How much can we borrow and what will it cost?

by Shaun Richards

It is not usually put like this but many countries are about to embark on a new fiscal adventure. It is rather soon after the last one and our political class are keen to distance themselves from the way that their previous fiscal splurge has partly created the need for the new one. Or indeed the way that their ill thought out energy policies have done so. As I type this the claimed 50 GW renewable capacity in the UK is producing just under 5 GW or as UB40 would say.

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Hopefully Solar will pick-up as the morning progresses but we find ourselves joining the dash for gas and indeed coal ( 1.2 GW right now) just as they are as expensive as they have ever been.

I will be looking at some UK numbers but the issue is a European generic and true in many other places as well. For example Germany had a 65 billion Euro “Rescue package” not even a week ago and now there is this.

After saying that some companies would have to close this winter, now Germany’s Economy Minister Robert Habeck promises help. “We will open a wide rescue umbrella,” he said Thursday in a speech. “We will open it widely so that small and medium enterprises can come under it.” ( @JavierBlas)

Returning to the UK the BBC is reporting this.

New Prime Minister Liz Truss will unveil plans to limit energy bill rises on Thursday, spending billions to protect people from soaring prices.

Typical household energy bills could be capped at around £2,500 a year, with firms also likely to get some relief.

It is unclear how long the support will last, but the government is expected to borrow at least £100bn to pay for it.

The original leaks were more in the area of £150 billion but the cap is now higher than what was originally floated which is the present just below £2000.

If we take the £100 billion then it is the second major fiscal intervention in short order.

Expressed as a ratio of UK gross domestic product (GDP), borrowing in the FYE March 2021 was 14.4%, which was the highest for 75 years. Early estimates indicate that this ratio fell by 8.3 percentage points to 6.1% over the 12 months to March 2022. ( Office for National Statistics )

In fact we borrowed approximately £450 billion in those two years but it is not quite so easy to say what the extra fiscal support was. It is a bit of a moving target as the definitions do change and the numbers get revised. But if we take the previous years borrowing and subtract that rate of borrowing we get £330 billion extra.

So the switch in policy from the days of claimed austerity post credit crunch has been enormous. Regular readers will recall that we were on the case and looked at this back in the day.

We find that, in advanced economies, stronger planned fiscal consolidation has been associated with lower growth than expected, with the relation being particularly strong, both statistically and economically, early in the crisis ( IMF 2013)

That was too late for Greece where the economy had been plunged into an economic depression but it was the seed of fiscal policy doing a Terminator style “I’ll be back” in the next big crisis. In the UK it returned for the Covid crisis and now is also back for something at least partly created by it.

What do we owe?

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There are always issues around what we do and do not owe. But of the published numbers this is the best guide.

Standing at £2,069.6 billion at the end of July 2022 (or around 82.8% of GDP), PSND ex BoE was £318.4 billion (or 12.7 percentage points of GDP) less than PSND ex.

You could add a £20 billion margin for the Term Funding Scheme is you wish but it does not materially change things and as we stand requiring that is not likely.

What do we pay?

In terms of debt interest we paid £34.4 billion in 2020/21 and £69.8 billion in 2021/22.  These numbers were effectively suppressed by the bond buying ( QE) of the Bank of England. It did not happen explicitly as it buys in the secondary market but in practice it pretty much bought what we were issuing for a while before reducing its involvement. As well as keeping yields lower we of course paid interest to it before then getting i So one factor looking ahead is that we have lost, at least for the time being the largest buyer.

As well as keeping yields lower we of course paid interest to it before then getting it back which saved us a bit over £15 billion last year.

The factor which has been raising things so far this year is simply inflation. In the financial year to July our debt costs have risen by 80.5% from £22.1 billion to £39.8 billion.So we are running hot in this sense and there is more to come because the impact of the rise in inflation is lagged as the bonds are mostly based on it 3 months before, so the recent rises have yet to arrive in the numbers.

What is on its way is the rise in the cost of issuing new conventional bonds or Gilts. This has become more expensive with our bond yields being 3% or so. It would be logical to borrow the extra £100 billion for as long as possible and our 50 year yield is 3.1%, So assuming we could borrow at that rate which does have some realism to it because markets have been adjusting to the likely news means a cost of £3.1 billion a tear going forwards.


There are more than a few moving parts in such analysis as the definitions change pretty frequently. But if we step back and observe the broad picture we see that we were going to be paying quite a bit more in debt costs anyway. But the energy plan will push this higher by £3.1 billion a year assuming it is £100 billion and by a multiple of that is it is more.

We should borrow all of this via conventional borrowing because we are seeing how inflation linked debt is proving so expensive. Those of you who have followed me will know I had a debate about this with Jonathan Portes who essentially argued that real rates mattered as opposed to my argument that we pay with nominal money which is what we are doing right now. We are paying a lot of it too. Although it may seem expensive paying 3% or so is in fact being inflated away with inflation in double-digits.

The fundamental question is why we always need bailouts? They are getting more frequent and are often in response to policy mistakes of which the latest has been energy policy. At some point we need to have an honest discussion based on facts and reality but instead we mostly just kick that poor battered can.

In the end the answer to “Is this affordable?” comes down to economic growth. That is more awkward as in recent  times it has been in short supply.

There is a counter-point to this and that is assuming it reduces inflation ( specifically the RPI) it will reduce our future debt costs for as long as it lasts.


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