Say the economy’s a mess and foreign gilt-holders may believe it

Does it matter that Britain’s national debt could soon reach 100 per cent of its gross domestic product, meaning that the government owes to investors a sum equal to the entire economy?
At an economic level, rising from the present level of 99.4 per cent to 100 per cent wouldn’t really matter. It’s just another number, after all. And the UK certainly doesn’t seem to have any problems raising debt. A gilt auction last week drew £110 billion of orders, a record high.
Politically, though, it should be no surprise that the stock of debt will get more attention if that symbolic 100 per cent GDP threshold is breached for the first time since the early 1960s, when Britain was still paying off its wartime borrowing.
Politics loves round numbers. Labour strategists might even be tempted to invoke a 100 per cent GDP debt as part of the poisoned inheritance narrative they’re deploying to persuade voters that the Conservatives wrecked the economy, justifying the painful fiscal changes due in next month’s budget.
Yet the national debt issue is complicated, made even more tricky because more than a quarter of that debt is held by investors outside Britain. Serious people are starting to worry that this creates a potential risk of those investors suddenly offloading large volumes of gilts, pushing up yields. Liz Truss can tell you how that story ends.
Within the British economics establishment, there is polite disagreement about foreign holdings of UK debt. The Debt Management Office, which issues gilts for the Treasury, is relaxed about overseas holders, suggesting that they can be stable and reliable long-term investors. The Office for Budget Responsibility thinks the UK is running a risk by borrowing so much from foreign investors. Those investors, it has said, are more “fickle” than domestic holders, potentially prone to dump gilts if they start to think Britain is a bad bet.
This arcane-seeming row has been complicated by poor data about how many gilts are held outside Britain and by whom. The best figures are from the International Monetary Fund, drawing on Bank of England data. The IMF calculates that 28 per cent of UK debt is held abroad, the second highest rate of any G7 nation. But is it held by private investors or governments?
Over the summer, the Fund significantly revised its calculations on the foreign holdings of UK debt. Previously, it had said that 2.9 per cent of gilts were held by foreign governments; now it puts that figure at 16 per cent, meaning that Britain owes about £370 billion to foreign states. Which ones remains unclear, but it’s enough to jangle nerves in Whitehall.
These IMF revisions were revealed in a recent letter from Richard Hughes, the chairman of the OBR, to the House of Lords’ economic affairs committee, a cross-party group that is investigating the national debt. “Foreign holdings of UK sovereign debt have risen over the past two decades and, all else equal, this makes the UK debt position more vulnerable,” Hughes wrote, adding that overseas government holdings raised additional considerations. “Foreign official investors may also be susceptible to geopolitical considerations in structuring their portfolios.”
That’s dry language for a scary idea: that foreign governments could use gilts as economic weapons against Britain. Is the OBR right to be so twitchy about foreign holdings of gilts? The high stakes mean that, at the very least, the issue should get more careful attention from policymakers.
It definitely means that ministers should be more careful with their “broken Britain” narratives. British investors are likely to see through the political rhetoric, but foreign ones could be more likely to take the government at face value and decide to offload gilts.
The Treasury, meanwhile, might need to show greater regard to the interests of domestic gilt investors, including the big pension funds at present coming under political pressure to reduce their gilt holdings in favour of equities.
James Kirkup is a partner at Apella Advisors