Still room for tax cuts despite jump in debt interest costs
Len Shackleton writes for City AM
“The latest data on UK government borrowing and debt tell us next to nothing new about the health of the public finances – or the case for tax cuts.
“Total borrowing of £22.9 billion in June was only £0.6 billion higher than the latest Office for Budget Responsibility (OBR) forecast. The monthly figures are volatile and often revised. Indeed, the ONS has lowered its estimate of total borrowing in 2021-22 by another £1.9 billion.
“The headlines have predictably focused on the jump in debt interest costs. This was not remotely a surprise. Indeed, the £19.4 billion figure for June was actually a little lower than the OBR forecast of £19.7 billion.
“Almost all (£16.7 billion) of this £19.4 billion was accounted for by the RPI uplift on the principal value of inflation index-linked gilts. This money will not actually be paid out until these bonds are redeemed, which will be years and even decades into the future.
“This does not mean, of course, that these costs do not matter. These are still costs that have to met by future taxpayers. But it seems odd to ignore the timing completely.
“It is potentially misleading to suggest that the government actually paid out £19.4 billion in debt interest last month, or to compare this figure to recurring annual spending on, say, defence or education.
“The increase in debt interest costs is not really about the level of debt, either. Inflation is increasing the cost of index-linked gilts, but the real interest rates on this borrowing are still negative, and inflation is helping the public finances in other ways. In particular, higher nominal incomes and prices mean that households and businesses are likely to pay far more in tax than anticipated.
“The bigger picture is that the government still has more room for tax cuts, even based on the existing OBR forecasts and the current fiscal rules. What’s more, these forecasts may well turn out to be too pessimistic.”
Notes to editors
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