UK Government Debt Stupid Question maybe?

SalarySlave

Hi All this may be a stupid question, or it may not.
If the UK interest bill on debt is roughly £43 billion a year, and equates to roughly 3% of the actual debt,, why hasn't the UK government refinanced its debt.

The interest rate from the BOE is currently 0.25 %. So if the UK could invent more money to pay off its debt and then repay the BOE at 0.25% the the interest on the debt would fall to below £4 billion a year instead of £43 billion.
Please tell me why this is not done, I would like to understand.

Browntoa

It's my understanding that it's all in the form of bonds so they promise to pay the bond holders x % in 15/25/40 years etc

michaels

In theory borrowing from the central bank (=printing money) is route one to Mugabe style hyper-inflation...or it was until QE came alog as being the only way to stimulate the economy post financial crash.

Existing debt can not be refinanced until it becomes due (unless it is bought out which is by definition expensive with low interest rates).

IN theory expiring bonds could all be refinanced 'short' - ie borrow for only a few months and then roll over but this is considered extremely risky as just like the banks before the financial crisis you are dependent on there being someone who wants to buy loads of debt on a regular basis. Borrowing longer costs more per year (due to the increased uncertainty) but is much safer. The Debt Management Office borrow at a mixture of Tenors (borrowing lengths) to balance risk against cost.

Thrugelmir

SalarySlave wrote: »

Hi All this may be a stupid question, or it may not.
If the UK interest bill on debt is roughly £43 billion a year, and equates to roughly 3% of the actual debt,, why hasn't the UK government refinanced its debt.

The interest rate from the BOE is currently 0.25 %. So if the UK could invent more money to pay off its debt and then repay the BOE at 0.25% the the interest on the debt would fall to below £4 billion a year instead of £43 billion.
Please tell me why this is not done, I would like to understand.

It did. QE. With another £100 billion last year.

Since last September the BOE has also completed a programme of buying £10 billion of corporate grade debt. That cash is now washing about the system.

Ballard

SalarySlave wrote: »

Hi All this may be a stupid question, or it may not.
If the UK interest bill on debt is roughly £43 billion a year, and equates to roughly 3% of the actual debt,, why hasn't the UK government refinanced its debt.

The interest rate from the BOE is currently 0.25 %. So if the UK could invent more money to pay off its debt and then repay the BOE at 0.25% the the interest on the debt would fall to below £4 billion a year instead of £43 billion.
Please tell me why this is not done, I would like to understand.

The government will have have long term issued bonds at varying rates over the years. If for example they've issued a 20 year bond at 5% they will need to compensate the bond holder for the loss of expected interest. This would be done by paying a premium on the bond so rather than repaying £1 per £1 bond they might pay £1.20 per £1. Note that this is just an example and I've not attempted to make the sums work.

My point is simply that there is a cost to refinancing which would need to be taken into account.

SalarySlave

Very interesting responses, and I do think I understand a little bit more. My second thought is, lets say inflation continues to rise and settles at lets say 5% but with continued 0.25% base rate then we could theoretically inflate our way out of debt as well, although it would take a long time and I guess we would be walking a tight line towards hyper inflation.

stator

Not directly related to this thread, but what's it called when the budget would be in surplus if not for interest payment? ie they point at which the government could, in theory, default on all it's debts. I'm sure there's a name for it.

antrobus

stator wrote: »

Not directly related to this thread, but what's it called when the budget would be in surplus if not for interest payment? ie they point at which the government could, in theory, default on all it's debts. I'm sure there's a name for it.

Primary surplus.

At least that's what it gets called in the Greece-EU debt deal.

According to what I can see, for 2016-17, the deficit was £52 bn, and debt interest was £49 bn. (Or £36 bn if you take QE into account. Take your pick.)

So we're not there yet.:)

michaels

SalarySlave wrote: »

Very interesting responses, and I do think I understand a little bit more. My second thought is, lets say inflation continues to rise and settles at lets say 5% but with continued 0.25% base rate then we could theoretically inflate our way out of debt as well, although it would take a long time and I guess we would be walking a tight line towards hyper inflation.

Inflating away debt is one of the oldest tricks in the book often attempted by governments of all flavours. This is part of what QE was about, trying to maximise nominal GDP increases to keep the debt plus deficit bill affordable each year.

Of course it only works with unanticipated inflation otherwise lenders simply price in the inflation when demanding interest when buying govt bonds (although of late there seems to have been a breakdown in the normal theory that investors demand a positive return for tying up their cash - perhaps linked to demographics of an aging population where rather than individuals demanding a premium to defer consumption from today to tomorrow they are actually willing to pay for the privilege.

Thrugelmir

SalarySlave wrote: »

My second thought is, lets say inflation continues to rise and settles at lets say 5% but with continued 0.25% base rate then we could theoretically inflate our way out of debt as well

Benefits, pensions, government debt, are also linked to inflation. To fund same. Government will borrow yet more.

antrobus

Thrugelmir wrote: »

Benefits, pensions, government debt, are also linked to inflation. To fund same. Government will borrow yet more.

Sometimes.

There are index linked gilts. Governments are usually keen to at least increase pensions in line with inflation. But the last time I looked many benefits were subject to a freeze.