A new paper by the TaxPayers' Alliance sets out the economic landscape in which the Bank of England's Monetary Policy Committee (MPC) will make its latest interest rate decision, and makes the case for not raising borrowing or spending despite superficially alluring low interest rates.
- EVEN if interest rates remain at their historically low level of 0.25 per cent, then the national debt is projected to reach 234 per cent of GDP in 2066-67.
- However, it is very likely that rates will go up soon, and when they do, the national debt as a percentage of GDP is also projected to rise.
- By 2066-67, any increase in interest rates will mean a significant increase in the national debt as a percentage of GDP.
The Bank of England's Monetary Policy Committee (MPC) will tomorrow say whether they are keeping interest rates at historically low levels, or whether to increase them for the first time in more than ten years.
Regardless of what they decide to do, interest rates will still be at an
unusually and historically low level, and politicians shouldn't see this as an opportunity to heap more debt onto taxpayers through more borrowing and more spending.
The UK's fiscal situation is still very fragile :
- The UK’s national debt currently stands at £1.7 trillion.
- This is equivalent to 89.3 per cent of GDP.
- When compared internationally, the UK has the eighth highest national debt in the EU and the fifth highest in the OECD.
- In the financial year ending March 2017, the UK’s national debt increased by £68.1 billion.
- This is the equivalent of £5.7 billion a month and £186 million a day.
- The UK government spends £48.4 billion each year on debt interest payments, more than it spends on the police transport combined.
Ben Ramanauskas, policy analyst at the TaxPayers' Alliance, and author of the paper, said:
"We keep hearing that historically low interest rates justify borrowing more from tomorrow's taxpayers to spend today. But that's precisely the point - they are historically low and likely to increase again over the next few years. The implications for the cost of servicing our eye-watering national debt are profound and we already spend more on debt interest than we do on the police and transport combined, so it is our children and grandchildren who will have the foot the bill for more goodies today. The case for protecting taxpayers by repairing our public finances is as strong as ever and politicians should have the courage to stick firmly to that course."
Negative effects to UK economy
In addition to higher debt interest payments and a bigger national debt, there are other serious negative effects of increased borrowing that are not currently part of the debate:
(i) The UK has a floating exchange rate and so has a small fiscal multiplier. So if capital does not come from other parts of the UK capital market, it must come from other economies. This results in the real exchange rate rising. This has a negative impact on the competitiveness of UK exports.
(ii) Index-linked gilts form approximately 25 per cent of the UK’s gilt portfolio, a high percentage compared to other highly developed economies. As a result of the relatively high proportion of index-linked gilts, the UK’s level of debt is particularly susceptible to increases in inflation. Therefore, the MPC has a further incentive to consider a moderate increase in interest rates in order to curb inflation.
(iii) The UK pays interest on the bonds which it issues in the form of yields. If the national debt increases then these yields will have to increase in order to attract investors
(iv). Very high national debt can have a negative impact on economic growth. For example, borrowing can crowd out other investment as investors loan money to the government, rather than to the private sector. Nations typically see growth slow when their debt levels reach 90 percent of GDP, with the median growth rate falling by 1 percent and average growth falling by even more.
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