Quarterly Bulletin
Public Sector Debt Articles

The impact of government spending on demand pressure (360k)
(by Bob Hills and Ryland Thomas of the Bank’s Structural Economic Analysis Division and Tony Yates of the Bank’s Monetary Assessment and Strategy Division). When assessing the outlook for inflation, the growth of real GDP is commonly used as an indicator of changes in current demand pressures. But as GDP includes the output of the government sector, this approach can in some circumstances be misleading. Government output is not necessarily an informative guide to the impact of government spending on the balance of demand and supply pressures in the marketed sector of the economy. Instead, it may be more informative to consider the quantity of resources that the government absorbs - that is, how much private sector output it buys and how much labour it hires - rather than the quantity of output it produces.

Public sector debt: end March 1999 (116k)
This article continues the annual series in the Quarterly Bulletin analysing the debt position of the UK public sector. It looks at market and statistical developments in the financial year to end March 1999, and examines some of the domestic and European issues that have influenced these measures. It also analyses the composition and distribution of the national debt.

• Public sector net debt fell by £3.7 billion to £349 billion, at nominal value, during the financial year to end March 1999. This was the first annual reduction since 1989/90 At end March 1999 public sector net debt stood at 40.6% of GDP, the lowest end-March figure since 1994, and 2 percentage points lower than at end March 1998.
• General government gross debt—the 'Maastricht' measure—also fell during the year, to £399 billion at end March. At 47.4% of GDP, this is comfortably below the 60% reference value in the Maastricht Treaty. The general government had a financial surplus of 0.9% of GDP in 1998/99, well within the Maastricht reference value, which allows a deficit of up to 3% of GDP.
• All data presented in this article reflect the transition to the latest international statistical standards, the European System of Accounts (ESA95). This is consistent with the UK National Accounts, published by the Office for National Statistics. However, as before, government debt figures are still presented on a nominal, rather than a market, valuation. The box on pages 356­57 gives details of the changes and shows the impact on the measurement of the public sector debt position.
  

Government debt structure and monetary conditions
(33k)
(by Alec Chrystal of the Bank's Monetary Assessment and Strategy Division, Andrew Haldane of the Bank's International Finance Division, and James Proudman of the Bank's Monetary Instruments and Markets Division). In June 1998 the Bank of England organised a conference on 'Government debt structure and monetary conditions'. The aim of the conference was to discuss the interactions between the size and structure of government debt and the concerns of monetary policy. The proceedings of the conference will be published shortly. This article summarises the issues discussed.

The article identifies three main channels through which government debt structure might influence monetary conditions. These are the potential effects of:

• the quantity of debt;
• the composition of debt (eg short versus long-maturity, index-linked versus conventional); and
• the ownership of debt (eg by banks or non-banks).

Taking each of these in turn, the following conclusions about the effects of government debt structure on monetary conditions are drawn:

• Effects of the quantity of debt. The consensus at the conference was that the insights of Michael Woodford were interesting but controversial and, as pointed out by Ben Friedman, were not of great current relevance to the UK conjuncture. Rather, as Charles Goodhart argued, new financial instruments, new issuing techniques and new capital market structures since the 1980s have all helped to reduce concerns about how the quantity of debt impinges on monetary control, to the point where the two issues could now be seen as almost distinct.
• Effects of the composition of the debt. Changes in the composition of debt might affect expected asset returns and the incentives facing the central bank. But the consensus at the conference appeared to be that the size of these effects was small, at least in response to marginal shifts in government portfolios. There was nevertheless a need for monetary policy makers to monitor changes in the composition in the debt portfolio carefully, to be alert to possible effects on the monetary aggregates.
• Effects from the ownership of debt. Most of the work on this topic has been done on the United States, where there were suggestions (for instance in the work of Kuttner and Lown) that government debt taken up by banks was a substitute for loans to the private sector. For the United Kingdom, the available evidence was consistent with the view that debt sales to banks had only a small impact on either money supply growth or bank lending. But little detailed empirical work has been done to support this result. So that view can, at most, be tentative.

Overall, the economic research discussed at the conference suggested that changes in debt management policy at the margin were unlikely to have first-order effects upon monetary conditions in normal circumstances. But two important caveats are needed. First, many aspects of the transmission mechanism and optimal debt management are not well understood, and policy should aim to be robust to a variety of different assumptions and models. Second, there are few, if any, examples of extreme changes by governments in debt management policy. So it is less clear that large changes in the quantity or composition of the debt will not have implications for monetary conditions. For these reasons, the effects of changes in debt management policy on monetary aggregates need to be monitored and interpreted with care.

Public sector debt: end-March 1998 (99k)
This article continues the annual series in the Quarterly Bulletin analysing the debt position of the UK public sector. It looks at developments in net and gross debt in the financial year to end March 1998, and examines some of the domestic and European issues that have influenced these measures. It also analyses the composition and distribution of the national debt.

The Office for National Statistics published the UK National Accounts in line with the updated European System of Accounts (ESA95) for the first time in September. This has had a number of implications for how debt levels are compiled. To ensure consistency with the previous articles in this series during the transition period, the data presented here are based on the previous accounting system. However, details of the changes and estimates of how they affect public sector debt are explored in the box on pages 334­35.

• In March 1998, the nominal value of the public sector's net debt stood at £352 billion, virtually unchanged from the March 1997 level of £350 billion. As a percentage of GDP, this was a fall of almost 2 percentage points. Total central government gross debt increased by £2 billion in 1997/98, to £403 billion.
  
• The ratio of general government consolidated gross debt to GDP on a Maastricht basis fell during 1997/98 to 51.7%, remaining comfortably within the 60% reference level in the Maastricht Treaty. The general government financial deficit has fallen below its reference value of 3% for the first time since 1991, to 0.7% of GDP for the year to March 1998.
  
• The responsibility for gilt issuance and sterling debt management was transferred from the Bank of England to the UK Debt Management Office, an executive agency of HM Treasury, on 1 April 1998. The transfer of cash management is not expected before the end of the year at the earliest.