Earlier this month, comedy writer and director Armando Ianucci tweeted out: “Genuine questions: if most countries are borrowing heavily to pay for the pandemic, who are they borrowing from, and is there some mechanism in place to agree to write off most of each other’s debt?”
These questions are important. They play into other anxieties visible in the media and in our politics about whether we can “afford” to borrow on such a scale to fund emergency measures, and if we can, how we are going to “pay the debt back.” Massive government borrowing has taken the UK’s national debt to above 100 per cent of GDP.
The anxieties stem from the understandable difficulties the average person has grasping how modern money and public finance works, the reasonable tendency to grapple with the topic using our personal experience—in this case of our household finances—and the temptation from time to time for the government to play on that analogy to suit its own purposes.
So how does the borrowing process really work? Not as you might think.
First, not all governments are borrowing to fight the pandemic. Some, like China, have suppressed the virus and opened their economies back up. Others, like Norway, have large stores of wealth that they can use to fund their own programmes and lend to other governments.
Those governments which are borrowing to combat the pandemic are doing so from citizens at home and abroad—typically those in middle and old age and the rich—who have accumulated savings and need somewhere to put them. Government borrowing in this country happens at “auctions,” where the Debt Management Office sells bonds that entitle you to a face value sum in a set number of years (known as the maturity of the bond). The bonds are normally sold at a discount on the face value, and the difference between the purchase price and what you get at the end of its lifetime is the equivalent of an interest rate. Government bonds have also been bought in large quantities by central banks, through a process known as Quantitative Easing.
At the moment, the borrowing is working out for most governments, and you can tell that all sides are relaxed about the process because it…