100-year Gilts

Britain is to offer 100-year gilts, meaning current Government borrowing will not be repaid until the next century, under a radical plan to be unveiled by George Osborne in next week’s budget, according to The Telegraph, 13th March 2012 

The Chancellor hopes that the 100-year gilts will help to “lock in” the benefits of Britain’s international “safe haven” status. The interest rates paid by the Government to borrow money have recently fallen to a record low and it is hoped the new gilts will mean “our great-grandchildren” can benefit from the low rates.

Mr Osborne is expected to launch a consultation alongside next week’s budget on the 100-year gilts. A plan for never-ending gilts is also likely to be considered.

Our government owes an astronomically large amount of money. Each year we have to pay taxes to cover the yearly interest on this national debt.

This interest costs each adult around £700 in taxes each year. That interest cost is money that can’t be spent on public services. In total, it’s close to the total amount that we spend on education.  It’s taxes that we have to pay without getting anything in return. And that figure is rising all the time.

National debt makes things harder for young people, children and those who aren’t even born yet. For a young person entering their first job, a lot of the taxes they pay will be paid in interest straight to investors who the government borrowed from in the past. Those who benefit from public spending now are effectively sending the bill on to future generations. Without fundamental banking reform, there’s no chance of this situation changing.

Our proposed reform allows the state to take back the exclusive power to create new money and to use any newly-created money to increase public spending, reduce taxes. The government may choose to use some of the newly-created money to pay down the national debt. This would not simply be printing money to pay off the debt (which would be considered to be an underhand way of defaulting or reneging on the debt), as the amount of money created will be restricted to be just enough to keep inflation low and steady.

At the same time, because our proposed reforms would reduce instability in the economy (think of the credit/debt-fuelled boom-bust cycle), there would be fewer and less severe recessions, which should lead to lower unemployment. This would mean that the government will not need to spend so much on unemployment benefits, freeing up more revenue for public services or to reduce the national debt.

How did the debt grow in the first place?

The national debt is the total amount of money that governments have borrowed over the last few centuries. However, unlike a debt like your mortgage, where your payments reduce the total amount of debt every year, the government typically does not pay off enough to reduce the total national debt. Instead they just borrow the money they need to pay the interest on the debt, and typically borrow a little bit more for additional spending. Since 2002, the government has simply borrowed the money it needed to pay the interest on the national debt. This is like paying off one credit card with another.

The national debt tends to shoot up during wars – such as World War I (from £650m in 1914 to £7.4bn
in 1919) and World War II (from £7.1bn in (1939) to £24.7bn (1949)).

It also shot up significantly in 2008 onwards, for two main reasons:
1. The government borrowed £179.8bn to bail out RBS, Lloyd’s and Northern Rock.
2. The recession triggered by the banking crisis led to redundancies and bankruptcies, along with less spending in the economy. This added up to mean that less tax was being paid, so the government’s revenue (income) fell.
3. At the same time, with more people redundant, there were more people claiming unemployment benefit, so government expenditures went up

Why the debt will only go up if we keep the current system

The debt is currently higher (in absolute terms) than it’s ever been before. While the government talks about reducing the deficit, the reality is that the total national debt will keep growing. It is almost impossible for the government to reduce the debt, meaning that even if they stop the debt growing, taxpayers will continue paying £120 million a day in interest on the national debt for eternity.

To understand why, look at what would have to happen to actually start paying down the debt:

1. Firstly, the government needs to start paying the annual interest on the national debt each year out of tax revenue, rather than simply borrowing more money to pay the interest. As the interest currently stands at £43bn this year this means that in order to stop the national debt growing, the government must raise another £43bn this year in taxes, which is equivalent to raising VAT (sales tax) to 30% (from its current level of 20%).

2. However, in the five years before the crisis, excluding the effect of the banking crisis, the government spent an average of 10.6% more than it took in in taxes every single year. So even after the £43bn interest on the national debt is paid, to run a ‘balanced budget’ right now, it would need to raise an extra £22bn in taxes, or cut public services by £22bn – equivalent to shutting down a fifth of the NHS.

3. So far in this example, the government has raised VAT by 30% and cut £22bn of public services and has still only managed to stop the debt growing any further. In order to actually reduce the debt, it needs to raise taxes even further, or reduce public spending even more.

If we decided that we want to pay off £30bn of national debt every single year, then we’d need to raise another extra £30bn in taxes: equivalent to doubling council tax. Even at this level, it would take 30 years to pay down the national debt.

In summary, simply to stop the debt growing, government would need to raise taxes so high that it would be thrown out of office at the next election.

As long as we keep the current banking system, the national debt will never go down and tax money that could have been used to fund public services will be used to pay interest on the national debt.

Read more here.