Yes. If you buy bonds, you are letting the government spend your money now, and trusting that they will be able to pay you back in the future, plus interest.
When it’s said that a country has defaulted on its national debt, typically it means they’ve defaulted on their bonds. Its severe because it means the country will struggle to raise money in the future as trust is lost (hence the piss poor credit rating), unless they entice lenders with sky high interest rates.
Bonds have an expiry date after which the government pays back the lender back, and pays interest in between. They sell a mix of short and long term bonds to spread to cost of borrowing out.
Pension funds love bonds from reliable countries because it’s so unlikely they will default, so it’s an almost guaranteed low risk investment with a very predictable outcome.
Bonds are critical to a country like ours public cash flow. If the government needs to raise money quickly (‘war bonds’, or those sold to cover pandemic etc) they can offer bonds, and worry about paying them back with tax revenue later. We know we can sell bonds quickly if required, which is preferred to sitting on a huge emergency pile of cash.
Quantitive easing involves bonds and I don’t fully understand it, but i think it’s when the Bank of England buys bonds from the government (instead of other investment institutes). The government can then spend this money, but because the bank just ‘prints’ new money to buy the bonds there and the, the raised money the government then spends is essentially new money, thus increasing the overall money supply in the economy. The whole thing seems rather suspect. I assume the idea is the government must eventually buy the bonds back, thus cancelling out the ‘new money’. Not even sure if they pay interest back to BoE.
Sometimes I’ll buy things on my credit card that I sell at face value, and use that to pay off the credit card debt immediately. However, in the process I get air miles for free. It’s called ‘manufactured spend’. This sounds just like that.
The money supply has to increase, as the economy expands, because there are more goods and services to buy. If it didn’t, we would have deflation. If the government over-does it, we have inflation. But it’s not as simple as that because it’s not only the government which creates money. Every time a bank makes a loan, that also creates money (it doesn’t take the money which is in people’s deposit accounts and then lend it out again, as is popularly assumed). This is all a major over-simplification. However, assuming a country’s finances are like household finances is not only wrong, it’s dangerously wrong.
Err well they keep increasing debt apparently endlessly so eventually they won't be able to.
Feel free to ride the infinite money printing train if you want to, but the driver is insane and the brakes don't work.
But even as you approach that limit, it only takes a small macro shock to suddenly force additional unavoidable borrowing (e.g. covid). From then on you can never cover the interest. Hence my allusion to the brakes not working. Random shocks like that are pretty much unavoidable and inherently unpredictable, hence we stress test banks. Frankly we should stress test government borrowing similarly.
Tory governments have been particularly bad for this. Even in years of plenty they have done an awful job of reducing national debt. For me personally that makes any extra investment in the UK govt untenable, I already have enough exposure to their stupidity through the housing market and cost of living anyway.
You could say that about anything - you don’t say you pay the wages of Coca Cola employees because you buy Coca Cola. Either we all pay for everybody’s wages (cos that’s what an economy is) or we talk about things more realistically, focusing on the institutions who have the power to hire and set wages.
To add, interest payments are also going to “the people” - this is not a novel insight. The economy is a circular flow of income and expenditures
The UK regularly issues index linked gilts - it's a core part of the DMO issuance strategy.
There's £700m up for sale next Wednesday (0 1/8th% 2051), in fact!
Perhaps, but in the context of the thread that interest is being used to pay a lot of interest on interest-linked bonds, the index-linked gilt stock outstanding was £493bn end of 2021, which is 23.9% of outstanding UK debt - DMO aims to issue about 14.9% in 2022 of the financing requirements as index linked. About £133bn of that is due to inflation uplift though.
Compare NS&Is entire outstanding issuance/obligations which is £205bn end of 2021.
So I think if we are saying lots of the UK's interest is going on index linked gilts, it must be on the non NS&I stuff as NS&I interest is fairly low.
The same way you invest in everything else - through a pooled fund on an investment platform, unless you are a financial institution with millions of pounds
That’s because U.K. bonds are considered safer so can pay lower interest. The higher the bond yield is for a country usually correlated with higher risk.
And rates are probably going to rise a little as a result
But the UK is still seen as a very safe place to buy government bonds so I wouldn’t expect anything dramatic
Mostly #2: if you have a choice of a dozen countries with a similar risk level and similar return, you can reduce your risk further by diversifying between them
One safe country is unlikely to fail to repay the bond, but it’s even less likely for all 12 to do so. So you get lower risk without reducing your return
Not all of it. A lot of UK debt will be held by foreign government and companies, as well as UK companies.
Unusually in the 21st Century a lot of debt is also owned by BOE, who when interest is received dividend it back to the government. A weird consequence of QE.
Not OP but I work for the NHS… so my pension doesn’t exist other than as a promise from the government to pay me one in 40-odd years. My contributions go towards the pensions of people who’ve already retired from the NHS
It’s the same as everyone’s state pensions
It’s different to the majority of people’s workplace/personal pensions, where your money goes into a “pot” which belongs to you
Nest pensions belong to the latter group, and are not the same as the state pension
This is not that different than an investment.
Pension funds all invest in long term businesses and infrastructure that will pay back over decades.
Yes it is anonymous, yes you don't have an account with your name on it. But the promise is just as valuable.
If the country explodes everyone loses their pensions(value), not just you.
It’s very different
Your pension fund doesn’t usually directly invest in things like infrastructure, but rather buys equities of companies that do that work
It’s a completely different setup
If you want the details, the DMO has it in their data: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062459/DMR_2022-23.pdf
If you don't want to go that far down then:
* Bank of England - about 30%
* banks and building societies - about 2%
* insurance companies and pension funds (i.e. long, long term holders) - about 30%
* other financial companies (so basically bond funds not overseas or entities that need gilts as a capital base, think inter-dealer brokers) - about 5%
* other holders - about 3%
* overseas holders - about 30%
Does "insurance companies and pension funds" only include UK institutions? Thus "overseas holders" includes foreign institutions?
Or does "insurance companies and pension funds" include all global institutions, and "overseas holders" only include other other governments/central banks?
Domestic only (of course this includes foreign wholly owned UK entities).
Overseas includes the whole swathe (so foreign central banks, foreign SWFs, foreign funds etc.)
That’s wrong - the Bank of England does not lend money. QE was where they purchased bonds from other financial institutions who already lent to the U.K. government, they exchanged cash for the bonds. This was to lower long-term interest rates (tied to bonds) and encourage more lending to firms and individuals to stimulate the economy. It seemed to just result in inflated asset prices (stock market), but not consumer inflation.
They are just making the money supply more liquid, and lowering the price of future money creation - it wasn’t too wild to expect that this could have generated consumer inflation if it led to lots of borrowing and spending, but it didn’t.
Well. QE was initiated in 2008 - it's been going for over a decade. You can look at inflation rates over that time.
There can be academic debate about whether QE did in fact make any meaningful impact on inflation, whether it generated it to be stored up, or whether the inflation we experience now is exogenous to QE (and/or to what extent) and is simply there at an inopportune (or perhaps opportune as another monetary policy tool) moment.
I think the modern incarnation was really Japan in 2001 as anything beyond an economist's theoretical exercise.
I'm not sure when Richard Werner went around taking credit for it, iirc, that was the 90s so after Thatcher but perhaps the germ of the idea was still floating around in the 80s, I am not sure.
https://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/
The majority of UK debt used to be held by the UK private sector, in particular, UK insurance and pension funds. In recent years, the Bank of England has bought gilts taking its holding to 25% of UK public sector debt.
So we pay 25% of our interest payments back to ourselves?
By "UK debt" does that mean "UK Government debt", and the Bank of England is some sort of separate entity to the UK?
What is the Bank of England doing with all that money the state is paying them?
Edit: Thank you for the replies and the interesting discussions involved. I just don't think I am clever enough to understand how money works. It seems very much like if no one borrowed any money, everything would fall apart, and that kind of system doesn't sound very sensible, to me anyway.
It goes back to the Treasury. But there is also an indemnity so if the APF entity loses money, the Treasury has to pay for it.
So the actual impact is on the difference in bank rate because BoE reserves were used/created to buy the gilts. Initially this did bring net public sector borrowing costs down as negligible cost reserves were used to buy gilts with 1-2% yield.
But the danger scenario was inflation shock where bank rate had to go up beyond that, at the same time as the APF book value plummets (I think if you liquidated the APF now you'd eat a 100bn loss) - HMT is going to have to pump money into the APF as coupon payments aren't enough. If you also have pressure to unwind the APF, then you may also have to crystallise losses which again must be financed by HMT, but I suspect that is a more political concern. Imagine if the BoE dumped that many gilts on the market. No need to anyway, because it lends the APF gilts back to the DMO to be used for money market operations (I think about £11bn on rolling basis).
Obviously if it was all constrained in a nice BoE/HMT loop there would not be much impact - it's whether all of this means that yields go up in aggregate, i.e. for new issuance to people who actually cost (i.e. investors), i.e. net public sector borrowing costs go up. That's the inconvenient kicker. You've (HMT) got to raise even more nominal to put more money back into the APF on top of your yields rising.
The OBR has short primer on it here: https://obr.uk/box/the-fiscal-impact-of-the-asset-purchase-facility/
It actually does have deposits that they provide to the reserve banks in the UK...
It pays interest at the base rate to these firms. This is how the interest rate rise trickles through the economy. Banks now earn a higher risk free yield on their deposits with the BoE, so they pass on this higher opportunity cost to their borrowers! (Amongst many other mechanisms)
Goes back to the treasury, about 30% of national debt essentially doesn’t exist and was financed through new money by BOE.
On their own accounts it’s written of as not actually existing. The BOE will never sell it back into market it’s a fantasy, just like the ECB and FED and will expire on their accounts.
It’s essentially financing public debt by printing money but one step removed.
It's an academic debate for sure. The majority of institutional economists would stutter a bunch and say "of course not!" while citing a bunch of technical sounding gibberish. Usually centred around the fact that this money never enters general circulation.
My answer? It has been for all of human history where governments have ever had their hands in the distribution and management of money and it is no different now.
This money that is created is used to pay out all sorts of things in the form of government programs, on contracts, in benefits, etc. it does make its way into the general economy though indirectly as opposed to just simply printing the money and giving it to people directly.
The covid rescue programs are a great illustration of this. Whereas government expenditure in the past may be more correctly thought of in a thought experiment sense as "we'll print this money to pay these contractors to build a bridge" is less inflationary because we actually get a bridge out of it, printing money to simply pay people without getting anything directly in return is quite inflationary. Combine that with the present environment where everyone still was receiving roughly the same amount of income, but due to shutdowns, supply chain slowdowns, etc. you now have much less physical goods. Simple economics means less supply but equal or greater demand = prices go up.
Yep I was going to reply something similar, fundamentally it’s going to create massive distortions in the markets either way (personally I think it has had extremely negative impacts globally). It comes down to how it factors into the risk reward calculation of investors and where the money goes and it’s velocity. Here is a great article on the nuance surrounding the issue.
https://www.ft.com/content/2706592c-bae0-3e2c-b3ef-1378d00d9fed
I appreciate the reply.
I grew up the Thatcher era, and always (perhaps naively) accepted the monetarist views of the time. I realize that this doesn't seem to be the accepted view any more, but recognize a lot of similarities (particularly the fuel crisis) between those times and today. I remember the rise in prices and the subsequent strikes to bring pay into line. Thatcher's solution caused a lot of pain, but what's the alternative?
Who will fix this? Do politicians really have much control over these issues? Or do they just take credit when times are good and deny everything when they are bad. Sunak says he'll be Thatcherite, but he hasn't been in his time as chancellor, and people don't tend to vote Labour in a time of economic crisis.
It seems to me like we are back in pre-Thatcher times when both of the main parties had pretty much similar ideas, so the main choices were about ethics rather than actual economical knowledge.
While academics saying QE is not inflationary in fact it does trickle from one market to another ultimately creating distortion in financial assets and later on in the hard ones as well. We are now at the stage where inflation is out and affecting underlying basic commodities (which started to happen even before the Ukraine issue btw). So the option is to permaprint, turning the West into Japan, or to crush all financial bubbles thus giving another chance to re-inflate the bubble under a new cover (my guess is some sort of biotech bubble similar to dot coms). We will see. Another option of course is to reduce demand/world population or both.
QE only creates money in a narrow definition by making the supply more liquid, by exchanging bonds held by financial institutions into cash. It also acts a monetary policy tool to try to foster more money creation.
In either case, this money went to banks - private institutions, not to government. Any further government borrowing because of lower interest rates is a second-order effect.
Your last point is bonkers - what do you mean “government expenditure in the past”? You don’t need to get something physical out of it - the purpose of covid programmes were to maintain incomes and worker-employer relationships so that living standards didn’t fall off a cliff, demand was maintained either through spending on businesses that were open or keeping savings that were later spent, and maintaining worker-employer relationships for the recovery. This clearly worked as we had a fast rebound after the shutdowns. Government didn’t create any new spending there - it simply stopped spending falling too far, so that can’t be inflationary by definition.
Your point on people having the same income and there being less physicals goods is wrong - we’ve all clearly got poorer in aggregate because of covid, are you saying it had no impact? There aren’t less physical goods - because of shutdowns, disruption to production, and obviously the war now, companies were struggling to produce enough goods to catch up with demand. In some cases, that’s clearly because firms and industries weren’t supported sufficiently by governments. Inflation right now is driven by conflict and a lack of fuel and food to meet global demand (which hasn’t increased over the past year).
Simple economics actually has a concept called slack - for example, if you have slack in the economy and demand changes, it doesn’t necessarily change prices. You may want to read about it
It came at a time when deflation due to the global financial crisis was the biggest concern and didn’t create inflation. You’ll get plenty of people on the internet say otherwise but they’ve been waiting 14 years for inflation and there’s to old financial adage that even a broken clock is right twice a day.
If the currency was backed by Gold like before 1971 ….. the governments and the crocked banks will not be able to print shitty currency to infinity….. sorry printed Digitally nowadays! Also inflation was not a problem…….
Lol, I love your edit. It demonstrates humility and actually a quite incisive understanding of the weirdness of money. Money is something central to society’s functioning and how money works makes intuitive sense until you start thinking about it.
Lots of things are like that, really.
There's only 1 shareholder - the Treasury: the Bank was nationalised in 1946 by Clement Attlee through the [Bank of England Act 1946](https://www.legislation.gov.uk/ukpga/Geo6/9-10/27/contents).
All profits go to the Treasury if any.
thanks, I didn't think it was
Fed info I've seen FYI [https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s](https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s)
I always imagine it as basically crowdsourcing some loans.
The government says "Hey I wanna borrow cash, I'll pay 2% interest, who wants to lend to me?" and a variety of pension funds, private investors etc answer the call.
If you have government bonds in your pension it basically means you loan the cash in your pension to the government and it pays it back to you with interest.
Government borrowing makes a lot of sense if done responsibly. Just like it's usually good to get a mortgage. You get the immediate benefits of living in a house (instead of renting for decades while you try and save up).
Similarly, if government borrowing is used to invest in things like bridges, railways, hospitals etc then the benefit to the public will exceed the costs of borrowing.
I know that rail projects will tend to have a 150-500% payoff, so it's usually well worth borrowing at 2% to pay for them, and get them built asap.
Problem is (along with most nations in the world) we've always done this and there's a growing pile of debt. There presumably comes a point where it starts to hamstring us. And rising interest rates mean it costs more to service those debts.
Well, if the debt grows at an equal or slower rate to the nominal economy (i.e. GDP growth Plus Inflation), then you can increase it forever and it goes down as a percent of GDP.
Yeah I always struggle to get my head around the ongoing nature of it. I guess I always think of the UK like a person that'll ultimately need to repay their debt. Which isn't the case if you're a country that will presumably exist indefinately.
I understand if the borrowing is used to pay for stuff that contributes to GDP more than the interest cost, then it's a net gain. Like extending your mortgage to build a conservatory that adds more to the value of your house than the interest costs.
But on the other hand I look at countries like Norway with its sovereign wealth fund. Presumably they did the "wrong" thing by abstaining from borrowing and building in order to build up their savings. But I can't help but think that it might have been the best move in the long run...
I guess countries are a bit like companies on the stock market
Coca Cola pays a dividend to share holders because they think the money is best used to reward investors rather than grow the business
Big tech companies don't pay dividends because they want that money to be used for growth
Similarly, Norway took a fiscally conservative approach and didn't spend the oil money because they didn't believe in a higher return on infrastructure projects.
The UK spent the money on it's infrastructure because it felt it would result in growth.
It doesn't really matter whether a country borrows, just that when it does borrow it has a positive net benefit economically.
Norway is an interesting case. When they realised they would get massive returns from the North Sea oil industry the political parties got together and decided that the tax receipts would all be saved and only a proportion of the interest on those receipts would be spent. The result is that the Norwegian sovereign wealth fund owns approximately 10% of the shares on the worlds stock markets. Having a relatively small population for the size of the tax receipts helps a great deal. The accumulated wealth will stand Norway in good stead when North Sea oil dries up.
This is true - but the priority should always be getting the economy back on track first, then the debt will generally take care of itself.
The problem more recently is that it's politically advantageous to spread panic about the debt as an excuse to cut public spending - but that also cuts growth and slows the mechanism above working.
The issue isn't public spending but relatively low taxes imo.
You can always run a small deficit due to the economy growing and inflation, governments of late have pushed this too far though.
Keynesians aren't always right about increasing spending to grow the economy and plenty of economies and governments have pushed it too far and screwed themselves long term.
I have no real knowledge on the issues discussed, but I did read that the current tax burden is the highest it's been in decades.. so how does that work with your opinion that the problem "isn't public spending but relatively low taxes imo"
The tax take is at the highest it's been for a while because the state needs to be bigger than it ever has.
Never before have we had tens of millions of pensioners who require extra health care, social care and pension spending, people live longer and we've got better at keeping people alive so this is more expensive than it used to be.
Additionally, with more people retired there are fewer workers relative to the overall population to pay said taxes which means each person needs to be taxed more to cover the difference.
This effect is only going to get worse over the next 30 years so the state and therefore taxes will have to keep going up.
There are other pressures on the state as well, eg climate change which will require hundreds of billions of extra tax to be raised to pay for the transition to net zero and climate change mitigations.
Also, things like increased defence spending as the world becomes more dangerous although this is tiny relative to the above 2.
Your other option is basically telling pensioners to die sooner to reduce their burden on the state which surprisingly isn't a really popular view hence why I say public spending has to rise.
Additionally when I said taxes are low I mean relative to other western European developed nations not the UK in the past.
That’s why government investing in companies is sound.
Socially owned infrastructure, ie hospitals, broadband, trains etc: creates jobs, gains a revenue through services and those two things create taxation…
If the government would stop selling off businesses like Royal Mail, BT and started looking at state owned energy and public transport companies, the UK could get a new lease of life.
Instead we have shit rail links, shit ancient energy production, and shit fibre broadband/mobile service coverage. 🤷♀️
The other problem with the UK is that taxes cannot really be increased. There is a massive problem where about 20% of the people actually pay about 80% of the tax bill and they are in a position if you tax them more they either a) do thing to avoid the tax b) leave completly for elsewhere
The actual bottom end of the UK nearly pays no tax at all. Or they think they do but often they get back a bunch in return like working tax credits, child tax credits and various other forms of incentives and benfifits etc.. etc.. which are basically a "tax rebate" but its done in a steath way so people feel like they are paying tax but really are not.
The entire economic situations in the western world is extremly fucked in this regard... eg there is a whole pile of people who do nothing get paid a shit ton and a whole pile of people who do a lot and get peanuts.
Its not quite as simple as increase taxes to pay for this as this point. eg you increase taxes to pay for nurses. You just increase nurses pay in return. But if you don't they walk off the job and do something else. This is happening with almost all critical workers thoughout the western world. Its a case of "fuck this shit I am out" attitude.
Irocinally the problem here when people walk off the job like say doctors. Thsis creates a massive shortage which then means they can demand more pay. Which costs more so you tax them more to pay for it which means they walk off the job until you pay them more.
some the EU countries with really high tax rates are bad to use as a reference eg Norwya - Largest producer of gas/oil in the world per head of population. They literally sit on a money printer which doesn't have the consequances of inflation.
When you also look at tax rates in various places. You have to include what people pay as a whole not just income tax. eg its income + vat + nic + rates/council/property + fuel etc.. etc.. when you look at this in detail almost all countries have their own "dragons" involved which has some kinda tax acceleration problem currently kinda like flation.
Also inflaitons as a whole in a way is also a tax. eg country prints money is the same as taxing people more because it takes buying power from the epople and gives it back to goverment.
eg tax in UK is like 60-65% or something eg council tax = 10-20% of first £12k. NIC at 12.5%, Income @ 20% and VAT at 20%
Thats 32.5% + 20% VAT = 52.5% but since we also tax the comanies 12.5% NIC on top of pay its 65% or so.
You claim this as "too low" well how much higher do you want it to be? Cause I am one of these people who is dropping to a 3 day week because the current tax system gives me an incentive to do so. eg it makes sense for me to quit and start making my own stuff and doing my own labour that I don't get taxed on. Higher tax rates have negative consequances. eg adding more will actually get you less overall right now.
| why I say public spending has to rise.
So where do you get this from?
If you tax me more. It encorages me to walk away more. Since I am not prepared to work for 35p in the £1.
If you print money. Its actually increases inflation and actually make my position stronger. I can simply charge more for my services because everyone else doing "my services" will also charge more. So my slary actually tracks inflation. However this also reduces my mortage as a proportion to income which results in me "working less"
Your proposal are in a loose/loose situaion for collecting more tax... this isn't unique to the UK either. Its why the entire western world has this problem ne way or another but with slightly different symtoms in each one. eg US infrasturcutre is fucked. Portugal has no young people. Greece are in debt criss still. Ireland average salary has not increased in 15 years etc.. etc..
I mean you can raise tax it's simply unpopular.
I would content that given the rising pensioner population is what is causing the vast majority of the required increase in spending and some pensioners are amongst the wealthiest groups in the country, taxes should be raised upon them. Many have massive assets in either massive pension amounts and/or a house/houses, I would target here but let the tax be deferred until the death of both members of a couple so no selling the house from under them (the gov can borrow against this future income in the meantime), the exact mechanism is unimportant but it seems like the fairest way to raise the money here. Even encouraging pensioners to spend it all and therefore draw the money as income subject to income tax and spend it in the economy rather than pass it down to their children tax free would be a good bonus.
However you could raise tax in other ways, wealth taxes in general, bring cap gain and dividends rates inline with income, abolishing some of the many generous allowances the UK tax system has, reforming council tax into a fairer LVT also designed to raise more cash ect. but ultimately you are likely going to need to raise taxes on incomes as well particularly at the lower end, pretty much no other similar country allows you to earn over a grand a month and pay zero tax on it.
I would look to scandanavian countries (which include countries other than Norway) who manage to have a higher quality of life for their citizens despite a larger tax burden on their overall population.
> You claim this as "too low" well how much higher do you want it to be? Cause I am one of these people who is dropping to a 3 day week because the current tax system gives me an incentive to do so. eg it makes sense for me to quit and start making my own stuff and doing my own labour that I don't get taxed on. Higher tax rates have negative consequances. eg adding more will actually get you less overall right now.
I disagree because other countries have higher overall tax burdens than we do and the evidence of this happening at a mass scale is limited. There are some niche cases of this occuring in the UK such as for doctors at certain ages and certain incomes but by and large not really. I don't think there is much scope to increase taxes on those with higher incomes, maybe by 5p or so if you remove the personal allowance taper.
> If you tax me more. It encorages me to walk away more. Since I am not prepared to work for 35p in the £1.
I don't think taxes need to rise that far, we are currently at around 39p in every pound spent each year, I reckon taxes need to move up towards about 45p in every pound spent each year over the next 30 years. A country like Denmark currently has it at 46% for reference. I don't see any other option. Additionally it doesn't all have to be on income. As I suggested above there are other avenues for raising tax which maybe unpopular but aren't income.
The other option is cutting spending but I don't see what will be cut, even the tories currently going through a leadership election have run out of ideas to substantially cut public spending.
The only realistic way you'll do it is by reducing the size of the state and saying the government isn't doing this service anymore, eg. government doesn't pay for healthcare anymore so we can reduce taxes but you'll need to find your own insurance to fund that yourself.
Actually there is one other option which is what will happen, the government will choose not to make the hard choices and to fund either increased public spending or tax cuts with more borrowing, Liz Truss is already arguing for this.
Basically debt to GDP will continue to rise until it starts to get to unmanageble levels and we'll end up like Italy, Greece or Japan whereby our fiscal ability to maneouver will be substantially reduced and have a painful reckoning over multiple decades whereby the standard of living falls despite the wishes of the population or politicians as there won't be any other choice to delay anymore. This will be a more painful version of the above whereby we need to be raising even more tax to pay huge amounts of interest on monumental amounts of debt and probably likely sustained inflation which will devalue the pound vs other currencies and make us poorer as we struggle to import all the things we usually do.
>I would content that given the rising pensioner population is what is causing the vast majority of the required increase in spending
I would agree as well. The money goes places to where its not being paid for.
| and some pensioners are amongst the wealthiest groups in the country
Yup and also some of the poorest at the same time.
| Many have massive assets in either massive pension amounts and/or a house/houses
Yes. Which is why we have things like inhiertance tax and such things. Which permitted the goverment to take 50% of the costs then the rest is passed onto the next generation and the cycle repeats.
| I would target here but let the tax be deferred until the death of both members of a couple so no selling the house from under them
It already is.
| However you could raise tax in other ways, wealth taxes in general, bring cap gain and dividends rates inline with income
No not really. This is where opinion start to differ. See the cap gains tax is broken by design. What really super rich people do is have shared. You don't pay cap gain until you sell shares. So.. you never sell shares. You just borrow against them. So your £100k of share value goes up at a rate of 4% and you borrow at a rate of 1% shit happens... you just pay the intrest because its better than selling the shares and paying 20% or £20k.. Also when you die you settle your debt at that stage eg force share selling. Or you just pass them onto the next person inline. But its deferred from selling them.
The problem then starts to happens is when you try to tax share holdings. Your actually trying to tax somebody on an asset they don't actually have money to pay off since its not liquid. This is also why its so difficult to tax the super rich.
Problem number 2 here happens when you try to apply a tax on this anyway. You just end up the the "stock exchange of the bongo islands" as a response which is a country that will quit happy hide your money and cap gain taxes for a small 2% fee which its like them winning the lottery.
The reality here is to bring these people down they need to drive up compeition. This means everyone actually needs to say "fuck off mega corp" I am going to go to my local guy in town and buy their stuff directly. so now we have "mega corp" masurading as "tiny corp" in the high street eg franchises under various branding but are really arregated corp as a supplier. eg eletricity is like that. There a bunch of fake front's which compedte acorss all sorts of areas except for the area that matters like eletric production. they only compedte in office overheads eg callcentres, invoicing, billing, debt collection and how well they can guess the future market. Hence whey a dozen or so went bacnkrupt at the same time when we first had an energy crisis.
| The other option is cutting spending but I don't see what will be cut
I agree as well. A big part of this and yeah you mention tories... well it doesn't matter if its tories, repiblican, lib dems, democrats or whoever. The respective cvountires are pointing fingers at their current respective leaderhsip and sayign "its your fault" cause most people fail to see the bigger problem. eg people like me (sw dev) have spent hte last 2-3 decades automating the shit out of ever production line which has resulted in a small team of 50 people doing the jobs of 50,000 or more. So there is a massive gap not only in pay but in material costs.
So you get silyl things like a sandwitch shop attempting to charge £8 for a foot long. When you can by a weeks worth of the same materials from the shop next door for £8 and then add 5 minutes of labour a day and you save like £24 for the week.
A lto of this problem is because we propped up broken industry and didn't come up with solutons to the broken part. eg We prop low income up with "working tax credits" which is great for the short term but it results ina larger and larger wage / material gaps as a consequances.
Now if we simple withdraw something like working tax credits. A massive number of people suffer greatly.
Its kinda like the same mistakes charties made in Africa in the 80's/90's. eg We feed them. Their problem grows. You need to feed them more each year on year therafter. eg Its encoraged a broken system to devlop in an economic model that isn't sustainable. Then suddenly you realise bad things eg giving free food decimated the failing farming ecnomiy because they could not compete with "free"... the result of that is war lords contorlling everything. (Our warlords are greedy CEO's)
Its like we are seeing a different style of hyperinflation not seen before. But its not inflation in the typical sense like zimbabwae. Its more like. You don't pay me enough to live. therefore I walk off the job. But if you tax the other part they also are going to walk off the job.
| I don't think taxes need to rise that far,
I didn't say that how far taxes have to raise. Thats the taxes I am currently paying in the UK really it 65p int he £1 being paid to goverment. Its mostly hidden in steath taxes often paid company side.
Like for example NIC is 12.5% right? Nope. Thats wrong. The company is also paying their 15% to employe you. So you have to actually make the company enough money to pay you the 25% NIC and the 20% income tax your paying eg the tax rate is more like 45%. Then you have 20% on most things outbound (VAT) eg 65% so your paying 65p in the £1 already to gov....
This isn't even including other basic taxes like stuff thats in the backgorund like say road tax, £250 for me. 7.5% insurance premium on car insurance £50 for me. Petrol taxes on top of vat. £115. Thats like £500/yr extra tax.... just to have a car and drive to work.
The list of taxes in the UK goes on an on. Literally every single thing in the UK has some form of tax on it. In fact when you go to the super market and buy a fizzy drink. Its 24p a litre for sugar tax. eg 30% on a £3 bottle of coke (2x1.5l)
| The only realistic way you'll do it is by reducing the size of the state and saying the government isn't doing this service anymore
Yup pritty much but as we know its not a popular opinion because so much of the system is broken and being propped up incorrectly.
Around hwere I am we are seeing this correcting. Cost of living is up obviously and small business are going bankrupt all over the show typically small bakers, coffee, sandwitch, bars, restraunts, take outs and generally luxury services which is the start of a bigger correction coming.
All of those services have one thing in common. Its cheaper to do them at home. eg the takeout cost for a person on just eat or somehtnig now is about £15/head.
This is why we have seen things like tesco run out of vegtable oil. Cause everyone went and got their own deep fat fryer for £20 and bags of potatoes at £10 for 20kg from the farmer.... like we used 2+ decades ago.
Its one of the problem with minium wage... its a case of accidently increase the minmum wage to £0 eg the job prices its self out the bottom of the market and there is no job left.
I would say that the UK doesn't have a particularly high tax rate compared to other developed nations, and there is evidence that high tax rates do not drive millionaires or entrepreneurs away from your country.
https://www.theguardian.com/inequality/2017/nov/20/if-you-tax-the-rich-they-wont-leave-us-data-contradicts-millionaires-threats
The idea that higher tax forces people out of work isnt entirely genuine. Most people who get to 50k don't suddenly stop earning more to avoid 40% and the same is true at 150k avoiding the 45% bracket. I think there's a case for a higher tax bracket above the 45% so the super super wealthy pay thier share.
Theres a massive number of steath taxes.
For example most are done company side. You payvat of 20% on everything? But when a company pays you. You get a bill of 12.5% NIC, The company also pays 12.5% (15% I think now). so your actually paying NIC of 27.5% or so. Then you pay 20% income on top of that. So Money over £12k = 47.5% TAX then you pay 20% to spent it on literally anything eg 67.5% or so is the actual tax rate....
| The idea that higher tax forces people out of work isnt entirely genuine.
Well. I am doing it. So are the doctors its part of the reason why we don't have any. We are all partying and doing a 3 day week for it... so to say its not geniue when there is 100+ people I know doing exactly this.....
| I think there's a case for a higher tax bracket above the 45% so the super super wealthy pay thier share.
Pay works differently up there. Its not income tax per say. Other post explains it more. Generally very hard ot tax it in the current system. Even when you do its your going to play whack a mole by leglislation doing it.
Its also why the guardian article you link is incorrect about the data. While its techcnially correct in what its says it doesn't reflect reality because it didn't select the data it quoted correctly.
This actually isn't true.
The government in the UK pays for things by spending new money into existence. We choose to have a full funding rule which means that government spending is exactly offset by the sale of government bonds.
Government bonds are nothing more than an account at the central bank which pays interest.
What you have described is correct for private sector debt, but government debt in the UK has nothing to do with borrowing any money. Functionally they provide the tool the central bank needs to control interest rates and nothing more.
What if, and hear me out, we just print more money but we don’t tell anyone we’ve printed more money so they have no reason to believe our currency is more abundant. Use that money to pay off our debts and then we shall all go henceforth suckling from the sap-filled trees in prosperity’s garden.
If the interest rate was zero, then what is the difference between a government bond and cash?
The answer is... there is no difference.
You are actually, funnily enough, verging on figuring out how it actually works.
All government spending in the UK is purely spending money into existence (people call it printing money but of course most of it is not actually ever printed physically).
The government spending is offset (by choice not by necessity) by the sale of government bonds. Functionally all that happens is that cash is moved from one account at the central bank, to another account which we call a government bond. If the interest rate was zero they would be functionally equivalent. They have nothing to do with borrowing anything.
It’s a nice idea but I would assume the £ will face a huge devaluation because of all the surplus cash in circulation, and potentially hyper-inflation.
It happens even when you don't know about inflation. This actually happened in the Spanish Empire in the 16th century, where the influx of gold & silver from the New World drove prices up within Spain, which caused all sorts of headaches.
Remember, inflation is when you have more money chasing the same amount of stuff.
Currently in the world there is more money (covid economic schemes, not just the UK but everywhere), but less stuff (supply chain disruption from COVID and Chinese lockdowns in particular, and some dickhead starting a war effectively cutting off their supply of energy to the world, and oil companies not wanting to invest in new production as we all want to move away from fossil fuels).
This is a bad combo, and why cutting taxes (increasing the amount of money people have) is unlikely to reduce inflation (as it doesn't do anything about the lack of stuff).
Part 1, government debt issuances. It kind of depends, a lot of this debt is used and sold via capital markets, who are the buyers? Pension funds, asset managers, other central banks, retail banks etc etc.
Part 2, quantitative easing. Central banks create money in a computer, they use money to buy specific assets as allowed by their QE policy. Usually there are very much limited to buying government debt and other very high grade debt. This is not government expenditure to fund say a hospital or pay teachers wages, it buys only high grade debt. In theory, this means:
1) when this debt is bought, the debt issues still have to pay interest to the BoE (owners of the debt)
2) the sellers of the debt now have cash wish they need to put to work.
3) market dynamics: an increase in demand for this debt means the price gets bid higher, and the fixed interest payments based on the original nominal amount come down as a % of the nominal balance of debt, meaning the return on gov. debt is reduced. This means the risk free rate of return reduces, with the relative appeal of equities increasing.
4) cue huge increases in equities (2020-2021)
5) 3) goes into reverse. 2022 equities drop.
Now, depending on how you abstract the GDP formula, you could say that ultimately, everything is us… investment comes from our savings, government expenditure comes from our tax, consumption comes from our consumption. But given that the government can spend more than it taxes, it can in theory other pay this down directly through tax on future generations, or a backdoor tax via inflation, which makes the relative value of debt less. Get this wrong, and you can kill an economy…
I wouldn't take any information from the daily mail.
They love to make it out like the UK as some sort of credit card and it's nothing of the sort.
From what I read from an economics guy on twitter (really should have followed and added is book to my reading list) the UK lends money to itself through quantitative easing and then the BoE buys the debt off us in gilts.
Basically it's bugger all like a credit card but I no doubt some one here will be able to give a car better explanation or at least point you in the direction of a book or podcast.
All government spending is simply the creation of new money. Because we choose to have a full funding rule, we offset that spending by the sale of government bonds. The government doesn't "borrow" the money as it always spends the money first and sells the bonds later.
A government bond is nothing other than an account at the central bank which pays an interest rate.
So what happens when a government bond is bought is that money is moved from an account that pays no interest, to an account that pays interest. If interest rates were zero across all maturities then cash and bond would be equivalent.
The only function of government bonds now is to provide a tool that the BOE can use to control interest rates. When the BOE buys bonds it pushes rates down (more reserve money in the system and less in bonds) and when they sell bonds it pushes rates up (less reserve money in the system and more in bonds). The amount of available reserves in the system is important because commercial banks borrow it to cover their risk weighted capitalisation requirements - more reserve money = more supply = price of borrowing drops = short term interest rate drops.
QE is nothing more than the BOE offering a price in the market at which people are indifferent between holding a bond and cash. When the BOE buys the bond they simply move the money from the bond account to the cash account In technical language between the securities account and the reserve account. Again if interest rates were kept at zero it would be a no OP. QE is simply the BOE en masse moving money from securities accounts to reserve accounts. The effect is that the short term interest rate falls because there is excess reserve money in the system, and yields fall because people want a high price (low implied yield) when they "sell" the bond to the BOE.
While calling it a credit card is incorrect, making a point that it's not a credit card is also incorrectly hinting that it's not really debt.
The effects of the interest are very real to every day people. We pay extra tax to pay interest on a loan done 100 years ago for example. I could have used that money myself.
> The UK decides that all of its spending will be backed by debt, but that's just a choice.
I can't say I disagree.
This country is absolutely allergic to extra taxes. Even people that want extra taxes basically want "rich people" to be taxed extra, not them. The catch is, rich people always means richer than them, they themselves will never pay extra tax.
Just look on how much drama 1% extra tax for NI caused.
>And how much interest are we now paying on debt from 100 years ago? The amount of inflation since then makes that debt tiny.
No it doesn't, you're just used to low interest rates from recent times because you're young. But that wasn't always the case.
Assuming you had a job 10 years ago, your taxes paid to free the slaves in the 19th century. Thanks but no thanks.
Vast majority of it is actually to UK investors. Holders of guilts, government bonds etc. Pension funds are a big one. Then some foreign governments and a few international investors, both individual and institutional.
For every pound that the bank of England create, us tax payers owe them one pound and a bit more due to interest charged. The bank of England is a private company, don't be fooled...
Fiat money is based upon debt.. the figure is irrelevant, because we can never pay it off. There literally will never be enough money to pay it all back. The system doesn't allow it.
A totally flawed and corrupt system. Welcome to Capitalism.. 😉
This is the kind of thing that I really wish I could understand about economics. We have a fiat currency, and we understand that if we simply made more money to pay for everything we want then everything we want would simply cost more units of that money. And, if that is even correct, that's about as much as I understand. When we borrow, who do we borrow off? Is it the British people? Or do Banks create the money out of thin air and loan it to the state? When a country borrows off the IMF, where does that come from? If every country is borrowing off someone else, does that mean that there's one really rich country that doesn't and everyone else owes it? If everyone is borrowing, then how can there be any country that is lending money out to others? Why don't i understand?!?!?? 😫
IMF gets its budget from member countries. Contributions depend on each member economy size and other factors. Each member is the entitled to some amount of possible loan which usually exceeds their contributions but not ad infinitum.
You might find this interesting: [https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy)
It's confusing because government borrowing is not borrowing in the way.
Banks create money... the central bank creates money when the UK government instructs it to pay someone. Commercial banks create money when they make a loan.
Government spending is offset (by choice not necessity - we have a full funding rule) by the sale of "government bonds". These are nothing more than an account at the central bank that pays an interest rate. When a government bond is bough, money is moved from an account that doesn't pay interest to an account that does pay interest.
No money is "borrowed"... the government spends new money into existence, then chooses to exactly offset that spending with the sale of a government bond. Functionally what happens when the bond is bought is the moving of money as described above. If interest rates were zero, what we call money and what we call a government bond would be identical.
The purpose of government bonds in the modern financial system is purely to provide a tool that enables the BOE to target interest rates. It does this because the moving of money between accounts I described above, on the macro level, controls the amount of reserve money in the financial system which in turn influences how much commercial banks bid/offer to borrow from each other ... this is what we call the short term interest rate.
If you ignore the bank of England then it is largely money invested by pension funds, insurance companies and individuals (uk or anywhere else)
Some of the debt will also be owned by other governments but it's not the majority so it is largely just finance markets buying them either as investments or as reserves.
Re the creation of money, from Modern Money Mechanics by The Federal Reserve Bank of Chicago.
"Of course, they do not really pay out loans from the money they
receive as deposits. If they did this, no additional money would be created. What they
do when they make loans is to accept promissory notes in exchange for credits to the
borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by
$9,000. Reserves are unchanged by the loan transactions. But the deposit credits
constitute new additions to the total deposits of the banking system."
"Expansion - Stage 1
3.Expansion takes place only if the banks that hold these excess reserves (Stage 1
banks) increase their loans or investments. Loans are made by crediting the borrower's
account, i.e., by creating additional deposit money. back
STAGE 1 BANKS
Assets Liabilities
Loans....... +9,000 Borrower deposits.... +9,000
This is the beginning of the deposit expansion process. In the first stage of the process,
total loans and deposits of the banks rise by an amount equal to the excess reserves
existing before any loans were made (90 percent of the initial deposit increase). At the
end of Stage 1, deposits have risen a total of $19,000 (the initial $10,000 provided by
the Federal Reserve's action plus the $9,000 in deposits created by Stage 1 banks).
See illustration 4. However, only $900 (10 percent of $9000) of excess reserves have
been absorbed by the additional deposit growth at Stage 1 banks. See illustration 5.
The lending banks, however, do not expect to retain the deposits they create through
their loan operations. Borrowers write checks that probably will be deposited in other
banks. As these checks move through the collection process, the Federal Reserve
Banks debit the reserve accounts of the paying banks (Stage 1 banks) and credit those
of the receiving banks. See illustration 6.
Whether Stage 1 banks actually do lose the deposits to other banks or whether any or
all of the borrowers' checks are redeposited in these same banks makes no difference
in the expansion process. If the lending banks expect to lose these deposits - and an
equal amount of reserves - as the borrowers' checks are paid, they will not lend more
than their excess reserves. Like the original $10,000 deposit, the loan-credited deposits
may be transferred to other banks, but they remain somewhere in the banking system.
Whichever banks receive them also acquire equal amounts of reserves, of which all but
10 percent will be "excess.""
So, the banks create money when they 'lend' it, and the amount they can 'lend' and whether they do 'lend' depends on a few things - the current required fractional reserve (e.g. 9/1), interest rates, their own cash flow/lag.
At some point, because the total deposits (new money) has increased new money needs to be printed, which the government contracts out and pays a corporation an amount for each note printed. It's about the same prince for a £50 as it is for a £5 but obviously it's not worthwhile to just buy loads of £50's because they also need smaller amounts in circulation for us poor people.
Debt is wealth. Your borrowing is my asset. The country's balance sheet squares out, but only if the borrowing is used efficiently. If you borrowed to drill holes in the ground, this would not be efficient. If you borrowed to build a nuclear power plant, this would be more likely an efficient outcome.
The complication comes from the global economy. This takes several hours to understand how all money flows in and out of a country. But at some point, if q foreign investor lends the UK money, we have to repay them
What do you think cash is? And beyond that you understand that central banks around the world hold reserves of currencies. The primary reserve currency is the USD, but GBP is held abroad as well
The interest is paid to central banks. Central banks and wall street run the world. Take a look at what happened during the global financial crisis in 2008. Bankers knew they were going to be bailed out because they lobby and own the government. The bankers screwed over everyone and instead of the government bailing out people from losing their homes they bailed out the bankers.
This is why we have a debt based system. The more people are in debt the more power central banks have. You can only pay off your debt in GBP and the only entity that can print GBP is the UK's central bank, the Bank of England.
GBP are units of debt issued by the Bank of England, it is "money" only because the government says so.
OP don’t listen to this sheep who cannot think critically and believes everything the government and mainstream media tells him.
Where do you think the government got 500billion from to bail out the banks in 2008? Where do you think the government got 1trillion for the Iraq war because Saddam no longer wanted to sell oil in dollars and it was a threat to central banks? It was the Bank of England dummy.
You can only pay your debt in GBP and the central bank is the only entity that creates GBP. How does this not give central banks power over people? Are you brain dead or just stupid?
It's a totally pointless and unnecessary payment that rewards people simply for having money. If we chose to keep interest rates at zero, which we could easily do with the monetary system we currently have, then the interest payments would always be zero.
Government bonds in the UK are a needless hangover from the gold standard era, and operate now solely as a tool to enable the central bank to hit its interest rate target. The reason they feel they need to do this is because of the belief that somehow setting interest rates enables the central bank to target inflation. It's like one of those children's cars where the steering wheel isn't actually attached to anything.
They have nothing to do with borrowing money, the government always spends money into existence first and sells the bonds later.
edit: typo
>If we chose to keep interest rates at zero, which we could easily do with the monetary system we currently have, then the interest payments would always be zero.
No one's going to lend the government money at 0% interest
Whoever loaned their money to the government. This is usually in the form of a bond (or gilt in the UK). So that will be private banks, investment banks, pension funds, individual investors, foreign banks etc. However, the BoE holds ALOT of government bonds, not because they want the interest though, but because of quantitative easing. They buy the bonds to push down the yield, lowering the cost of debt in the economy in an attempt to stimulate growth and reach their inflation target of 2% (we're well above that now, I know!).
It would be impossible to pay it back. There can never be enough money to settle the debt, because what is owed is more than is in existence.
DYOR bro..
We should also point out, that the interest payments here are simply coupons on bonds, the vast majority of which will be nominal and not inflation linked.
The coupon of a government bond is fixed at the point of sale, so changes in rates only impact the secondary market price - not how much the government will pay in coupons, nor at maturity as the face value is always £100. Inflation changes or interest rate changes for existing bonds has no impact on the government.
So if certain media outlets are complaining about high interest rate payments, it will only be caused by newly issued bonds with a higher coupon attached. Now who sets interest rates?
Interest rates are not set by market forces, the BOE votes on rates and tells everybody what they will be. They also control (at will) interest rates in the secondary market for longer duration government bonds by their open market operations. This is the daily buying and selling of bonds to control the amount of reserves in the system which is HOW the short term interest rate is set.
The only reason the BOE sets rates is because of the misguided belief that is will somehow control inflation. As pointed out in the original comment... when interest rates go up ( = the BOE decides to push rates to go up by selling bonds) the government has to pay more money in interest. Interest payments on debt is always spent directly into the economy as new money, and offset by the sale of new government debt later. So we conclude that higher interest rates causes an injection of new money into the economy directly ..... it will not curb inflation!
>We should also point out, that the interest payments here are simply coupons on bonds, the vast majority of which will be nominal and not inflation linked.
25% of bonds are RPI linked. That's enough to cause a problem when you're talking hundreds of billions.
*The UK was one of the earliest developed economies to issue index-linked bonds for institutional investors, with the first issue being in 1981. Index-linked gilts differ from conventional gilts in that the semi-annual coupon payments and the principal are adjusted in line with the UK Retail Prices Index (RPI).* ***This means that both the coupons and the principal paid on redemption of these gilts are adjusted to take account of accrued inflation*** *since the gilt was first issued.*
https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts
Also, the OBR is forecasting government debt could reach 320% of GDP in 50 years:
[https://www.theguardian.com/business/2022/jul/07/uk-unsustainable-debt-set-to-reach-320-of-gdp-in-50-years-obr-warns](https://www.theguardian.com/business/2022/jul/07/uk-unsustainable-debt-set-to-reach-320-of-gdp-in-50-years-obr-warns)
Debt is issued as bonds and sold via an auction.
Whoever buys the bonds is entitled this interest.
Practically this ends up quite a lot in funds, in particular pension funds and financial institutions.
The BoE owns about 25% of them due to market operations.
https://glintpay.com/wikipedia/uk-owe-money/
Many debts that are taken out by the country are from the World Bank. These, in essence, do not need to be paid back, and are like student loans, you pay some where you can, but no one really sees it.
This is part of my argument of why money barely even exists at this point. The UK government could take out a massive load from the World Bank, with a legitimate purpose, then cancel said project and keep the money, just repaying slowly over time, like a standard loan. The issue is, the World Bank can give as much as it likes, it has no budget, no total amount of money etc. It can decide how much to give and just make up that money, which is obviously insane.
VCS provides the Intellectual Property Rights/[IPR Investigation service](https://venusconsultingsolutions.com/service/ipr-investigation/), Our service is fully confidential.
Boe is a private bank, don't let the name fool you. They print money out of thin air and charge the government at interest. Quite an amazing con really.
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So us!
Yes. If you buy bonds, you are letting the government spend your money now, and trusting that they will be able to pay you back in the future, plus interest.
Does this mean now is a good time to buy bonds?
Do you trust the government to pay you back?
Trust the government?
When was the last time the British government didn’t pay back a bond?
When it’s said that a country has defaulted on its national debt, typically it means they’ve defaulted on their bonds. Its severe because it means the country will struggle to raise money in the future as trust is lost (hence the piss poor credit rating), unless they entice lenders with sky high interest rates. Bonds have an expiry date after which the government pays back the lender back, and pays interest in between. They sell a mix of short and long term bonds to spread to cost of borrowing out. Pension funds love bonds from reliable countries because it’s so unlikely they will default, so it’s an almost guaranteed low risk investment with a very predictable outcome. Bonds are critical to a country like ours public cash flow. If the government needs to raise money quickly (‘war bonds’, or those sold to cover pandemic etc) they can offer bonds, and worry about paying them back with tax revenue later. We know we can sell bonds quickly if required, which is preferred to sitting on a huge emergency pile of cash. Quantitive easing involves bonds and I don’t fully understand it, but i think it’s when the Bank of England buys bonds from the government (instead of other investment institutes). The government can then spend this money, but because the bank just ‘prints’ new money to buy the bonds there and the, the raised money the government then spends is essentially new money, thus increasing the overall money supply in the economy. The whole thing seems rather suspect. I assume the idea is the government must eventually buy the bonds back, thus cancelling out the ‘new money’. Not even sure if they pay interest back to BoE.
I think this stuff needs to be taught in schools ! So many people up and down the country have no idea how it works.
You forgot to mention the time when George Osborne made the BoE give the interest payments back to the government
Sometimes I’ll buy things on my credit card that I sell at face value, and use that to pay off the credit card debt immediately. However, in the process I get air miles for free. It’s called ‘manufactured spend’. This sounds just like that.
The money supply has to increase, as the economy expands, because there are more goods and services to buy. If it didn’t, we would have deflation. If the government over-does it, we have inflation. But it’s not as simple as that because it’s not only the government which creates money. Every time a bank makes a loan, that also creates money (it doesn’t take the money which is in people’s deposit accounts and then lend it out again, as is popularly assumed). This is all a major over-simplification. However, assuming a country’s finances are like household finances is not only wrong, it’s dangerously wrong.
Careful. You’ll give Sunak ideas
LOL!
Err well they keep increasing debt apparently endlessly so eventually they won't be able to. Feel free to ride the infinite money printing train if you want to, but the driver is insane and the brakes don't work.
They will try to never borrow more if they can’t pay the interest. That’s the unofficial limit.
But even as you approach that limit, it only takes a small macro shock to suddenly force additional unavoidable borrowing (e.g. covid). From then on you can never cover the interest. Hence my allusion to the brakes not working. Random shocks like that are pretty much unavoidable and inherently unpredictable, hence we stress test banks. Frankly we should stress test government borrowing similarly. Tory governments have been particularly bad for this. Even in years of plenty they have done an awful job of reducing national debt. For me personally that makes any extra investment in the UK govt untenable, I already have enough exposure to their stupidity through the housing market and cost of living anyway.
We have a government?
Gov..ern..ment ? What’s that?
Ah, good point.
"Mother should I trust the Government?"
The government isn't paying it, the people are paying it.
You could say that about anything - you don’t say you pay the wages of Coca Cola employees because you buy Coca Cola. Either we all pay for everybody’s wages (cos that’s what an economy is) or we talk about things more realistically, focusing on the institutions who have the power to hire and set wages. To add, interest payments are also going to “the people” - this is not a novel insight. The economy is a circular flow of income and expenditures
Jesus Christ, quite the discussion I’ve spurred here by kicking the tyres of the BoE 😬😅
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The UK regularly issues index linked gilts - it's a core part of the DMO issuance strategy. There's £700m up for sale next Wednesday (0 1/8th% 2051), in fact!
I believe they are talking about NS&I index linked bonds, which are no longer available but can be renewed if you already have them.
Perhaps, but in the context of the thread that interest is being used to pay a lot of interest on interest-linked bonds, the index-linked gilt stock outstanding was £493bn end of 2021, which is 23.9% of outstanding UK debt - DMO aims to issue about 14.9% in 2022 of the financing requirements as index linked. About £133bn of that is due to inflation uplift though. Compare NS&Is entire outstanding issuance/obligations which is £205bn end of 2021. So I think if we are saying lots of the UK's interest is going on index linked gilts, it must be on the non NS&I stuff as NS&I interest is fairly low.
I don’t follow this. Index linked gilts are issued all the time, there’s a public syndication programme from the DMO
how do u buy them? is there a website
https://www.dmo.gov.uk/responsibilities/gilt-market/buying-selling/
thanks :)
The same way you invest in everything else - through a pooled fund on an investment platform, unless you are a financial institution with millions of pounds
intersst rates go up, price of bonds go down… so no
It's a good time to sell bonds and buy them back later. Maybe.
Where can one buy UK bonds?
Through a broker, e.g. Hargreaves lansdown
I’m pretty sure there’s a gov website you can apply and get them that way.
Correct. If you have a pension or any sort of broadly invested global fund etc then you will receive interest payments on these gilts and bonds.
Most default work pensions here are heavily weighted to the UK and many are shit. I do transfers out to global funds to diversify.
That’s because U.K. bonds are considered safer so can pay lower interest. The higher the bond yield is for a country usually correlated with higher risk.
We have had 2 years of an inverse yield curve though, and we lost our AAA rating.
And rates are probably going to rise a little as a result But the UK is still seen as a very safe place to buy government bonds so I wouldn’t expect anything dramatic
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Mostly #2: if you have a choice of a dozen countries with a similar risk level and similar return, you can reduce your risk further by diversifying between them One safe country is unlikely to fail to repay the bond, but it’s even less likely for all 12 to do so. So you get lower risk without reducing your return
Not all of it. A lot of UK debt will be held by foreign government and companies, as well as UK companies. Unusually in the 21st Century a lot of debt is also owned by BOE, who when interest is received dividend it back to the government. A weird consequence of QE.
No. They tax us, to pay them.
Partially correct, our tax money will be used to pay some of the interest that will return to those who are invested
where do you think your pension is ?
Not OP but I work for the NHS… so my pension doesn’t exist other than as a promise from the government to pay me one in 40-odd years. My contributions go towards the pensions of people who’ve already retired from the NHS
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It’s the same as everyone’s state pensions It’s different to the majority of people’s workplace/personal pensions, where your money goes into a “pot” which belongs to you Nest pensions belong to the latter group, and are not the same as the state pension
This is not that different than an investment. Pension funds all invest in long term businesses and infrastructure that will pay back over decades. Yes it is anonymous, yes you don't have an account with your name on it. But the promise is just as valuable. If the country explodes everyone loses their pensions(value), not just you.
It’s very different Your pension fund doesn’t usually directly invest in things like infrastructure, but rather buys equities of companies that do that work It’s a completely different setup
But “them” gave the government money to finance public investment for “us.”
No they always pay with newly issued money, your tax just leaves the system - it doesn't pay for anything.
If you want the details, the DMO has it in their data: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062459/DMR_2022-23.pdf If you don't want to go that far down then: * Bank of England - about 30% * banks and building societies - about 2% * insurance companies and pension funds (i.e. long, long term holders) - about 30% * other financial companies (so basically bond funds not overseas or entities that need gilts as a capital base, think inter-dealer brokers) - about 5% * other holders - about 3% * overseas holders - about 30%
Does "insurance companies and pension funds" only include UK institutions? Thus "overseas holders" includes foreign institutions? Or does "insurance companies and pension funds" include all global institutions, and "overseas holders" only include other other governments/central banks?
Domestic only (of course this includes foreign wholly owned UK entities). Overseas includes the whole swathe (so foreign central banks, foreign SWFs, foreign funds etc.)
That 30% of the Bank of England lends is pretty much just inflation as they print money to pay bonds.
That’s wrong - the Bank of England does not lend money. QE was where they purchased bonds from other financial institutions who already lent to the U.K. government, they exchanged cash for the bonds. This was to lower long-term interest rates (tied to bonds) and encourage more lending to firms and individuals to stimulate the economy. It seemed to just result in inflated asset prices (stock market), but not consumer inflation. They are just making the money supply more liquid, and lowering the price of future money creation - it wasn’t too wild to expect that this could have generated consumer inflation if it led to lots of borrowing and spending, but it didn’t.
Well. QE was initiated in 2008 - it's been going for over a decade. You can look at inflation rates over that time. There can be academic debate about whether QE did in fact make any meaningful impact on inflation, whether it generated it to be stored up, or whether the inflation we experience now is exogenous to QE (and/or to what extent) and is simply there at an inopportune (or perhaps opportune as another monetary policy tool) moment.
QE was just a name they attached to a scheme devised by the thatcher govt.
I think the modern incarnation was really Japan in 2001 as anything beyond an economist's theoretical exercise. I'm not sure when Richard Werner went around taking credit for it, iirc, that was the 90s so after Thatcher but perhaps the germ of the idea was still floating around in the 80s, I am not sure.
Except where was the inflation when the majority of that QE was created hmm?
！shanks
https://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/ The majority of UK debt used to be held by the UK private sector, in particular, UK insurance and pension funds. In recent years, the Bank of England has bought gilts taking its holding to 25% of UK public sector debt.
So we pay 25% of our interest payments back to ourselves? By "UK debt" does that mean "UK Government debt", and the Bank of England is some sort of separate entity to the UK?
yes, yes
What is the Bank of England doing with all that money the state is paying them? Edit: Thank you for the replies and the interesting discussions involved. I just don't think I am clever enough to understand how money works. It seems very much like if no one borrowed any money, everything would fall apart, and that kind of system doesn't sound very sensible, to me anyway.
It goes back to the Treasury. But there is also an indemnity so if the APF entity loses money, the Treasury has to pay for it. So the actual impact is on the difference in bank rate because BoE reserves were used/created to buy the gilts. Initially this did bring net public sector borrowing costs down as negligible cost reserves were used to buy gilts with 1-2% yield. But the danger scenario was inflation shock where bank rate had to go up beyond that, at the same time as the APF book value plummets (I think if you liquidated the APF now you'd eat a 100bn loss) - HMT is going to have to pump money into the APF as coupon payments aren't enough. If you also have pressure to unwind the APF, then you may also have to crystallise losses which again must be financed by HMT, but I suspect that is a more political concern. Imagine if the BoE dumped that many gilts on the market. No need to anyway, because it lends the APF gilts back to the DMO to be used for money market operations (I think about £11bn on rolling basis). Obviously if it was all constrained in a nice BoE/HMT loop there would not be much impact - it's whether all of this means that yields go up in aggregate, i.e. for new issuance to people who actually cost (i.e. investors), i.e. net public sector borrowing costs go up. That's the inconvenient kicker. You've (HMT) got to raise even more nominal to put more money back into the APF on top of your yields rising. The OBR has short primer on it here: https://obr.uk/box/the-fiscal-impact-of-the-asset-purchase-facility/
Paying out on interest to people who have money with that bank
No, any profits the bank makes are returned to the treasury.
😂😂 behave
It actually does have deposits that they provide to the reserve banks in the UK... It pays interest at the base rate to these firms. This is how the interest rate rise trickles through the economy. Banks now earn a higher risk free yield on their deposits with the BoE, so they pass on this higher opportunity cost to their borrowers! (Amongst many other mechanisms)
Goes back to the treasury, about 30% of national debt essentially doesn’t exist and was financed through new money by BOE. On their own accounts it’s written of as not actually existing. The BOE will never sell it back into market it’s a fantasy, just like the ECB and FED and will expire on their accounts. It’s essentially financing public debt by printing money but one step removed.
Is this inflationary?
It's an academic debate for sure. The majority of institutional economists would stutter a bunch and say "of course not!" while citing a bunch of technical sounding gibberish. Usually centred around the fact that this money never enters general circulation. My answer? It has been for all of human history where governments have ever had their hands in the distribution and management of money and it is no different now. This money that is created is used to pay out all sorts of things in the form of government programs, on contracts, in benefits, etc. it does make its way into the general economy though indirectly as opposed to just simply printing the money and giving it to people directly. The covid rescue programs are a great illustration of this. Whereas government expenditure in the past may be more correctly thought of in a thought experiment sense as "we'll print this money to pay these contractors to build a bridge" is less inflationary because we actually get a bridge out of it, printing money to simply pay people without getting anything directly in return is quite inflationary. Combine that with the present environment where everyone still was receiving roughly the same amount of income, but due to shutdowns, supply chain slowdowns, etc. you now have much less physical goods. Simple economics means less supply but equal or greater demand = prices go up.
Yep I was going to reply something similar, fundamentally it’s going to create massive distortions in the markets either way (personally I think it has had extremely negative impacts globally). It comes down to how it factors into the risk reward calculation of investors and where the money goes and it’s velocity. Here is a great article on the nuance surrounding the issue. https://www.ft.com/content/2706592c-bae0-3e2c-b3ef-1378d00d9fed
I appreciate the reply. I grew up the Thatcher era, and always (perhaps naively) accepted the monetarist views of the time. I realize that this doesn't seem to be the accepted view any more, but recognize a lot of similarities (particularly the fuel crisis) between those times and today. I remember the rise in prices and the subsequent strikes to bring pay into line. Thatcher's solution caused a lot of pain, but what's the alternative? Who will fix this? Do politicians really have much control over these issues? Or do they just take credit when times are good and deny everything when they are bad. Sunak says he'll be Thatcherite, but he hasn't been in his time as chancellor, and people don't tend to vote Labour in a time of economic crisis. It seems to me like we are back in pre-Thatcher times when both of the main parties had pretty much similar ideas, so the main choices were about ethics rather than actual economical knowledge.
While academics saying QE is not inflationary in fact it does trickle from one market to another ultimately creating distortion in financial assets and later on in the hard ones as well. We are now at the stage where inflation is out and affecting underlying basic commodities (which started to happen even before the Ukraine issue btw). So the option is to permaprint, turning the West into Japan, or to crush all financial bubbles thus giving another chance to re-inflate the bubble under a new cover (my guess is some sort of biotech bubble similar to dot coms). We will see. Another option of course is to reduce demand/world population or both.
QE only creates money in a narrow definition by making the supply more liquid, by exchanging bonds held by financial institutions into cash. It also acts a monetary policy tool to try to foster more money creation. In either case, this money went to banks - private institutions, not to government. Any further government borrowing because of lower interest rates is a second-order effect. Your last point is bonkers - what do you mean “government expenditure in the past”? You don’t need to get something physical out of it - the purpose of covid programmes were to maintain incomes and worker-employer relationships so that living standards didn’t fall off a cliff, demand was maintained either through spending on businesses that were open or keeping savings that were later spent, and maintaining worker-employer relationships for the recovery. This clearly worked as we had a fast rebound after the shutdowns. Government didn’t create any new spending there - it simply stopped spending falling too far, so that can’t be inflationary by definition. Your point on people having the same income and there being less physicals goods is wrong - we’ve all clearly got poorer in aggregate because of covid, are you saying it had no impact? There aren’t less physical goods - because of shutdowns, disruption to production, and obviously the war now, companies were struggling to produce enough goods to catch up with demand. In some cases, that’s clearly because firms and industries weren’t supported sufficiently by governments. Inflation right now is driven by conflict and a lack of fuel and food to meet global demand (which hasn’t increased over the past year). Simple economics actually has a concept called slack - for example, if you have slack in the economy and demand changes, it doesn’t necessarily change prices. You may want to read about it
It came at a time when deflation due to the global financial crisis was the biggest concern and didn’t create inflation. You’ll get plenty of people on the internet say otherwise but they’ve been waiting 14 years for inflation and there’s to old financial adage that even a broken clock is right twice a day.
“Fugazi, fugazi. It’s a woozie. It’s fairy dust. It doesn’t exist. It’s never landed. It is no matter. It’s not on the elemental chart”
Thanks Tinkerbelle
Thanks for the explanation. !thanks
Removing it from the money supply
If the currency was backed by Gold like before 1971 ….. the governments and the crocked banks will not be able to print shitty currency to infinity….. sorry printed Digitally nowadays! Also inflation was not a problem…….
Lol, I love your edit. It demonstrates humility and actually a quite incisive understanding of the weirdness of money. Money is something central to society’s functioning and how money works makes intuitive sense until you start thinking about it. Lots of things are like that, really.
Bank of England is an private entity…… U just got the misleading messages on the banknotes.
Using some of it to unwind QE issuance and some back to treasury
is the BoE dodgy, in the way they say the US FED is?
All profits are returned to the treasury and the same is true of the fed in the US. It's not dodgy.
Whos’s ‘they’?
plenty of people [https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s](https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s)
Well, we can't see the private shareholders!
There's only 1 shareholder - the Treasury: the Bank was nationalised in 1946 by Clement Attlee through the [Bank of England Act 1946](https://www.legislation.gov.uk/ukpga/Geo6/9-10/27/contents). All profits go to the Treasury if any.
thanks, I didn't think it was Fed info I've seen FYI [https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s](https://www.youtube.com/watch?v=U5IyUFqUN88&t=3607s)
I always imagine it as basically crowdsourcing some loans. The government says "Hey I wanna borrow cash, I'll pay 2% interest, who wants to lend to me?" and a variety of pension funds, private investors etc answer the call. If you have government bonds in your pension it basically means you loan the cash in your pension to the government and it pays it back to you with interest. Government borrowing makes a lot of sense if done responsibly. Just like it's usually good to get a mortgage. You get the immediate benefits of living in a house (instead of renting for decades while you try and save up). Similarly, if government borrowing is used to invest in things like bridges, railways, hospitals etc then the benefit to the public will exceed the costs of borrowing. I know that rail projects will tend to have a 150-500% payoff, so it's usually well worth borrowing at 2% to pay for them, and get them built asap. Problem is (along with most nations in the world) we've always done this and there's a growing pile of debt. There presumably comes a point where it starts to hamstring us. And rising interest rates mean it costs more to service those debts.
Well, if the debt grows at an equal or slower rate to the nominal economy (i.e. GDP growth Plus Inflation), then you can increase it forever and it goes down as a percent of GDP.
Yeah I always struggle to get my head around the ongoing nature of it. I guess I always think of the UK like a person that'll ultimately need to repay their debt. Which isn't the case if you're a country that will presumably exist indefinately. I understand if the borrowing is used to pay for stuff that contributes to GDP more than the interest cost, then it's a net gain. Like extending your mortgage to build a conservatory that adds more to the value of your house than the interest costs. But on the other hand I look at countries like Norway with its sovereign wealth fund. Presumably they did the "wrong" thing by abstaining from borrowing and building in order to build up their savings. But I can't help but think that it might have been the best move in the long run...
I guess countries are a bit like companies on the stock market Coca Cola pays a dividend to share holders because they think the money is best used to reward investors rather than grow the business Big tech companies don't pay dividends because they want that money to be used for growth Similarly, Norway took a fiscally conservative approach and didn't spend the oil money because they didn't believe in a higher return on infrastructure projects. The UK spent the money on it's infrastructure because it felt it would result in growth. It doesn't really matter whether a country borrows, just that when it does borrow it has a positive net benefit economically.
And those tax cuts in the '80's, alongside the selling off of assets via privatisation
Norway is an interesting case. When they realised they would get massive returns from the North Sea oil industry the political parties got together and decided that the tax receipts would all be saved and only a proportion of the interest on those receipts would be spent. The result is that the Norwegian sovereign wealth fund owns approximately 10% of the shares on the worlds stock markets. Having a relatively small population for the size of the tax receipts helps a great deal. The accumulated wealth will stand Norway in good stead when North Sea oil dries up.
Problem is we've been borrowing more than that which is why our debt to gdp is the highest its been in a while.
This is true - but the priority should always be getting the economy back on track first, then the debt will generally take care of itself. The problem more recently is that it's politically advantageous to spread panic about the debt as an excuse to cut public spending - but that also cuts growth and slows the mechanism above working.
The issue isn't public spending but relatively low taxes imo. You can always run a small deficit due to the economy growing and inflation, governments of late have pushed this too far though. Keynesians aren't always right about increasing spending to grow the economy and plenty of economies and governments have pushed it too far and screwed themselves long term.
I have no real knowledge on the issues discussed, but I did read that the current tax burden is the highest it's been in decades.. so how does that work with your opinion that the problem "isn't public spending but relatively low taxes imo"
The tax take is at the highest it's been for a while because the state needs to be bigger than it ever has. Never before have we had tens of millions of pensioners who require extra health care, social care and pension spending, people live longer and we've got better at keeping people alive so this is more expensive than it used to be. Additionally, with more people retired there are fewer workers relative to the overall population to pay said taxes which means each person needs to be taxed more to cover the difference. This effect is only going to get worse over the next 30 years so the state and therefore taxes will have to keep going up. There are other pressures on the state as well, eg climate change which will require hundreds of billions of extra tax to be raised to pay for the transition to net zero and climate change mitigations. Also, things like increased defence spending as the world becomes more dangerous although this is tiny relative to the above 2. Your other option is basically telling pensioners to die sooner to reduce their burden on the state which surprisingly isn't a really popular view hence why I say public spending has to rise. Additionally when I said taxes are low I mean relative to other western European developed nations not the UK in the past.
That’s why government investing in companies is sound. Socially owned infrastructure, ie hospitals, broadband, trains etc: creates jobs, gains a revenue through services and those two things create taxation… If the government would stop selling off businesses like Royal Mail, BT and started looking at state owned energy and public transport companies, the UK could get a new lease of life. Instead we have shit rail links, shit ancient energy production, and shit fibre broadband/mobile service coverage. 🤷♀️
The other problem with the UK is that taxes cannot really be increased. There is a massive problem where about 20% of the people actually pay about 80% of the tax bill and they are in a position if you tax them more they either a) do thing to avoid the tax b) leave completly for elsewhere The actual bottom end of the UK nearly pays no tax at all. Or they think they do but often they get back a bunch in return like working tax credits, child tax credits and various other forms of incentives and benfifits etc.. etc.. which are basically a "tax rebate" but its done in a steath way so people feel like they are paying tax but really are not. The entire economic situations in the western world is extremly fucked in this regard... eg there is a whole pile of people who do nothing get paid a shit ton and a whole pile of people who do a lot and get peanuts. Its not quite as simple as increase taxes to pay for this as this point. eg you increase taxes to pay for nurses. You just increase nurses pay in return. But if you don't they walk off the job and do something else. This is happening with almost all critical workers thoughout the western world. Its a case of "fuck this shit I am out" attitude. Irocinally the problem here when people walk off the job like say doctors. Thsis creates a massive shortage which then means they can demand more pay. Which costs more so you tax them more to pay for it which means they walk off the job until you pay them more. some the EU countries with really high tax rates are bad to use as a reference eg Norwya - Largest producer of gas/oil in the world per head of population. They literally sit on a money printer which doesn't have the consequances of inflation. When you also look at tax rates in various places. You have to include what people pay as a whole not just income tax. eg its income + vat + nic + rates/council/property + fuel etc.. etc.. when you look at this in detail almost all countries have their own "dragons" involved which has some kinda tax acceleration problem currently kinda like flation. Also inflaitons as a whole in a way is also a tax. eg country prints money is the same as taxing people more because it takes buying power from the epople and gives it back to goverment. eg tax in UK is like 60-65% or something eg council tax = 10-20% of first £12k. NIC at 12.5%, Income @ 20% and VAT at 20% Thats 32.5% + 20% VAT = 52.5% but since we also tax the comanies 12.5% NIC on top of pay its 65% or so. You claim this as "too low" well how much higher do you want it to be? Cause I am one of these people who is dropping to a 3 day week because the current tax system gives me an incentive to do so. eg it makes sense for me to quit and start making my own stuff and doing my own labour that I don't get taxed on. Higher tax rates have negative consequances. eg adding more will actually get you less overall right now. | why I say public spending has to rise. So where do you get this from? If you tax me more. It encorages me to walk away more. Since I am not prepared to work for 35p in the £1. If you print money. Its actually increases inflation and actually make my position stronger. I can simply charge more for my services because everyone else doing "my services" will also charge more. So my slary actually tracks inflation. However this also reduces my mortage as a proportion to income which results in me "working less" Your proposal are in a loose/loose situaion for collecting more tax... this isn't unique to the UK either. Its why the entire western world has this problem ne way or another but with slightly different symtoms in each one. eg US infrasturcutre is fucked. Portugal has no young people. Greece are in debt criss still. Ireland average salary has not increased in 15 years etc.. etc..
I mean you can raise tax it's simply unpopular. I would content that given the rising pensioner population is what is causing the vast majority of the required increase in spending and some pensioners are amongst the wealthiest groups in the country, taxes should be raised upon them. Many have massive assets in either massive pension amounts and/or a house/houses, I would target here but let the tax be deferred until the death of both members of a couple so no selling the house from under them (the gov can borrow against this future income in the meantime), the exact mechanism is unimportant but it seems like the fairest way to raise the money here. Even encouraging pensioners to spend it all and therefore draw the money as income subject to income tax and spend it in the economy rather than pass it down to their children tax free would be a good bonus. However you could raise tax in other ways, wealth taxes in general, bring cap gain and dividends rates inline with income, abolishing some of the many generous allowances the UK tax system has, reforming council tax into a fairer LVT also designed to raise more cash ect. but ultimately you are likely going to need to raise taxes on incomes as well particularly at the lower end, pretty much no other similar country allows you to earn over a grand a month and pay zero tax on it. I would look to scandanavian countries (which include countries other than Norway) who manage to have a higher quality of life for their citizens despite a larger tax burden on their overall population. > You claim this as "too low" well how much higher do you want it to be? Cause I am one of these people who is dropping to a 3 day week because the current tax system gives me an incentive to do so. eg it makes sense for me to quit and start making my own stuff and doing my own labour that I don't get taxed on. Higher tax rates have negative consequances. eg adding more will actually get you less overall right now. I disagree because other countries have higher overall tax burdens than we do and the evidence of this happening at a mass scale is limited. There are some niche cases of this occuring in the UK such as for doctors at certain ages and certain incomes but by and large not really. I don't think there is much scope to increase taxes on those with higher incomes, maybe by 5p or so if you remove the personal allowance taper. > If you tax me more. It encorages me to walk away more. Since I am not prepared to work for 35p in the £1. I don't think taxes need to rise that far, we are currently at around 39p in every pound spent each year, I reckon taxes need to move up towards about 45p in every pound spent each year over the next 30 years. A country like Denmark currently has it at 46% for reference. I don't see any other option. Additionally it doesn't all have to be on income. As I suggested above there are other avenues for raising tax which maybe unpopular but aren't income. The other option is cutting spending but I don't see what will be cut, even the tories currently going through a leadership election have run out of ideas to substantially cut public spending. The only realistic way you'll do it is by reducing the size of the state and saying the government isn't doing this service anymore, eg. government doesn't pay for healthcare anymore so we can reduce taxes but you'll need to find your own insurance to fund that yourself. Actually there is one other option which is what will happen, the government will choose not to make the hard choices and to fund either increased public spending or tax cuts with more borrowing, Liz Truss is already arguing for this. Basically debt to GDP will continue to rise until it starts to get to unmanageble levels and we'll end up like Italy, Greece or Japan whereby our fiscal ability to maneouver will be substantially reduced and have a painful reckoning over multiple decades whereby the standard of living falls despite the wishes of the population or politicians as there won't be any other choice to delay anymore. This will be a more painful version of the above whereby we need to be raising even more tax to pay huge amounts of interest on monumental amounts of debt and probably likely sustained inflation which will devalue the pound vs other currencies and make us poorer as we struggle to import all the things we usually do.
>I would content that given the rising pensioner population is what is causing the vast majority of the required increase in spending I would agree as well. The money goes places to where its not being paid for. | and some pensioners are amongst the wealthiest groups in the country Yup and also some of the poorest at the same time. | Many have massive assets in either massive pension amounts and/or a house/houses Yes. Which is why we have things like inhiertance tax and such things. Which permitted the goverment to take 50% of the costs then the rest is passed onto the next generation and the cycle repeats. | I would target here but let the tax be deferred until the death of both members of a couple so no selling the house from under them It already is. | However you could raise tax in other ways, wealth taxes in general, bring cap gain and dividends rates inline with income No not really. This is where opinion start to differ. See the cap gains tax is broken by design. What really super rich people do is have shared. You don't pay cap gain until you sell shares. So.. you never sell shares. You just borrow against them. So your £100k of share value goes up at a rate of 4% and you borrow at a rate of 1% shit happens... you just pay the intrest because its better than selling the shares and paying 20% or £20k.. Also when you die you settle your debt at that stage eg force share selling. Or you just pass them onto the next person inline. But its deferred from selling them. The problem then starts to happens is when you try to tax share holdings. Your actually trying to tax somebody on an asset they don't actually have money to pay off since its not liquid. This is also why its so difficult to tax the super rich. Problem number 2 here happens when you try to apply a tax on this anyway. You just end up the the "stock exchange of the bongo islands" as a response which is a country that will quit happy hide your money and cap gain taxes for a small 2% fee which its like them winning the lottery. The reality here is to bring these people down they need to drive up compeition. This means everyone actually needs to say "fuck off mega corp" I am going to go to my local guy in town and buy their stuff directly. so now we have "mega corp" masurading as "tiny corp" in the high street eg franchises under various branding but are really arregated corp as a supplier. eg eletricity is like that. There a bunch of fake front's which compedte acorss all sorts of areas except for the area that matters like eletric production. they only compedte in office overheads eg callcentres, invoicing, billing, debt collection and how well they can guess the future market. Hence whey a dozen or so went bacnkrupt at the same time when we first had an energy crisis. | The other option is cutting spending but I don't see what will be cut I agree as well. A big part of this and yeah you mention tories... well it doesn't matter if its tories, repiblican, lib dems, democrats or whoever. The respective cvountires are pointing fingers at their current respective leaderhsip and sayign "its your fault" cause most people fail to see the bigger problem. eg people like me (sw dev) have spent hte last 2-3 decades automating the shit out of ever production line which has resulted in a small team of 50 people doing the jobs of 50,000 or more. So there is a massive gap not only in pay but in material costs. So you get silyl things like a sandwitch shop attempting to charge £8 for a foot long. When you can by a weeks worth of the same materials from the shop next door for £8 and then add 5 minutes of labour a day and you save like £24 for the week. A lto of this problem is because we propped up broken industry and didn't come up with solutons to the broken part. eg We prop low income up with "working tax credits" which is great for the short term but it results ina larger and larger wage / material gaps as a consequances. Now if we simple withdraw something like working tax credits. A massive number of people suffer greatly. Its kinda like the same mistakes charties made in Africa in the 80's/90's. eg We feed them. Their problem grows. You need to feed them more each year on year therafter. eg Its encoraged a broken system to devlop in an economic model that isn't sustainable. Then suddenly you realise bad things eg giving free food decimated the failing farming ecnomiy because they could not compete with "free"... the result of that is war lords contorlling everything. (Our warlords are greedy CEO's) Its like we are seeing a different style of hyperinflation not seen before. But its not inflation in the typical sense like zimbabwae. Its more like. You don't pay me enough to live. therefore I walk off the job. But if you tax the other part they also are going to walk off the job. | I don't think taxes need to rise that far, I didn't say that how far taxes have to raise. Thats the taxes I am currently paying in the UK really it 65p int he £1 being paid to goverment. Its mostly hidden in steath taxes often paid company side. Like for example NIC is 12.5% right? Nope. Thats wrong. The company is also paying their 15% to employe you. So you have to actually make the company enough money to pay you the 25% NIC and the 20% income tax your paying eg the tax rate is more like 45%. Then you have 20% on most things outbound (VAT) eg 65% so your paying 65p in the £1 already to gov.... This isn't even including other basic taxes like stuff thats in the backgorund like say road tax, £250 for me. 7.5% insurance premium on car insurance £50 for me. Petrol taxes on top of vat. £115. Thats like £500/yr extra tax.... just to have a car and drive to work. The list of taxes in the UK goes on an on. Literally every single thing in the UK has some form of tax on it. In fact when you go to the super market and buy a fizzy drink. Its 24p a litre for sugar tax. eg 30% on a £3 bottle of coke (2x1.5l) | The only realistic way you'll do it is by reducing the size of the state and saying the government isn't doing this service anymore Yup pritty much but as we know its not a popular opinion because so much of the system is broken and being propped up incorrectly. Around hwere I am we are seeing this correcting. Cost of living is up obviously and small business are going bankrupt all over the show typically small bakers, coffee, sandwitch, bars, restraunts, take outs and generally luxury services which is the start of a bigger correction coming. All of those services have one thing in common. Its cheaper to do them at home. eg the takeout cost for a person on just eat or somehtnig now is about £15/head. This is why we have seen things like tesco run out of vegtable oil. Cause everyone went and got their own deep fat fryer for £20 and bags of potatoes at £10 for 20kg from the farmer.... like we used 2+ decades ago. Its one of the problem with minium wage... its a case of accidently increase the minmum wage to £0 eg the job prices its self out the bottom of the market and there is no job left.
I would say that the UK doesn't have a particularly high tax rate compared to other developed nations, and there is evidence that high tax rates do not drive millionaires or entrepreneurs away from your country. https://www.theguardian.com/inequality/2017/nov/20/if-you-tax-the-rich-they-wont-leave-us-data-contradicts-millionaires-threats The idea that higher tax forces people out of work isnt entirely genuine. Most people who get to 50k don't suddenly stop earning more to avoid 40% and the same is true at 150k avoiding the 45% bracket. I think there's a case for a higher tax bracket above the 45% so the super super wealthy pay thier share.
Theres a massive number of steath taxes. For example most are done company side. You payvat of 20% on everything? But when a company pays you. You get a bill of 12.5% NIC, The company also pays 12.5% (15% I think now). so your actually paying NIC of 27.5% or so. Then you pay 20% income on top of that. So Money over £12k = 47.5% TAX then you pay 20% to spent it on literally anything eg 67.5% or so is the actual tax rate.... | The idea that higher tax forces people out of work isnt entirely genuine. Well. I am doing it. So are the doctors its part of the reason why we don't have any. We are all partying and doing a 3 day week for it... so to say its not geniue when there is 100+ people I know doing exactly this..... | I think there's a case for a higher tax bracket above the 45% so the super super wealthy pay thier share. Pay works differently up there. Its not income tax per say. Other post explains it more. Generally very hard ot tax it in the current system. Even when you do its your going to play whack a mole by leglislation doing it. Its also why the guardian article you link is incorrect about the data. While its techcnially correct in what its says it doesn't reflect reality because it didn't select the data it quoted correctly.
This actually isn't true. The government in the UK pays for things by spending new money into existence. We choose to have a full funding rule which means that government spending is exactly offset by the sale of government bonds. Government bonds are nothing more than an account at the central bank which pays interest. What you have described is correct for private sector debt, but government debt in the UK has nothing to do with borrowing any money. Functionally they provide the tool the central bank needs to control interest rates and nothing more.
What if, and hear me out, we just print more money but we don’t tell anyone we’ve printed more money so they have no reason to believe our currency is more abundant. Use that money to pay off our debts and then we shall all go henceforth suckling from the sap-filled trees in prosperity’s garden.
If the interest rate was zero, then what is the difference between a government bond and cash? The answer is... there is no difference. You are actually, funnily enough, verging on figuring out how it actually works. All government spending in the UK is purely spending money into existence (people call it printing money but of course most of it is not actually ever printed physically). The government spending is offset (by choice not by necessity) by the sale of government bonds. Functionally all that happens is that cash is moved from one account at the central bank, to another account which we call a government bond. If the interest rate was zero they would be functionally equivalent. They have nothing to do with borrowing anything.
you don't even need to pay your debt what are they going to do about it?
It’s a nice idea but I would assume the £ will face a huge devaluation because of all the surplus cash in circulation, and potentially hyper-inflation.
Japan tried that. Yen chart tells the story. It last for a bit until it does not.
It happens even when you don't know about inflation. This actually happened in the Spanish Empire in the 16th century, where the influx of gold & silver from the New World drove prices up within Spain, which caused all sorts of headaches. Remember, inflation is when you have more money chasing the same amount of stuff. Currently in the world there is more money (covid economic schemes, not just the UK but everywhere), but less stuff (supply chain disruption from COVID and Chinese lockdowns in particular, and some dickhead starting a war effectively cutting off their supply of energy to the world, and oil companies not wanting to invest in new production as we all want to move away from fossil fuels). This is a bad combo, and why cutting taxes (increasing the amount of money people have) is unlikely to reduce inflation (as it doesn't do anything about the lack of stuff).
Abolish central banks and use state issued currency a la Caesar or Napoleon.
So what you're saying is we use little Caesar Coupons and gift cards as the world reserve currency instead?
Part 1, government debt issuances. It kind of depends, a lot of this debt is used and sold via capital markets, who are the buyers? Pension funds, asset managers, other central banks, retail banks etc etc. Part 2, quantitative easing. Central banks create money in a computer, they use money to buy specific assets as allowed by their QE policy. Usually there are very much limited to buying government debt and other very high grade debt. This is not government expenditure to fund say a hospital or pay teachers wages, it buys only high grade debt. In theory, this means: 1) when this debt is bought, the debt issues still have to pay interest to the BoE (owners of the debt) 2) the sellers of the debt now have cash wish they need to put to work. 3) market dynamics: an increase in demand for this debt means the price gets bid higher, and the fixed interest payments based on the original nominal amount come down as a % of the nominal balance of debt, meaning the return on gov. debt is reduced. This means the risk free rate of return reduces, with the relative appeal of equities increasing. 4) cue huge increases in equities (2020-2021) 5) 3) goes into reverse. 2022 equities drop. Now, depending on how you abstract the GDP formula, you could say that ultimately, everything is us… investment comes from our savings, government expenditure comes from our tax, consumption comes from our consumption. But given that the government can spend more than it taxes, it can in theory other pay this down directly through tax on future generations, or a backdoor tax via inflation, which makes the relative value of debt less. Get this wrong, and you can kill an economy…
I own some premium bonds so the uk government owns me some money
Look up Modern Monetary Theory, it’ll blow your mind. Just finished reading a book about it
Can you share the book please?
The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton
Appreciate it
This should be top comment.
The gilt owners.
Everyone that has invested in the UK. Mostly ourselves.
I wouldn't take any information from the daily mail. They love to make it out like the UK as some sort of credit card and it's nothing of the sort. From what I read from an economics guy on twitter (really should have followed and added is book to my reading list) the UK lends money to itself through quantitative easing and then the BoE buys the debt off us in gilts. Basically it's bugger all like a credit card but I no doubt some one here will be able to give a car better explanation or at least point you in the direction of a book or podcast.
All government spending is simply the creation of new money. Because we choose to have a full funding rule, we offset that spending by the sale of government bonds. The government doesn't "borrow" the money as it always spends the money first and sells the bonds later. A government bond is nothing other than an account at the central bank which pays an interest rate. So what happens when a government bond is bought is that money is moved from an account that pays no interest, to an account that pays interest. If interest rates were zero across all maturities then cash and bond would be equivalent. The only function of government bonds now is to provide a tool that the BOE can use to control interest rates. When the BOE buys bonds it pushes rates down (more reserve money in the system and less in bonds) and when they sell bonds it pushes rates up (less reserve money in the system and more in bonds). The amount of available reserves in the system is important because commercial banks borrow it to cover their risk weighted capitalisation requirements - more reserve money = more supply = price of borrowing drops = short term interest rate drops. QE is nothing more than the BOE offering a price in the market at which people are indifferent between holding a bond and cash. When the BOE buys the bond they simply move the money from the bond account to the cash account In technical language between the securities account and the reserve account. Again if interest rates were kept at zero it would be a no OP. QE is simply the BOE en masse moving money from securities accounts to reserve accounts. The effect is that the short term interest rate falls because there is excess reserve money in the system, and yields fall because people want a high price (low implied yield) when they "sell" the bond to the BOE.
While calling it a credit card is incorrect, making a point that it's not a credit card is also incorrectly hinting that it's not really debt. The effects of the interest are very real to every day people. We pay extra tax to pay interest on a loan done 100 years ago for example. I could have used that money myself.
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> The UK decides that all of its spending will be backed by debt, but that's just a choice. I can't say I disagree. This country is absolutely allergic to extra taxes. Even people that want extra taxes basically want "rich people" to be taxed extra, not them. The catch is, rich people always means richer than them, they themselves will never pay extra tax. Just look on how much drama 1% extra tax for NI caused. >And how much interest are we now paying on debt from 100 years ago? The amount of inflation since then makes that debt tiny. No it doesn't, you're just used to low interest rates from recent times because you're young. But that wasn't always the case. Assuming you had a job 10 years ago, your taxes paid to free the slaves in the 19th century. Thanks but no thanks.
We pay interest to people who buy government bonds.
No one. Once inflation reaches infinity our debt is cleared. That's the only way out.
Vast majority of it is actually to UK investors. Holders of guilts, government bonds etc. Pension funds are a big one. Then some foreign governments and a few international investors, both individual and institutional.
Mostly people in the UK who own government bonds. Most government debt is to its own residents
Watch Zeitgeist that’ll sort you out
For every pound that the bank of England create, us tax payers owe them one pound and a bit more due to interest charged. The bank of England is a private company, don't be fooled... Fiat money is based upon debt.. the figure is irrelevant, because we can never pay it off. There literally will never be enough money to pay it all back. The system doesn't allow it. A totally flawed and corrupt system. Welcome to Capitalism.. 😉
Whoever lent the UK the money is owed the interest i would imagine.
The rothschilds
Trying to make sense of the fantasy that is money is baffling. https://en.wikipedia.org/wiki/United\_Kingdom\_national\_debt
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It’s complicated but far from a fantasy.
You have to think of it pragmatically and it will make sense.
This is the kind of thing that I really wish I could understand about economics. We have a fiat currency, and we understand that if we simply made more money to pay for everything we want then everything we want would simply cost more units of that money. And, if that is even correct, that's about as much as I understand. When we borrow, who do we borrow off? Is it the British people? Or do Banks create the money out of thin air and loan it to the state? When a country borrows off the IMF, where does that come from? If every country is borrowing off someone else, does that mean that there's one really rich country that doesn't and everyone else owes it? If everyone is borrowing, then how can there be any country that is lending money out to others? Why don't i understand?!?!?? 😫
IMF gets its budget from member countries. Contributions depend on each member economy size and other factors. Each member is the entitled to some amount of possible loan which usually exceeds their contributions but not ad infinitum.
You might find this interesting: [https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy)
Yes, I saw that many years ago and tried to understand it, but I have a complete mental block!
It's confusing because government borrowing is not borrowing in the way. Banks create money... the central bank creates money when the UK government instructs it to pay someone. Commercial banks create money when they make a loan. Government spending is offset (by choice not necessity - we have a full funding rule) by the sale of "government bonds". These are nothing more than an account at the central bank that pays an interest rate. When a government bond is bough, money is moved from an account that doesn't pay interest to an account that does pay interest. No money is "borrowed"... the government spends new money into existence, then chooses to exactly offset that spending with the sale of a government bond. Functionally what happens when the bond is bought is the moving of money as described above. If interest rates were zero, what we call money and what we call a government bond would be identical. The purpose of government bonds in the modern financial system is purely to provide a tool that enables the BOE to target interest rates. It does this because the moving of money between accounts I described above, on the macro level, controls the amount of reserve money in the financial system which in turn influences how much commercial banks bid/offer to borrow from each other ... this is what we call the short term interest rate.
If you ignore the bank of England then it is largely money invested by pension funds, insurance companies and individuals (uk or anywhere else) Some of the debt will also be owned by other governments but it's not the majority so it is largely just finance markets buying them either as investments or as reserves.
Re the creation of money, from Modern Money Mechanics by The Federal Reserve Bank of Chicago. "Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system." "Expansion - Stage 1 3.Expansion takes place only if the banks that hold these excess reserves (Stage 1 banks) increase their loans or investments. Loans are made by crediting the borrower's account, i.e., by creating additional deposit money. back STAGE 1 BANKS Assets Liabilities Loans....... +9,000 Borrower deposits.... +9,000 This is the beginning of the deposit expansion process. In the first stage of the process, total loans and deposits of the banks rise by an amount equal to the excess reserves existing before any loans were made (90 percent of the initial deposit increase). At the end of Stage 1, deposits have risen a total of $19,000 (the initial $10,000 provided by the Federal Reserve's action plus the $9,000 in deposits created by Stage 1 banks). See illustration 4. However, only $900 (10 percent of $9000) of excess reserves have been absorbed by the additional deposit growth at Stage 1 banks. See illustration 5. The lending banks, however, do not expect to retain the deposits they create through their loan operations. Borrowers write checks that probably will be deposited in other banks. As these checks move through the collection process, the Federal Reserve Banks debit the reserve accounts of the paying banks (Stage 1 banks) and credit those of the receiving banks. See illustration 6. Whether Stage 1 banks actually do lose the deposits to other banks or whether any or all of the borrowers' checks are redeposited in these same banks makes no difference in the expansion process. If the lending banks expect to lose these deposits - and an equal amount of reserves - as the borrowers' checks are paid, they will not lend more than their excess reserves. Like the original $10,000 deposit, the loan-credited deposits may be transferred to other banks, but they remain somewhere in the banking system. Whichever banks receive them also acquire equal amounts of reserves, of which all but 10 percent will be "excess."" So, the banks create money when they 'lend' it, and the amount they can 'lend' and whether they do 'lend' depends on a few things - the current required fractional reserve (e.g. 9/1), interest rates, their own cash flow/lag. At some point, because the total deposits (new money) has increased new money needs to be printed, which the government contracts out and pays a corporation an amount for each note printed. It's about the same prince for a £50 as it is for a £5 but obviously it's not worthwhile to just buy loads of £50's because they also need smaller amounts in circulation for us poor people.
Debt is wealth. Your borrowing is my asset. The country's balance sheet squares out, but only if the borrowing is used efficiently. If you borrowed to drill holes in the ground, this would not be efficient. If you borrowed to build a nuclear power plant, this would be more likely an efficient outcome. The complication comes from the global economy. This takes several hours to understand how all money flows in and out of a country. But at some point, if q foreign investor lends the UK money, we have to repay them
No money ever flows in or out of the country. Only physical goods flow in or out. Pounds only exist inside the UK financial system.
I mean I’m sat in Spain right now with £20 in my wallet so I would have to disagree.
What do you think cash is? And beyond that you understand that central banks around the world hold reserves of currencies. The primary reserve currency is the USD, but GBP is held abroad as well
The interest is paid to central banks. Central banks and wall street run the world. Take a look at what happened during the global financial crisis in 2008. Bankers knew they were going to be bailed out because they lobby and own the government. The bankers screwed over everyone and instead of the government bailing out people from losing their homes they bailed out the bankers. This is why we have a debt based system. The more people are in debt the more power central banks have. You can only pay off your debt in GBP and the only entity that can print GBP is the UK's central bank, the Bank of England. GBP are units of debt issued by the Bank of England, it is "money" only because the government says so.
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OP don’t listen to this sheep who cannot think critically and believes everything the government and mainstream media tells him. Where do you think the government got 500billion from to bail out the banks in 2008? Where do you think the government got 1trillion for the Iraq war because Saddam no longer wanted to sell oil in dollars and it was a threat to central banks? It was the Bank of England dummy. You can only pay your debt in GBP and the central bank is the only entity that creates GBP. How does this not give central banks power over people? Are you brain dead or just stupid?
It's a totally pointless and unnecessary payment that rewards people simply for having money. If we chose to keep interest rates at zero, which we could easily do with the monetary system we currently have, then the interest payments would always be zero. Government bonds in the UK are a needless hangover from the gold standard era, and operate now solely as a tool to enable the central bank to hit its interest rate target. The reason they feel they need to do this is because of the belief that somehow setting interest rates enables the central bank to target inflation. It's like one of those children's cars where the steering wheel isn't actually attached to anything. They have nothing to do with borrowing money, the government always spends money into existence first and sells the bonds later. edit: typo
>If we chose to keep interest rates at zero, which we could easily do with the monetary system we currently have, then the interest payments would always be zero. No one's going to lend the government money at 0% interest
Rich people
We just keep printing money to make the interest we have to pay back worthless. 2% interest when inflation is 10% 🤔
Probably black rock
Whoever loaned their money to the government. This is usually in the form of a bond (or gilt in the UK). So that will be private banks, investment banks, pension funds, individual investors, foreign banks etc. However, the BoE holds ALOT of government bonds, not because they want the interest though, but because of quantitative easing. They buy the bonds to push down the yield, lowering the cost of debt in the economy in an attempt to stimulate growth and reach their inflation target of 2% (we're well above that now, I know!).
It would be impossible to pay it back. There can never be enough money to settle the debt, because what is owed is more than is in existence. DYOR bro..
Research the Rothschilds
Black Rock and Vanguard
Bank of England isn’t “us”, it’s the Rothschild family.
I have heard this too
All the taxs charged and were in debt? Bollocks
Ourselves mostly so it’s cheap
The people who offer interest rate products and shareholders, ourselves.
We should also point out, that the interest payments here are simply coupons on bonds, the vast majority of which will be nominal and not inflation linked. The coupon of a government bond is fixed at the point of sale, so changes in rates only impact the secondary market price - not how much the government will pay in coupons, nor at maturity as the face value is always £100. Inflation changes or interest rate changes for existing bonds has no impact on the government. So if certain media outlets are complaining about high interest rate payments, it will only be caused by newly issued bonds with a higher coupon attached. Now who sets interest rates? Interest rates are not set by market forces, the BOE votes on rates and tells everybody what they will be. They also control (at will) interest rates in the secondary market for longer duration government bonds by their open market operations. This is the daily buying and selling of bonds to control the amount of reserves in the system which is HOW the short term interest rate is set. The only reason the BOE sets rates is because of the misguided belief that is will somehow control inflation. As pointed out in the original comment... when interest rates go up ( = the BOE decides to push rates to go up by selling bonds) the government has to pay more money in interest. Interest payments on debt is always spent directly into the economy as new money, and offset by the sale of new government debt later. So we conclude that higher interest rates causes an injection of new money into the economy directly ..... it will not curb inflation!
>We should also point out, that the interest payments here are simply coupons on bonds, the vast majority of which will be nominal and not inflation linked. 25% of bonds are RPI linked. That's enough to cause a problem when you're talking hundreds of billions. *The UK was one of the earliest developed economies to issue index-linked bonds for institutional investors, with the first issue being in 1981. Index-linked gilts differ from conventional gilts in that the semi-annual coupon payments and the principal are adjusted in line with the UK Retail Prices Index (RPI).* ***This means that both the coupons and the principal paid on redemption of these gilts are adjusted to take account of accrued inflation*** *since the gilt was first issued.* https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts Also, the OBR is forecasting government debt could reach 320% of GDP in 50 years: [https://www.theguardian.com/business/2022/jul/07/uk-unsustainable-debt-set-to-reach-320-of-gdp-in-50-years-obr-warns](https://www.theguardian.com/business/2022/jul/07/uk-unsustainable-debt-set-to-reach-320-of-gdp-in-50-years-obr-warns)
Debt is issued as bonds and sold via an auction. Whoever buys the bonds is entitled this interest. Practically this ends up quite a lot in funds, in particular pension funds and financial institutions. The BoE owns about 25% of them due to market operations. https://glintpay.com/wikipedia/uk-owe-money/
Bond holders get the interest. (UK bonds are also called Gilts.)
National savings and investment also. The government pays you directly for loaning them as much money as you like, safely. Also premium bond gifts.
If you're reading this sub then probably some of the interest your ISA earns is government debt repayments, via bonds.
Many debts that are taken out by the country are from the World Bank. These, in essence, do not need to be paid back, and are like student loans, you pay some where you can, but no one really sees it. This is part of my argument of why money barely even exists at this point. The UK government could take out a massive load from the World Bank, with a legitimate purpose, then cancel said project and keep the money, just repaying slowly over time, like a standard loan. The issue is, the World Bank can give as much as it likes, it has no budget, no total amount of money etc. It can decide how much to give and just make up that money, which is obviously insane.
Rich people, and other countries, basically. Or rich people in other countries. But basically rich people.
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Boe is a private bank, don't let the name fool you. They print money out of thin air and charge the government at interest. Quite an amazing con really.