Although the budget has revised down the government's forecast of borrowing and debt, in terms of the big picture it has made virtually no difference. Total debt is still forecast to rise to £1.4 trillion by 2014-15, which is £56,000 for every household in Britain.
What's more, the government's definition of debt excludes a number of items that add hugely to taxpayer liabilities. These include public sector pensions, PFI debt, Network Rail debt, and of course the liabilities relating to the bank bailouts, which extraordinarily are omitted from the official debt total. Adding in all of those items increases our total debt by around £1.4 trillion.
However, even setting these Enron style debts aside, the official public debt on its own is going to impose a substantial and increasing burden on taxpayers over coming years.
Hidden away in its detailed tables, the Budget projects an increase in public sector debt interest payments from £31.5bn this year to £73bn in 2014-15, a rise of 130%. Which means that in four years time, the average household will have to pay £3000 pa in tax just to pay the government's debt interest bill.
And debt interest will be eating up an increasing share of the government's income. Instead of going to fund public services, a bigger slice of our taxes will be paying debt interest:
So whereas over most of the last decade the public sector was spending 5-6% of its income on debt interest, by 2013-14 it will exceed 10%. That takes us right back to the 70s, with debt interest was a constant drain on the public finances.
Worse, the budget assumptions on government borrowing costs (gilt yields) may well be too optimistic. The Treasury is assuming yields remain in the range 4-4.5%. But given its continuing need for substantial borrowing throughout the forecast period, plus the fact that the Bank of England will probably not be repeating its huge gilts purchases last year (Quantitative Easing), there is a real risk that gilt yields move higher. And that would increase debt interest costs.
To gauge the possible additional costs, we have looked at three alternative scenarios for gilt yields: that yields move 1%, 2%, or 3% higher than assumed by HM Treasury in the budget. Some may argue that a 3% increase to over 7% is extreme, but we should remember that yields have been far higher than that in the past – as high as 17% in the 70s.
And if yields did increase to 7%, we project that debt interest costs reach £94bn by 2014-15, adding the best part of another £1000 pa to the average household's tax bill:
Taxpayers are about to rediscover the costs of deficit financing. Whether we believe the Treasury's rosy assumptions on gilt yields, or expect an increase, we are facing a massive escalation in debt servicing costs. And the budget has done nothing to contain it.