Britain is deeply in debt, like most western countries, but some of the debt is much longer term than usual:
Britain will pay off all of its debt used to fund World War One next March, when it redeems a government bond first issued more than 80 years ago to help pay for the conflict.
The finance ministry said on Wednesday that it would redeem the 1.9 billion pound ($3 billion), 3.5 percent War Loan — a perpetual bond which means it has no fixed maturity date — on March 9 next year.
Issued in 1932, the War Loan was used to refinance debt accumulated during World War One, which ended in 1918.
Some market experts said they would miss the bond as a rare historical curiosity in modern finance.
“For those of us who’ve been looking at the gilt market for a long time, a little bit of magic has fallen out of the market,” said Barclays fixed income strategist Moyeen Islam.
What needs to be pointed out however, is that they’re not actually paying off the WW1 debt: they’re eliminating that particular interest-bearing bond (because it’s now paying a higher rate of interest than the UK government’s other debt instruments). The money to pay off the current holders of those bonds will be borrowed on the market at current market rates. That’s the government equivalent of paying off one credit card with another … you still have a debt, it’s just being held by a different lender now. Tim Worstall explains:
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?
H/T to Elizabeth for the original link.