£375bn Reasons for George to be Cheerful? Behind the smoke and mirrors of government borrowing.

There is one number virtually no-one* has mentioned in all the coverage of the Budget – £375bn.

£375bn is the amount of government debt (bonds) held by the Bank of England. Part of the reason for Mr Osborne’s perpetual smirk may well have something to do with this £375n number.

These government bonds were purchased – from ‘the market’ and private sector financial institutions – as part of BoE ‘quantitative easing’ program. It was their way of pumping ‘created’ money into the financial system by buying up Government bonds.

(We’ll leave aside the fact that as these bonds may well have been owned outside the UK it meant a lot of the ‘quantitive easing’ went straight out of the country).

At the moment this £375bn represents around a quarter of all Government bonds – or put another way, about 1 in 4 of every pound of the national debt is owned by the Bank of England.

HM Treasury has to pay interest on all the bonds it issues (via the Debt Management Office or DMO), and as these are owned by the BoE we have the slightly bizarre situation where one part of government – HMT – is paying interest to another part of government – the BoE. As this is bizarre, the BoE promptly hands the money back to HMT – meaning the loans (bonds) are in reality interest free at the moment.

Bonds (loans) are issued for fixed periods (their ‘maturity’) and at the end of the period HM Treasury has to repay the original money it has borrowed. So a 5-year bond for £10m matures after 5 years and then HMT has to pay whoever owns it £10m.

Normally HMT simply issues new bonds – to anyone who will buy them – to replace maturing ones and ‘rolls over’ its debt (rather like rolling-over or switching your fixed rate mortgage when its term ends).

So obviously some of the £375bn in bonds held by BoE are coming up to maturity. Technically at this point HMT has to start repaying the loans to the BoE.

Now, if the government wanted to ‘unwind’ this situation the obvious thing to do would be to repay the BoE and issue fresh bonds into the market to replace them. Gradually we would return to the situation where government bonds are bought by “the market” (which, ironically, often includes other countries sovereign wealth funds).

During the current Parliament around £190bn of all bonds – owned by ‘the market’ and BoE – will come up for repayment and need £190bn of new bonds issued to replace them.

Hidden away in the Budget documentation is what the government has actually decided to do. As the BoE owned bonds mature, HMT repays the money that the BoE is immediately using to buy new government bonds.

This means that of the ‘replacement’ bonds issued during this Parliament, £146bn will be bought by the BoE – a staggering three-quarters of all rolled-over borrowing.

The BoE will maintain its ‘stock’ of £375bn of effectively interest free government debt.

This reinforces the view that this ‘debt’ effectively has been written off. We (the government) pay no interest on it and it is going to be forever ‘rolled over’.

In any normal business or circumstance this would be regarded not as a loan but as a gift. If you tried doing this with your money HM Revenue would take a dim view and regard it as a gift, not a loan.

So why its it not simply written off? It would have zero effect on ‘the market’ as this debt is very unlikely to ever be off-loaded back into the market place. It would reduce the national debt “at a stroke” by a quarter. And this is probably why it isn’t being formally written off. It would massively reduce the reasons for “austerity” and the “fiscal crisis” narrative of the Chancellor. 

What is perhaps more of a mystery is why the media and the Opposition seem to be ignoring this rather large ‘elephant’ too?

* The honorable exception being the NIESR whi have picked up on it – see here final section