Chancellor faces struggle to defuse Britain’s ticking debt time bomb

Jeremy Hunt Debt
Jeremy Hunt Debt
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It seems that everywhere you look in the world today, there’s trouble, so you’d be forgiven for not noticing that there is another Budget on Wednesday.

Theoretically, this should be more eye-catching than most, if only because it is widely thought to be the last such fiscal event before the general election, and therefore also the last opportunity for bribing the voters with their own money.

There is of course still some possibility that confronted by some severely constraining Office for Budget Responsibility (OBR) forecasts, Jeremy Hunt, the Chancellor, might conclude he’d be better off delaying any fiscal pyrotechnics until the very eve of the election later this year.

The economy may look a bit better by then, and besides, he would also have an extra year of fiscal headroom to play with.

Saving the fireworks for a second fiscal event would be high-risk, because the economic outlook might deteriorate in the meantime.

But given the straitjacket of constraint currently imposed by the Government’s own fiscal rules, and the fact that the economy does indeed seem to be on an improving trend, it is not without its political attractions.

Inflation is coming down, business and consumer confidence is improving, real wages are rising again, and even without the completely idiotic idea of government-backed, 100pc mortgages for first time buyers, the housing market is reviving.

There seems to be every prospect of a goldilocks outcome, where the labour market is soft enough to justify a series of interest rate cuts, but strong enough for workers to feel secure in their employment prospects.

Yet it’s the bigger, and longer-term picture I want to focus on here, and this does not look good, not good at all. Last financial year, the Government received just over £1,023bn in tax and other receipts. On the other side of the ledger, outgoings were £1,151bn, leaving a shortfall of £128bn. The national debt meanwhile stood at £2,251bn and rising.

If by removing seven of the noughts on these numbers we pretend that this was a household, its income would be a relatively healthy £102,300, but its expenditure would be a distinctly alarming £115,100, a shortfall of £12,800 a year.

With outstanding debt already at £225,000, or nearly two times income, this is plainly a household living well beyond its means. Banks would think twice before extending further credit.

Yet there is little sign of markets applying similar disciplines to governments. Even five years out, according to OBR forecasts, there will still be a sizable shortfall, albeit one reduced by pencilling in tax rises and spending cuts that in practice are quite unlikely to be delivered. There seems to be no limit on what markets are prepared to lend.

The analogy with a household is of course a misleading one in some respects. A household’s ability to service and repay its debts is time limited by earnings capacity and ultimately death.

That’s why mortgages used to be of no more than 25 years’ duration, with the mortgagee expected to have repaid all of the loan by the end date. Standards have slipped, it might be said, but the principle remains the same; the banker still expects to get all his money back over the household’s lifetime.

With governments, it’s not the same. They do occasionally default, but this is rare. Unless you count a coupon adjustment on a war loan, the UK has always been good for its debts.

The same, by the way, cannot be said of continental Europe, where there have been repeated defaults. Germany, which is today regarded as one of the most creditworthy countries in the world, has for instance run away from its debts at least twice in the last century.

What makes governments nevertheless seem more creditworthy than households is that their debts can theoretically be rolled over indefinitely, with each successive generation on the hook to honour them. They are also in charge of the supply of money, so in extremis can always print their way out of trouble.

As the economy grows, moreover, the value of the debt relative to national income erodes, making it seem affordable to add yet more it.

This dynamic has generally worked well since the Second World War, with the national debt plunged all the way from the extreme levels of 250pc of GDP reached at the height of the military spending in 1945 down close to 20pc in the early 1990s.

Relative to GDP, the national debt again rose quite a bit during the free spending years of New Labour, but still remained essentially manageable.

Then came the financial crisis, from which the economy never properly recovered, followed little more than a decade later by the twin shocks of the pandemic and the spike in energy prices. Debt again spiralled upwards, eventually reaching 100pc of GDP.

Even this looked tolerable as long as interest rates remained close to zero, but that luxury has now gone. So too has the “peace dividend” of the post-Cold War era, squandered on a major expansion of the welfare state.

Worse, the post-Second World War demographic dividend of Baby Boomers has also gone powerfully into reverse, with fewer taxpaying workers relative to tax consuming non workers than perhaps ever before in British history.

The economy is still growing, just about, but that’s substantially because of migrant-led population growth, which may be as much of a cost to the exchequer in public spending as a bonus in extra taxes.

All this is a long-winded way of saying that whatever the Chancellor announces on Wednesday, or perhaps via a second fiscal event later in the year, doesn’t alter the grim underlying reality. He’s completely snookered, as indeed his successors will be too.

Like Mr Micawber in David Copperfield, we are left hoping that something will turn up. That something, policymakers believe, could be artificial intelligence, which if properly applied does indeed promise another great leap forward in productivity.

But it’s “pie in the sky when you die” stuff, and in the meantime, the Chancellor is left fiddling while Rome burns, unable to free himself from the shifting sands of demographic, geopolitical and monetary turmoil.

The Chancellor has been urged by one of his predecessors, George Osborne, to shoot Labour’s fox by stealing its proposed clampdown on non-doms for himself, thereby yielding a theoretical £3.6bn to play with for tax cuts elsewhere.

Personally, I doubt the OBR will give the Government any such credit. There would be no fox to shoot if the OBR were to conclude, as it should, that by driving wealthy foreigners out of the country, the measure would cost almost as much as it raised.

You can wriggle and squirm all you like, but whether it’s tax cuts or domestic spending programmes, there is no money to fund them. The future of tax-and-spend is instead one of ever more difficult political choices.

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