The Bailiffs Are Coming for the UK...

Pre Budget Thoughts

It’s budget time and like his predecessors for the last twenty years Jeremy Hunt can’t balance the books. He’s run a deficit of some £120 billion this year, delivered zero growth and it’s looking like his tax “giveaway” – only a politician could consider not taking our money as a gift – isn’t going to be much. That a Tory Chancellor should have discovered that high taxation kills growth and thus creates a deficit beggars belief; such is the state of UK politics and government.

Mr Hunt castigates government waste as immoral but that isn’t quite the point. Government deficits are immoral, as they increase the national debt which is a tax on the unborn. That government departments waste some of that money is egregious, but waste is an inevitable consequence of an out of control public sector full of apparatchiks who are more interested in preserving their jobs and pension rights than serving the public. The real sinners are the politicians who have failed to control their departments and let the woke agenda fly through Whitehall in place of fiscal prudence. NHS diversity officers have starting salary £45,000 – more than a nurse, midwife or doctor. .

Since 1997 every government has failed to balance the books, mostly because they have failed to control spending. The language of modern politics itself drives up spending; the Westminster parties compete to spend more on (say) the NHS rather than demand more operations and shorter wating times. They pledge to spend 2% of GDP on defence, but in a recession that just locks in a cash cut, and thus yet another procurement black hole. It’s lunacy.

The net result is that the UK debt is over £2,600 billion. It’s managed by the Debt Management Office, which performs the vital task of selling new bonds to raise new money. The DMO also sells new bonds to replace old bonds (i.e. rolling over debt as it falls due which the government can’t replay because it doesn’t have a surplus.) They are also selling the old bonds that they own themselves having created them during the magic money tree years of QE. All of which means that there are lots of new bonds for sale.

Any supply glut drives prices down. The DMO runs weekly Gilt auctions (Gilt is the bond market’s name for government stock). The last one, on 5th March, sold £3.75 billion of debt maturing in 2027 at a nominal 3.75%. The market didn’t like that, and the average bid was £98.41 for £100 of gilts, giving a real interest rate (yield) of 4.3%, While there were plenty of bids, the real interest rate was 0.3% higher than the 28 Feb auction (of 2031 maturity stock). That’s just one data point, but it’s a reminder that neither the government nor the Bank of England set the interest rates, the market does.

Someone needs to explain this to the House of Commons Public Accounts Committee, the group of MPs supposed to scrutinise government spending. They have just released a report calling for the DMO to do more to ensure that debt is issued at the lowest possible cost. They seem to be under the delusion that the DMO sets the price of debt; it doesn’t. It can only set the term of each gilt, a nominal interest rate and whether that is linked to inflation or not.

The MPs assert that “The DMO now needs to address some of the legacy issues created from the large-scale borrowing during the pandemic.” They seem to be blaming one of the few bits of government that works well (there hasn’t been a bond strike yet) for the idiotic, spendthrift policies that created the debt mountain that we have bequeathed to future generations. (Some UK gilts have a duration of 50 years and 25% of them are “long” meaning over 15 years). While spreading debt over a wide range of maturities eases the challenge of repayment at term, it means interest will be paid for longer.)

Debt interest can only be paid from taxation or further borrowing, which brings with it more interest. In 2022-23 the interest was £112 billion, or 4.7% of GDP. £1 in every £10 of tax raised went on debt. It will be worse this year. Indeed it will be worse every year until either the government’s budget (including debt interest) is balanced or the UK defaults – at which point the IMF will step in and it’s game over.

There is no telling if or when a bond strike will happen but rising bond yields is a clue. It’s also worth noting that before the 2007 crash a yield of 5% was very low. Indeed Adam Smith himself concluded that the “natural” rate of return is 5%. All of which means that the UK desperately needs to wean itself off deficits.

That can only be achieve through cutting government expenditure. Labour’s traditional approach of taxing people until the pips squeak ends in tears and the IMF and the New Labour / Nice Tory option created the debt mountain. Controlling expenditure has eluded every department of every government for over two decades, a telling comment on the ability and experience of senior politicians and civil servants.

Liam Byrne left a note for his successor as Chief Secretary to the Treasury “I’m afraid there is no money” - quite possibly the most honest thing a politician has said in my lifetime. Were Jeremy Hunt as candid his note to a successor would read “The bailiffs are coming.”