It's little wonder the government has announced it will accept in full the recommendations of the public sector pay award bodies, but won't provide any additional funding for it. Awards that are above the government’s target will have to come from existing budgets, even though for many workers their potential increases will be lower than the rate of inflation, in other words, a pay cut. This comes at a time when living standards are falling, inflation is stubbornly high, taxes are at a 70-year high, the national debt is the highest since the early sixties with interest rates on the up and basically, hardly any of the public services work properly at even a minimum level.
We’ve had problems like this before but not all at once and getting worse. Covid and the Ukraine war were thrust upon us and have created a lot of our problems, but Brexit is another big contributor. And that we have uniquely and deliberately imposed on ourselves.
The government needs more money but the normal sources aren't open to either more tax or more borrowing. Things are bad and are going to get worse before they get better. The Tories have always claimed they have to come in when Labour runs out of money, now that task is going to fall on Kier Starmer.
He and Labour will be able to bring some stability and honesty, I'm sure, but anybody who thinks the election will make much difference to our economic trajectory is in for a disappointment. The economy has flatlined since 2019 and it’s only doing that because of a surge in immigration, per capita we’re all getting poorer.
The OBR’s latest fiscal risks and sustainability report tells its own story. I am not an economist and I don't pretend to understand public finances well, but I do recognise a debt problem when I see one. Chapter 4 of the report is about debt sustainability and this makes disturbing reading.
I picked out a few quotes to illustrate the problem:
"Over the first 23 years of this century, public sector net debt in the UK has trebled as a share of GDP from under 30 per cent in 2000 to around 100 per cent this year – a 62-year high."
"The UK ended the last century with a debt-to-GDP ratio that was the lowest in the G7 and close to the bottom quartile of advanced economies (Chart 4.2)."
"Overall, since the start of the century, the UK has seen the second largest increase in gross debt in the G7, with four-fifths of this accruing in just six years of crisis and the UK achieving the second fewest years of retrenchment in between (with debt falling in only seven out of the last 23 years)."
It's not just that our debt has rocketed by 230% but that much of it was accumulated when interest rates were absolutely minuscule and about a quarter is now in Index Linked Gilts (ILGs) where the interest rate is not fixed but connected to inflation:
"This level of inflation sensitivity in the Government’s debt stock is historically unprecedented, as there were no ILGs in issuance when debt was last at 100 per cent of GDP in the early 1960s, and issuance had only just begun the last time annual RPI inflation was in double digits (at 11.9 per cent) in 1981. The UK Government’s degree of debt indexation is also unusual among advanced economies. As Chart 4.5 shows, the UK has over twice the proportion of inflation-linked debt (25%) than the next largest inflation-linked issuer, being Italy at 12 per cent."
"The UK Government’s high level of debt and the high share of ILGs meant that the high inflation of the past two years has sharply increased both debt interest costs and the stock of debt itself. Expenditure on central government debt interest (net of the APF) increased by £89 billion (3.4 per cent of GDP) due to the impact of inflation on the interest costs from the stock of ILGs across 2021-22 and 2022-23."
APF is the Asset Purchase Facility - part of the quantitative easing programme - and Banks have made a killing while they were borrowing from the government at low rates but charging higher ones to borrowers. Now that has swung and they're making losses that are passed on to the Treasury (ie us):
"In the UK, the cash profits of QE were originally retained inside the Bank of England’s Asset Purchase Facility (APF), but since the start of 2013 they have instead been remitted to the Treasury. As Chart A shows, up to July 2022, a cumulative total of nearly £124 billion was passed to the Treasury."
And compared to other EU member states, more of our sovereign debt is held by foreigners who are more likely to sell than domestic institutions like pension providers and insurance companies.
"With the European Central Bank purchasing significant shares of German, French, and Italian government debt in the meantime, this leaves the UK with the second-highest proportion of its sovereign debt in foreign, non-official hands in the G7, behind France."
And in the future private sector investors will need to purchase gilts at twice the rate that they have been doing between 2009 and this year:
"However, with the APF now a seller of gilts and net issuance by government also expected to remain high across the medium term, private sector buyers will need to absorb an average of 6.5 per cent of GDP each year between 2023-24 and 2027-28, more than twice the post-financial-crisis average, and a level not seen since the financial crisis itself."
Inflation is usually helpful to governments because it inflates away debt - reduces the real value of accumulated debt and makes it more manageable over time, but even this isn't doing what it should:
"In fact, 2022 is one of only three peacetime years since the early nineteenth century in which CPI inflation exceeded 9 per cent and debt did not fall as a share of GDP."
The early 19th century means a period of more than 200 years!! The OBR say:
"Other advanced economy governments with much lower shares of inflation-linked debt have derived a more significant fiscal benefit from higher inflation. Despite experiencing the largest increase in inflation, up to April 2023 among G7 economies, the UK is the only country that is expected to see its debt-to-GDP ratio rise this year."
"... the UK has seen its interest costs rise more than twice as fast as any other G7 country between 2019 and 2022 (Chart 4.12). Over this period, UK debt interest costs rose by 2.6 per cent of GDP net of the APF and by 2.2 per cent of GDP ignoring the rise in interest payments via the APF (a more internationally comparable measure). By contrast, interest costs fell as a share of GDP in four of the other G7 countries, with increases only seen in Italy (1.0 per cent of GDP) and France (0.5 per cent of GDP). This reflects the much more rapid transmission of any increase in interest rates and inflation through the consolidated liabilities of the UK public sector relative to the debts of other major advanced economy governments."
The cost of borrowing is on the rise and by more than is being seen in countries with more rational governments:
"UK borrowing costs, as reflected in the 10-year gilt yield, have risen by 2.0 percentage points in the 12 months to 26 June of this year. That is more than any other G7 economy and 1.5 percentage points more than the G7 average of 0.5 percentage points."
"On 30 June, Bank Rate expectations rose to 5.8 per cent compared to 4.1 per cent during our March forecast in 2023-24, and 10-year gilt rates were on average 62 basis points higher across our five-year forecast horizon. Holding all else equal, these interest rate rises would increase debt interest payments by £13.7 billion in 2027-28 alone and by a total of £91.5 billion across the medium term (a proxy for what they would add to the cash level of debt in 2027-28). Such large increases in a relatively short time period illustrate how sensitive the fiscal position is to increases in interest rates."
The government has a plan (which Labour have now committed to stick to if they win the next election) which is to to turn a primary deficit of 2.2 percent of GDP in 2023-24 into a primary surplus of 1.1 per cent of GDP in 2027-28. The OBR hint that this 3.3 per cent of GDP turnaround, achieved by increasing taxes by 0.8 per cent of GDP and reducing primary spending by 2.5 per cent of GDP, is "at risk on both the tax and spending sides."
Others are more blunt and say the 'plan' is nothing more than a fantasy in which both main parties are now complicit.
The OBR confirms that UK general government debt is forecast to rise by 3.1 per cent of GDP this year, compared with average falls of 1.8% in other European countries and in the long run - assuming future governments don't take measures to stop it - the UK national debt could rise to as much as 435% of GDP by the 2070s allowing for other periodic financial shocks.
There are some oblique references to Brexit, such as the one below:
"However, the rise in global inflation since the pandemic has delivered little net benefit to the UK public finances relative to the inflation surprises of the past. This is partly because this most recent inflation shock has been closer to a pure ‘terms of trade’ shock, in which the rise in the prices of the things the UK imports and consumes (manufactured goods, energy, and food) has far outstripped the rise in the prices of the things the UK produces and exports (mainly services)."
The Tories will be leaving the economy in terrible shape and headed for worse.
Both Labour and the Tories can’t afford to be honest with voters. The government’s forecasts for the next few years are a fiction and Labour will pledge to stick to them. Amazing, eh? What have we come to?
Robert Peston has a few comments about it on Twitter HERE.
