Thursday, June 24, 2010

Deeper In Debt


Keep this handy - you're still going to need it

For yesterday's TPA budget presentation we updated some of our previous charts on projected government debt interest.

As we know, in the run-up to the emergency budget, Cam quite rightly highlighted the fact that Labour's plans involved debt interest escalating to an eye-watering £70bn pa by 2014-15 - nearly £3 grand per family. Unfortunately, although George's budget has reduced that a bit, in the overall scale of things you'd hardly notice:


By 2015-16, debt interest is still forecast to be running at £68bn pa. Which is hardly surprising, given that even after George's tough budget, government debt still goes on increasing in each and every year of the forecast period.

But at least George's budget secured the all-important confidence of the markets. Gilts strengthened further (ie the interest rate on government debt fell), sterling rallied, and two of the major credit rating agencies immediately indicated that the UK's AAA rating was now safe. Which is a big win because it means that even higher debt servicing costs resulting from higher gilt yields now look less likely.

Unfortunately, we can't rule it out entirely. Even if the UK is now viewed once again as a safe haven for international bond investors, taking a 3-4 year view it's quite likely that interest rates around the world will move higher from their current historically low levels. And we will not be immune. So just as a reminder, here's how HMG's debt interest bill looks under three alternative scenarios with gilt yields 1%, 2%, and 3% above the rates assumed by HMT in the budget:


As we can see, with gilt yields 3% higher than the HMT assumption, debt interest costs are nearly £90bn pa by 2015-16. And that would be more or less equal to the entire education budget this year.

Finally, it's worth noting that, despite George's efforts, within a couple of years the escalating cost of government debt interest will still mean the average family will be paying more in tax to cover it than it's having to pay in interest on its own mortgage:

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