It’s hard to think of a more shambolic budget than the one Rachel Reeves will deliver next week. His Majesty’s Treasury has spent the last month pitch-rolling policies in the Financial Times – using the paper as a sort of town crier – then pulling them back as the OBR’s forecasts have wobbled.
Directly, the cause for this volatility is the wafer-thin headroom the Chancellor left herself after her first Budget and the Spring Statement. The markets quickly eroded the slack in the face of persistent inflation and a government politically incapable of reining in Britain’s stratospheric spending.
Beneath all that is the staggering amounts we’re spending on debt interest. Indeed, figures released this morning by the Office for National Statistics show that in the first seven months of this financial year we’ve had to borrow nearly £117 billion – £9.9 billion more than the Office for Budget responsibility had forecast in March. The current budget deficit now runs at £15 billion more than projected and debt interest continues to spiral too.
Add it all up and Britain’s annual debt servicing bill has hit £105 billion. We are not far off from governments having to make a choice between educational improvements, strengthened borders, health service innovation or keeping our creditors at bay.
There is, of course, a way out of all this: pay our debt down. A new paper released today by the TaxPayers’ Alliance, however, puts the scale of that challenge in stark terms.
Right now general government gross debt stands at 101 per cent of GDP. The European Central Bank finds that debt starts to seriously hamper growth once it passes 67 per cent of GDP. Once it crosses the 70 per cent mark academic research shows it pushes interest rates up too. The reasons for wanting to get it back down nearer those levels are obvious.
The trouble is that doing so might be the greatest challenge we’ve faced in peacetime. Taking the Maastricht treaty target of 60 per cent, the TaxPayers’ Alliance calculates that reducing the debt to that level within 10 years would require an annual surplus of nearly 5 per cent, equivalent to £137 billion in this year alone. This is clearly not going to happen.
The most realistic scenario offered up by the TPA is a 25-year austerity plan. That would require a quarter of a century of annual surpluses of at least 2 per cent of GDP – equivalent to £59 billion this year. And none of that accounts for pandemics, wars or energy crises.
Finding £59 billion in today’s money would be equivalent to 30 per cent of NHS England’s resource spending, nearly 60 per cent of the Department for Education’s total budget or almost the entirety of our defence spending. Good luck with that!
Even if we did see a smooth 25 years in which to tackle the debt challenge, the political consensus required would surely be unachievable. Since the turn of the millennium the UK has been in deficit every single year. Indeed, since 1990 there have only been five years where the government was in surplus. Even if a party were elected on the commitment to bring in enough austerity to achieve the 2 per cent surplus, the public would find the conditions it created so dire that they’d surely boot them out at the first electoral opportunity. A realignment like this could only be achieved with generational consensus.
There’s just no precedent for such fiscal discipline in modern British history
After the war we did manage to reduce our debt from a whopping 270 per cent of GDP to around 50 per cent over a 30-year period, but those times were very economically different. Austerity was not the only weapon in our arsenal and instead we managed to grow our economy while inflating the debt away. There’s no chance of doing that now.
As the TPA’s report notes, no post-war government has maintained a primary surplus above 2 per cent for more than five years. Doing so for 25 years would require maintaining the commitment across five general election cycles and through economic boom and bust. There’s just no precedent for such fiscal discipline in modern British history. Without a generational commitment to restraint and reform, Britain’s debt burden will remain the immovable object in the path of national renewal – and the task before us, as today’s figures show, may simply be too great to overcome.
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