This week, the UK Chancellor of the Exchequer will present the UK’s new budget. Since the September 2022 debacle, when Liz Truss and Kwasi Kwarteng’s bizarre tax plan almost brought the UK’s pension and insurance system to the brink of collapse, the extra attention has been justified. In the end, the Bank of England had to intervene to “save the furniture”, as the Belgians say. This earned Liz Truss the dubious honour of the shortest-serving prime minister.
Paying more
On 6 March, it probably won’t be such a big deal. But a recent study by the Institute for Fiscal Studies (IFS) shows yet again how unsustainable the fiscal path of many “western” countries is, including the UK.
As a result of a tax increase for businesses and a “freeze” in income tax rates, tax revenues as a percentage of GDP rise from 33 per cent for the COVID period to almost 38 per cent in 2028-2029. This is the highest percentage since World War II. Hearing this, you probably won’t panic immediately.
Spending even more
But as always, spending is the culprit. The IFS calculates that although spending falls from 45 per cent to just under 43 per cent of GDP in 2028-2029 in the coming years, it is still three percentage points higher than before COVID.
After putting all the figures together, the IFS comes to the following painful conclusion: “… the fact remains that public sector net debt will barely be on course to fall in five years’ time, and only on the basis of plans for fuel duties, business rates and, in particular, day-to-day spending on public services that are unlikely to be realised…”
In other words, even if the UK’s tax burden is at its highest level in more than 70 years, that is not enough to reduce debt as a percentage of GDP. According to the UK Statistics Office, the net(!) debt ratio is now approaching 100 per cent.
Finally, the IFS also points to rising interest costs. For decades, the UK government spent around 2 per cent of GDP on interest. Currently, this figure stands at 3.5 per cent, and even if interest rates are forecast to fall, the burden will not fall below 3.0 per cent.
Unsustainable
There are “economists” who point out that the UK (and other countries) have seen higher interest charges in the past. True, but they forget that the very combination with all the other rising charges makes the situation unsustainable. Health costs are skyrocketing worldwide. The cost of poorly implemented climate policies is exorbitant. And recent developments within NATO clearly confirm that almost all countries need to increase their defence spending. Add to this the structural labour shortages that have emerged in several sectors, and it becomes an impossible task.
It seems clear how governments, with central banks as their extension, are tackling debt unsustainability: extremely low interest rates, for as long as possible. I know, global debt has become a bit of my hobbyhorse, but the facts speak for themselves.
Jeroen Blokland is founder and manager of the Blokland Smart Multi-Asset Fund and founder of True Insights, a platform providing independent multi-asset investment research. Blokland was previously head of multi-assets at Robeco. His chart of the week appears each week on Investment Officer.