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Telegraph
4 days ago
- Business
- Telegraph
Britain risks following France into a terrifying debt crisis
Last week brought more bad news about the UK's public finances. June's figures for public sector borrowing came in at £20.7bn, well above the OBR's forecast and City expectations. What's more, £16.4bn of this was accounted for by debt interest payments. Yes, that's right: £16.4bn in one month. We are borrowing enormous sums to pay the interest on past borrowings of enormous sums. We are getting dangerously close to what economists call 'the debt trap'. This is when, under the pressure of rising debt interest payments, the debt ratio starts to explode. It goes without saying that it is good to avoid this, if you can. But can we? Be warned, you may need a ready supply of hot towels for this next bit. The key players in the debt drama are: the budget deficit, the debt ratio, the growth rate of the economy in money terms (which is equal to the real growth rate plus the rate of inflation) and the rate at which the Government can borrow. If the rate at which the Government borrows exceeds the growth of the economy (in nominal terms), then debt interest payments and the overall debt will rise as a share of GDP. In order to stop this process from leading to an ever-higher debt ratio, the Government must run a primary budget surplus (meaning a surplus on its budget without interest payments), requiring higher taxes and/or cuts in government spending. And the higher the initial debt ratio, the larger the surplus needs to be to stabilise the debt ratio. The debt dynamics are merciless. When emerging market countries become stuck in the debt trap, the result is usually default or much higher inflation, or both. Remarkably, given our pitifully low to non-existent real growth rate, the nominal growth of GDP (i.e. expressed in money terms), exceeds the average rate at which the Government borrows by a small margin. Phew! But this is somewhat misleading because the average cost of government debt is heavily influenced by past borrowing, some of which was at lower interest rates. When this debt matures, there is a risk that it will be refinanced at higher interest rates. So we are currently just avoiding the debt trap, but with the deficit so large, the debt ratio is still rising. In these circumstances, it is hardly surprising that the gloom is still gathering about the fiscal prospects that the Chancellor faces in the Budget this autumn. It hardly makes our position any better, but we are not alone. Amid all this domestic pessimism, few people have noticed what is happening to our close neighbour across the channel. France is facing a fiscal predicament every bit as serious as ours. For a start, France's ratio of government debt to GDP is higher than ours – 113pc of GDP compared with our 100pc. And its deficit is higher too – 5.8pc last year compared to our 5.1pc. And ours is set to be just under 4pc this year. In both countries, GDP growth has been weak, and prospects are clouded with uncertainty. The one area where France is better positioned is the cost of borrowing, and this really does show the weakness of the UK's position. Whereas 10-year bond yields here are 4.6pc, in France they stand at about 3.5pc, similar to other euro-zone members. In this regard, however, something extraordinary has been happening. French yields have been converging on Italy's. The gap between them is now only 0.18pc, the lowest for almost 20 years. It doesn't seem too fanciful to imagine that French yields will soon surpass Italy's. Admittedly, after a recent period of comparatively strong growth, it looks as though Italian economic growth is set to be slower than growth in France, returning to the long-established norm. That certainly does not make the job of stabilising the public finances any easier. And, at 135pc of GDP, Italy's debt ratio is a good deal higher than in France. But Italy possesses two striking advantages. First, its fiscal deficit is only 3.4pc of GDP, compared to France's 5.8pc. And excluding interest payments (the so-called primary budget), it is in a surplus of 0.5pc, compared to France's deficit of 3.7pc. The result is that to stabilise the debt ratio, Italy needs to tighten the budget deficit (through a mixture of higher taxes and expenditure cuts) by only 0.5pc of GDP. By contrast, to stabilise her debt ratio, France needs to tighten fiscal policy by over 3pc of GDP by 2027. Italy's second advantage is surprising to anyone who has followed Italian politics over the past 80 years. She seems to be more politically stable than France. Giorgia Meloni looks likely to be Italy's first post-war prime minister to complete their term. In France, there have been six prime ministers since 2020, and the current incumbent, Francois Bayrou, who heads a minority government, could be ousted any time soon. He recently announced a plan to tighten French fiscal policy by 1.5pc of GDP. By comparison, Rachel Reeves' Budget last October increased taxes by 1.2pc of GDP, but this was more than offset by increases in public expenditure. There is little chance of the proposed French tightening getting through parliament unscathed. The failure to pass a budget for next year, leading to the fall of the present government, could cause French bond yields to flare up. And then there is the presidential election in 2027. On voting intentions in the first round, Jordan Bardella, the likely candidate of Marine Le Pen's National Rally, is well ahead of the other candidates. Obviously, there's many a slip twixt the cup and the lip. But if the markets were to view a victory for the National Rally as likely, then they would surely send French bond yields much higher, thereby putting France in a dangerous fiscal position. We cannot gloat. There but for the grace of God go all of us.
BBC News
7 days ago
- Business
- BBC News
UK economy assessments should be cut to one a year, IMF suggests
The UK government's finances should be assessed only once a year to avoid "overly frequent" changes to policy, the International Monetary Fund (IMF) has suggested. At the moment, the government's independent forecaster - the Office for Budget Responsibility (OBR) - has to produce two forecasts a year for the economy and public finances, and to assess if the government is on course to meet its limits on year changes in its forecast for the economy, driven by rises in global and domestic government borrowing rates, led to Chancellor Rachel Reeves announcing £5bn in health-related welfare the cuts were then reversed after a Labour backbench revolt last month. The influential IMF, as part of its annual health check of the UK economy, said the best solution would be for the government to allow greater room for manoeuvre around its financial targets, "so that small changes in the outlook do not compromise assessments of rule compliance". The advice, if followed, could mean more tax rises than expected at the Budget in Autumn, as the chancellor rebuilds a bigger financial buffer to deal with a volatile global government is considering a change that would help support its move to there being a single Budget every year, a move which was designed to increase policy stability. The Institute for Fiscal Studies recently recommended downplaying the Spring Statement with a looser borrowing target, to prevent the need for constant fiddling of tax and spend chancellor is following two main rules for government finances, which she has repeatedly said are "non-negotiable". They are: day-to-day government costs to be paid for by tax income, rather than borrowingdebt to be falling as a share of national income by the end of this parliament in 2029-30The IMF, in general, praised the UK economy and recent "bold agenda" of pro-growth reforms, saying its medium-term borrowing plans were "credible" and that the UK's trade deals meant it was well placed to ride out current global suggested that should economic shocks materialise, the government should consider replacing the state pension triple lock, widening the applicability of VAT, means-testing more benefits, and co-payments for richer users of the to the IMF's report, Reeves said: "Today's IMF report confirms that the choices we've taken have ensured Britain's economic recovery is underway, and that our plans will tackle the deep-rooted economic challenges that we inherited in the face of global headwinds."Our fiscal rules allow us to confront those challenges by investing in Britain's renewal."
Reuters
25-07-2025
- Business
- Reuters
Breakingviews - The debt supercycle has reached its final leg
LONDON, July 24 (Reuters Breakingviews) - British politicians know that their workplace, the Palace of Westminster, is in a shambolic state. The 19th-century complex of buildings suffers from an infestation of vermin, falling masonry, leaking water from lead piping, and worn-out electric wiring. There's a constant danger of fire. Yet the occupants cannot summon up the will to tackle the problem. They shelved elaborate and costly renovation plans several years ago. Instead, the decaying structures are temporarily patched up. Yet the longer the delay, the higher the estimated costs of the building works and the greater the risk of a catastrophic incident, Parliament's Public Accounts Committee has warned. There's another challenge that Britain's political class seem incapable of rising to. Since the pandemic, UK public borrowing has been on a sharp upward trajectory. By the end of last year, the national debt approached 100% of GDP and the fiscal deficit was over 5%. The Office for Budget Responsibility warns, opens new tab that if nothing changes the public debt will reach 270% of annual output over the next 50 years. A recent relatively minor act of fiscal restraint – the Labour government's proposal to cut winter fuel payments to wealthier retirees – was reversed after it ran into fierce opposition from the party's own lawmakers. Last month, the state borrowed a further 21 billion pounds, its highest ever monthly net borrowing (aside from the pandemic year), and 3.6 billion pounds higher than the OBR had predicted. Britain is hardly an outlier among the large, developed economies. France's public debt is even higher at 112% of GDP and last year's budget deficit was 5.7% of economic output. U.S. public debt last year reached 121% of GDP and its fiscal deficit hovers around 7%. In its latest Fiscal Monitor, opens new tab the International Monetary Fund exhorts governments to 'put their fiscal house in order.' In principle, sovereign insolvency is not inevitable. Governments could raise taxes, cut spending and act decisively to boost economic growth. If they took these tough measures, pesky fiscal deficits would gradually evaporate. But the political resolve is lacking. Britain's OBR notes that 'public expectations of what government can and should do in response to emerging threats and future emergencies seem to be rising.' French Prime Minister François Bayrou warns that his country is addicted to borrowing and just 'one step away from the cliff.' Yet France's latest, faintly comic, plan to reduce the fiscal deficit involves cancelling two national holidays, an act which is strongly opposed on both the left and the right. Across the Atlantic, whatever savings were achieved by Elon Musk's Department of Government Efficiency have been completely overwhelmed by President Donald Trump's One Big Beautiful Bill Act, which the Congressional Budget Office predicts, opens new tab will add a further $3.4 trillion to U.S. deficits over the next decade. The root of the problem appears to be cultural. In his book, opens new tab, 'The Fourth Turning is Here: What the Seasons of History Tell Us about How and When This Crisis Will End', demographer Neil Howe posits that human societies pass through multi-generational cycles. In the first generation, society is strong, cohesive and optimistic. The next generation experiences an 'awakening' in which established values come under attack. There follows an 'unravelling' as institutions weaken, civic order decays and society becomes increasingly polarised. 'Incompetent governance, ebbing public trust, and declining public compliance all feed on one another in a vicious cycle,' intones Howe. The resolution finally comes with a 'fourth turning' when a new civic order replaces the old one. Howe's long cycle originates with the work of the 15th-century Arab historian Ibn Khaldun, who traced the rise and fall of ruling dynasties through changes in group cohesion. By Khaldun's fourth generation the founders' collective spirit has become widely despised, complex laws are evaded, vast riches are hoarded by the few and 'destroyers' preside over the dynasty's collapse. Hard-nosed financial types may find this civilisational cycle somewhat nebulous. But it appears to complement the broadly accepted notion of a debt supercycle – a multidecade period in which total borrowings ratchet ever higher. In his latest book, 'How Countries Go Broke: The Big Cycle', Ray Dalio takes issue with 'the insouciant belief that there's no limit to government debt or debt growth, especially for countries with a reserve currency.' The veteran hedge fund manager's 'big debt cycle' lasts around 80 years (roughly the same periodicity as Howe's revolution). Over the course of Dalio's cycle, sound money gives way to government-issued fiat money, the private sector takes on too much debt, at which point the government steps in to bail out borrowers, and total debt keeps on rising. As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments' debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing. That pretty much describes the situation which several advanced economies, including Britain, France and the United States, find themselves in today. The investment conclusions from Dalio's historical study are unsurprising. Owning government bonds at the end of a debt supercycle is not a good idea. Faced with a crisis, central banks usually bail out their governments. When inflation picks up, currencies depreciate on the foreign exchanges. Real assets are a safer bet. Stocks tend to decline into the crisis but generally recover their losses in the aftermath. Gold shines, beating bonds on average by 71% during crisis periods, according to Dalio. 'History is seasonal, winter is here,' writes the dismal prophet Howe. Dalio does not think a debt crisis is imminent, but believes one is likely to arrive within the next decade. Bondholders are forewarned. On the bright side, it's possible that by then a more resolute generation of parliamentarians will have started work on fixing the Palace of Westminster. Follow @Breakingviews, opens new tab on X
Daily Mail
24-07-2025
- Business
- Daily Mail
State pension age 'could have to hit 80' with warnings cost crisis is even worse than feared - as union threatens to take to streets if retirement handouts are delayed
Brits are facing a stark warning today that the state pension crisis could be even worse than feared. Concerns have been raised that estimates by the Treasury's OBR watchdog might be underplaying the challenges posed by life expectancy improvements. According to analysis by consultancy Barnett Waddingham, a more 'cautious' approach would be to assume the longevity gap closes between the poorer and wealthier ends of society. That suggests spending would be the equivalent of £8billion a year higher by the mid-2070s. Maintaining the cost of the state pension at around the current proportion of GDP would then require withholding the payments until people reach 80, rather than 74 as previously mooted. The grim calculations emerged as a union threatened to take to the streets if the government tries to increase the official retirement age more quickly. The Rail, Maritime and Transport union lashed out after a government review was launched this week - although it is not expected to report until the end of the decade. Speculation is mounting about the sustainability of the pensions triple lock, which means the state's old-age payouts rise by whichever is highest out of rates of inflation, earnings or 2.5 per cent every year. A government review published in 2023 indicated that if life expectancy returned to the trajectory expected in 2014 the state pension age could be 71 by the late 2050s The OBR warned earlier this month that the policy could cost three times as much as originally expected by the end of the decade, as the ageing population piles further pressure on public finances. The pension age is already slated to rise to 67 between 2026 and 2028. Currently the legal position is that it will reach 68 from 2044-46. But a previous report by former Tesco director Baroness Neville-Rolfe cautioned that might need to be accelerated. With the triple lock in place it has been estimated the level would have to hit 74 by 2065–67 in order to keep spending at around 6 per cent of GDP. But Jack Carmichael, senior consulting actuary at Barnett Waddingham, said there was a 'very real risk' that the situation would be even worse. 'The OBR's 'Fiscal risks and sustainability' report shows the cost of State Pension as a proportion of GDP doubling over the next 50 years, driven by a growing retirement population relative to the working age population,' he said. 'The OBR's modelling uses a high life expectancy scenario, based on the ONS's definition in their population projections, that results in an additional annual State Pension cost of c£2billion in today's terms. 'It assumes a long-term rate of 1.9 per cent, rather than 1.2 per cent. 'In reality, that sensitivity is too cautious and broad-brush, which underplays the degree of longevity risk in the State Pension system. Mr Carmichael suggested it would be more appropriate to assume 'a closing of the life expectancy gap between the individuals with the lowest and highest life expectancy'. 'Not only does this more accurately capture the financial impact of longevity risk in the UK State Pension system, it is also more likely to reflect healthcare spending priorities over the next 50 years if those living the longest at the moment are assumed to have almost reached the life expectancy cap,' he said. 'Under this alternative life expectancy sensitivity, the annual cost of the State Pension would increase by c£8billion - four times higher than the current model predicts. 'To keep the cost of the State Pension at a similar proportion of GDP would then require a massive increase in the State Pension Age, potentially up to the dizzying heights of age 80.' Dr Suzy Morrissey has been commissioned by Work and Pensions Secretary Liz Kendall to look at the 'factors government should consider' on state pension age. And the Government Actuary's Department has been asked to produce a report on the proportion of adult life in retirement. However, it is understood that final decisions are highly unlikely to be taken until the next Parliament, despite concerns about giving people enough time to prepare for changes. RMT general secretary Eddie Dempsey said: 'The UK state pension is already one of the worst in the entire developed world, which is a direct result of decades of governments transferring both our national and personal wealth to the super rich. 'Any decision to squeeze more out of working people by forcing us to work even longer would be a national disgrace.' He continued: 'Our members work in physically demanding, round-the-clock, safety-critical jobs. 'Many already struggle to reach retirement in good health, especially shift workers. 'Raising the pension age even further isn't just cruel and unnecessary, it's a slap in the face to the very people who keep this country running. 'If this government makes any move to drastically increase the retirement age, we intend to lead our movement onto the streets and will not hesitate to protest nationally and take co-ordinated direct action.'
Spectator
23-07-2025
- Business
- Spectator
What's the score on ‘score'?
The courtship rituals of the Treasury and the Office for Budget Responsibility last ten weeks. The consummation is a fiscal event, such as the Budget coming in the autumn, if we survive. Eligible young ladies used to have dance cards on which to enter the names of their suitors. The Treasury has a scorecard on which its proposed measures are drawn up for the OBR to score. The analogy is with the cricket field rather than the ballroom. The OBR score indicates its forecast for spending, receipts and public debt. It also takes into account knock-on effects of a policy change. This is called dynamic scoring. I had to ask Veronica about this and, since it's years since she split up with her unsatisfactory City trader, she might have got it wrong. In 2021 the OBR had to explain that the dynamic effect of a rise in tobacco duty was so large that 80 per cent of the increase was lost to the Treasury. After the increase, people changed their behaviour: some gave up cigarettes, some rolled their own and not a few got cigarettes from illegal sources. Is that where all those Turkish barbers come in? There was a response that benefited government coffers when it cut the top rate of tax from 50 to 45 per cent in 2012. The static effect would have cost the Treasury £3.8 billion. But behavioural changes, such as hours worked, meant the OBR's estimate of the loss of revenue was only £100 million. Dynamic scoring shares an etymology with the score cut in pork skin to make crackling – from a productive ancient Germanic word that also gives us shear, shard and share (used for ploughing). Dynamic scoring is also a variant of the scoring done by our Anglo-Saxon forebears cutting a score in a stick every time they'd counted 20 sheep. 'The days of our age are threescore years and ten,' says the Psalm, 'and though men be so strong that they come to fourscore years, yet is their strength then but labour and sorrow.' We know the score.
