Bill Jamieson: No ‘wriggle room’ if debt makes us squirm

Chancellor Philip Hamond.  Picture: Tolga Akmen/Getty
Chancellor Philip Hamond. Picture: Tolga Akmen/Getty
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Some numbers we just don’t like to talk about. And there are other numbers too big to comprehend. So I start today with a simple, small number: £55 billion.

This – or more precisely, £54.7bn – was the amount set aside in the UK government accounts to pay debt interest in the year to March. Little wonder it is not mentioned much by a political class that prefers to talk about government spending.

The debt interest figure is equivalent to the combined proceeds due this year from tobacco taxes, spirits duty, wine and beer duties, Stamp Duty, Inheritance Tax, Capital Gains tax, the Climate Change Levy and Air Passenger Duty – £54.6bn in total – lest you thought these fine taxes were helping to build shiny new schools, hospitals and roads. Well, they were in a sense – the ones we built yesterday.

Put another way, the annual debt interest charge is now equivalent to the combined costs of the Home Office and the budgets for the Environment Department, international development, Scotland, the Justice Department and the Department of Work and Pensions.

Now let’s ponder the bigger number – £1.798 trillion. This is the cash total of government net debt, equivalent to 86.3 per cent of Gross Domestic Product. In cash terms that is the highest total recorded and as a ratio of GDP is up from 85.3 per cent last year.

I mention these numbers up front, because in the past week there has been much government cheer and backslapping over figures showing government borrowing has fallen to its lowest annual level in 11 years. This is down by £3.5bn to £42.6bn in the 2017-18 financial year, according to the ONS, and below the estimate of £45.2bn produced by the independent Office for Budget Responsibility last month. Borrowing has narrowed to just 2.1 per cent of GDP, down from 10 per cent in 2010. It has sparked much commentary that Chancellor Philip Hammond now has “wriggle room” – he could loosen the purse strings and unleash a spending spree budget in the autumn.

Now, the fall in the deficit is good news and to be welcomed. But our annual borrowing is not to be confused with debt. When the government talks about reducing the deficit, it is not referring to a reduction in debt but to the further amounts it is still having to borrow – not debt reduction at all, but a reduction in the rate at which it is rising. So much for nine years of spending squeeze and “austerity”.

Yet need we worry? That debt ratio was above 100 per cent of GDP for many years after the war – indeed, while it has risen sharply since the 2008-09 financial crisis, it was still over 80 per cent of GDP for much of the 1960s.

Some argue that the ONS numbers are a gross overstatement of our “true debt”. City University professor Richard Murphy, author of a book yet to scale the Amazon bestseller table entitled The Joy Of Tax, has argued that because the Bank of England owned some £435bn of this debt, and the Bank is owned by the government, it is a meaningless figure and should not be counted as debt owed. This would bring down debt to some 66 per cent of GDP.

“Right now,” he has argued, “there is no national debt issue to worry about. The debt is under control. The real rate allowing for Quantitative Easing is at historically low levels. And we actually need more debt, and not less of it.”

Well, as one critic pointed out, why not wipe out all the UK national debt by doing even more QE? And why not keep doing it so we can spend as much as we want on anything we want? Taxes would not need to go up, or even be as high as they are. Boo hoo – no “Joy of Tax” after all!

But worry we should. Because debt is a black hole in the national accounts, and the more it expands the more treacherous its properties and the risk of it expanding to suck in ever more sums of money.

While a weather-blasted economic performance in the first quarter reduced the likelihood of a rise in interest rates next month, Bank of England governor Mark Carney has warned businesses and households to be on guard for rate rises in the medium term. And be on guard we should. For even with interest rates at their emergency low level of 0.5 per cent, we are already spending more on debt interest payments than on defence. That annual interest bill would rocket were rates to rise to their more normal level of three to four per cent.

While the Bank can set official interest rates, this is not the same as setting the rate at which government debt interest is charged. Most of the government’s borrowing is done through the bond market. Here interest rates are not only higher – currently 1.46 per cent – but are also sensitive to changes in market sentiment.

If buyers sense that the government is borrowing too much or that the economy is in trouble, the price of bonds will fall and their yields will rise until they are seen to offer a credible compensation for the risk involved. And there are times when the apprehension is such that bond markets can be highly volatile.

This would be a major constraint if, for example, a Corbyn-led Labour government embarked on a spending and borrowing spree to meet election commitments. Bond markets would have searching questions to ask as to how much it intends to fund by way of higher tax or more borrowing – this on top of the extra financial demands placed on government by the demographics of an ageing population.

Even as matters currently stand, with the UK’s debt pile still rising and the economy showing only fractional growth with consequent slow increases in tax revenues, there is all too little of that famed “wriggle room”. Small wonder there are numbers we just don’t want to talk about, and numbers we can barely comprehend.