11.1 The measurement of public decits and debt

Box 11.1

Measures of the public debt

The overall measure of debt prepared for the UK government by the ONS is:

public sector net debt public sector consolidated gross debt



total public sector liquid assets

The principal element of the public sector consolidated gross debt is the gross debt

of the central government. This in turn consists of the following items:

l	market holdings of national debt (including holdings of government debt by theIssue and Banking Departments of the Bank of England);

l	national savings;
l	accrued interest and indexing on National Savings;
l	coin in circulation;

l	other (comprising market holdings of Northern Ireland government debt, bank andbuilding society lending, and balances held by some public corporations with thePaymaster General).

The market holdings of national debtmake up more than 90 per cent of the total

consolidated gross debt and consist of:

l	British government securities (sterling, marketable, interest-bearing securities issuedby the UK government);

l	treasury bills;
l	National Savings securities;

l	IMF interest-free notes (non-marketable, non-interest-bearing treasury notes at thedisposal of the International Monetary Fund as a reciprocal facility for loans receivedby the UK);

l	certicates of tax deposit;
l	other sterling debt; and foreign currency debt. The principal items in public sector liquid assets are:
l	the gold and foreign exchange reserves of central government;

l	commercial bills and British government stock held by the central government underrepo arrangements (see section 5.3);

l	the bank and building society deposits of central government, the local authorities andpublic corporations.

Annual changes in public sector net debt are equal to the PSNCR for the previous year

plus certain nancial adjustments. For example, foreign currency assets and liabilities

have to be revalued to take account of exchange rate changes over the year and the

capital value of index-linked debt has to be increased to take account of ination during

the year (this is referred to as capital uplift).

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Chapter 11 • Government borrowing and nancial markets

The rst problem arises from the division of receipts and expenditure into those

on current and capital accounts. Current account expenditure consists largely of con-

sumption of goods and services and interest payments on the existing public debt.

Capital account expenditure is, on the other hand, investment, being made up largely

of gross domestic xed capital formation and capital transfers by government to other

sectors of the economy. Since the aim of investment is to provide future returns, it

can be argued that even ‘good housekeeping’ on the part of government would permit

borrowing to nance capital expenditure. Certainly, most of the corporate sector

and a large part of the personal sector borrow for this purpose. Our only concern

should be with whether the rate of return on government investment matches the

rate of interest payable on borrowed funds. The problem is that much government

expenditure produces its returns in the form of social benets (or the reduction of

social costs) and these are not easily measured. For example, how does one estimate

the rate of return on the construction of a new prison? It is even difcult to calculate

a rate of return on obvious items of government investment such as the construc-

tion of new schools and hospitals since the resulting services are not directly sold in

the market place.

However, with the election of the Labour government in 1997, the notion that

government should be allowed to run decits in order to invest was re-established.

Indeed, it was enshrined in what the Chancellor of the Exchequer, Gordon Brown,

referred to as ‘the golden rule’ of the public nances – that over the economic cycle,

the government should borrow only to invest and not to fund current spending.

This has led to emphasis, from the point of view of economic policy, being placed

on the public sector current balance – the balance between current spending and

current receipts – rather than on the PSNCR. Clearly, nancial markets also have

to pay close attention to the public sector current balance, especially in the run

up to the budget (in March each year) and to the government’s annual expenditure

review (in November) since it might well affect taxation and spending decisions.

Nonetheless, the PSNCR remains important to the markets and is the gure more

likely to inuence the interest rate decisions of the Monetary Policy Committee

(MPC) of the Bank of England.

Critics of government decits argue that taxes must be raised in future to pay the

interest on the funds borrowed (which add to the size of the public debt) and that

this represents a transfer of income from future generations (who do not have a vote

and cannot inuence government policy) to the present generation. However, this

argument is not a strong one as long as borrowing is undertaken to allow ‘wise’

investment – that is, investment which contributes considerably to the wealth and

social welfare of future generations. The question at issue is not simply one of whether

there should be a decit but the much broader and more difcult one of the use to

which the decit is put and hence of the quality of government investment.

A second issue relates to the possible sale of public sector assets as a method of

nancing government expenditure. In the calculation of a single gure for the PSNCR,

there is no difference between raising revenue through taxation and through selling

public sector assets. They are treated differently in government accounts but they lead

to the same overall result.

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