Sharp rise in government banking activities driven by government debt policy

Increasingly, the government is operating as a bank, instead of paying back government debt. Over the last five years, government lending has been expanded by the equivalent of 2 percent of the GDP (after taking into account economic growth and the discontinuation of extraordinary lending in connection with the financial crisis). There has also been an involuntary growth in arrears, corresponding to 1.4 percent of the GDP since 2013. The combined growth of 3.4 percent of the GDP corresponds to nearly 72 billion DKK (at 2017 levels).

This development will only be hastened by the new housing tax system and the government’s proposal to convert ordinary housing association mortgages into government loans. This will increase the government’s lending to a level corresponding to 11.6 percent of GDP, or 247 billion DKK.

This government banking activity offers no advantages in socio-economic terms. However, these developments also appear to be the product of factors relating to government debt politics, and a desire for a more liquid government debt market. Despite the colossal sums involved, there is a severe lack of transparency regarding government debt policies. We propose the abandonment of state lending schemes related to the housing tax system and the debt of general housing associations. If, after an open professional and political discussion of government debt policies, a larger supply of government bonds is desired, this can be achieved by selling from government fund holdings.