The UK is a fiscal saint, not a sinner

{"text":[[{"start":null,"text":"

"}],[{"start":6.22,"text":"The French government hangs by a thread because its parliament cannot agree a budget. Even with Donald Trump’s tariff revenues, US public finances show little sign of improvement and the borrowing forecast looks set to remain close to an unsustainable 6 per cent of GDP for the foreseeable future. Italian and Japanese general government net debt is 127 per cent and 134 per cent of GDP respectively this year."}],[{"start":36.82,"text":"Compared with others mired in a fiscal bunker, the UK’s public finances are objectively better placed. Net debt is still below 100 per cent of GDP. Unlike other G7 governments, the deficit is on track to decrease by around 1 per cent of GDP this financial year and borrowing is only two-thirds of US levels. Despite this, UK politics and financial markets are consumed by fiscal concerns. Government long-term borrowing costs have hit the highest level since 1998 and the UK pays more to raise medium and long-term finance than any other country in the G7. It takes a special sort of political, institutional and economic dysfunction to achieve these results."}],[{"start":88.96,"text":"Talk of a doom loop of slow growth, higher interest rates, worsening debt dynamics and higher taxes proliferates, but this is a poor diagnosis of the problems when UK growth rates have actually exceeded expectations this year. Even more absurd is excitement that London might soon need IMF support, as it did in 1976, despite there having been no significant stress in UK debt issuance."}],[{"start":117.58,"text":"However, just the facts about the UK’s better public finance starting point and short-term prospects than other advanced economies do not tell us why its reputation is struggling so much. Some more context is clearly required."}],[{"start":133.3,"text":"In the short term, Britain is an outlier with a persistent inflation problem, limiting the speed at which the Bank of England can safely reduce interest rates. This raises short-term borrowing costs. Much of the stickiness in inflation was caused by direct or arms-length government decisions such as increasing vehicle excise duties, employer payroll taxes and water bills. However, financial market expectations do not suggest a long-term loss of faith in the BoE’s ability to control inflation, so the explanation for high borrowing costs must lie elsewhere."}],[{"start":172.9,"text":"Although there has been some embarrassing slippage in ministers’ ability to trim public spending on welfare, the scale of the problem is not huge and cannot alone explain the UK’s high level of 10 and 30-year borrowing costs. Population ageing will add to public finance pressures in future, but this issue is far from unique. And Labour cannot keep blaming the hapless Liz Truss for their own problems, tempting as it might be."}],[{"start":201.3,"text":"Instead, there are three genuine explanations for Britain being singled out for punishment in markets. First, the rise in 30-year UK gilt yields reflects a collapse in demand from defined benefit pension funds as they hit maturity and no longer require such debt in large quantities. Second is the peculiar twice-yearly pass-fail nature of Britain’s fiscal rules, which create destructive industries in forecasting black holes in the public finances and imagining scare stories about who tax rises will hit next. The third is that the binary fiscal rules relate to highly uncertain fiscal forecasts five years hence, set by the independent Office for Budget Responsibility, not the current reality."}],[{"start":252.02,"text":"For the Budget this autumn, it is not much of an exaggeration to say that Sir Keir Starmer and Rachel Reeves’ fortunes depend on the mood of two OBR officials — Richard Hughes and David Miles — on the day they set their productivity growth forecast. No one knows what the right number is, but the decision matters more than any other. It should not need saying, but this is no way to conduct public finances in a mature democracy."}],[{"start":281.6,"text":"What should the UK government do? In the short term, some decisions are easy. It should direct its Debt Management Office to issue much less long-term debt. UK gilts already have an average maturity of about 14 years, twice the level of other advanced economies on average. There are few risks in dramatically scaling back long-term debt issuance and avoiding paying current high market borrowing costs. The BoE, likewise, will decide this month on its balance sheet run-off and how much of the long-term debt, amassed under quantitative easing, it wants to sell. That’s a monetary policy decision for them, but it is difficult to think of good arguments why very high long-term borrowing costs help manage a short-term inflation problem."}],[{"start":331.22,"text":"The government should also move quickly to implement a version of the IMF’s recommendation and limit fiscal forecasts to one a year. The UK is unusual in having two; each one comes with huge amounts of damaging speculation and such a change would not water down Reeves’ “ironclad” rules."}],[{"start":353.18,"text":"It is likely that the OBR’s forecasts will still show that tax rises are needed in the Budget in order to hit the fiscal rules by 2030. If so, their implementation should be delayed. There is no need for additional fiscal consolidation immediately."}],[{"start":370.48,"text":"The chancellor should tell markets and the public today that her strategy will be deferred broad tax increases. In the meantime, the government needs to show and not tell. Keeping the deficit on track and parliament voting for continued fiscal consolidation is far more important than any forecast. Markets cannot persistently ignore the UK’s superior public finances if ministers can demonstrate they are here to stay."}],[{"start":405.34,"text":""}]],"url":"https://audio.ftmailbox.cn/album/a_1756867521_2214.mp3"}