According to the Office for National Statistics (ONS), new public sector borrowing hit a record £15.9bn for August. This comes after inflation led to a rise in interest payments on index-linked government bonds. Officials claim this is further evidence that the coalition is right to press ahead with cuts. Net debt, relative to GDP, rose to 56.3%. That borrowing figure was about £3bn more than economists expected.
An article in BBC news quotes the latest figures for borrowing in the first 5 months of the financial year reaching £58.1bn. Interest paid out on government debt was close to £4bn in August. This disappointment on the spending side is caused by the retail price index (RPI), being negative a year ago and interest spending being low.
What the article does not mention is that debt interest costs will not deviate much from £70bn under the coalition’s plans, increasing to £66.5bn in 2015-16. In comparison, under labour’s plans, the Office for Budget Responsibility (OBR) claims it would have reached this level earlier, in 2014-15. That is a lot of money.
Tax revenue is rising, but so is the cost of dealing with the nation’s borrowing. The article notes that the forecast for 2010-11 borrowing as a whole is around £149bn, down from last year's total of £155bn.
The ONS figures leave out the impact of financial intervention by the government, which reduce overall borrowing because of profit contributions from the part-nationalized banks. The rise in the RPI (used to set payments on index-linked bonds), meant interest payments were at £3.8bn, almost three times what they were in August last year and the country’s finances could be out of whack for some time.
But it may be too early in the fiscal year to draw major doom and gloom conclusions. Before this month, borrowing figures had come in lower than expected in 9 of the previous 12 months, with revenues coming in unexpectedly strong.
The bottom line still stands that revenues are usually always weak in August, and so far they are still 9% up on last year, compared to a Treasury forecast of 6.6% growth in 2010-11. If nothing changes, total borrowing this year would still come in several billion below forecast.
And for those suggesting the government’s borrowing will lead the country to bankruptcy, well it is simply not the case and an old saying of ours comes to mind. When pigs fly?
Governments can default on their debt but they can’t go bankrupt. Before the election, the UK still had triple-AAA credit rating, and the market was demanding and interest rate of only 3.9% to lend the government money. For a reference, U.S bonds were 3.7%. Whatever the coalition is facing, it is certainly not bankruptcy or default.
Investors are worried about the huge debt in the financial sector, and of those debts, how many the government will be forced to honour. This ties in to the latest headlines in Ireland, where the government has lost control of it’s balance sheet.
Another article in today’s BBC news gives the latest report on Irelands banking and property crisis. We should be reminded here, that reducing public borrowing is only part of the problem as governments also need to be concerned with what is happening in the private sector. This ties in to the latest headlines in Ireland, where the government has lost control of it’s balance sheet.
Index linked: An investment, where the return rises in line with inflation.
UK National Statistics website found here.
No comments:
Post a Comment