The UK Government Is Not About To Pay Off All World War One Debt; Don’t Be …

Yes, it’s the day of the Autumn Statement and as a politician George Osborne has to have something to pull out of his bag to wow the crowds. Whether what he says is true is rather different from whether what he says is politically effective: he is a politician, first and foremost, after all. And the trick seems to be the announcement that he’s going to pay off all of the remaining World War One debt that’s out there. Which he isn’t at all: he’s going to refinance that World War One debt, a very different kettle of fish.

Here’s how the Telegraph is, umm, telegraphing the announcement:

Nearly one hundred years after it was first issued, the UK Government has announced that it will repay all of the nation’s World War One debt.

In October, the government said that it would redeem £218m of so-called “4pc Consols” – bonds that were first issued by then Chancellor Winston Churchill in 1927, partly to refinance National War Bonds originating from the First World War. This was the first planned repayment of an undated gilt of this kind by the UK Government for 67 years.

Today’s news extends the repurchasing programme to include all of the debt that the UK incurred during the Great War.

Mr Osborne said: “This is a moment for Britain to be proud of. We can, at last, pay off the debts Britain incurred to fight the First World War. It is a sign of our fiscal credibility and it’s a good deal for this generation of taxpayers. It’s also another fitting way to remember that extraordinary sacrifice of the past.”

Note that he really has said “pay off” there and that’s the part that just isn’t so. A government that is borrowing £100 billion a year and change isn’t paying off any debt whatsoever. It’s just swapping one debt for another. By the definitions that Osborne is using, in fact that WWI debt was all paid off in 1927. Which, given that we’ve still got bonds around relating to that debt shows that a refinancing is not actually the same as paying off a debt.

As background, yes, Britain ran up big debts in WWI. Those were those National War Bonds. And interest rates changed a bit, finances moved around, and in 1927 it was decided that those National War Bonds should be changed. And the change was to turn them into perpetual bonds: the capital would never be paid off, there would just be a stream of interest off into the indefinite future. The government retained the right to buy them in at any point (a “call option” on them) which is what Osborne is exercising now. One more thing: there were other bits and pieces of debt lying around. Odd bits and pieces from the 19th century, debt from the Crimean War, from those (not large enough) attempts to deal with the Great Famine in Ireland, bits and pieces relating to the Napoleonic Wars and even, would you believe it, some parts that related all the way back to the South Sea Company and the South Sea Bubble of the 1720s (although that connection is pretty remote).

All of these pieces were dumped into the same pot and “consolidated” into these perpetual bonds. They were and are thus known as “Consols”.

What Osborne is going to do is exercise that call option and bring those bonds back in. But he’s not actually “paying off” those debts. He’s going to issue other, more conventional, gilts in order to have the money to give to those sending in their Consols. He must be doing that: the government really is borrowing £100 billion a year and change at present. This is no more “paying off” those debts than my taking out a bank loan to pay off my credit card is paying off debts. It might well be a very good idea to do that, given the difference in the terms of the debts and the interest rates, but it’s still not paying off, is it?

So, Osborne is refinancing those bonds, not paying off the debts. Might be a good idea, might not be, that’s an entirely different matter. But it’s not quite what he’s saying it is. And, of course, if refinancing a series of bonds is indeed equivalent to paying them off than of course those Napoleonic debts, those South Sea ones, Crimean and Great War, were all paid off when they were refinanced into Consols in 1927, weren’t they? So, if Osborne’s definition is correct we paid off those debts 87 years ago. Which means that Osborne’s definition cannot be correct, for if it were we wouldn’t have to be paying them off today, would we?

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