Julian Jessop

Of course we can afford to cut taxes

What the debt doom-mongers get wrong

The latest data on the UK’s public finances have provided more ammunition for those arguing that the government cannot afford to cut taxes. However, the economic reality is far more nuanced – especially when it comes to interest payments.

The bad news is that the government borrowed another £14 billion in May, £3.7 billion more than forecast by the Office for Budget Responsibility (OBR). This reflected both lower-than-expected tax receipts, despite the increase in National Insurance contributions, and higher spending, including £7.6 billion in debt interest costs.

This means that the government has already borrowed £35.9 billion in the first two months of the new fiscal year, or £6.4 billion more than forecast. To rub it in, these figures will get worse before they get better. In particular, debt interest costs will almost certainly top £20 billion in June alone, because the inflation uplift on index-linked government bonds (gilts) will be based on the jump in the Retail Price Index (RPI) between March and April.

This OBR was already forecasting that debt interest payments will cost the government over £87 billion in the current financial year (2022-23). A figure nearer £100 billion is now plausible. This has led a number of well-placed commentators to rally to the support of the Treasury. For example, Robert Peston was quick to compare that potential £100 billion to government spending on education and to endorse the Chancellor’s line that ‘rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets’.

But that’s not quite right. For a start, it is wrong to compare the £87 billion (or £100 billion) bill for debt interest to annual spending on, say, defence, justice or education. The RPI uplift applies to the principal value of index-linked gilts and will only be paid out when these bonds are redeemed – over an average of more than 18 years.

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