The cost of public debt is lower than it has been in nearly three centuries — you wouldn’t know that from the media coverage.
This Latest Government Lending Data Out came the predictable misconception that often dominates the headlines: We should panic about the size and cost of the national debt.Interest paid by the government on national debt already increased, but interest payments did not exceed 2018 levels relative to the size of the economy or tax revenue (see chart below).In fact, while government borrowing is at its highest level since the 1960s, and inflation is rising at the fastest rate in 30 yearsthe cost of servicing government debt remains relatively lower than it has been over the past three centuries.
The pandemic has forced the government to provide aid to businesses and households, and the additional funding needed for these programs, combined with shrinking tax revenues and a drop in economic output from the crisis, means that Government borrowing is 15.0% of UK Gross Domestic Product (GDP) in 2020/21. That’s a third higher than when the global financial crisis hit in 2008, and the highest level since the end of World War II. Overall, this borrowing helped push total government net debt to 94.9% of GDP, the last level seen in the early 1960s.
The Office for National Statistics (ONS) reported that the government paid £6.1bn in interest in January 2022, the highest January amount since records began in 1997, and over the past few months, The media are increasingly reporting The amount of interest paid by the government.It’s great to see the media pay more attention to interest payments as these can more important Not the borrowing or debt numbers themselves.
Interest payments have been at an all-time low for years, here’s why the world’s leading economists Encourage the government to borrow more money to invest in the economy – just two weeks ago former Conservative finance minister Add his name to the list. Unfortunately, finding a title that reports record-low borrowing costs is as rare as finding a hen with teeth. Now, rising inflation and a small rise in interest rates have put more focus on interest payments.
While it shouldn’t be taken lightly, there are many reasons why we don’t need to worry.There is still plenty of room to borrow to pay for much-needed investments, such as reducing dangerous carbon emissions, a social safety net that supports everyone who needs it, and ‘Level the backward areas of the country.
For its part, on a monthly basis, in pounds – what economists call it ‘“Nominal value” – the £6.1bn interest payment figure may appear relatively high. This is the crux of the matter – the nominal term refers to a value that is not adjusted for factors such as inflation, the size of the economy and other important macroeconomic conditions. Nominal numbers – especially when it comes to interest payments – don’t really tell us much and can be highly misleading if taken at face value.
If we really want a fuller and more accurate picture of the affordability of government debt servicing costs, we should consider interest payments related to the size of the economy or government tax revenue. Additionally, we need to take into account that the Bank of England’s Asset Purchase Facility (APF) holds nearly a third of the government’s debt. So, in a roundabout way, about a third of the interest payments are paid from the Treasury to the banks. But because the Ministry of Finance owns the bank, the profit of the bank is recycled back to the Ministry of Finance, and the debt service cost of the government is greatly reduced.
Figure 1 shows that despite significant increases in debt and borrowing, government debt servicing costs remain lower than in 2018 and in almost all years since World War II. Despite rising inflation and interest rates, debt servicing costs as a percentage of the size of the economy and tax revenues will remain about double what they were in early 1980.
Figure 1: Despite the recent increase in interest payments, debt servicing costs remain extremely low by historical standards
Given the media attention on record government debt, it is worth noting that while debt in 2020/21 is at its highest level since World War II, interest payment As the share of tax revenue is at its lowest level in 320 years and remains relatively lower than it has been in the past three centuries (see Figure 2).
Figure 2: Debt interest as a percentage of income is lower than in the past 330 years
Rising interest payments and the recent increase in government borrowing and debt are important trends that should be monitored and not taken lightly. But when making judgments about spending and investment, it’s important to consider all risks — not just those related to public finances. It’s hard to think of a more important time to better understand our public finances as we face a cost-of-living crisis and governments fail to invest enough in reducing emissions.
picture: number 10 (CC BY-NC-ND 2.0)
