Policy Research in Macroeconomics

The Shadow Chancellor and the government’s debt interest payments

The following is a statement in response to recent media comment on the public finances, signed by 37 economists as at 30th November 2017.  It has been updated since first posted on 26th November (by then signed by 22) to include the further signatories.

It can be
downloaded here as a pdf

Andrew Neil of the BBC Politics programme recently challenged the Shadow Chancellor, John McDonnell, on the likely cost in interest payments of additional public borrowing. Mr Neil suggested that current debt interest payments are estimated at £49 billion, and rising. His use of £49 billion was misleading, as it included £9 billion owed by the Treasury to the Bank of England (BoE).  Because the Bank is part of the public sector, £9 billion is in effect owed by government to itself, as the Office of Budget Responsibility (OBR) explains. [1] The government’s debt interest payments are therefore £40 billion.

But the £40 billion is not meaningful in isolation. It is best understood as a share of the UK’s national income or GDP. This amounts to just 2% of GDP – a historically low share of the national ‘cake’. This is remarkably low, given the costs (debt) incurred by the government to bail out the private financial system after the 2007-9 global financial crisis, and given Britain’s falling wages which reduce government tax revenues. Above all, given the slowest economic recovery on record.

In 1987/88 when Conservative Chancellor Nigel Lawson was stoking an unsustainable boom, debt interest (see the OBR’s databank on public finances
here) was at virtually the same level as the OBR estimates it is today – circa £40 billion (in 2016/17 constant prices). When the Tories left office in 1996/7 debt interest payments were again at the same level as estimated today –  £40 billion (also in 2016/17 constant prices).

But there is a stark difference between the period of Lawson’s boom, the Conservative government of 1996/ 1997 and Britain in 2017. Today the nation is struggling to recover from the devastating effects of a global financial crisis, and for ten years has suffered falling wages and incomes, the dismantling and defunding of vital public services and with it, the loss of the’ social wage’. And thanks to austerity, this has been the slowest economic recovery from a slump in history.

Chancellor Nigel Lawson and Prime Minister Margaret Thatcher were relaxed about spending close to £40 billion on debt interest payments at a time of prosperity. Today we face ongoing economic weakness, the rise of populism and the possibility of a major economic shock posed by Brexit in 2019. In these circumstances, neither Labour (nor indeed the current government) should be deterred from borrowing for productive investment, especially at a time when interest rates are historically very low. [2]

Increased public investment in productive activity will expand our nation’s income and with it, government tax revenues.  By so doing public investment will enlarge the economic ‘cake’ and help bring down future debt interest payments as a share of GDP.

Signed by

Professor John Weeks, coordinator Progressive Economists Group & SOAS, University of London

Professor Lord Meghnad Desai, London School of Economics

Professor Stephany Griffith-Jones, Columbia University New York

Professor Frances Stewart, Centre for Research on Inequality, Human Security and Ethnicity, Oxford University

Professor Özlem Onaran, Greenwich Political Economy Research Centre , University of Greenwich

Professor Daniela Gabor, University of the West of England, Bristol

Professor Trevor Evans, Berlin School of Economics and Law, Germany

Professor James K. Galbraith, University of Texas, Austin

Professor Prem Sikka, University of Essex Business School

Professor Malcolm Sawyer, Leeds University

Professor Susan Himmelweit, Open University

Professor Richard Murphy, City, University of London

Professor Pritam Singh, Oxford Brookes University

Professor Christopher Cramer, SOAS, University of London

Professor Bruce Cronin, Centre for Business Network Analysis, University of Greenwich

Professor Guy Standing, SOAS, University of London

Professor Geoffrey Harcourt, Emeritus Reader, Cambridge University

Yanis Varoufakis, economist

Dr Jo Michell, UWE, Bristol

Andy Ross FAcSS, Visiting Professor, Birkbeck University of London

Ann Pettifor, director Policy Research in Macroeconomics

Jeanette Findlay, Senior Lecturer in Economics, University of Glasgow

Alfredo Saad, SOAS, University of London

Marco Veronese Passarella, Economics Division, Leeds University Business School

Leslie Huckfield, Yunus Centre for Social Business & Health, Glasgow Caledonian University

Hassan Hakimian, SOAS, University of London

Dr Suzanne J Konzelmann, Birkbeck College, University of London

Howard Reed, Director, Landman Economics,

Guglielmo Forges Davanzati, Associate professor of Political Economy, University of Salento, Italy

Sara Maioli, Lecturer in Economics, Newcastle University

Stewart Lansley, City, University of London

Jeff Tan, Associate Professor, Aga Khan University

Carolina Alves, Cambridge University

Jeff Powell, Senior Lecturer in Economics, University of Greenwich

Carlos Oya, SOAS, University of London

Diego Sanchez-Ancochea, University of Oxford

Karen Hancock, former Chief Economist Department for Education  


[1]  See the Office for Budget Responsibility on
Debt interest: “The Bank holds lots of gilts and is part of the public sector, so the interest paid by central government on those gilts does not actually leave the public sector.”

[2] For example, just over a week ago, on the 16th November 2017, sales of the 1.25% 10 year-gilt was over-subscribed 2.3 times. See DMO notice of that date. 

6 Responses

  1. Does the author of this opinion have any shred of impartiality or is it supposed to be designed as confirmation bias click-bait?

  2. As Ralph Musgrave alludes, the government does not HAVE TO (excuse caps lock, Irish Ape) borrow, it is the issuer of its own currency and can just go ahead and issue it. (Sometimes called Sovereign Money Creation). The problem is that at present the UK is bound by article 123 of the Lisbon Treaty and to the EU Fiscal Compact that first of all prevents its Central Bank from issuing currency to the government, and second limits its deficit to 3% of GDP. I fear that any trade deal with the EU will involve adhering to these constraints otherwise the UK would have a clear advantage.

  3. If someone is convinced by Milton Friedmann he is only likely to convince Neanderthal monetarists himself.

  4. Ralph. Your use of caps lock UNDERMINES your argument. But thank you for going up against all those academics etc on your own. Well done you

  5. Glorious litany of false logic above.

    First, the fact that the cost of McDonnell’s proposals are small compared to the cost of an almighty blunder, i.e. the 2007/8 bank crisis, is not a brilliant argument for Mc Donnell’s proposals.

    Second, the fact that we’ve had the “slowest economic recovery on record” (just like other countries) is not an argument for a large dose of stimulus NOW. The crucial determinant of whether stimulus is justified NOW is what inflation is doing NOW. And in the opinion of the committee charged with looking at that question, the BoE MPC, inflation is sufficiently uppity NOW, that stimulus needs reining in.

    Of course the BoE might be wrong, but determining whether IT IS WRONG requires a detailed look at how much inflation is cost push and how much is demand pull, rather than vague statements about the “slowest economic recovery on record”.

    “In these circumstances, neither Labour (nor indeed the current government) should be deterred from borrowing for productive investment…”. Total confusion of unrelated issues.

    Assuming public investment is best funded via borrowing (and that is very debatable for reasons spelled out by Milton Friedman and Warren Mosler), the optimum amount of such borrowing will not be much affected by whether the economy is at capacity or in recession. I.e. sensible investment decisions are taken on the basis that the economy is at an average sort of level, capacity wise. I.e. the argument that “stimulus is needed, so let’s have a big increase in investment spending” makes little sense.

    Moreover, sudden changes in investment spending, or any other form of spending, tend to make for inefficiency. Put another way, when stimulus is needed, there is merit in spreading the extra spending as widely as possible over public and/or private sectors.

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