£100 billion of the UK’s extra debt relates to the Bank of England’s “Asset Purchase Facility,” writes Portes. Photo: NurPhoto/SIPA USA/PA Images

“Conservatives believe in balancing the books and paying down debts—because it is wrong to pass to future generations a bill you cannot or will not pay yourself.” That’s what the Conservative manifesto said. And it is true that the deficit has been reduced very significantly since its post-crisis peak—down from about £150 billion in 2009-10 to less than £50 billion last year. So, although we’re still a long way from “paying down” the national debt, at least we’re not adding to it at nearly the same rate?

Not so fast. In fact, over the last year, the national debt—public sector net debt, excluding public sector banks, (“PSND ex”), which is both the ONS headline measure and the one officially targeted by the government—increased by nearly £144 billion. In other words, it’s going up almost as fast as it was when the deficit was three times as high.

How come? The answer is very technical—£100 billion or so of the extra debt relates to the Bank of England’s Asset Purchase Facility. Briefly, the BoE makes loans to banks and buys corporate bonds, in return for cash (“central bank reserves”). The latter are a financial liability of the BoE, so public sector debt, as measured, increases. Of course, the BoE now has assets to match these liabilities—it’s not actually “spending” the money, and there is no impact on the deficit. But since these assets are not liquid (that is, easy to turn into money and spend), they do not offset in the official measure of PSND (which follows international guidelines).

So, in economic terms, the underlying financial position of the public sector—its net worth—hasn’t changed, as both assets and liabilities have increased but PSND has gone up. Recognising this, there’s been little or no press or political attention paid to this huge increase in the national debt—and precisely zero market reaction.

So why does this matter at all? The answer is it doesn’t matter much—and that’s the point. The need to “pay down the debt” has been central to government rhetoric for the past seven years—and is enshrined in the government’s target to reduce PSND (as a proportion of GDP) in 2020-21.  The fact that the BoE can “borrow” an extra £100 billion and increase PSND by this amount, and that neither markets nor politicians take a blind bit of notice, is surely interesting.

And it’s particularly interesting when we look back at the 2017 election. Much was made during the campaign of Labour’s supposedly “unfunded” proposals to renationalise Royal Mail and the water industry (and, partially, electricity and rail); and to fund a new UK Investment Bank. For example, Laura Kuenssberg tweeted:

None of Labour's big proposed nationalisations have got numbers against them in manifesto costings

— Laura Kuenssberg (@bbclaurak) May 16, 2017

As I pointed out at the time, nationalisations—generally accomplished by purchasing the shares of the company to be nationalised—don’t directly impact the deficit, because a share purchase is a financial transaction, but they do increase PSND, for precisely the same reason as that explained above: both assets and liabilities have increased, but the new assets are not classified as “liquid,” and hence do not offset in the PSND measure. The same would be true of loans made by a new UK Investment Bank.

So the fact that a large increase in PSND doesn’t appear to have any great economic, political or market significance is, in itself, economically and politically significant. If Labour—or indeed any future government—borrowed to finance nationalisations, infrastructure assets, or to fund a new investment bank, that would indeed result in a substantial increase in the national debt according to the standard measure. And we should worry about that very little. There are lots of very good arguments against nationalisation (for what it’s worth, I think Labour’s proposals make very little sense overall, and certainly should not be a priority compared to other more pressing issues). But the fact that they’d increase the national debt isn’t one of them.

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