Central banks raise interest rates to control inflation. UK debtors have paid a ballpark £500 billion since rates began rising in November 2021, mostly through higher mortgage and credit card payments, averaging 7% of GDP each year. The banks keep a chunk, and the rest goes to their clients, with taxes collected along the way. The average UK saver is getting a few hundred pounds in interest each year but the vast majority of that half trillion (and rising) is going to the already rich.
Yet over half of UK owner-occupation is outright ownership. Their savings grow from any interest rate increase intended to curb inflation by making us poorer. The pain inflicted on mortgage holders and other debtors (including government) is all the greater to compensate for the extra purchasing power going to the already rich. Their higher propensity to save reduces demand temporarily, later adding to the annual £100 billion in inflationary inheritances that the debtors must also counter.
There is a better way. Inflation management requires pain, but if we inflict it through higher taxes instead of higher interest rates we can use the money to pay off the national debt and restore public finances. £500 billion exaggerates the savings we have missed in recent years if less pain is needed because tax changes are more immediate and better targeted, but less pain is its own reward. Paying off the national debt locks the money away, instead of redistributing it to the already rich, which is both counter-productive and highly regressive.
Later in the cycle, as tax rates are cut to stimulate the economy, tax revenues would still accrue relative to the position pre-tightening, only more slowly. Interests rates would remain the backstop against inflation, deflation, and government profligacy. Good fiscal governance could see the interest rate unchanged throughout the economic cycle, increasing stability and reducing costs. Corporations would invest more, easing inflationary pressures. Currently investment is often cut when companies are hit as collateral damage by interest rate hikes aimed at changing consumer behaviour.
This is Keynesian demand management, but without the commitment to full employment. Instead, we can use demand management as the first line of defence against inflation, leaving an independent monetary policy as the backstop instead of first resort. A tax ‘ventilator’ from zero to 3% on incomes above the national average should be sufficient to control inflation, targeting those most responsible for consumer spending. With all proceeds paying off the national debt, it is cheap at twice the price.
A double lock on inflation will reduce interest rates, cut mortgages and other debt servicing, and also stimulate investment and growth; all the while bailing out heavily indebted governments instead of exacerbating inequality. Neo-Keynesianism requires less pain to control inflation, which could be borne by the broadest shoulders should a government so choose.
* Alastair Bowman is a life-long Lib Dem who chaired Camberwell and Peckham from 2007 to 2010. He now lives in the French Pyrenees.
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33 Comments
“Paying off the national debt locks the money away, instead of redistributing it to the already rich..”
I’m afraid you are wrong on this point. Paying off any amount of National Debt means, in practice, the government raising less by selling new government bonds, which are basically IOU notes that pay interest, than it spends repaying bonds whose repayment time has arrived. While most debt continues to be ‘rolled over’ – taking free borrowing so existing debt can be repaid on time, any repayment of national debt is basically returning money to those with the wealth who are willing to lend to governments. So the money is not ‘locked away’ – it is returned to the same wealthy interests who ultimately also lend money for other purposes…including money that gets borrowed by those wishing to buy a property that costs up to 20 times their savings.
Sorry…one typo (predictive text)…the phrase ‘taking free borrowing…’ should read ‘taking fresh borrowing.
If the National Debt were correctly accounted for it would include all kinds of Govt IOUs instead of only bond IOUs and other Govt securities. Once we see it this way we can also see that selling a bond doesn’t do anything to change the total debt. We can also see that the total debt is simply all the ££ that have ever been issued which haven’t been recovered in tax.
Therefore if the ND didn’t exist none of us would have any money! At least none that were expressed in pounds. We’d have to rejoin the EU and use their euros! 🙂
@Peter Martin
“ Therefore if the ND didn’t exist none of us would have any money! At least none that were expressed in pounds”
You will understand in 1707, at the creation of the Union, that Scotland had no National Debt but England did. For this reason the Treaty of Union of 1706 provided for a payment to be made to Scotland (known as The Equivalent) to compensate for Scotland having to take on part responsibility for England’s National Debt as part of the Union’s national debt.
I mention this historical fact merely to illustrate that countries can have a currency in circulation (as Scotland did prior to 1707) without having a national debt.
Indeed, countries can be in surplus.
“Central banks raise interest rates to control inflation.” yes unfortunately this nonsense from monetarism remains an article of faith to too many economists despite the lack of any causal link.
@ Brenda and Chris,
The same argument is made for the USA in the early part of the 19th century. However, the dollar then wasn’t a fiat currency. It was fully on the gold standard and the higher value coins were gold or silver based. If the value of the gold, or any other valuable metal, is included in the accounts then it is quite possible for the National debt to become a National Asset.
So, historically, the monetary base in most countries was never counted as part of the National debt. It was considered to be backed by gold. The change to fiat currencies which was globally complete after President Nixon delinked the dollar from gold in 1971 should have changed that but the rules never caught up.
So, now, we have a situation where £ denominated IOUs in the form of bank notes and £ deposits with the BoE aren’t counted as debt but £ IOUs in the form of govt bonds are.
Go figure!
@ Alistair Bowman,
I’m broadly in favour of the approach you advocate, with some provisos, but you perhaps could have pointed out that there are downsides. You don’t mention the likely depreciation of the exchange rate if interest rates are suddenly reduced. It’s not just that Spanish holidays wouldn’t be quite so cheap any longer. The price of fuel and everything else would rise sharply too.
This wouldn’t be immediately popular! No government would survive if they made the abrupt policy change you advocate right now.
The best time to have made the change would have been after the 2008 GFC when all major central banks were lowering interest rates to near zero. They could have been left there and fiscal measures could have been used to regulate the economy instead.
Sadly, it’s too late for that now and we might have to wait for the next crash to have the same opportunity.
Brunei has its own sovereign currency – the Brunei Dollar- and has no national debt in the form of bonds. The former Portuguese colony of Macau is now an autonomous region of China that issues its own currency – the Macau Pataca- and has no sovereign debt. Liechtenstein uses the Swiss Franc as its legal tender under a customs and monetary union with Switzerland and has no sovereign debt in circulation.
National currency in circulation held as private sector savings can be considered a form of non-interest bearing debt or deferred taxation even though it is not recognised as such in offical statistics.
When the government wants to increase its spending beyond the capacity of the economy to grow it must transfer existing resources and consumption from the private sector to the public sector. Those resources are transferred either by way of direct taxation or by removing the capacity of the private sector to spend savings by borrowing those funds via the issue of government bonds. The increased government spending increases the money supply, taxation reduces it and the issue of government bonds restricts the capacity of the private sector to compete with the government in the acquisition of existing resources that the government is in need of.
BofE interest rates are driven by bond markets. For the government to be able to control interest rates it needs to be able to instill confidence in markets that the purchasing power of its currency will not be depreciated by inflation or eroded by excessive fiscal deficits through insufficient levels of taxation. Alternatively, it can begin to pay down debt levels as a % of GDP by running budget surpluses while stimulating economic growth through increased productivity and moderate inflation within target. The latter would require radical tax reform and redistribution to effect in the UK.
@ Joe,
Any country which uses someone else’s currency, such as Lichtenstein, need not have any sovereign debt.
For the other countries you mention, it depends on how they do their accounts. If , for example, Brunei issues and spends a billion of its own own dollars into its economy it has created a billion dollars of debt until those dollars come back as taxation revenue. Brunei dollars are IOUs just like any other dollars. All IOUs should be counted as a debt even if they aren’t. Brunei will also have lot of assets in the form of foreign currency, gold reserves, oil wealth etc. If it includes these its debt will vanish.
The UK has lots of assets too. We could probably make our own National debt vanish, or at least substantially shrink, if we included those.
Peter,
the government does publish whole of government accounts. The 2024 accounts show consolidated assets of £2.6 trillion (comprising primarily property, equipment and financial assets) and consolidated liabilities of £5 trillion (comprising primarily government borrowings, other financial liabilities and net public sector pension liabilities) Whole of Government Accounts year ended 31 March 2024 i.e. a negative net worth of £2.4 trillion for the government sector approximating the UK National debt. The state pension and welfare benefits are not considered to be liabilities in these accounts as there is no unavoidable or contractual commitment to pay them: they are future policy choices.
A negative Public sector net worth position reflects the use of deficit funding for the maintenance of current recurring expenditure rather than infrastructure and other capital expenditure that has an enduring benefit for future consumption and effectively the acquisition of what were once public assets like the water utilities and government buildings by private sector interests rather than the public as a whole.
Private banks can and do create money/credit in the economy to facilitate commercial transactions. With respect to government money creation, I think it may be more accurate to say that if government hadn’t spent money into the economy, there would be no money available for taxpayers to make payment to them to settle the tax bill that they raise.
Thank you for a most important article!
“Debt:something. especially money that is owed to someone else, or the state of owing something”. [Cambridge Dictionary]
Differentiation of the National Debt is most informative about its components and, some might say, about its use to avoidably frighten the electorate. Indeed, if such is the case, it may also tell us something significant about the attitudes of H. M. G’s attitudes to its citizens.
To the best of my information the National Debt comprises:
a) 32% overseas government debt which is offset by some £75.29 M owed to H. M. G.
b) 24% held by the Bank of England
c) 21% financial arrangements with insurance and pension private companies
d) 10% other private financial institutions and corporations
e) 7% monetary institutions
f) 6% ?
As is demonstrated by the article below, 55% of “National Debt” is a vital, longer term savings and financial insurance set up without which the private money industry could not function without avoidable risk.
As such is not a debt in vernacular language, might labeling it as National Debt be considered to be misleading?
Can what you “owe” yourself really be considered to be a debt”
Is an essential government service an everyday debt?
Bar the 6% which is unaccounted for, might our real National Debt be about a third of the sum with which we seem to be intimidated by H. M. G and the main stream media?
https://www.taxresearch.org.uk/Blog/2025/07/24/badenoch-is-talking-nonsense/
@ Joe,
Your first paragraph does underline my point in that there is a large degree of scope in making the National Debt figure to be as large or as small as anyone chooses it to be politically. The question of how to factor in future liabilities is problematic. I agree that some attempt should be made though. The government seems determined to minimise its own debt by taking out Public Private Finance agreements. This simply replaces future interest payments of a debt to buy something by larger future rental payments to lease the same thing.
This is probably not a mistake you or I would make in our personal finances.
Private banks can only create money, by lending, denominated in pounds because the government issues money, by spending, which is denominated in pounds. Lending is not the same as spending. The money is not the same. Loans have to be repaid.
Alastairs writes that Central banks raise interest rates to contol inflation by reducing demand in the economy.
Increased taxation also serves to reduce disposable incomes and hence demand.However, tax receipts automatically rise and fall with a buoyant or slowing economy so there is an automsatic stabiliser element that comes into play with taxation that may obviate the need for a ‘tax ventilator’.
The alternative to tax increases is government borrowing but that becomes increasingly onerous as debt levels reach high proportions of GDP. The reason is that interest payable on government borrowing is not set by the central bank but via bond auctions in international capital markets.
Japan has a high level of government debt to GDP but a reasonbly healthy net asset position. Despite the governments desire to keep interest rates down Japan is having to offer ever higher rates to refinance its borrowings The bond market maths does not add up for governments
The US dollar has been falling in value relative to other International currencies (evn while bond yields are incresing) as a result adding price pressures to imports on top of tariffs.
The UK has worsening fiscal and net asset position with rising inflation, low growth and increasing costs of government borrowing. I think the only potential solution is effective tax reform and redistribution to generate demand at the consumer level coupled with productivity enhancing public and private sector investment to meet the increased demand without generating price inflation.
Yes, our current tax set up/racket certainly needs reform!
https://www.taxresearch.org.uk/Blog/2025/07/21/why-has-inequality-grown-and-how-can-we-make-sure-that-the-rich-contribute/
Might the (pretended) management of inflation using increased bank rates be a racket too?
1) The unwealthy do not cause inflation
2) The unwealthy have a greater need to borrow to survive
3) Raising the bank rate results in the unwealthy paying to the already wealthy to survive which further, avoidably, destabilizes our society and so makes it less efficient/effective
4} Raising the bank rate automatically increases the wealth of the rentiers.
“Rentier: a person whose money comes from investments and who does not have to work” (Cambridge Dictionary)
P.S. “National Insurance Contributions are only payable from working, not on investment income.”
P. P. S. Yes, not all the unwealthy are saints and some contribute to their problems but the taxation structure is neither equitable, transparent nor efficient.
@Steve Trevethan
“ The unwealthy have a greater need to borrow to survive”
Current bank base rate is 4.25%. Average credit card interest rates are 25% and current bank overdraft interest rates are around 40%.
Yes, increasing base rate may edge up all other interest rates in the country, but the high rate of interest on credit cards and overdrafts – the main forms of borrowing by those who have a ‘need’ to borrow to survive – are far more influenced by the risk of lending not being repaid than by the level of base rates.
As an aside, many people confuse ‘borrowing to survive’ with ‘borrowing to maintain a certain lifestyle’. In other words, those who turn up at food banks because they have no money left to buy food, but are paying a huge monthly contract for the latest mobile phone, are not struggling to buy food due to lack of income.
As a former Chair of a Food Bank in Scotland, could I ask Brenda Will whether she has anything other than anecdotal evidence that recipients of food banks give preference to paying for a mobile phone instead food ?
Reference to a food bank is not a casual business but through proper referral channels. Food banks can and do work with social care departments and other agencies such as the Citizens Advice Bureau.
such as Citizens advice.
@ Brenda Will,
.”those who turn up at food banks because they have no money left to buy food, but are paying a huge monthly contract for the latest mobile phone, are not struggling to buy food due to lack of income.”
I would imagine that the same thing was said in the 1930s about anyone who was “paying a huge monthly contract for the latest” model from Radio Rentals.
I don’t know what you mean by “huge”. Are we talking about £50 or so per month? You can get a decent phone for that. Possibly the less well off could choose to spend their money more effectively but given that it’s just about impossible to manage life off the internet these days I wouldn’t be too quick to make a judgement about that.
Even if anyone is paying £100 per month, the main cause of lack of money will more likely be a rent of £1000, or maybe more, per month
@David Raw
“…could I ask Brenda Will whether she has anything other than anecdotal evidence that recipients of food banks give preference to paying for a mobile phone instead food ?”
Hi David, my mother volunteers at a food bank and told me of a woman who admitted to her that she couldn’t afford groceries that week because she had just signed a £50 per month mobile phone contract for a new phone. My mother told me because she was quite upset by the incident, knowing that people gave donations to help people in genuine need.
So yes, anecdotal, but my mother’s first hand experience.
There used to be a degree level question “Make an economic case for paying off the national debt”, note not a political or moral one.
We have had a national debt for well over 300 years, and probably longer. No government, of whatever political stripe have ever tried to pay it off. Yes, reduce it a little, or don’t add to it quite as fast.
Let me pose another question. What would be the effect of adding say £1 trillion to the national debt, other than increased interest payments? If it was for infrastructure improvements, I would suggest that it would have little effect at all. After all, borrowing to build goes on all the time and eventually the loan is paid off, even if it takes 25 or 30 years to do so. The markets would shrug it off as sensible investment for the future. If it was for current spending, then any sensible person and the markets would be alarmed.
As a party we have always been taken in by the monetarists doom laden views about debt and it’s time we started pressing for more borrowing to fund the vital infrastructure in the water industry, the NHS, the Green economy and transport.
@ Mick,
If I was answering your exam question I’d start off by saying that if anyone bought a £1000 worth of bonds, the Government’s National Debt would rise by the same amount. By doing this and not spending the money I’d be doing my little bit to slow the economy. It wouldn’t be enough to notice but if enough others were also doing this it would be.
So, we can say that an increasing National Debt is a sign of a slowing economy and conversely a reducing National Debt would be a sign that everyone is spending more than they are saving and there could be a danger that the economy would start to overheat.
The case for reducing the National Debt is therefore to reduce the possibility that everyone will one day start to de-save and cause a run on the currency. If the level of savings are low de-saving won’t be a problem.
This is probably putting it the opposite way around to what I’d been taught in lectures so I might not get good marks.
What do you think?
@ Mick,
I thought I might have a go at your second exam question:
“What would be the effect of adding say £1 trillion to the national debt, other than increased interest payments?”
The implication in your question is that government can choose to add £1 trillion to the National Debt rather like you or I could choose to go to the bank and ask to borrow £10,000 or so for house improvements. Is this a sign of some latent ‘household economic’ thinking?
A alternative way is to think of the government itself as the bank. Users of the currency, including our overseas trading partners , may choose to deposit money in, or lend it to, the UK bank. We, as domestic individuals, or institutions may choose to save in the bank by buying bonds. Our overseas trading partners overall like to sell us more than they buy from us so have to find somewhere to park their spare cash.
This spare cash can be viewed as a voluntary, but temporary, payment of taxes.
@ Mick
/cont
We, ie Govt, can influence the desire of others to save by varying our interest rates but we can’t control it by a simple decision in the same way can in our personal finances. We probably wouldn’t want to encourage too much de-saving too quickly by suddenly reducing interest rates. The Govt/BoE could do this very quickly by a simple decision of the Monetary Committee and a commitment to restart its QE program. This would reduce our debt but probably overheat the economy. It is something we could do at a more measured pace -if we are concerned about high public debt.
Conversely we probably don’t want to try to increase our debt by £1 trillion, or whatever, by pushing up interest rates too quickly. If others want to save an extra £1 trillion with us that has to be mainly their decision.
It really doesn’t matter whether the spending is classed as current or capital providing it’s sensible. We shouldn’t choose to spend sensibly to appease “the markets”. We should do this to make best use of our available resources.
@Peter Martin. I suppose I should have phrased the questioon differently. What would be the effect be of the government financing £1 trillion of expenditure through government borrowing. After all, this government is basically saying it can’t do that because of the monetarist ‘black hole’ in the economy.
You pose the question of capital investment and everyday expenditure and suggest it doesn’t make any difference. I think it does to the government’s ability to spend on infrastructure without frightening the horses!
@ Mick,
I would say it’s basically the same question as the original one and the one I answered.
Some in the peripheral MMT crowd would say “just create the money”. Or borrow it from the BoE which is the same thing. They’d say the government is a currency issuer and can never run out of ££ etc etc. They’d also say that the government’s debt is everyone else’s financial assets. All this is true but it also must follow that these assets constitute the government’s debts. Therefore it is only possible to increase the government’s debt if everyone else is happy to increase their financial assets.
This may involve an increase in interest rates.
If they choose to spend them there could be an inflation problem and the debt won’t increase. So there is some substance to your “frighten the horses” comment. Dealing with livestock may not always be logical. Most MMTers would say otherwise but I don’t believe this is contrary to a correct understanding of it.
What do you make of my ‘exam answer’ of the 27th July?
Thank you to those who commented on my post.
@ Brenda. Yes, strictly speaking, the tax ventilator would reduce the need to replace maturing debt rather than pay it back. But by taxing and not spending, demand weakens, inflation is countered, and the national debt is reduced.
@ Caracatus. Monetarism is nonsense, monetary policy is not – though it is a blunt, arbitrary and unfair. We should keep independent central banks targeting low inflation as now, but have them as last resort, with politicians (the Chancellor or possibly the Treasury select committee) setting the ventilator to forestall the need to change interest rates, promoting stability, investment and growth.
@ Peter. The markets like stability and low inflation so the depreciation risk is limited. Low inflation helps lubricate the economy, and interest rates should offer a real return, so I’d envisage a base rate of about 2%. Locking into near-zero rates would be undesirable if we want room for manoeuvre against any future deflation. The £500bn could just as well come from an increase from 2% to 7%, as from zero to 5%.
Is this bad politics or does it address our fractured society? The rise in inequality due to neo-liberalism is a fundamental driver of extremist politics, and this is how to reverse it. It is only fair that the debt-free share in the fight against inflation instead of displacing their costs onto debtors. It is also efficient, achievable and transformative.
@Andrew: Claiming that the rise in extremism is due to inequality and neoliberalism is a bold assertion for which I’m not aware of any evidence. There is correlation to the extent that both inequality and extremism has risen in recent decades, but correlation is not causation. If inequality was the cause, you’d expect extremism would be greatest amongst the poorest/most disadvantaged people, but I see no indication that is the case.
On the other hand, many other things have happened in recent decades that could plausibly equally explain the rise in extremism (which remember has happened across all industrialised countries, not just the UK): Vastly greater immigration levels, the Internet causing spread of misinformation, loss of influence of professional journalism/media and also providing places for people to feel safe propagating unpopular opinions, loss of confidence in politicians, greater uncertainty in the World, rapid rate of technology change due to IT, the rise of culture politics and cancel culture causing people to feel threatened, greater polarisation of politics (possibly a consequence of the Internet), etc. etc.
Probably most of those things have had some influence, maybe along with other causes I haven’t thought of. To blame it entirely on ‘neoliberalism/inequality’ seems to me simplistic. Also, beware of the tendency that all human beings, of all political persuasions, have to want to pin the blame on things that they already dislike. (Most liberals dislike neo-liberalism, so…)
@ Simon,
“If inequality was the cause, you’d expect extremism would be greatest amongst the poorest/most disadvantaged people, but I see no indication that is the case.”
You might want to take another look. When I lived in London many years ago I noticed that the National Front and various offshoots didn’t fare too well in the leafy Surrey suburbs. But in the more deprived East End………..
It’s not too much different now.
@ Alistair,
You make some good points. Yes, rising interest rates do make some people richer because it means Govt has to put more money into the economy. So whereas we can accept that doing this is meant to be inflationary in general, we are also meant to make an exception on the question of interest rates.
However, I don’t believe you have it right on the question of the National Debt. Whenever government has tried to squeeze the economy fiscally to reduce debts and deficits the results haven’t been good – to say the least. I notice you include the proviso “without the commitment to full employment”.
Instead, you’re going to need a commitment to very high unemployment.
This is why your remedy won’t work. We do need everyone to be working productively to pull ourselves out of a hole.
My experiences spending my working life amongst some of the most deprived communities in the North of England taught me to distinguish between those at the sharp end of inequality with some sense that life could be better and those for whom sheer survival from one day to the next was the only priority. The likes of REFUK will happily exploit the former and ignore the latter.
@ Simon
Yes, fair point, though a widening disparity of experience, opportunity and aspiration due to rising inequality only compounds other divisions. At least this solution puts us all on the same side, instead of pitting the haves against the have-debts, rewarding one while battering the other as we try to control inflation.
@ Peter
All action against inflation is deflationary and bad for employment. Since it is sometimes necessary the only question is how to inflict the pain. Monetary policy is a very blunt tool, often under- or over-shooting, hitting borrowers (people, companies and governments) while exempting the debt-free and rewarding the cash rich. Tax changes are more immediate and can be better targeted on consumers. With less pain inflicted more precisely, the employment hit should be lower and shorter.
@ Alastair,
“All action against inflation is deflationary and bad for employment. ”
Yes, it is in conventional terms. There something called the non-accelerating inflation rate of unemployment (NAIRU) which few politicians dare talk about openly even if they are aware of it. Your idea of short sharp ‘precise’ hit is somewhat misplaced and over optimistic. IMO. It needs to be permanent. But, then we are creating a pool of unemployed who are also more likely to become unemployable. There’s also the problem of under-employment so we’d really need to add an extra U to the NAIRU.
The only way out is to offer guaranteed jobs and replace a pool of unemployed by a pool of JG workers. There are political problems with this too but we could be moving in this direction.
https://en.wikipedia.org/wiki/NAIRU
@Peter: I’m not sure it’s that simple. Yes, the far right has historically often done better in working class areas than in leafy suburbs, but that could equally be a result of generally higher levels of education in places like Surrey, along with that working class places have tended to be culturally more conservative. After all, even in places like Dagenham or Ashfield, most people are going to be working and actually financially stable, with only a minority in actual poverty.
My own suspicion is that support for the far right is most likely to come from people who are less well educated, have conservative social attitudes, and who feel alienated from and have little confidence in mainstream politicians. That would probably explain the geographical variation in support for – say, the BNP in the past or for Reform today just as well as an explanation that blames it on inequality.
@ Peter
The way to get non-inflationary employment growth is investment, which would strongly benefit from sustainably low interest rates.
Re ‘precise’, a 0-3% tax ventilator on incomes above the national average (£32k) would focus the inflation fight on those consumers most responsible for discretionary spending. Monetary policy is far more blunt and arbitrary, and far less effective.