Home Blog The true scale of UK government debt

The true scale of UK government debt

Nick Silver
26 April 2011

A couple of years ago, in an IEA paper, I suggested that the UK’s public debt was many times larger than the official figure. Following the financial crisis, I recalculated my estimate and subsequently the official figure, published by the Office of National Statistics (ONS), has changed significantly. In addition, two other organisations, the TaxPayers’ Alliance (TPA) and the Centre for Policy Studies (CPS), have published their own estimates. The various studies have produced very different figures, leading to confusion. The purpose of this note is to clarify the situation.

The differences between the figures are caused by a disagreement about what should be included, not by the actual calculation of the numbers. I therefore set out below the different liability figures, along with the major items they include.

ONS: £2,252bn (official debt, bank liabilities)

IEA: £4,771bn (official debt, public sector pensions, state pensions)

TPA: £7,873bn (official debt, bank liabilities, public sector pensions, state pensions)

CPS: £3,617bn (official debt, bank liabilities, public sector pensions)

There are further differences, including the treatment of PFI and Network Rail, but these are relatively minor so I am ignoring them for simplicity.

My calculation (IEA) is an attempt to provide a realistic assessment of the country’s debt. All of the independent estimates include public sector pensions liabilities. The argument of why these should be included has been well rehearsed, and I refer the reader to Sir Humphrey’s Legacy by Neil Record.

I diverge from all the other calculations in ignoring the liabilities from RBS, Lloyds and Northern Rock. The ONS and others include the full liabilities of these banks. I do not believe this represents a realistic reflection of the country’s debt as it ignores the assets of these institutions which approximately balance out the liabilities. The banks could be sold next week and this liability would disappear. The government is ‘on the hook’ if some of the assets of those banks defaulted. However, the actuarial value of this is the product of the probability and the magnitude of the losses, a much smaller number than the full liability (I have estimated this smaller number in my calculation).

The final difference is that both my study and the TPA’s include an allowance for state pensions (i.e. basic state pensions and state second pensions). This is more controversial than including public sector pensions; the argument against including them is that pensions are paid out of future tax revenue and also that the government can change the level of these pensions. However, I strongly believe these are true liabilities of the state as people earn the entitlement to a pension through paying national insurance contributions. This makes state pensions different to a future spending commitment, such as future NHS spending. People have earned their pension from past contributions, so this is a debt on the government, whereas the NHS is more akin to an insurance policy which is paid for out of current NI contributions.

Tags: government borrowing, national debt, Nick Silver, public finances, public sector pensions, Tax and fiscal policy
Submitted by Felix on Tue, 26/04/2011 - 17:14.
Just a thought on the bank debts, don't they have limited liability? If that is the case, than the only liabilities (from the banks) that the government should include is the amount of money it paid for the bank shares, and that is only if the banks go bust. Don't forget, if the banks return to profit, than they start paying dividends to the government, and the government increases it's revenue.
Submitted by Philip on Wed, 27/04/2011 - 09:28.
Felix - limited liability refers to the nominal value of shares but you are still right that, in theory, nothing further should be lost by the government because the worst that should happen is that they go bust and are effectively sold for zero. However, the point of the rescue was to stop them going bust and, presumably, the government will put in extra capital if they run through their equity capital again - which is not to say they should, just that they will
Submitted by ahmed desai on Wed, 27/04/2011 - 13:43.
Chris you're usually much better than this. As every first year accountant knows, let alone a smart economist like you, totting up liabilities without adding in assets only gets you a gross debt total, not a net asset position. If any or all of these future libailities are being included, to establish the net asset postion requires the further addition of the asset counterpart on the balance sheet. You dismiss the funding for the stae-supported baks on these precise rounds (although the net postion, based on current market capitalisation, is a negative one.) Yet you include pension liabilities wthout including the pensions payments that fund them. If, one day, the govt decides that it will no longer levy pensions contributions (taxes, NI or direct contributions), and yet will carry on paying out pensions over the next 40 years, this wold be a legitimate method. But as they aren't going to do that, this is plain silly.
Submitted by Philip on Wed, 27/04/2011 - 21:06.
@ahmed - not quite sure who Chris is, I assume you mean Nick. I am afraid that you are simply avoiding the legitimate debating points with your comment. It is true that, against explicit government debt, you might want to include government-owned infrastructure (so long as it generated a return). That figure is probably about £370bn. With regard to pension liabilities, I assume you mean state pensions as opposed to public sector pensions (the latter have no future national insurance contributions to finance them). There are two ways of looking at the problem. The first way is to think about the total promises that this generation has made to themselves - that way, I am afraid that the NI contributions to be paid by the next generation are not an asset. How can I include my children's NI contributions as my asset? Alternatively you might think about the scheme as a continuing entity though to do so ignores the risks of shrinking populations and assumes that it will be possible to fund tomorrow's pensions not from a set aside capital sum represented by physical capital but from future taxes on incomes. A company cannot assume that future sales are an asset today (except in very specific circumstances); when my mortgage goes into negative equity I cannot say to the bank "its okay, my children will earn enough money to pay this off" but you are saying that is okay for a country. Your position can be argued (though I do not agree with it) but I am afraid you state too emphatically that Nick is wrong. I hope the first year accountant learns in the second year the difference between an expected future cash flow and an asset!
Submitted by Felix on Sat, 30/04/2011 - 22:32.
Philip - you are right that the government might want to put more capital into the banks if they failed - but don't forget, that plan was initiated under the Labour government, whilst the conservatives were in favour of letting the loss-making investment parts fail. As F.A. Hayek said, a recession is a restructuring of the mal-investments that were made in the boom, and that the government should do its best to not interevene in the natural process of the markets
Submitted by Matt on Sun, 27/11/2011 - 23:19.
I'm in no way financially literate so maybe someone here could give thier honest opinion. Even with austerity measures the scale of the debt is so huge that to think it can actually be done before the country implodes is crazy surely? Is this inevitably leading to a point where the pound becomes so undervalued that peoples pensions etc.. become worthless? The question above worries me as a sizeable chunk of my income goes into a private pension and has done for years. Should I be looking to invest it differently instead?

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