Britain, Economy

Gilts through the Looking Glass

Good news everybody. Our government is losing control of borrowing. I have been following gilt issuance auctions since the days of Northern Rock in all their profligate glory and where there was improvement there is now substantial deterioration.

Ninety percent of all issuance is being bought by banks as part of their legal requirement to meet their Tier 1 capital ratio, the UK also has the largest syndicated debt offerings in Europe. These marvellous little instruments enable the Debt Management Office to sell gilts far more expensively than by conventional auction. Here the government sell the bonds to a syndicate for a hefty fee who then sell these gilts on – and bearing in mind 90% are bought by banks – presumably to themselves.

Average cover to bid ratios are almost at their lowest ever levels. Only calendar year 2008 had a lower cover ratio than 2011 and that was when the world’s finances went to the lavatory en masse. If we take out the highly subscribed index-linked gilts the cover ratio is the lowest ever. And this cover is being provided by the banks and pension funds with statutory obligations to buy the damned things.

Gross debt interest will rise from £46 billion to £63 billion in the next General Election year. It was £43 billion last year. This doesn’t even include redemptions – settling up the gilts when they come to the end of their issuance – which was £39 billion last year, £49 billion this year and will be (as of 29th June 2011) £52 billion in 2012, £42 billion 2013, £70 billion 2014, £70 billion 2015 and another £55 billion in 2016.

The combined cost of our gilt redemption and interest payments per year is a minimum of £82 billion per annum (last year) rising to £133 billion per annum by 2015. This assumes that all economic indicators stay as predicted by the BofE, OBR and HM Treasury. Like many, I doubt the ability of these organisations to accurately predict a sunset let alone the economic conditions 5 years down the line.

What is startling about these figures is not just how bad they are but how close they are to matching what our borrowing requirement actually is. At least, in the meantime the cost of our borrowing is less than the UK government deficit, as we move further down the line the cost of our borrowings from interest and redemption actually substantially exceed the need for the borrowing. Net borrowing falls from a 2010 high of £155 billion through £146 billion, £122 billion, £101 billion, £70 billion and £46 billion in 2015. Again assuming assumptions accurately assume.

In the short-term we are borrowing almost wholly to fund our borrowing or to put it another way if we hadn’t have borrowed the money we wouldn’t need to be borrowing the money to pay off our borrowings. Which begs the question: was it worth borrowing this money in the first place?

If we assume yes; then we have what we have now.

If we assume no; what would have happened? No bank bailouts – whoops – there goes the debt and those holding it i.e. the silly banks with all the risk assessment skills of a lemming migration. Also, as the government wouldn’t be borrowing either the taxes would be higher or the money wouldn’t have been spent. Imagine that: a population actually paying for the policies of its government or not getting those policies in the first place. Either no massive public sector pensions (say)or a tax rate that took into account current and future liabilities.

In fact, the more one thinks about our debt burden, what it has and will cost and the nefarious effect on government policy of transferring liabilities to future generations, it makes one wonder why government borrowing is not more strictly controlled.

So this is my proposition. Restrict government borrowing by law. The day-to-day running of government should not be underwritten by debt except for the natural variations in the annual income. Some months see bumper tax revenues while others see lower returns; it would be churlish to prevent a government access to the very short-term market equivalent of the payday loan. It would also incur little coupon cost.

If the government then wants to borrow money it would need a two-thirds majority in both houses of a democratically elected parliament. So bye-bye House of Lords. If Peers want to take a party whip and sit in Parliament they can get elected. If not, don’t bother applying.

Non day-to-day running expenses can be borrowed such as capital expenditures.  Say we want to build a new airport, or hospital or road network or whatever. Let the government issue specific bonds for these items. And also permit contingency and or national emergency borrowing. I have no complaints at the near bankrupting of the UK when fighting WWII. I have massive complaints at the near bankrupting of the UK bailing out banks in a capitalist system where failure should be accepted. Or borrowing billions to pay a massive benefits bill. And then imagine if this had never happened: we could cut tax by 10% across the board. By literally doing nothing.

But that would involve our dear MPs giving up their legislative monopoly and access to easy money to both reward their core voters and bribe potential supporters. It is clear that the current parties will not limit the power of government to enrich itself at our expense.

But, like in Greece, if it gets so bad that government loses control…then you never know. Default on the debt and we lose the obligation to pay off our creditors and our ability to go to the gilt markets for anything other than short-term debt.

A government with limited access to money is a limited government. A government losing control of borrowing could be good news indeed.



One thought on “Gilts through the Looking Glass

  1. Interesting article – however unfortunately flawed. UK Debt to GBP ratio’s, the real measure of the burden of national debt, are still at historically low levels – see charts going back to 1900 on my blog: – apologies but they won’t paste into this comment box

    Similarly if you were to require parliamentary permission for current borrowing save as you put it pay day loans; how do you differentiate between the two of them? Sure you could limit short term borrowing to, I dunno, a week? a month? but that’s what happens anyway and the debt is rolled as per the maturities – any government could get around a current expenditure borrowing rule by simply rolling the loans at short tenors.

    Its clear that the borrowing is not the problem. It’s what the borrowed funds are being spent on that’s creating the issues.

    Posted by GUBUWorld | July 7, 2011, 11:14 pm

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