How many more wake up calls does the government need, before they recognise the seriousness of the UK’s debt situation?
In government circles it is fashionable to dismiss arguments that we need to control the deficit. They believe that spending whatever it takes will prevent or limit the recession. They think they can go on printing money to get them closer to the next election. They say that of course the UK will never default on its debt. All it has to do in their world is print some money so it can meet the debt bills.
There are two ways a country can try to default on its debts. It could stop paying the interest, or literally cancel the bonds. The UK does not do such things, and it is unlikely to start any time soon. The other way is to undermine the currency and the value of the pound, so the money can be repaid in depreciated notes. Some in world markets are now worried that this is exactly what the government will do. There has been a steady stream of overseas sellers of UK government debt, selling it back to the Bank of England as they do the buying.
At a certain point buyers of Uk government debt want a higher rate of interest to justify making a further investment. The government gets itself into a nasty spiral. It is spending too much, so it borrows too much. The amount spent on interest payments goes up, requiring yet more borrowing to pay the interest. The rate at which it has to borrow goes up, again increasing the interest charges and requiring yet more borrowing to pay the interest.
In Opposition Labour used to know this. They rightly pointed out that the then government spent too much on debt interest, and too much on the “costs of economic failure” – welfare benefits for those without jobs. Many people are now very nostalgic for the relatively low levels of debt and the lower costs of welfare of those days. By its own former rhetoric this government has got itself into the wrong situation. Its own budget deficit is now ballooning through too much debt interest and too many people out of work.
They are about to discover that it is easy to get into a vicious circle on debt, but much more difficult to get out. If you borrow £417,000,000,000 gross debt in just two years as they are doing, you have to pay £12,500,000,000 a year in interest at 3%. If you had to borrow that again at 5% the interest bills soars to £20,850,000,000 a year. And that’s just the interest on two year’s borrowings!