>The French government hangs by a thread because its parliament cannot agree a budget. Even with Donald Trump’s tariff revenues, US public finances show little sign of improvement and the borrowing forecast looks set to remain close to an unsustainable 6 per cent of GDP for the foreseeable future. Italian and Japanese general government net debt is 127 per cent and 134 per cent of GDP respectively this year.
>Compared with others mired in a fiscal bunker, the UK’s public finances are objectively better placed. Net debt is still below 100 per cent of GDP. Unlike other G7 governments, the deficit is on track to decrease by around 1 per cent of GDP this financial year and borrowing is only two-thirds of US levels. Despite this, UK politics and financial markets are consumed by fiscal concerns. Government long-term borrowing costs have hit the highest level since 1998 and the UK pays more to raise medium and long-term finance than any other country in the G7. It takes a special sort of political, institutional and economic dysfunction to achieve these results.
>Talk of a doom loop of slow growth, higher interest rates, worsening debt dynamics and higher taxes proliferates, but this is a poor diagnosis of the problems when UK growth rates have actually exceeded expectations this year. Even more absurd is excitement that London might soon need IMF support, as it did in 1976, despite there having been no significant stress in UK debt issuance.
>However, just the facts about the UK’s better public finance starting point and short-term prospects than other advanced economies do not tell us why its reputation is struggling so much. Some more context is clearly required.
>In the short term, Britain is an outlier with a persistent inflation problem, limiting the speed at which the Bank of England can safely reduce interest rates. This raises short-term borrowing costs. Much of the stickiness in inflation was caused by direct or arms-length government decisions such as increasing vehicle excise duties, employer payroll taxes and water bills. However, financial market expectations do not suggest a long-term loss of faith in the BoE’s ability to control inflation, so the explanation for high borrowing costs must lie elsewhere.
>Although there has been some embarrassing slippage in ministers’ ability to trim public spending on welfare, the scale of the problem is not huge and cannot alone explain the UK’s high level of 10 and 30-year borrowing costs. Population ageing will add to public finance pressures in future, but this issue is far from unique. And Labour cannot keep blaming the hapless Liz Truss for their own problems, tempting as it might be.
1 Comment
>The French government hangs by a thread because its parliament cannot agree a budget. Even with Donald Trump’s tariff revenues, US public finances show little sign of improvement and the borrowing forecast looks set to remain close to an unsustainable 6 per cent of GDP for the foreseeable future. Italian and Japanese general government net debt is 127 per cent and 134 per cent of GDP respectively this year.
>Compared with others mired in a fiscal bunker, the UK’s public finances are objectively better placed. Net debt is still below 100 per cent of GDP. Unlike other G7 governments, the deficit is on track to decrease by around 1 per cent of GDP this financial year and borrowing is only two-thirds of US levels. Despite this, UK politics and financial markets are consumed by fiscal concerns. Government long-term borrowing costs have hit the highest level since 1998 and the UK pays more to raise medium and long-term finance than any other country in the G7. It takes a special sort of political, institutional and economic dysfunction to achieve these results.
>Talk of a doom loop of slow growth, higher interest rates, worsening debt dynamics and higher taxes proliferates, but this is a poor diagnosis of the problems when UK growth rates have actually exceeded expectations this year. Even more absurd is excitement that London might soon need IMF support, as it did in 1976, despite there having been no significant stress in UK debt issuance.
>However, just the facts about the UK’s better public finance starting point and short-term prospects than other advanced economies do not tell us why its reputation is struggling so much. Some more context is clearly required.
>In the short term, Britain is an outlier with a persistent inflation problem, limiting the speed at which the Bank of England can safely reduce interest rates. This raises short-term borrowing costs. Much of the stickiness in inflation was caused by direct or arms-length government decisions such as increasing vehicle excise duties, employer payroll taxes and water bills. However, financial market expectations do not suggest a long-term loss of faith in the BoE’s ability to control inflation, so the explanation for high borrowing costs must lie elsewhere.
>Although there has been some embarrassing slippage in ministers’ ability to trim public spending on welfare, the scale of the problem is not huge and cannot alone explain the UK’s high level of 10 and 30-year borrowing costs. Population ageing will add to public finance pressures in future, but this issue is far from unique. And Labour cannot keep blaming the hapless Liz Truss for their own problems, tempting as it might be.