Sunday, 15 March 2009

Yes, the government does pay interest on its debt

When was the last time you heard Darling or Brown mention the cost of government borrowing?

Last year, the central government interest bill was ₤32 billion, or roughly 2.2 percent of GDP. Currently, the general government public debt stock, in terms of GDP, stands at 48 percent. Roughly speaking, the government is paying about 4.5 percent on its debt; a figure broadly confirmed by the yield on a 20 year treasury bond.

Looking foward, things are about to get a lot worse. UK public finances are in a complete mess. The government has already committed to the banking system about 90 percent of GDP as loan guarantees and recapitalisations. It also intends to run up a fiscal deficit of 8 percent for the next two to three years. It is not hard to imagine that public debt in terms of GDP could increase to 100 percent of GDP within two or three years.

Assuming that the interest cost in terms of GDP remains the same, the government could end up paying 4.5 percent of GDP in interest payments each year. Even if the government balances its current expenditure and capital investment with its tax revenues, it will still be running a huge deficit.

But what if investors demand a higher yield on government paper. Suppose rates have to go up to 7 percent. Then the government will be an unsustainable deficit. Only dramatic expenditure cuts or huge increases in taxes will bring the situation under control.

There is another more nefarious solution to the government's increasing fiscal difficulties. It could try to destroy the real value of debt by rapid increases in prices. Right now, this is what the Brown, Darling and King are trying to do through quantitative easing. Increased inflation is a now a policy objective. They want to make savers pay for their mistakes through a dishonest and undemocratic inflation tax.


Josh said...

thats right, no one ever mentions the cost of government borrowing. No free lunchs etc...

Anonymous said...

We had a dinner party the other night. All career people with good jobs and money. All once Labour supporters. We spent the night arguing as to what was the best description of the government's policies these days. And after a night of drunken debate, it came to this: masturbated faeces. That was the only phrase that really summed up what Gordon Brown was about: vulger, gross, wasteful (unless your name is Onan).

Rick said...

This is the real reason for QE. If the BoE buys government debt out of imaginary money yields fall as no one can compete in any market with an organisation that can create unlimited amounts of money.

The problem as I see it is that Brown is clinically insane and will not know when to stop. Britain will in time see horrendous rates of inflation followed by a downgrade in its credit rating.

Anonymous said...

The lights are going out too and who will lend the UK money for new power plants?

Budvar said...

£32billion divided by 60million people works out at £533. That means every man, woman an child owes £10 per week just to service the debt. This is at interest rates the lowest ever since records began.

The definition of QE?? The reality is this, I get called into the bank and the manager says "Mr Budvar, your borrowings are in excess of your agreed overdraught limit, would you be so kind as to pay some of it off?" To which I reply "Hey, no problem. How much would you like?" She says "Oh about 10% of the balance should do it". I then whip out my biro and write her a big fat cheque. Now here's where it gets all surreal, instead of having me clapped in irons for being the raike and wastrell that I am, She says not only "That'll do nicely sir" but "would I like to rub her tits too". We're living in a bleedin fantasy world I tells ya!!

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