Gilty of too much optimism
There are some European countries in a worse financial position than the UK, but not many. Italy, Portugal and Spain have relatively bigger debt burdens, and each has had a funding crisis in recent years. The problem for Britain is of a very poor position which is getting worse.
Ignore those Pollyanna suggestions of tax cuts following a slightly less awful government deficit last month. Here are some figures courtesy of the boys at Bond Vigilantes: government debt is about £2.5tn (£2,500,000,000,000) or £86,000 for every man, woman and child in the land, and roughly equal to an entire year’s economic output. That would be manageable if interest rates were very low, and if government spending was below its income.
Neither is true. Interest rates are still going up (though the next Bank Rate rise could well be the last) while the administration remains as incontinent as ever. Despite record levels of taxation, spending far exceeds revenue. Looking at the long-term projections from the Office for Budget Responsibility, Bond Vigilantes concludes:
“The UK’s debt levels will most likely continue increasing due to ongoing fiscal spending and increased future spending toward a net zero economy. As debt levels rise, the government will need to issue more bonds, which should result in higher interest payments. Looking at the future projection from the OBR, debt is going up under all modelled scenarios.”
This year, interest payments alone will total around £94bn, more than half the cost of the NHS, and could well break £100bn next, as cheap debt is redeemed and more money needs to be raised to cover the deficit. Against this background, the wonder is not at the price of government-issued debt but the fact that it can be sold at all. Holders have just seen the purchasing power of their assets fall by double-digit percentages, and at 4.7 per cent, the yield on gilts is still too low to compensate for inflation.
Yet such is the paradox of economics that there are still buyers, thanks to the threat of near-zero growth turning into recession. Those buyers argue that recession favours low-risk assets like bonds, and that 4.7 per cent could look quite attractive if the Bank of England is really serious about getting inflation back to 2 per cent.
Well, it’s a point of view. With taxation essentially at the maximum the earners will bear, there are two ways for some future administration to escape the debt trap that is opening up before us. Find a magic formula to grow the economy faster than the growth in debt, or cut current spending. Given the public mood that more “resources” (state spending) is the answer to almost every social and medical need, that is a forlorn hope.
Listen to Neil Collins and Jonathan Ford’s podcast A Long Time In Finance here.
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