Add Debt managment Review post

content/post/debt-management-review/index.md

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+---
+title: "Time for a Debt Management Review"
+date: 2025-01-12T12:38:07Z
+summary: "If we're going to have government debt, then it's time to retire Thatcher-era monetarism and adopt a modern, cost-efficient approach to its management."
+
+---
+
+Recent headlines have painted an alarmist picture of the UK's debt
+situation, rife with half-truths and outdated comparisons. Even
+the [ordinarily rational Andrew Neil][1] has succumbed to monetarist
+misconceptions, claiming that
+
+> Investors will not take on any more British sovereign debt without a
+substantial risk premium
+
+Before drawing flawed parallels between the UK and Germany by comparing
+borrowing costs within entirely different currency frameworks.
+
+Meanwhile, [Faisal Islam at the BBC][2] noted that
+
+> Government borrowing costs have hit their highest level in 16 years.
+
+While he offers some context by pointing to the uncertainty of future
+U.S. economic policies, his analysis still contributes to the broader
+narrative of misplaced panic.
+
+These commentaries fail to grasp the key issue: the current debt
+management framework is a relic of outdated policy, ill-suited for the
+realities of the modern financial system. It's time to reconsider and
+update our approach.
+
+## The Origins of the Current Policy
+
+The UK's current 'full funding' rule dates back to 1985 when it was
+introduced to neutralise the public sector's influence on the M4 money
+supply.[^9] This framework was solidified by a [1995 review][3] long before
+critical developments like Bank of England reserves, interest on those
+reserves, and Quantitative Easing (QE) reshaped monetary dynamics. The
+rule's foundation—derived from fixed exchange rate thinking and
+monetarist orthodoxy—does not reflect the operational reality of the
+UK's floating exchange rate regime.
+
+The floating exchange rate fundamentally alters how government spending interacts with a currency
+area. When the government spends, in effect [it gives the private sector the money][5] it uses to buy government bonds.
+At an aggregate level, in the UK, the choice boils down to holding a
+gilt or a Bank of England deposit. There is no other alternative. This
+interdependence makes the lifetime price of a gilt a reflection of
+expected Bank of England deposit rates over the same period.
+
+Yet, the Debt Management Office (DMO) remains shackled by 1990s thinking,
+issuing long-term gilts into a market seeking shorter durations. For
+instance, [recent ultra-long gilt sales][6] forced the country to lock
+in a 5% running yield on £2.25 billion—higher than the current Bank Rate of
+4.75%. This mismatch is costly and entirely avoidable.
+
+## A Call for Policy Modernisation
+
+The DMO should never sell gilts at yields exceeding the Bank
+Rate. Instead, it should align its operations dynamically with
+any market preferences for shorter maturities, [as determined
+by current redemption yields][8]. At a minimum, the government should
+adjust the DMO's remit to ensure gilt issuance is always cost-effective
+regardless of market conditions.
+
+Moreover, the outdated full-funding rule, grounded in discredited
+monetarist beliefs about the M4 money supply, should be scrapped. By
+default, HM Treasury should leave deficits on the Ways and Means account
+at the Bank of England, paying the Bank Rate. This approach eliminates
+redundant cash management processes, saving costs and streamlining
+operations.
+
+The DMO's role should shift to reducing this default cost
+by issuing gilts and Treasury Bills on tap, priced in line
+with OBR yield curve projections. It should only issue securities if
+doing so would be cheaper than the projected floating path alternative,
+ensuring interest payments on any deficit increase remained within budget.
+
+## Conclusion
+
+The UK's debt management framework is stuck in the past, constrained
+by Thatcher-era monetarist principles that never applied in the first
+place. Just as the government recently updated its debt definition from
+Public Sector Net Debt to Public Sector Net Financial Liabilities, it
+must now overhaul debt management practices to reflect modern monetary
+realities. By embracing a more flexible, cost-efficient approach, we
+can discard outdated constraints and better support the nation's renewal.
+
+A debt management review is well overdue. Let's make 2025 the year we
+move beyond 1990s thinking and embrace a framework that fits today's
+economic challenges.
+
+[^9]: "When the 'full fund' policy was introduced in 1985, it was designed to ensure the financial transactions of the public sector had no direct effect on the M4 money supply". [Debt-Management Review, July 1995](https://web.archive.org/web/20220308123738/https://www.dmo.gov.uk/media/2083/report95.pdf)
+
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+
+[1]: https://www.dailymail.co.uk/debate/article-14267671/ANDREW-NEIL-economy-Budget-Taxes-cuts-financial-Labour.html
+[2]: https://www.bbc.co.uk/news/articles/cx2pg75yn88o
+[3]: https://web.archive.org/web/20220308123738/https://www.dmo.gov.uk/media/2083/report95.pdf 
+[5]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
+[6]: https://www.dmo.gov.uk/media/d34ffquc/070125conventional.pdf
+[8]: https://www.dividenddata.co.uk/uk-gilts-prices-yields.py
+