Before the financial crisis crashed the public finances and the economy in 2008-09, Labour Chancellor Gordon Brown liked to point out that his management of the public finances helped to cut the interest rate bill on the national debt to negligible levels.
There was no mention of this volatile topic in Jeremy Hunt’s lengthy speech, yet the numbers are explosive.
The Office for Budget Responsibility reckons the debt interest bill in the current 2022-23 fiscal year more than doubles to £120.4billion, or 4.8 per cent of total output.
Pressure: The Office for Budget Responsibility reckons the debt interest bill in the current 2022-23 fiscal year will more than double to £120.4bn or 4.8% of total output
Just to place that in context, it is more than the 4.6 per cent of GDP deficit on current spending and not far short of the £133billion gobbled up by the NHS this year.
Since the start of the century the UK’s stock of debt has become enormously sensitive to changes in interest rates and inflation.
Fortunately, for most of the period the Bank of England was able to meet its mandate of 2 per cent inflation.
The financial crisis, Covid and the Russian war on Ukraine have blown the cost of living and the interest rate outlook off course
The overall debt stock quadrupled from 28 per cent of output in 2000-01 to an expected peak of 102 per cent in the current fiscal year.
There is comfort to be drawn that, even at this level, the British debt to GDP ratio is lower than that of Japan, the US, Italy and France.
Hard numbers are alarming, with a full one percentage point rise in interest rates adding £26billion to the annual bill, against just £6billion at the Millennium.
Among the main reasons for this ratchet is the structure of the debt. In 2000-01, just 6 per cent of borrowing was linked to the retail prices index, as against 22 per cent at present.
Why index-linked stock is linked to retail prices (RPI) rather than the consumer prices index (CPI) is inexplicable. RPI almost always runs hotter than CPI.
Quantitative easing has also driven debt interest. The Bank’s use of this has resulted in the maturity of UK debt shortening and this increases the impact of rises in interest rates on a bill that ultimately rests with the taxpayer.
The use of index-linked stocks was expanded because there were ready buyers in UK pension funds.
Arguably, the failure of successive chancellors to clearly monitor the gilts market has been a car crash waiting to happen.
Former investment banker Harriet Baldwin MP, now chairman of the Treasury select committee, could make her mark by launching a probe into how this calamitous mismanagement of the public finances came about.
Free at last
Jolly good that, in a last-minute deal, the Treasury and the Bank of England’s prudential arm finally have an agreement which will free the UK from the onerous rules of Solvency II.
The great hope will be that this could unleash the billions of pounds, in the hands of insurers and pension funds, for investment in infrastructure.
The Prudential Regulation Authority has backed the goal but is also concerned about capital buffers.
That is quite understandable given how close the financial system came to meltdown when a sharp shift in gilt yields caused mayhem in the highly geared liability driven investments market.
The Solvency II move may not be as game-changing, as it appears some of the biggest players, such as Legal & General, have been carefully investing in infrastructure, housing projects and the likes for several years.
The Treasury looks to be giving with one hand and taking away with the other.
A clampdown on capital gains tax breaks and inheritance taxes, the freeze on ISA allowances and lowering the threshold for top rate taxpayers are measures that dampen aspiration and encourage wealth to shift overseas.
Not a great policy in a country which craves investment.
Slaying the dragon
Grant Shapps has shown grit in blocking the sale of UK chip maker Newport Wafer Fab to Nexperia, where Chinese investors are in ultimate control.
It is to be trusted that this marks a tougher stand against the export of valuable UK technology to Beijing.
The Business Secretary should now look at the multi-billion purchase of Aveva by France’s Schneider, which has significant operations in China. Britain is too careless with its intellectual property.