I’ve been asked a number of questions since I returned to the subject of excess interest payments being recorded as a result of the extraordinary provisions being made for redemption costs on index-linked bonds. As a result, I have prepared the following table:
The data comes initially from the Office for National Statistics. That of gilts in circulation and Bank of England holdings is of the latest Debt Management Office publication, which is the best available.
What is clear is that the problem addressed here is entirely related to index-linked bonds. No problem with conventional gilts.
The rate of return on index-linked bonds has risen in line with inflation, which is not surprising. However, as inflation falls, as it will, that rate will also fall. In fact, it is possible that it could turn negative, as the data shows that it is entirely possible. In other words, this is a very short-term phenomenon.
Simply equating rates of return, there was a cost overrun for index-linked bonds in 2022 of around £57bn. That calculation could be refined: it wouldn’t change the conclusions much if it were.
If that cost overrun were spread out, as I appropriately suggest, over the 17-year period that these bonds have, on average, remained in existence, then the cost to be recorded in 2022 would have been about £3.4 billion, which is not quite neither here nor there.
Instead, it has been recorded as an excess and an ongoing cost when it is not. My suggestion is that this is deliberate misaccounting to fuel the austerity agenda.
When accounting is used in this way, it is no longer objective, true or fair and the Office for National Statistics must know this. Whichever accounting standard they use, there is always a true and fair option that they can use to report for decision-making purposes. They are not using that option and that is, in my opinion, a huge failure on their part.
Not only is interest on the national debt the amount they report because they do not net it6 of amounts paid to HM Treasury, but they also deliberately overstate the cost of index-linked bonds that must accumulate over their lifetime. Accounting flaws don’t get much bigger than this. The interest cost overstatement was approximately £66 billion (£57 gilt overrun minus £3 billion prorated cost plus £12 billion of interest paid to the Treasury). That’s a flop in anyone’s book.
