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If I look, for example, at the UK government's Autumn 2017 budget document the spending piechart has a wedge which says 'net debt interest £41bn'. I notice the wording says 'interest' and not something like 'net debt servicing' or 'interest and principal'. The government has to repay the principal amount of the bond when it matures. My question is are these prinicpal payment included in normal budget spending? If not where are they accounted for in government finances? Thank you.

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  • $\begingroup$ I'm not really clear on this subject of roll overs etc as none of it is explicit or complete. But I do know the debt should consist of inter government agency/department bonds which are special bonds the government entity can issue to the Treasury. I beleive it is this that constitutes government debt. As for Treasury itself I have no idea. I would think because it prints money it is meaningless to be in debt or keep books of its debts? So when it's fed sells bonds it can just pay that money as new coupons or actually print, or print when they mature. Maybe someone can answer good? $\endgroup$ – marshal craft May 13 '18 at 9:54
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Normally, they aren’t, but there are exceptions. For example. The Japanese Ministry of Finance includes principal repayments in its definition of “debt service” - see budget summary for 2014, page 4.

(The inclusion of principal payments in debt service seems to be a convention for external debt: how much foreign currency debt that needs to be paid back can matter for credit risk. Floating currency sovereigns like the U.K. have negligible credit risk for their local currency borrowings.)

The reason why it is ignored principal repayment is a fairly meaningless number in government finance. If the government issues \$1 billion in short-term debt, in one year it will have:

  • (roughly) \$12 billion in principal repayments if it rolls over 1-month bills,
  • (roughly) \$4 billion in principal repayments if it rolls over 3-month bills, or
  • (roughly) \$1 billion in principal repayment if it issues a 12-month bill. (Numbers are approximations since Treasury bills are discount instruments.)

The same principle works for longer-dated debt: you have twice the principal repayments if you roll over a 5-year bond instead of issuing a 10-year bond.

So all principal payments tell us about is the debt management strategy of the government.

If you want to know how government debt is out there, you just look at the debt stock.

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The UK figure for debt interest doesn’t include repayment of principal. It is instead covered as part of the ‘Net cash requirement’ - the amount of extra cash that the government needs to raise to finance spending/operations each year.

When a bond (or gilt, for the UK) matures, the government will need to finance its repayment. However this is just added to the stock of other cash it needs to finance that year. This will primarily be financed by issuing new gilts to raise the cash.

The recording for National Accounts dictates that exchanging one financial asset (a debt security, such as a gilt) in return for another financial asset (cash) is purely a financial transaction and isn’t included in the normal budget deficit. It does, however, affect the size of the government’s debt, as the gilts issued are liabilities on the balance sheet.

If you can afford to repay the principal without issuing more gilts, your stock of liabilities goes down and you will need lower debt interest payments in future.

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