Why the public debt should be treated as an asset

The Bank of England. Captain Roger Fenton / Flickr. Public domain.

The 20th century American comedian Rodney Dangerfield had a catchphrase: “I don’t get no respect”. The public debt is the Rodney Dangerfield of government finances. It is a long term benefit treated as perennial problem.

When we change our perspective on of the nature, size and ownership of the UK public debt we can see that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. If we treat the national debt as an asset, we can use it as a means to end austerity. 

Give the public debt some respect and end austerity!

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why.

When our government borrows it does so by selling a promise to pay, called a bond. For example, a household buys a £100 bond and our government promises to buy it back at the same amount in ten years with interest (at present 2.5% or £2.50 every year). A pound note also is a promise to pay (look at the small print near the Queen’s picture). A pound note is a bond paying zero interest.

Britain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England. The option to sell to the Bank of England provides a fool-proof mechanism to prevent excessively high bond rates.

Whether the economy is strong or weak, the British government can never default on its debt. The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

This buying and selling of public bonds is not the much-misunderstood Quantitative Easing (QE). QE was a one-way street – our government bought private corporate assets from companies threatened with bankruptcy. In a phrase, QE was “bail-outs” of reckless private sector financial behaviour.

The size of the public debt is not a problem

Figure 1 shows that outstanding public bonds (called “gilts” from the days when the edges of the bond had gold gilt) amounted to £1.9 trillion or 96% of GDP at the end of 2016, which was the UK gross debt.

When we look closer at the national debt, its nature changes. Public sector liquid assets (for example, cash deposits held by the central and local governments and financial assets such as stocks and bonds) reduced this to £1.7 trillion or 86% of GDP. When we subtract the government’s assets from its debt, we have the net debt, the measure of public indebtedness used by the Treasury. The gross/net distinction also applies to households. A household with a £300,000 mortgage and £50,000 in the bank has a net debt of £250,000.

Another 27% of the net debt amount (£466 billion) was held by public sector institutions, the vast majority by the Bank of England. This portion of the national debt is what the public sector owes itself. Subtracting this gives the effective debt, the debt that the UK government owes to others. In 2016, the effective debt was 62% of GDP.

 The public debt is not a burden

Who the government owes is an important factor determining whether the public debt is a burden. In the UK, the public sector itself owns 25% of the £1.9 trillion UK gross public debt (see Figure 2). The government pays the interest on this portion of the debt to itself. Thus, one-quarter of the debt and the interest paid on it are not a burden.

Pension funds hold a large portion of the 75% of gilts not owned by the government. The interest paid on debt held by pension funds is income to retired households. As such, this portion of the national debt is a source of household income, a benefit not a burden to citizens.

Debt held by the government itself and pension funds are long term holdings, rarely bought and sold. They do not represent a speculation danger that might put upward pressure on bond rates. When these are subtracted the remaining “gilts” constitute the market-active public debt, £808 billion, or 45% of GDP.

At the end of 2016, private corporate and foreign gilts holders owned 41% of the UK’s national debt. Only the £524 billion of gilts held by foreign creditors could be considered a “burden” in that the associated interest payments are from UK taxpayers to non-UK creditors. For fiscal year 2015/16 interest payments to foreign creditors were approximately £12 billion, or 0.6% of GDP – quite a small burden.

This analysis of the nature, size and ownership of the UK public debt shows that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. From this come the following policies to end austerity:

  1. Sound management of the national debt means more public borrowing for investment and current expenditure, which is justified by the modest size of the effective debt.
  2. The minor burden represented by foreign interest payments could be reduced by measures that would limit bond sales to domestic buyers (already applied in several other countries).
  3. Implementing a fair and progressive taxation system will ensure interest payments to domestic bond holders don’t have negative redistribution effects.
  4. Any speculative pressure on government bond interest rates can be prevented by selling bonds to the Bank of England.
  • William MacDougall

    You say Gilts are not a problem because they can be repaid by printing money, but surely if done too much that will cause inflation. We can argue about what “too much” is and about how much inflation is a difficulty, but they clearly are problems as Venezuela is discovering.

    • Ralph Musgrave

      Several Western countries have bought up billions if not trillions of their own debt over the last five years. As predicted by me and others, and contrary to the predictions of some “eminent” economists, there’s been little effect on inflation. But clearly, as you suggest, the printing can go too far.

      • William MacDougall

        I agree; the harm of debt is often exaggerated, and indeed was by some in the aftermath of the financial crisis, when counter-cyclical expansion was needed. But that crisis was ten years ago, and Britain now has record employment; it would be dangerous to run large deficits in the UK today.

  • Ralph Musgrave

    I basically agree with John Weeks. My only slight quibble is that I go along with the idea put by Milton Friedman and Warren Mosler (founder of Modern Monetary Theory) that there should be no government debt in the sense that the only liability that government and central bank should issue should be zero interest yielding base money. I go into the reasons for that idea in much more detail here:

    http://www.openthesis.org/document/view/603834_0.pdf

    Week’s article features on an MMT site (link below) and there’s a comment by Andrew Anderson saying much the same as me, i.e. that there should be no debt of the interest yielding variety.

    http://mikenormaneconomics.blogspot.com/2018/09/john-weeks-why-public-debt-should-be.html

  • Egmont Kakarot-Handtke

    Why the MMT benefactors of humanity never talk about profit
    Comment on John Weeks on ‘Why the public debt should be treated as an asset’

    The most curious thing about economics is that most models ― Walrasian, Keynesian, Marxian, Austrian does not matter ― do NOT contain macroeconomic profit in explicit form. And when it appears occasionally it is misspecified.#1 This is why economics is a failed/fake science. MMT is no exception.

    In John Weeks’ post about the mistreatment of public debt as perennial problem instead of a long term benefit, the word profit does not appear once. The bottom line of his argument is that the public debt is not as massive as everybody thinks and on closer inspection, not a burden but, on the contrary, has a lot of advantages for WeThePeople. In detail he argues:

    • People are told that public debt 1) must be repaid, 2) threatens the country with bankruptcy, and 3) is a burden on future generations. All these arguments are wrong.

    • The British government can never default on its debt.

    • A good portion of the national debt is held by the public sector, i.e. Bank of England, this is what the public sector owes itself.

    • The interest paid on debt held by pension funds is income to retired households.

    • At the end of 2016, private corporate and foreign gilts holders owned 41% of the UK’s national debt. Only the £524 billion of gilts held by foreign creditors could be considered a “burden” in that the associated interest payments are from UK taxpayers to non-UK creditors.

    • A fair and progressive taxation system could ensure that interest payments to domestic bond holders don’t have negative redistribution effects.

    • Sound management of the national debt means more public borrowing for investment and current expenditure, which is justified by the modest size of the effective debt.

    The whole argument boils down to a plea for more deficit spending/money creation. This is what MMT policy guidance is all about.

    Fact is:

    • MMT is a macroeconomic theory that is refuted on all counts.#2

    • John Weeks does not mention once the profit effect of deficit-spending/money-creation.#3

    • From the scientifically correct Profit Law follows (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which boils down to Public Deficit = Private Profit.#4

    • MMT economic policy boils down to the permanent growth of public debt which is nothing else than the permanent self-alimentation of the oligarchy.#5

    • All the social benefits MMTers promise are paid in real terms by WeThePeople themselves via stealth taxation.#6

    • Public debt is deferred taxation of WeThePeople which is simply pushed beyond the time horizon. Public debt is NOT an asset but a time bomb.

    MMT claims to push the agenda of WeThePeople but in fact pushes the agenda of WeTheOligarchy. MMT is failed/fake science and the proponents of MMT are NOT benefactors of humankind but quite ordinary political swindlers.#7

    Egmont Kakarot-Handtke

    #1 For details of the big picture see cross-references Profit
    http://axecorg.blogspot.com/2015/03/profit-cross-references.html

    #2 For the full-spectrum refutation see cross-references MMT
    http://axecorg.blogspot.com/2017/07/mmt-cross-references.html

    #3 Keynes, Lerner, MMT, Trump and exploding profit
    https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

    #4 Down with idiocy!
    https://axecorg.blogspot.com/2017/12/down-with-idiocy.html

    #5 MMT: Redistribution as wellness program
    https://axecorg.blogspot.com/2017/10/mmt-redistribution-as-wellness-program.html

    #6 MMT, money printing, stealth taxation, and redistribution
    https://axecorg.blogspot.de/2017/11/mmt-money-printing-stealth-taxation-and.html

    #7 MMT: academic snake oil for the people
    https://axecorg.blogspot.com/2018/02/mmt-academic-snake-oil-for-people.html

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