How to reduce Government debt by almost a third, at no cost? Sounds mad? Read on..

If it hadn’t come from such a well respected source you’d immediately think this was bonkers. Lord Adair Turner, former head of the FSA, appearing on the BBC R4 World at One suggested a very simple but extraordinary move. But he did it in such an understated way that it seemed to pass by his interviewer.

What Turner suggested was that the Bank of England should effectively write off the almost a third (30.1%) of Government debt it holds. The BoE bought £375bn of government bonds with Quantitative Easing (QE) as a way of pumping money into the financial system.

It already gets no interest on these bonds – or rather it does but HM Treasury simply pays it with one hand and then takes it back with the other. This was how Chancellor George Osborne tried to pretend his deficit reduction policies were working better than the are, by including the £35bn of interest payments that HMT had ‘reclaimed’ in his debt and deficit numbers.

Lord Turner suggested that, as these bonds pay no interest, are not going to be repaid by the Government, they are effectively junk and can just be written off. This would reduce Britain’s £1,200bn debt by £357bn with dramatic effect.

Danny Blanchflower, the ex-MPC economist, has already suggested its a good idea on Twitter (after I posted Turner’s suggestion). Time for a serious debate methinks….

3 thoughts on “How to reduce Government debt by almost a third, at no cost? Sounds mad? Read on..

  1. Yeeessss, but if it was that easy wouldn’t someone have done it by now? Or is the Government choosing to retain the debt? Stranger things have happened, I’m sure… But if this is true, the Government has a hell of a lot of suffering to answer for, of which the bedroom tax – especially in its effect on sick & disabled people – is merely one of the most egregious examples!

  2. If I read this right, it would reduce the notional total debt, but would touch neither the deficit nor the cost of servicing the debt – so while it would make one number look less intimidating, it wouldn’t change anything about the challenge overall of government spending being so much higher than income from tax etc.

    A splendidly Sir Humphrey Appleby solution to a problem – “you asked us to reduce the number on the debt report, minister, so we reduced the number…”

    1. Actually Jen, it would reduce the deficit as well as the debt because HMT would no longer even have to notionally pay interest on the bonds. Reducing interest payments by 30% or so would make a significant dent in the deficit.

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