The most overcooked canard in political discourse is “taxpayers’ money”. The public purse stopped being your money at the point at which you were taxed; it’s the government’s money now. You can’t have it back and it will be spent on things you don’t like, such as an overpriced wooden lectern, or a nuclear weapon, or Grant Shapps.
That said, there is one way to get some of it back, because very large amounts of this money – more than £100bn of it, last year – are given directly to other people as interest on the state’s debt (currently around £2.5trn, rising to £3trn by 2028/29). People around the world lend money to our government by buying UK government bonds, known as gilts, and like any borrower the government has to service this debt by paying interest. For a long time (the post-2008 era of cheap debt) these bonds didn’t pay very high returns, or “yields”, but now that monetary policy (which controls the price of debt) has changed direction yields are much higher, and regular investors have taken more of an interest in gilts.
Here’s why: no high-street bank would offer you a savings account that guaranteed to pay 4.75 per cent interest for 19 years, but the snappily titled GB00BPJJKP77 will. As a government bond, it guarantees “coupon” payments of 4.75 per cent per year until October 2043, at which point the “principal” (the original amount invested) will be repaid. This makes gilts very safe, in one sense: if you invest in a company you need to consider the risk that it could go out of business, but there’s no point worrying about the state defaulting on its debts from an investment point of view, because if that did happen there would be more pressing issues than the performance of your portfolio (see Hobbes’s Leviathan for further details).
However, they’re not risk free. If you need to spend that money before 2043, you can “withdraw” it from an investment in bonds by selling them, but this is where you can lose out, because the price you’ll get for them on the secondary market could be different from the principal invested. Then again, you might profit from a gain in prices (and these gains would be tax free).
In this sense buying a gilt is, like a mortgage deal, a bet on the future of the economy – but because you’re the one lending the money, it works the other way around. If you think interest rates are going to fall soon, then now is not the time to take out a mortgage fixed (at today’s high rate) for ten years. It would, however, be a good time to lend money to the government, fixed (at today’s high rate) for ten years.
It’s for this reason that many investors are now buying gilts – because they believe interest rates have peaked. Gilts are sold by the government’s Debt Management Office at auctions in which there have recently been very high levels of demand; on a single day last month the DMO issued £5bn in gilts and the demand (the “bid-to-cover ratio”) was 3.68 times the supply.
Since March the investing platforms Hargreaves Lansdown and Interactive Investor have offered regular investors the ability to buy gilts at auction. You can also invest in exchange-traded funds that track gilts or buy them on the secondary market. In fact, you almost certainly own some already, via your pension, a significant portion of which will be invested in government bonds. As with any investment, the results are unpredictable and you need to read more than a one-page column if you’re going to give it a go, but gilts come with a number of advantages – not least, the satisfaction of watching the Budget and thinking: that guy owes me money.
[See also: You’re not paying as much tax as you think]
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This article appears in the 01 May 2024 issue of the New Statesman, Labour’s Forward March