How borrowed money ends up in the hands of the UK's wealthiest

CERTAIN numbers have a strong psychological impact. £9.99 seems much lower than a tenner. The final year of an old decade drives many people to compete in a marathon. National debt breaching 100% of GDP seems to suggest some kind of barrier has been crossed, ringing alarm bells. But like many headline figures, this number is not economically significant. 

The Office for National Statistics releases monthly information on the public sector’s finances. In May, the media concentrated on one figure: Government debt, for the first time since 1961, was above 100% of GDP. The narrative was, wow, this must be bad! The figure was revised to under 100% in June. But the damage had been done.  

Considering this framing, the take home from those newspaper reports will be that the government is spending beyond its means and must either raise taxes or cut expenditures. It seems intuitive. Once you spend more than you earn, you have moved from what economist Hyman Minsky called a "hedge" position to a "speculative" one. This risks financial instability and underpins the Conservative and Labour party's views that "it will spook the markets" (Anas Sarwar) or "there just, frankly, is no money left", (Lucy Powell).

However, this is nonsense. Josh Ryan-Collins from UCL, responding directly to Labour shadow culture secretary Lucy Powell said last week: “To say there is 'no money left' is economically illiterate.” In other words, you can not be financially unstable if you can always add to your financial assets. 

Moving from a hedge to a speculative position should concern a business or a household. But it has no meaningful economic impact for a currency-issuing government. Debt-to-GDP ratios of 60% or 100%, or 200% are economically meaningless when a government issues its own currency. As can be seen below, spending more than you earn is, in fact, the natural order of things in the UK. 

Treating the UK Government as a business or a household is a weak foundation for judging the economy's health. But it is worse than that.

GDP v government debt measures a stock, net debt, against GDP, a flow. Comparing a stock to a flow is an inherently dangerous tool to reach any concrete financial decision. When you plan a holiday, you look at your savings, not just your income. However, the main problem is that commentators examine the wrong debt number.

To see how much money the public sector owes as a percentage of GDP, we must consider central government debt minus debt held at the Bank of England. If, for example, you want to see if you are losing weight, you don’t step on the scales wearing a backpack. Debt to the BoE is debt the government owes to itself. The ONS state this, unfortunately widely ignored, figure. For June, it was at 90.4% of GDP. This is a massive £265.9bn pounds lower than the figure used to calculate the psychologically scarily high 100% figure. 

£2330.3bn is the total amount of debt, a stock, that the Government owes to the private sector. The next thing to consider is what makes this number rise or fall. 

In short, if the Government spends more than it taxes back, this number increases. If it takes from us more than it gives us, the number falls. In June, as in almost every month, net debt grew. The Government "borrowed" £18.5bn to meet its spending commitments. This figure includes £12.5bn debt service, the interest paid on central government debt. 

Two-thirds of the money borrowed by the Government in June was used to pay off its debt.

Since December last year, the total debt service paid was over £55bn. This money flows directly to those who own government bonds, ostensively the wealthiest in society. 

Bairns not bonds

In June, the Government paid 12.5% interest on its debt. This figure is even more shocking when considering that the Government sets this rate via the BoE. The Government chooses to pay much more to the wealthiest in society at a time when it refuses to offer a real wage increase to public sector workers in England, pay for school meals for kids or pay universal credit to families with more than two kids.

This narrative should dominate the coverage when these figures are released each month. The headlines should read: Two-thirds of the money borrowed by the Government in June was funnelled to the wealthiest in society. It chooses to do this. 

READ MORE: Richard Murphy: The UK's politics give us many reasons to be fearful

In summary, the net debt stock should not be compared to the flow of GDP. The comparison is not particularly informative when it relates to a currency-issuing government. Often the wrong figure is used, clouding what is really going on in the economy. And the amount of debt service paid to the private sector is controlled by the government. This is what is really happening.

Finally, it would be remiss not to state that £2330.3bn is the total amount of money the Government spent into the economy that has yet to be taxed back. If you know anything about basic accounting, someone’s debt must be someone else’s credit. Therefore, factoring out the rest of the world for simplicity, the Government's liability is the private sector’s asset. 

The private sector, theoretically, at least, includes you and me. But you won't see the benefits unless you earn a chunk of revenue from government bonds. You will only see the pain. And the amount of pain the UK Government delivers is a policy choice. 

The current government and the only alternative in the UK are fighting over who can deliver the most pain. Scotland deserves better.

Join us on Wednesday 26 at 2.30pm to discuss our four articles this month. 

All figures and charts from ONS.