Great description Fraser. And yes a doom loop it is! We need big decisions from big decision makers to change this spiral. And by the looks of things Starmer and Reeves are not them! But neither is anyone else either. Lots of problem descriptions but little in answers. I’d like to have a go! … the problem as I see it snd funnily enough the answer is in SPENDING! As nothing good happens from not spending! …. And… we all need to understand our tax system as to, ‘how tax is triggered’? Once we all understand that money has to move (SPENDING) and tax has to be funded as a result of a well funded economy we can quickly see that the tax take can be more than sufficient for all our needs! First Fraser I would like to explain why we need spending?…. well, without spending we don’t get any tax revenue to the exchequer. Without spending money that money incurs no tax! None!! Nada!!! So tax is a result of spending so the answer to increase tax revenue is yes, …. More spending! Next, explain why spending (money moving or changing hands) triggers tax? Well…. Surely, income tax is triggered by income? No!! It’s triggered by Spending! Despite Income tax having income in it, it’s only calculated on wages. It’s paid by employers SPENDING on the wages of employees! Without spending for companies to earn they have no money to spend on wages. So by default we see income tax is triggered by spending. Just as VAT and Duty! Also council tax is Spending(as we have to move money by order). So it’s all on spending. Now we know all tax is as a result of money moving or having to change hands let’s look at all the money that isn’t spent? Yes, 5% of people hold 95% of money! And they don’t spend it every month! …. Just think about that?…. Most or rather, nearly all of our money is held by people who don’t spend it! Not just that, they don’t pay any tax on it! You pay no tax on money unspent unused and idle! None! Nada!!! So there we have it Fraser, most money untaxed unspent and held outside our monthly pot! Whereas we have 95% of people holding just 5% of our money fighting over it to pay tax on! No wonder our tax take is insufficient! And who do we borrow off? Yes the 5% who are holding all our money!!! And what do they want? Interest! So they get even richer! OMG! Isn’t that simple? We have an undemocratic few holding all our money to ransom! It’s not just undemocratic it’s unfair! The system is skewed. I’m all for people earning as much as they can but, I’m all for them having to spend it too! Otherwise it isn’t going to work. In short we need to bring back exchange control. No money out of UK. None. Goods can go but not money. Put a ‘spend by date’ on money electronically. Spend it or lose it to the exchequer. Make money move! Make VAT the tax of choice and the tsunami of money being spent each month will definitely fill the coffers of the exchequer! So much so we won’t need any other tax! We can give more in pensions, more in benefits and more in wages with a turbo charged economy. More tax revenue on more money being spent. It would be autonomous and perpetual and streamlined. It would be fair and democratic. And it would fix every problem. No more borrowing. Debate that Fraser?
Surely that's a very simplistic answer. If you keep SPENDING then you have no savings. If you keep Spending on credit, you have debt. How can you spend yourself out of debt?
I'm now retired so have less income ergo my Spending has reduced.
If you spend everything then you have nothing to pass on to your children so no IHT.
It's not a logical answer INMO. The standard balance sheet with 'knowables' works for me.
Hi Jennifer! Thank you for taking time to debate this. If I may answer … yes we save money because with our present system, we don’t know when we might get it again. In essence basing that view on today’s worry. My view is as we would be then…. I expect the flow of spending to create so much tax income that we can have double treble or more extra for pensions! So you can have that extra each month to enjoy and live, knowing it will come back next month! So taking away the need to worry about… ‘if and when money might come back in’. I too am retired and last week showed how our money now is not secure as income. That’s why we need a guarantee that only comes with money moving. It will also ensure all businesses will survive and earn good profit! So all wages should increase as a result. And finally we won’t need to borrow! We can always sell what we have bought along the way! If you need an influx of funds. We all do it now anyway but it too would guarantee a sale as everyone has to spend unlike now! Now to reassure you further, I still believe in rainy day money! There is no reason not to have the ability to spend on that! My point is that our rainy day money is not the same as theirs! Those 5% hold on to 95% of all money! That’s not rainy day! That’s a power we should not allow as a democracy. I see we need more benefits not less. We need more wages not less and we need more pensions not less. Why should we suffer after a lifetime of effort. Benefits are minimum wages and workers see work sometimes is less than that! And so the imbalance fuels division. But if we had proper benefits and a clear increase above for workers then there will be a real gap to show working is best! Earn as much as we can. And it should be at least double benefits! But we can’t have either if the rich keep holding onto the money! We need it swishing around the workers economy! If you have a wealth tax it’s one amount to the exchequer. If you make them spend all their money like we poor pensioners all do now, you get tax after tax via vat exponentially more than a single wealth tax! The flow around us all generates much more taxation as it goes around. There lies the economic utopia . To end with one more thought…. We need to be sure there is enough money to go round to begin with! I’m not sure there is! There is about £19 trillion pounds out there. That is big! But it may be not enough! We need a mathematical answer to that question. Obviously a population of 60 million needs more money in it than say a population of 1 million? My argument is 95% of our 19 trillion is not in our monthly pot! That’s a failure of the system which we can now change because of computer payment card accounts! I hope that answers some of your worry’s. You can’t enjoy money you don’t spend! And holding it means everyone else can’t enjoy it either. We need money flowing thicker and faster to enjoy it! I don’t want austerity to help them hold our money! I want to enjoy it more! And ironically the rich will still be rich… even richer too! But not with money no! With more stuff they have had to buy with it! Rich on more stuff not money itself. Surely that’s better than now? It’s extreme yes. But for now we definitely need a spending policy not a cuts policy!
Brian, I don't need more stuff. I'm one of those people who worked hard for their money, no freebies nor welfare. I prefer to see my money grow than spending it on my nails. Why do I want to see it grow? I am fully aware that as I get older, I will need more help to do things I currently do myself. I will need more money for private healthcare otherwise I'll die waiting. Inflation will eat away at my work pension which is static.
What you seem to suggest is a Marxist philosophy, one which I can never support. It encourages entitlement with no responsibility nor discipline. I know how hard it is to fund and run your own business. I know the risks, which are sometimes out of one's control (eg. Covid). I do not begrudge those who have worked hard, saved and have a few bob as a result, providing its done legally and honourably.
Great view Jennifer I fully appreciate it. But you have made money on an economy that needs money to run. We both come from a time where we could easily get on the property ladder or could save money because we were earning more than we needed or decided to save for a rainy day. But I’m not trying to take that away from you or anyone. What I’m saying is that with more spending we can all be in receipt of a good NHS or very large pensions snd benefits so we don’t have to save! So we no longer need private health or a private pension. As well all have a state pension that gives us happiness not survival. S better life than we have now. I’m not making spending compulsory. Just if you don’t wish to spend it get it taken by the government who need it! We are lucky that the workers of tomorrow will pay for our needs in retirement. But they are not doing that . They will fail to support us. We may not have a pension at this rate. Nor will private pensions be able to pay one either. The NHS may not work for us by underfunding and we may not be able to borrow from the bond markets who are charging more and more interest now, causing us all to go bankrupt in the end . Our house will be taken to pay for health bills and a life won’t be worth living! It’s not far away at this rate. We are falling down the world rankings as we increase debt to £1,800,000,000,000.00 trillion pounds and counting! We can’t afford the interest on it let alone capital repayment. Our positions are not secure. But if you think the status quo is alright for you then fine stick with it. But 2008 bank crash will defiantly happen again. So money is not a sure thing. Snd nor is it’s present value. Germans used wheelbarrows to carry useless paper money around after they had hyper inflation! Surely that’s not a better way is it? The system has been hour to us. But it isn’t working for everyone now! That’s why I am offering help to impress another view. That’s all.
An interesting perspective Brian one that is unlikely to work nor be implemented. Even when Maslows hierarchy of basic needs is applied, humans want/need different things. As my dad always used to tell us, control your spending as, not even daddy, has a magic money tree in the garden.
That’s an interesting article Fraser . Thank you . However I think you have rather confused yourself with the relevance of the index-linked debt. This is a (very) long-term issue but just doesn’t seem relevant to the rest of your article ( which focuses on why interest payments have increased so much in recent years ).
If index linked debt is about 25 per cent of the stock ( and significantly less of the interest bill as the coupons are very low ) then the increase in inflation around the time of COVID can have had little effect on total interest payments on government debt.
Thanks Fraser. I think it is 4.16 in the OBR report you are pointing me to, but sadly it is not very clearly written!
What I think it would be nice to have is a simple table which shows over a number of years the total amount of interest the government has paid per year and how much of that is represented by interest on linkers (as say a % of GDP). It would also be great to understand how much that figure would change in the future under different inflation scenarios.
To tie in with the main part of your article I think it would also be very useful to understand how this number changes on various scenarios of how the bank plays QT in the next few years.
Similarly (and to possibly support your longer-term views) it would be good to see govt debt/GDP scenarios under different rates of inflations
It really can't be that difficult to do, but sadly I have a day job....hopefully someone at the OBR reads your Substack and the notes and a bit of spare time!
(Incidentally, and it obviously counts for nothing, my view is that it is very hard in the current environment to cut government costs or increase tax revenues so we are well and truly behind the black ball whichever of these various scenarios you take!).
Is this the right way, or the only way, to characterise government debt interest? You talk of 'the extra £50bn now being wasted on debt interest' - but is it waste?
The accountant & finance commentator Richard Murphy said in August last year, 'many on the political right wing obsess about interest paid on government debt as if it disappears into some black hole. It doesn't. It's just interest paid on savings deposited with the government and there's been nothing excessive about its overall cost of late.'
Discussing issuing inflation-linked debt, you say, 'The UK did this to an absurd, almost reckless degree. In all, 25pc of UK debt was made inflation-proof - twice as much as the next highest country (Italy). We had offered the mother of all hostages to economic fortune.' And you suggest the OBR agrees.
Murphy doesn't like inflation-linked debt either:
'Index linked bonds should never have happened ... it was not the job of the state to guarantee the value of money over time to pension funds'
But he doesn't accept that it adds up to a looming disaster, or even that they should be on the Treasury's balance sheet:
'The claim is that the government is paying more than a hundred billion pounds a year in interest. It isn't. That's not true. The fact is that the government has been accruing an interest liability of around £100 billion a year for the last couple of years with regard to interest. But it has not been paying that sum.'
That's because £40bn of that cost is due on index-linked bonds or 'linkers':
'...many of those bonds may not be repaid for many years to come ... on average, index-linked bonds have a life in excess of 15 years, meaning that much of this money that has been recorded over the last couple of years as being payable won't be due for up to 15 years, by which time we won't even notice the cost.
'So, the true cost of interest is nothing like the amount that everyone talks about. The actual cash outflow cost of paying interest over the last couple of years has been maybe only 60 percent of the total sum recorded. So those making complaint are anyway talking a lot of nonsense about the burden that it creates and that it is putting a cash flow strain on the government which is preventing it spending on other things when that is not the case, and the government has up to 15 years to save up the £40 odd billion - make it £80 billion for two years - that it's got to pay because of the recent bout of inflation.'
So our national accounting includes:
'£40bn of falsely represented cost per annum.'
And Murphy reminds us that government debt, far from being a Bad Thing, plays an important role in the economy:
'What interest rates are doing is allowing the government, as usual, to provide depositors who want a safe place to put their money with somewhere to put it, so that our banking system can operate properly, those in the pension funds and the life assurance sectors who need long-term deposits can have them, and overseas governments can save in UK sterling, which is of enormous benefit to our economy because it facilitates trade and our balance of payments.
'So, let's stop making a fuss about something that isn't real. Interest rates in the UK are not an impediment to our government doing anything with regard to what should be its core objectives, like relieving poverty, investing for the future, dealing with climate change, improving the quality of housing, and so much else.'
It could hardly be a more different account from yours, Fraser. For you, the index-linked debt is a 'calamity', a 'sorry tale', '[a] fiscal hazard.' Combined with QE policy during Covid, 'it has left us with a unique level of exposure.' The UK is 'sitting on a bed of nitroglycerine ... HM Treasury [has] ... created a potential monster.'
Moreover, you reiterate a view of the economy framed as essentially a household budget with lots of zeros added to all the numbers, aka 'corner shop economics' or the 'household fallacy', a strategy very much promulgated by Margaret Thatcher and many since. 'We came to forget the difference between a bank balance and a credit card limit. Living life at the edge of that limit means becoming a slave to the bond markets, as Starmer has now indelibly learned.'
I'll be honest with you: I'm no economist, but I don't think you are either, and you frighten people. I suppose that's part of your aim as a journalist, and it's an entirely legitimate aim. But if there's any truth in what the accountant Richard Murphy is saying, you're frightening us for no good reason. So I'm interested in your response to his points. Not just deriding him as a lefty, as many do. You've based your arguments on facts and figures, so challenge his. How can the same reality be interpreted in two such divergent ways?
I try to understand debt but don't have any background in it. There's always a point in an article like this where I lose the plot. Would it be possible to further elaborate on this section which I think is the most important part?
"Chapter 4 of that report tells the sorry tale about how we got here. I’ll give you my version. These ‘linkers’ - inflation-linked bonds - worked very well for Britain until they didn’t. Offering to make loans inflation-proof helps flog them, so you borrow at a lower rate - so it’s a saving assuming (as they all did) that inflation, as we once knew it, would not come back. From its independence in 1997, HM Treasury had high confidence in its ability to control inflation and imagined the old tiger had been slain.
The linkers is just one part of the story. Perhaps just as big a factor is the way we did QE. Every country printed money after the crash, but the UK wanted to put HM Government at the front of the queue for cheap debt. The Bank of England bought bonds and turned long-term, future-proofed debt into short-term exposure at the overnight rate. In effect, QE tore up much of the UK’s locked-in low rates. By replacing long-term gilts with floating-rate reserves at the Bank of England, QE left us far more exposed to rising interest rates. According to the OBR, it has increased the speed at which higher borrowing costs jack up our debt interest bill by a factor of six (!). As its report explains:-
“The impact of a 1 percentage point rise in interest rates within one year has increased by around six-fold from a less than 0.1 per cent of GDP hit to net interest costs at the beginning of the century to about a 0.5 per cent of GDP hit by 2022.”"
Great description Fraser. And yes a doom loop it is! We need big decisions from big decision makers to change this spiral. And by the looks of things Starmer and Reeves are not them! But neither is anyone else either. Lots of problem descriptions but little in answers. I’d like to have a go! … the problem as I see it snd funnily enough the answer is in SPENDING! As nothing good happens from not spending! …. And… we all need to understand our tax system as to, ‘how tax is triggered’? Once we all understand that money has to move (SPENDING) and tax has to be funded as a result of a well funded economy we can quickly see that the tax take can be more than sufficient for all our needs! First Fraser I would like to explain why we need spending?…. well, without spending we don’t get any tax revenue to the exchequer. Without spending money that money incurs no tax! None!! Nada!!! So tax is a result of spending so the answer to increase tax revenue is yes, …. More spending! Next, explain why spending (money moving or changing hands) triggers tax? Well…. Surely, income tax is triggered by income? No!! It’s triggered by Spending! Despite Income tax having income in it, it’s only calculated on wages. It’s paid by employers SPENDING on the wages of employees! Without spending for companies to earn they have no money to spend on wages. So by default we see income tax is triggered by spending. Just as VAT and Duty! Also council tax is Spending(as we have to move money by order). So it’s all on spending. Now we know all tax is as a result of money moving or having to change hands let’s look at all the money that isn’t spent? Yes, 5% of people hold 95% of money! And they don’t spend it every month! …. Just think about that?…. Most or rather, nearly all of our money is held by people who don’t spend it! Not just that, they don’t pay any tax on it! You pay no tax on money unspent unused and idle! None! Nada!!! So there we have it Fraser, most money untaxed unspent and held outside our monthly pot! Whereas we have 95% of people holding just 5% of our money fighting over it to pay tax on! No wonder our tax take is insufficient! And who do we borrow off? Yes the 5% who are holding all our money!!! And what do they want? Interest! So they get even richer! OMG! Isn’t that simple? We have an undemocratic few holding all our money to ransom! It’s not just undemocratic it’s unfair! The system is skewed. I’m all for people earning as much as they can but, I’m all for them having to spend it too! Otherwise it isn’t going to work. In short we need to bring back exchange control. No money out of UK. None. Goods can go but not money. Put a ‘spend by date’ on money electronically. Spend it or lose it to the exchequer. Make money move! Make VAT the tax of choice and the tsunami of money being spent each month will definitely fill the coffers of the exchequer! So much so we won’t need any other tax! We can give more in pensions, more in benefits and more in wages with a turbo charged economy. More tax revenue on more money being spent. It would be autonomous and perpetual and streamlined. It would be fair and democratic. And it would fix every problem. No more borrowing. Debate that Fraser?
Surely that's a very simplistic answer. If you keep SPENDING then you have no savings. If you keep Spending on credit, you have debt. How can you spend yourself out of debt?
I'm now retired so have less income ergo my Spending has reduced.
If you spend everything then you have nothing to pass on to your children so no IHT.
It's not a logical answer INMO. The standard balance sheet with 'knowables' works for me.
Hi Jennifer! Thank you for taking time to debate this. If I may answer … yes we save money because with our present system, we don’t know when we might get it again. In essence basing that view on today’s worry. My view is as we would be then…. I expect the flow of spending to create so much tax income that we can have double treble or more extra for pensions! So you can have that extra each month to enjoy and live, knowing it will come back next month! So taking away the need to worry about… ‘if and when money might come back in’. I too am retired and last week showed how our money now is not secure as income. That’s why we need a guarantee that only comes with money moving. It will also ensure all businesses will survive and earn good profit! So all wages should increase as a result. And finally we won’t need to borrow! We can always sell what we have bought along the way! If you need an influx of funds. We all do it now anyway but it too would guarantee a sale as everyone has to spend unlike now! Now to reassure you further, I still believe in rainy day money! There is no reason not to have the ability to spend on that! My point is that our rainy day money is not the same as theirs! Those 5% hold on to 95% of all money! That’s not rainy day! That’s a power we should not allow as a democracy. I see we need more benefits not less. We need more wages not less and we need more pensions not less. Why should we suffer after a lifetime of effort. Benefits are minimum wages and workers see work sometimes is less than that! And so the imbalance fuels division. But if we had proper benefits and a clear increase above for workers then there will be a real gap to show working is best! Earn as much as we can. And it should be at least double benefits! But we can’t have either if the rich keep holding onto the money! We need it swishing around the workers economy! If you have a wealth tax it’s one amount to the exchequer. If you make them spend all their money like we poor pensioners all do now, you get tax after tax via vat exponentially more than a single wealth tax! The flow around us all generates much more taxation as it goes around. There lies the economic utopia . To end with one more thought…. We need to be sure there is enough money to go round to begin with! I’m not sure there is! There is about £19 trillion pounds out there. That is big! But it may be not enough! We need a mathematical answer to that question. Obviously a population of 60 million needs more money in it than say a population of 1 million? My argument is 95% of our 19 trillion is not in our monthly pot! That’s a failure of the system which we can now change because of computer payment card accounts! I hope that answers some of your worry’s. You can’t enjoy money you don’t spend! And holding it means everyone else can’t enjoy it either. We need money flowing thicker and faster to enjoy it! I don’t want austerity to help them hold our money! I want to enjoy it more! And ironically the rich will still be rich… even richer too! But not with money no! With more stuff they have had to buy with it! Rich on more stuff not money itself. Surely that’s better than now? It’s extreme yes. But for now we definitely need a spending policy not a cuts policy!
Brian, I don't need more stuff. I'm one of those people who worked hard for their money, no freebies nor welfare. I prefer to see my money grow than spending it on my nails. Why do I want to see it grow? I am fully aware that as I get older, I will need more help to do things I currently do myself. I will need more money for private healthcare otherwise I'll die waiting. Inflation will eat away at my work pension which is static.
What you seem to suggest is a Marxist philosophy, one which I can never support. It encourages entitlement with no responsibility nor discipline. I know how hard it is to fund and run your own business. I know the risks, which are sometimes out of one's control (eg. Covid). I do not begrudge those who have worked hard, saved and have a few bob as a result, providing its done legally and honourably.
Great view Jennifer I fully appreciate it. But you have made money on an economy that needs money to run. We both come from a time where we could easily get on the property ladder or could save money because we were earning more than we needed or decided to save for a rainy day. But I’m not trying to take that away from you or anyone. What I’m saying is that with more spending we can all be in receipt of a good NHS or very large pensions snd benefits so we don’t have to save! So we no longer need private health or a private pension. As well all have a state pension that gives us happiness not survival. S better life than we have now. I’m not making spending compulsory. Just if you don’t wish to spend it get it taken by the government who need it! We are lucky that the workers of tomorrow will pay for our needs in retirement. But they are not doing that . They will fail to support us. We may not have a pension at this rate. Nor will private pensions be able to pay one either. The NHS may not work for us by underfunding and we may not be able to borrow from the bond markets who are charging more and more interest now, causing us all to go bankrupt in the end . Our house will be taken to pay for health bills and a life won’t be worth living! It’s not far away at this rate. We are falling down the world rankings as we increase debt to £1,800,000,000,000.00 trillion pounds and counting! We can’t afford the interest on it let alone capital repayment. Our positions are not secure. But if you think the status quo is alright for you then fine stick with it. But 2008 bank crash will defiantly happen again. So money is not a sure thing. Snd nor is it’s present value. Germans used wheelbarrows to carry useless paper money around after they had hyper inflation! Surely that’s not a better way is it? The system has been hour to us. But it isn’t working for everyone now! That’s why I am offering help to impress another view. That’s all.
An interesting perspective Brian one that is unlikely to work nor be implemented. Even when Maslows hierarchy of basic needs is applied, humans want/need different things. As my dad always used to tell us, control your spending as, not even daddy, has a magic money tree in the garden.
I'll stick to my financial prudence thanks.
That’s an interesting article Fraser . Thank you . However I think you have rather confused yourself with the relevance of the index-linked debt. This is a (very) long-term issue but just doesn’t seem relevant to the rest of your article ( which focuses on why interest payments have increased so much in recent years ).
If index linked debt is about 25 per cent of the stock ( and significantly less of the interest bill as the coupons are very low ) then the increase in inflation around the time of COVID can have had little effect on total interest payments on government debt.
Hi Alastair, Ch4 of this OBR report puts it better than I can (or probably did!) https://obr.uk/docs/dlm_uploads/Fiscal_risks_and_sustainability_report_July_2023.pdf
Thanks Fraser. I think it is 4.16 in the OBR report you are pointing me to, but sadly it is not very clearly written!
What I think it would be nice to have is a simple table which shows over a number of years the total amount of interest the government has paid per year and how much of that is represented by interest on linkers (as say a % of GDP). It would also be great to understand how much that figure would change in the future under different inflation scenarios.
To tie in with the main part of your article I think it would also be very useful to understand how this number changes on various scenarios of how the bank plays QT in the next few years.
Similarly (and to possibly support your longer-term views) it would be good to see govt debt/GDP scenarios under different rates of inflations
It really can't be that difficult to do, but sadly I have a day job....hopefully someone at the OBR reads your Substack and the notes and a bit of spare time!
(Incidentally, and it obviously counts for nothing, my view is that it is very hard in the current environment to cut government costs or increase tax revenues so we are well and truly behind the black ball whichever of these various scenarios you take!).
Brilliant analysis. Thanks.
Is this the right way, or the only way, to characterise government debt interest? You talk of 'the extra £50bn now being wasted on debt interest' - but is it waste?
The accountant & finance commentator Richard Murphy said in August last year, 'many on the political right wing obsess about interest paid on government debt as if it disappears into some black hole. It doesn't. It's just interest paid on savings deposited with the government and there's been nothing excessive about its overall cost of late.'
Discussing issuing inflation-linked debt, you say, 'The UK did this to an absurd, almost reckless degree. In all, 25pc of UK debt was made inflation-proof - twice as much as the next highest country (Italy). We had offered the mother of all hostages to economic fortune.' And you suggest the OBR agrees.
Murphy doesn't like inflation-linked debt either:
'Index linked bonds should never have happened ... it was not the job of the state to guarantee the value of money over time to pension funds'
But he doesn't accept that it adds up to a looming disaster, or even that they should be on the Treasury's balance sheet:
'The claim is that the government is paying more than a hundred billion pounds a year in interest. It isn't. That's not true. The fact is that the government has been accruing an interest liability of around £100 billion a year for the last couple of years with regard to interest. But it has not been paying that sum.'
That's because £40bn of that cost is due on index-linked bonds or 'linkers':
'...many of those bonds may not be repaid for many years to come ... on average, index-linked bonds have a life in excess of 15 years, meaning that much of this money that has been recorded over the last couple of years as being payable won't be due for up to 15 years, by which time we won't even notice the cost.
'So, the true cost of interest is nothing like the amount that everyone talks about. The actual cash outflow cost of paying interest over the last couple of years has been maybe only 60 percent of the total sum recorded. So those making complaint are anyway talking a lot of nonsense about the burden that it creates and that it is putting a cash flow strain on the government which is preventing it spending on other things when that is not the case, and the government has up to 15 years to save up the £40 odd billion - make it £80 billion for two years - that it's got to pay because of the recent bout of inflation.'
So our national accounting includes:
'£40bn of falsely represented cost per annum.'
And Murphy reminds us that government debt, far from being a Bad Thing, plays an important role in the economy:
'What interest rates are doing is allowing the government, as usual, to provide depositors who want a safe place to put their money with somewhere to put it, so that our banking system can operate properly, those in the pension funds and the life assurance sectors who need long-term deposits can have them, and overseas governments can save in UK sterling, which is of enormous benefit to our economy because it facilitates trade and our balance of payments.
'So, let's stop making a fuss about something that isn't real. Interest rates in the UK are not an impediment to our government doing anything with regard to what should be its core objectives, like relieving poverty, investing for the future, dealing with climate change, improving the quality of housing, and so much else.'
It could hardly be a more different account from yours, Fraser. For you, the index-linked debt is a 'calamity', a 'sorry tale', '[a] fiscal hazard.' Combined with QE policy during Covid, 'it has left us with a unique level of exposure.' The UK is 'sitting on a bed of nitroglycerine ... HM Treasury [has] ... created a potential monster.'
Moreover, you reiterate a view of the economy framed as essentially a household budget with lots of zeros added to all the numbers, aka 'corner shop economics' or the 'household fallacy', a strategy very much promulgated by Margaret Thatcher and many since. 'We came to forget the difference between a bank balance and a credit card limit. Living life at the edge of that limit means becoming a slave to the bond markets, as Starmer has now indelibly learned.'
I'll be honest with you: I'm no economist, but I don't think you are either, and you frighten people. I suppose that's part of your aim as a journalist, and it's an entirely legitimate aim. But if there's any truth in what the accountant Richard Murphy is saying, you're frightening us for no good reason. So I'm interested in your response to his points. Not just deriding him as a lefty, as many do. You've based your arguments on facts and figures, so challenge his. How can the same reality be interpreted in two such divergent ways?
His blog: https://www.taxresearch.org.uk/Blog/2024/08/23/interest-paid-on-government-debt-increases-private-wealth/
Does anyone have the courage and authority to explain the effects of Brexit to the British public?
I try to understand debt but don't have any background in it. There's always a point in an article like this where I lose the plot. Would it be possible to further elaborate on this section which I think is the most important part?
"Chapter 4 of that report tells the sorry tale about how we got here. I’ll give you my version. These ‘linkers’ - inflation-linked bonds - worked very well for Britain until they didn’t. Offering to make loans inflation-proof helps flog them, so you borrow at a lower rate - so it’s a saving assuming (as they all did) that inflation, as we once knew it, would not come back. From its independence in 1997, HM Treasury had high confidence in its ability to control inflation and imagined the old tiger had been slain.
The linkers is just one part of the story. Perhaps just as big a factor is the way we did QE. Every country printed money after the crash, but the UK wanted to put HM Government at the front of the queue for cheap debt. The Bank of England bought bonds and turned long-term, future-proofed debt into short-term exposure at the overnight rate. In effect, QE tore up much of the UK’s locked-in low rates. By replacing long-term gilts with floating-rate reserves at the Bank of England, QE left us far more exposed to rising interest rates. According to the OBR, it has increased the speed at which higher borrowing costs jack up our debt interest bill by a factor of six (!). As its report explains:-
“The impact of a 1 percentage point rise in interest rates within one year has increased by around six-fold from a less than 0.1 per cent of GDP hit to net interest costs at the beginning of the century to about a 0.5 per cent of GDP hit by 2022.”"
The chronology since Brexit… war and growing oligarchy and cultish authoritarianism
Respect democracy… they said
It’s too late….
They didn’t.
Liam Halligan talks about this a lot, to his credit.
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