A frequently asked question is – Who does the UK borrow from? Who owns the UK’s government debt?
UK government debt is primarily held by:
- Private financial institutions – banks, pension funds, investment trusts and also private households.
- 27% is held by overseas investors (e.g. American investment trusts/Japanese banks)
- 23% is held by Bank of England – as part of Quantitative easing/asset purchase programme.
These are bought by private sector institutions such as pension funds, investment trusts and banks. The majority of these private sector buyers are domestic financial institutions. Most UK government debt is owned by the UK private sector. From 2009-12, the Bank of England has pursued a policy of Quantitative easing which involves buying gilts from the private sector. Therefore, there has been a growth in the % of UK gilts held by the Bank of England.
Notes about government debt
- The government needs to borrow because it spends more than it receives in tax revenue.
- To finance this shortfall the government sell bonds, gilts, and treasury bills.
- In the UK government debt is managed by the DMO Debt Management Office
- Government debt is the accumulation of past borrowing. The government’s budget deficit adds to its total debt. It borrows by selling ‘gilts’ and bonds. In return purchasers of bonds get paid an interest from government.
- Government debt is different from the external debt of a country (the total owed by private and government sector to foreign debtors)
- It is also different to the balance of trade (concerned with the level of UK imports and exports)
Why do people lend buy gilts? (effectively lending government money)
- Government bonds are seen as a safe investment. The UK has not defaulted on debt in the past. It is a safer investment than shares – which can go down in value.
- Rate of interest. Buyers of bonds get an interest on the bond. Some bonds are ‘index-linked’ which means the rate of interest varies with inflation. If investors are nervous about inflation reducing the value of gilts, they can buy these index-linked bonds
- In a recession, demand for government bonds tends to be higher because of banks, companies are more nervous about lending and investing. Government bonds are a safe investment for turbulent times.
- Pension funds need to invest contributions for future payouts. Government bonds provide a secure part of the portfolio.
- Companies like Apple may have a large surplus of profit and high levels of savings. Bonds are a way to invest this money.
- Households can buy bonds as a way to save and get a guaranteed bond yield (often higher than bank rates.
This shows people were willing to buy government bonds – despite lower bond yields.
Trends in ownership of UK debt
Since 2009, the Bank of England has purchased gilts. During this period, the % of gilts held by UK insurance and pension funds has fallen.
On 2nd November 2017, The Bank of England has bought £495bn worth of UK gilts.
Overseas holdings have stayed fairly constant around 30%. Helped by the Euro-crisis making UK debt more attractive than countries in the Eurozone.
UK Public sector net debt was1,785.3 billion at the end of September 2017, equivalent to 87.2% of GDP
Holdings of gilts by sector
Other small fractions include public corporations and local authorities.
Graph Showing UK Debt Held By Overseas Investors
Who owns US National Debt?
As of March 4, 2009, the total U.S. federal debt was $10,942,165,294,650.89 (just under $11 trillion) You can find latest figure here at US Treasury Direct
The biggest foreign holders of US debt are:
- China – $727 bn
- Japan – $629 bn
- UK – $157 bn
- Brazil – $129bn
- Russia – $116bn
Total foreign debt holdings = $3,000bn or about 28% of total national debt.
Note: in 2001, foreign debt holdings were $1,051 bn or 17% of total holding
Source: debt statistics at US treasury