“The public finances remain in a mess”, says IEA economist
Matthew Lesh comments for The Mail
“The latest data on government borrowing and debt provide another reminder that inflation is often good for the public finances, and that the Chancellor has plenty of wiggle room to ease the cost of living crisis without raising any more taxes.
“The budget deficit is still uncomfortably large, but the government borrowed a little less than anticipated in April. This was partly due to higher tax revenues, especially from VAT and income tax. Borrowing in the last fiscal year (2021/22) was also revised down, by £7.2 billion.
“The ‘debt interest’ bill of £4.4 billion in April is not all that it seems, either. Only about £0.5 billion of this is interest which was actually paid out last month. The rest (£3.9 billion) is the RPI uplift on the principal value of index-linked gilts. This will be paid out in stages as these bonds mature – in an average of more than 18 years’ time.
“Of course, this will simply pass the bill on to future generations of taxpayers. But assuming at least some real growth in the economy, the burden of these payments will be lower than if they had to be made now. This also means that the headline numbers for debt interest are not directly comparable to annual spending in other areas, such as education or defence.
“The public finances remain in a mess and there are worrying signs that higher levels of public spending and tax have become the ‘new normal’. But the government should still focus on measures to support economic growth, including easing the tax burden. A recession would have far bigger fiscal costs. A bit more imagination now should therefore pay dividends in the long run.”
Notes to editors
Contact: [email protected], 07763 365520
IEA spokespeople are available for interview and further comment.