This Chart of the Month shows who holds UK government debt.
What is striking here is the increase in total debt after the 2008 financial crisis, as well as subtle changes to its ownership.
Significantly, the total value of bonds held by the Bank of England (BoE) has increased from nothing to almost £895 billion, worth 25% of total government debt. This is due to the introduction of quantitative easing since the great recession, a monetary policy response to insufficient aggregate demand. To boost the economy, the BoE effectively “prints” money by buying large quantities of government bonds, which increases the money supply indirectly and encourages spending.
Because the BoE acts as a buyer of last resort, the UK government knows it can always find a buyer for its debt, which allows it to lower the “price” of bonds. Bonds are “priced” by the amount of interest that the government offers to owners of bonds, the so-called “bond yield.”
Low bond yields have allowed the government to borrow at historically low levels. Any increases in government debt are not necessarily a cause for concern, as long as a large proportion of it remains with the Bank of England. This helps to keep the bond yield low and stop debt repayments from overwhelming government finances.
However, this has also made UK bonds less attractive to risk-taking investors who seek higher returns. This may explain why the proportion of debt held by insurance companies or pension funds has decreased in the past decade.
Recent shocks to the UK economy have had dramatic effects on the ownership of UK government bonds. With debt at an all-time high, we are only beginning to adapt to a new normal.
We leave you with today’s Question of the Month:
“How might the ownership of UK debt change in the future, and what economic effects might this have?”
Written by Tristan Hand and Chenyang Li