions to the consumer banks which were supported/nationalised in 2008, you know, the ones which held ordinary people's money.

What's Barclays then? A bank or an investment bank? HSBC, UBS?
I did say that Blackrock was arguable, but what does Blackrock do- takes deposits and invests in assets to pay a return on deposits.

Instead of using the term bank, I could have written out 'the whole financial industry' . Insurerers, credit agencies, auditors. All in the same boat: Make massive fees and creating financial instruments that are no better than casino gambling. No downside risk=the taxpayer will bail you out. Upside=massive fees.

Using debt as investment is a good thing, but quality of investment is poor in the UK, HS2 is a prime example.