Maths swot Sunak needs to crunch the numbers on Britain’s £2.5trn debt

Now pay attention. Don’t worry, it’s nothing like as hard as the A-level questions that our dear prime minister thinks we should be able to tackle. There is no calculus, trigonometry or nasty compounding interest questions, but the sums are very large, and getting larger by the day.

The subject is the UK government’s financial position: is it dire, or merely grim? In November, it needed to borrow £22 billion, £8 billion more than in November 2021 (when it was paying so many people not to work) to cover its spending. In the 11 months it needed £126 billion to balance the books. Note to students: these numbers may look precise, but they are not, and depend significantly on exactly what is included, and how the calculation is done.

So much for mathematical accuracy, but the numbers do provide some idea of the gap between what the government spends and what it raises in taxation. That £126 billion took the total outstanding debt to £2.48 trillion (£2,480,000,000,000) or around £40,000 for every man, woman and child in the country.

Is this a lot? It certainly sounds a lot, and is far higher than ever before. Not only that, it is rising faster than ever before. The Kwazy Budget proposed adding billions to that by borrowing to finance tax cuts, sending the gilts market plunging, helped down by the forced selling from pension fund managers who had thought they could get extra reward for no risk (they couldn’t).

On that mad day in October, a nippy investor could buy a 20-year government stock on a 5 per cent yield. Were the whole of the government debt to cost 5 per cent, just paying the interest would eat £120 billion a year before the state had spent a penny.

Fortunately for the taxpayer, a lot of the debt is much cheaper than 5 per cent, and in the weeks that followed, as some form of fiscal order was restored, prices recovered, and the yield fell back to 3.3 per cent in mid-November.

This was still a whole lot higher than in the balmy days of last summer, when it seemed that governments could borrow as much as they liked for little more than nothing. Yet since that November low, yields have been creeping up (and prices down) to levels which again promise a headache for incontinent governments like, say, that of the UK. Twenty-year money costs it 4 per cent today.

Things now get more complicated. A quarter of the debt is indexed to inflation. For a decade, this was a terrific bargain for the borrower, but it has now come back to bite the government. In November, paying that inflation-linked interest pushed the cost of debt interest to £7.3 billion, far higher even than the furlough-bloated £4.9 billion figure for November 2021.

On the other hand (this is economics, remember) inflation erodes the real cost of the outstanding conventional debt, some of which is only repayable decades hence. The equation is: if debt interest > inflation plus growth, then borrowing is unsustainable. Assume inflation at 2 per cent (long-term) and if the government must pay 5 per cent, the economy must grow at 3 per cent. There is no chance of that.

Today’s 4 per cent gives a required growth rate of 2 per cent. For Britain’s ageing, unhealthy and inefficient economy, even that may be too much.

Still, a burst of inflation, provided it is brought down and not reinforced by matching pay rises, offers some respite for the government’s medium-term finances – which helps explain why Rishi Sunak is holding out against public sector workers’ demands.

As for the answer to our exam question: not quite dire, but grim enough.

MUSK try harder

Two contrasting electric car stats this week: in the UK, the number sold in December passed the number of diesel vehicles for the first time. In the US, Tesla admitted that its sales had fallen short of its forecast, and that it was selling fewer cars than it made.

This is seriously bad news for any automaker, since the stock piles up, the buyers start to notice and the selling price must be cut. Share traders noticed months ago, of course, and the Tesla price is down 70 per cent from its peak.

Some brave souls are now suggesting that this is a buying opportunity for a glamorous tech stock. Well, maybe, given Elon Musk’s astonishing capacity to surprise and the loyalty of his fans.

But he has been forced to turn the company into his personal cash cow after his madcap adventure with Twitter. Its models are no longer new and exciting, and the opposition has spent billions to catch up. Car-making is ruthlessly competitive and often not very profitable, which is why Tesla’s competitors command such low ratings. The share price looks likely to join them.

In the UK, electric cars remain protected by their tax privileges, but the government has served notice that those will be progressively whittled away, to help replace the £26 billion in tax and fuel duties paid by other vehicles. It looks a better investment to buy a conventional new car while we’re still allowed to do so.

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