2 days ago
A reliance on capricious foreign investors has left Britain on a knife edge
As the Chancellor, Rachel Reeves, will only too painfully be aware, the UK Government pays more for long-term money than almost any other advanced economy.
More than the US, where Donald Trump is giving a whole new meaning to the term 'fiscal profligacy'; significantly more than France and Italy, both of which have higher debt burdens than the UK and arguably bigger fiscal challenges; and almost unbelievably, bigger even than one-time economic basket case Greece.
With her 'non-negotiable' fiscal rules, Reeves claims to be restoring stability to the public finances. But it is far from evident in the nation's debt-servicing costs, which are expected to reach a jaw-dropping £111.2bn this financial year, and have become a major part of the UK's wider fiscal problem.
Why are we paying more than others? Growing credit risk is one obvious explanation – investors are simply not convinced by Reeves's promise of fiscal discipline.
The Chancellor raised spending by £70bn in her first Budget last October, but only half of that was met by increased taxes. The rest came from higher borrowing.
What's since become clear, moreover, is that she is going to have to tax and borrow even more to honour the Government's growing list of spending commitments.
Already markets are suffering from acute indigestion, and fear the worst from the next Budget in a couple of months time.
The other part of the explanation is higher and more persistent inflation than elsewhere. These higher inflationary expectations are reflected in elevated interest rates and therefore debt-servicing costs.
Britain has a bigger proportion in its overall sovereign debt profile of index-linked gilts than any other advanced economy. The higher the inflation rate, the greater the cost.
