It’s official – the British government owes trillions

Earlier this year I published a report estimating British government debt at £4.8 trillion. However, over the summer the Office for National Statistics (ONS) published a paper which proves me wrong on two counts – firstly, I understated the true debt and secondly, rather than going bankrupt sometime in the future, the UK should probably already be calling in the receivers.

If the reader will stay with me, I would just like to briefly explain the differences between my figures and those of the ONS (they are quoted in the press with a debt figure of £4 trillion). The ONS found extra debts of £250 billion which I was not aware of (from PFI projects and nuclear decommissioning). In addition, both sides of the balance sheet are included, so if we are doing this it is OK to include the nationalised banks’ liabilities of up to £1.5 trillion as long as their assets are also included. Also, projections of “official” national debt are £900 billion whereas I used £770 billion.

The main difference between our figures is the allowance for state pensions: my figure for this is twice theirs because they have used a GAD estimate from 5 years ago, whereas I have estimated what the liabilities are now. That means that our gross national debt is about £6.5 trillion.

The ONS also calculate the country’s assets as approximately £3.5 trillion, if we include the banks’ balance sheets. We therefore have a hole of £3 trillion to be funded by future tax revenue. This is in addition to future government spending. To ensure the public finances are sustainable in the long term, the government will not only have to reduce the current budget deficit of 9% of GDP; it will also have to run a surplus to “pay off” the £3 trillion. And this assumes that the assets will also generate cash or could be sold off, both of which are pretty unlikely.

Looked at this way, the UK is effectively an enormous unfunded and effectively bankrupt pension scheme, with a large speculative holding in some banks and a sideline in running a small island state off the northern coast of France.

6 thoughts on “It’s official – the British government owes trillions”

  1. Posted 08/09/2010 at 10:45 | Permalink

    How does this amount of debt compare with other countries such as France, Germany, Italy, Spain, Japan and the United States?

    What would be the impact on the debt position of selling off the government’s interest in the banks, following the bail out, assuming a sale at market rates for the assets and a reduction of the corresponding bank held debt obligations?

  2. Posted 08/09/2010 at 13:01 | Permalink

    ” … rather than going bankrupt sometime in the future, the UK should probably already be calling in the receivers.”

    Do you think you could feasibily be exagerating a tad? Surey if this were the case we would have spiralling interest rates (we dont) and unending gilt strikes (again – we dont).

  3. Posted 08/09/2010 at 13:14 | Permalink

    What are tax revenues at the moment – just under £500bn? We are spending £650bn-ish. So if we raised tax revenue by 50% to £750bn ( a massive ask – we would be on massively penal income tax rates, much high VAT, etc etc) we would be running a surplus (assuming no increases in spending) of c. £100bn/pa. We would therefore take 30 years to pay the unfunded £3 trillion.

    We would have to run our economy at wartime levels of taxation for 30 years to pay off our debts. Not going to happen, not in a democracy.

    Result,one of two scenarios – a) inflation is let rip to reduce the debt or b) a total societal meltdown and a resetting of the clock with a new currency/no debt.

    My money is on inflation.

  4. Posted 08/09/2010 at 14:34 | Permalink

    Thanks for comments,

    In answer to questions:

    Other countries: i haven’t done the figures, but I guess they have similar levels
    Banks: no net affect on balance sheet as we’ll lose equivalent assets and liabilities (probably make a small profit)
    Inflation: unfortunately pensions are inflation linked so this won’t work.
    Exaggeration: I have talked to bond investors who say they don’t take pensions debt into account, but would if they were published. This doesn’t fill me with confidence. What is most likely scenario is default on pension commitments. This may not be bankruptcy in the conventional sense, but I think future pensioners (i.e. us) might like to know this.

  5. Posted 08/09/2010 at 14:54 | Permalink

    While the author is blindfolded and feeling the the trunk of this elephant, a similarly challenged MMT school economist has a leg. They’re saying the UK government is a monopoly issuer of a non-convertible currency. Debt in pounds can always be paid. Anyway, a sovereign government’s spending need not be financed by debt (see TARP as a trillion dollar example). Bankruptcy is therefore a policy decision not a fiscal inevitability. And as long as deficit spending doesn’t create an excess of aggregate demand then there’s no inflation effect either.

    Meanwhile another one has the tail, and thinks the other two are talking hogwash.

    Macro economics needs to find it’s Newton or Darwin and fast.

  6. Posted 08/09/2010 at 15:59 | Permalink

    […] trillions By Toby Baxendale, on 8 September 10 Another great article from the IEA, this time by Nick Silver: Earlier this year I published a report estimating British government debt at £4.8 trillion. […]

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