Borrowing billions is about to get a lot more expensive

There was good news, of a sort, on the British economy this week. The government managed to get by borrowing only £18.1bn in March. Analysts had expected about a billion pounds more. Unfortunately, the total for the fiscal year was still £151.8bn, £24bn more than the Office for Budget responsibility had forecast, the third-worst outturn since 1947, and rounding off a year of spectacular government incontinence.

This sum represents a debt of about £2,500 for every man, woman and child in the country, and takes the total borrowed to £2,225bn. This year, reckon Capital Economics, the government will need to borrow another £100bn. As usual, there is the never-never land of balanced revenue and expenditure, projected for a few years out, which everyone knows is only there to avoid scaring the market horses.

Does the deficit matter? Well, up to a point, the point being beyond which the state struggles to finance its debt. If the rate of growth exceeds the cost of financing the debt, all will (eventually) be well. When the Bank Rate was managed down to 0.1 per cent, and the economy grew at 2 per cent or so, the equation looked plausible. The Bank of England was an enthusiastic consumer of the state’s paper under the QE Ponzi scheme, so huge deficits could be financed at a bearable cost. Now that interest rates are going up, the Bank will revert to its more traditional role of issuing new stock to pay for the state’s spending.

The cost of this debt is rising fast. From a quite painful £70bn last year, the experts’ projections are for about £85bn this, a number which already looks optimistic. Inflation, which used to be the bond issuer’s friend, is now less help. A quarter of the issued government debt is indexed to the cost of living, so servicing the existing debt is getting rapidly more expensive. It is already more than the education budget and is second only to health and social security in government department spending. Ominously, the projected growth rate for the economy is now below the cost of new debt.

This could hardly come at a more uncomfortable moment, as the Bank prepares to celebrate its 25 years of independence. The idea of independence was always a bit of a fiction, since the state is the sole shareholder and the Chancellor appoints the Governor. It has served well enough when falling costs of goods and the IT revolution made hitting its 2 per cent mandated inflation target relatively easy. Now, though, it is impossible without imposing interest rate pain which is politically too hard to bear.

This is why returning to 2 per cent inflation may be as much of a chimera as the balanced Budget. Governments are always short of money, and always looking for the least politically painful way of getting round the next financial corner. If letting inflation rip looks easier than either further tax rises or actual cuts in public spending, then above-target inflation will continue, and the Bank of England will be left to make pollyanna projections that inflation, and thus interest rates, will somehow fall in future. The cost to the government of new borrowing is going up, and bond prices have a good deal further to fall.

Global warming, doncha just love it?

Here’s Reuters energy expert John Kemp: “During the ‘long winter’ from October through March, which includes almost all the hemisphere’s heating demand, temperatures were 1.64°C above the long-term average for the 20th century. The long winter was the third-warmest on record, helping limit consumption of gas, coal and electricity across the major consuming centres of Asia, Europe and North America.”

We may not be as lucky next winter, although if coal makes the sort of comeback that many are anticipating, and fossil fuels really do cause global warming, we may be grateful for its unintended consequences when Russian fuel is sanctioned (or taxed) out of western markets.

A dividend from wine, of sorts

The International Exhibition Co-operative Wine Society is offering a “spring clean mixed case” of a dozen bottles for £85. It’s the society’s spring clean rather than your own, of course, and as a long-standing, near-dormant member, the price to me would be almost covered by the £74.79 I have accumulated in dividends. Except that I would have to die first, since only then can the dividend be paid.

This rather eccentric approach to rewarding capital has worked well for nearly 150 years, but times change, and what is now an established business with sales of £120m might look like an attractive morsel to some red (wine) blooded capitalist. Perhaps the board has noticed the shambles at another venerable institution, Liverpool Victoria, which after saying mutual ownership was no longer possible, got the answer from its members that they preferred it to takeover by the private equity bandits.

Whatever, the society is proposing to shore up its defences against carpetbaggers at July’s annual meeting by changing the rules to require a 75 per cent majority vote threshold for demutualisation. Quite right. I’m braced to forego the (deferred) £74.79 and vote for the change.

The mystery of how Sajid Javid established his non-dom status despite being born and brought up in Rochdale is the subject of this week’s A Long Time In Finance by Jonathan Ford and me. On Spotify.