The National Debt is unsustainable
What is Government debt?
In simple terms it is all the money the government has ever spent and not taxed back. It is the non-government sector’s savings and that includes you and me.
All money in the UK economy is issued either by the Bank of England or by its agents: the high street banks.
Bank loans
The money created by private banks (bank loans and mortgages), is called bank “credit”, because over time, the money (loans) must be repaid. As bank loans are repaid, the money is deleted. Bank loans are the major contributor to the amount of money in the economy at any given moment. Every loan a bank grants creates new bank deposit money, and this stays in the economy until our repayments reduce it. When we look at the private sector as a whole, the total amount of bank credit money still owed to the banks must equal the total amount of bank credit money remaining in the economy. Economists would say bank credit and debt “net to zero”.
Government issued currency
The money created by the government is very different. When the government spends it creates money in the same way high street banks create money: by typing numbers into bank accounts; but government money is deleted in a different way – not by loan repayment, but by taxation. Whereas bank loans are deleted in full, only a portion of the government spending is deleted through taxation.
Example: If the government pays a nurse £100, and the nurse pays taxes of £20, the £20 is deleted and the nurse is left with £80. Nurses call that £80 their ‘savings’, economists call it, part of the national debt. Note: in the example above, the money was created to buy the nurse’s time. The nurse has earned the money – it is not a ‘loan’.
All government spending creates new money in exactly the way described above, in this case, by crediting the nurse’s account. This is how our monetary system works, regardless of the economic framework you believe in. Once you understand this, it becomes obvious that the government is in a unique position: it has no need to ‘earn’, or ‘borrow’ its own money to spend.
- The national debt IS the private sector’s savings.
- The national debt ISN’T a loan.
In short, the government ‘debt’ is simply a record of every pound freely spent into existence by the government minus every pound taxed out of existence. The untaxed money belongs to us, the private sector. It is the private sector’s (our) net saving!
Then why do we call it a ‘debt’?
By definition, all money is a promise to pay – an IOU - and a promise is a debt. In this regard, ‘debt’ describes all money – but in the context of government spending, the word is a source of much confusion. We understand debt as something that must be repaid at some future date – like a bank loan. But government “debt” is just a different way of saying, “our savings” and does not have to be repaid. Most private sector savings are held in the form of government bonds.
Government Bonds
Most government ‘debt’ (private sector savings) is held in the form of IOUs called bonds. Pension funds hold them. The bonds are an asset to the pension fund and pay interest. Bonds are like a savings account at the Bank of England. When bonds mature the Bank of England moves the money from the savings (bond) account and back into the pension funds’ current (reserve) account.
We understand debt as something that must be repaid at some future date – like a bank loan. Because the government creates its own money via the Bank of England, paying off the national debt simply means reducing a savings account balance (bond) and increasing a current account balance (reserve) using a keyboard.
To sum up - although the words ‘national debt’ sound worrying, it is a misleading term: governments create money to pay off an existing debt. This money is held in the economy as private savings. The government’s debt is our savings!
A note on foreign-denominated debt
While in the UK, the national debt is held in its own currency, in some countries, mainly in the global south, the debt is held in a foreign currency - usually US dollars. As these countries cannot create US $s, they must earn them by selling goods in exchange for $s. In such cases, the indebted countries must prioritise producing goods their creditors need (usually raw materials) above meeting the needs of their own people (food, energy etc.).