Often important facts and news can generate some headlines but pass quickly and often go unnoticed by the public and even political commentators.
One such news topic was the Government borrowing figures for March and indeed the financial year to end March 2025. Arguably this is the kind of statistic which interests anoraks and economists, but they are actually very important and do matter as they impact all of us.
In March the UK government borrowed i.e. the difference between the amount generated by tax and the amount of public spending, the huge sum of £16.4 billion of which £4.3 billion was interest payments alone. This was £2.8 billion more than last March. For the full year the UK government borrowed £151.9 billion again an increase from the previous year of over £20 billion. As a nation our government is presently borrowing over 5% of GDP – basically 5% of our total expenditure is borrowed.
Why be concerned? Well, the larger the debt we have to service the more we pay in interest on that debt. Interest payments mean there is less to spend on public services. In the year 2024/25 we paid £104 billion in interest the equivalent of 8.2% of all government spending. But the real danger is if we do not have a growing economy, we enter a doom loop where the rising debt means higher interest payments which means more borrowing and even less to spend.
The money borrowed comes from the markets known as the “Bond” market. It is huge and international. If the markets are happy they will lend at a reasonable rate. However, if they feel that a government is borrowing too much, is reckless or their policies are risky the rate of interest charged will rise to reflect the perceived risk.
As Jame Corville an American political consultant once said,
“I used to think if there was re-incarnation I wanted to come back as the President or the Pope or as a 400-baseball hitter. But now I would like to come back as the Bond market. You can intimidate everyone”
It was the Bond market which did it for the Liz Truss government and it is the Bond market which has forced Donald Trump to retreat from some of his economic policies/ideas. The Bond markets are truly very powerful and something all chancellors have to be aware of at all times.
Should Rachel Reeves be worried? Maybe not right now but it is clear that she is keeping an eye on the markets, and rightly so. The world economy is fragile, there is little or no growth in the UK economy (growth is the only true way out of a debt crisis) and she has labour MPs and activists (who have little understanding of markets) all wanting to see significant increases in public spending.
Clearly in the autumn the Chancellor will have to make some really tough decisions around tax and spending. Almost certainly taxes will have to rise if they want to avoid a full-blown financial crisis – something that is a real risk given the lack of growth and the lack of real confidence in the Uk economy. Rising taxes can impact business confidence and the ability of the economy to expand and generate tax revenue there by compounding the potential problem.
So maybe the alarm bells are not yet ringing but they are certainly primed.
