Readers Question: Who lends the government money?
Government debt is primarily sold to banks, pension funds, private investors and overseas investors. These financial institutions and individuals effectively lend the government money in return for gaining a safe investment (bond) with a guaranteed interest payment. Approx 27% is ‘lent’ by overseas investors.
Investors do not see themselves as ‘lending’ money to the government. From their perspective, government bonds provide a relative safe, secure, low-risk investment option. In an investment portfolio, government debt secures the low-risk, low yield aspect.
UK public sector debt in Aug 2017 was £1,773.3 billion equivalent to 88% of GDP. See: UK National Debt.
On this debt, the government have to pay interest payments, In 2016/17 this was £49.1bn – approx 2.5% of GDP billion a year. See: interest payments on UK debt.
To finance this national debt, bonds are sold through the Debt Management Office (DMO) on behalf of the government to the private sector. Most of this government debt is bought by financial institutions such as:
- Pension funds
- Building societies.
- Investment trusts
- Insurance companies
- Private individuals (UK households)
Therefore, the interest payment is paid to those who buy the government bonds and gilts.
Since 2008, The Bank of England has purchased 25% of government gilt holdings as part of quantitative easing. This means a significant proportion of UK debt is being financed by Bank of England.
Trends on holdings of UK Gilts
The Bank of England has not taken nearly 30% of gilt holdings.
Foreign Holdings of UK Debt
The percent of UK government bonds bought by foreign financial institutions.
Quantitative Easing and Government Debt
Since 2009, the Bank of England has used electronically created money to purchase government bonds. The initial wave of quantitative easing involved £200bn. Therefore, a significant part of the governments debt is held by the Bank of England. (21% at start of 2011)
Note: The purpose of quantitative easing is supposed to be – keep interest rates low, encourage bank lending. It isn’t meant as a way of financing government debt. After economic recovery, the Bank of England will sell these government bonds back onto the market. Thus debt will be held by the private sector again.