Years of budget deficits have bloated the government's debt pile

All developed economies face the same problem: how to manage the ever-rising tide of welfare and medical spending.

Dilok Klaisataporn via Shutterstock

In September 1976, the UK government was in economic disarray. It had a monster Budget deficit that it needed to finance, and the market traders could smell weakness. Seeing their power, the buyers effectively went on strike and waited until they received an offer they really couldn’t refuse. By the time terms had been agreed between the principal traders and the Government Broker, HM Government was forced to pay 15.5 per cent to borrow for 20 years.

It turned out to be the fixed-interest bargain of the century because long-term borrowing costs fell dramatically as both inflation and the state’s need to raise money plunged. We are some distance from those conditions today, but the traders in UK government debt can, once again, sense weakness from a forced seller. In some ways, the government is in a worse position today than it was back then. Years of budget deficits have bloated the size of the debt pile, and the projected cost of servicing it, at over 7 per cent of public spending, now exceeds the budgets of all but the biggest departments.

Should Mr Market decide that this is too big to be sustainable, it would demand a higher reward for the added risk. Indeed, this is already happening, as yields on UK gilts have risen significantly in recent weeks. The Big Bad Treasury (always trying to urge restraint on the spenders) calculates that each £25bn of extra borrowing pushes up the cost of financing it by between 0.6 per cent and 1.25 per cent. As you can see, this is not an exact science, but obviously, the more you need to borrow, the higher the interest rate you have to pay.

At this point it hardly matters whether the extra borrowing is to buy off public sector strikes or to build some useful piece of infrastructure. Neither produces any short-term gains. Gordon Brown promised to borrow only to invest, but the line between the two is never clear. He became a master prestigitator in his Budget statements. He hardly ever spent a penny. It was always “investment”. We shall see soon enough whether our current Chancellor has learnt from him.

She may decide to move the goalposts and highlight another measure for limiting state spending. But however clever she is with the numbers - and all the ridiculous talk of “headroom” for pet projects just demonstrates the general ignorance of much commentary - each extra pound invested must be borrowed or taxed.

All developed economies face the same problem: how to hold back the ever-rising tide of welfare and medical spending. The UK’s position is not even the worst, but it is compounded by unconditional pay awards to public sector workers and the scale of bureaucratic incompetence in the government machine. The last administration proved itself incapable of resisting the next good cause, and this one is about to face its first real test.

 As a nation, we have become obsessed with process, almost regardless of cost. The 359,000 pages of documents covering the Lower Thames Crossing (where construction is yet to start) is just an extreme example of this uniquely British disease. These are the real hard choices Labour faces. Fiddling around with how its deficit will be measured does not tackle any of them, and merely ensures ever-increasing taxes for diminishing returns.