The government is starting to get a bit nervous about the amount of debt we are running up. The Chancellor is apparently going to spell out to the country next week just how deep a hole we're in after the pandemic. We have a national debt at around 100 per cent of GDP - not historically massive, it was 258 per cent in 1946, but still uncomfortably high. Bear in mind we had slowly paid it down to a low point of 27 per cent in 2000/01. There is no problem in governments borrowing in times of crisis of course and at the moment debt interest is exceptionally low.
But there are growing ears that we are about to see a return of inflation and an increase in interest rates which could spell disaster.
A report on Reuters suggests bond yields spiked last month - "From the United States to Germany and Australia, government borrowing costs on Friday were set to end February with their biggest monthly rises in years as expectations for a post-pandemic ignition of inflation gained a life of their own."
I had a look at a House of Commons report from last November about debt and you can see below a table showing that debt interest next year (2021/22) is set to be £36 billion on £2.478 Trillion of debt. This is less than we paid in 2010/11 on less than half the amount of debt. It all looks quite manageable doesn't it?
Britain has a lot of longish term debt so the interest payments aren't likely to rise sharply but when loans need to be repaid, as they do all the time, we need to pay them off by borrowing more. If rates rise, this is going to be a problem.
Inflation has been relatively benign for a long time and interest rates quite modest but it doesn't take a genius to see if rates ever go back to the levels they were in 2007/08 and debt is five times (5x) higher we are looking at £150 billion a year in interest. As I say, this is unlikely to happen quickly because there are only so many loans having to be rolled over each year but by the end of the decade things could be a bit awkward.
This morning an MP from the Northern Research Group was calling on Sunak not to abandon the 'levelling up' agenda and keep spending. Phillip Hammond, the former chancellor, was urging caution and suggesting modest tax rises the other day. I don't think we will see a return to austerity because that was politically a no-brainer for the Conservatives in 2010. They could cut spending and blame the hardships on Labour. Now they can't and there is little room for more spending cuts anyway.
This continued pressure to keep the spending hose turned on is what Sunak is worried about. Of course, plenty of other countries will be in the same or a worse position. But, no other country is also erecting trade barriers with their largest overseas market at the same time.
Brexit is only going to exacerbate our problems. The trade gap is going to be truly terrible this year and isn't going to recover quickly. It takes a long time to build a market position and just a few months to lose it. UK exporters are not going to replace what they're losing in Europe with increased trade elsewhere. This isn't going to happen at all, let alone within a couple of years.
Looking at earlier years I note that during the war we borrowed a lot but afterwards, in the late 1940s the government was raising more revenue than it needed - in other words borrowing was negative and we were paying down the debt almost immediately.
If I compare that with the present, I can see we haven't paid our way for twenty years. The last time we were in surplus was 2000/01. Since then we have borrowed money every year to make up for the shortfall between taxes and spending.
Unless something dramatic changes and the economy takes off I can't see debt reducing for years. Even the government is anticipating we will be borrowing £100 billion a year in 2025/26 and hence still adding to the debt burden.
If Brexit is as many expect, a drag on the long term health of the UK economy I can't see any alternative to big tax rises and/or big spending cuts sooner or later for which the Conservatives will pay a heavy price. They mismanaged the pandemic and then gave us Brexit in a perfect economic storm.
