I hear the point about the bond market, but is there not a difference when Truss borrowed not to invest but to cut taxes for rich people Vs the idea of borrowing to invest? Surely governments borrow for the purposes of capital investment all the time?
Yeah, there is a difference, but that doesn’t mean it’s a binary.
The core issue with Truss was borrowing without a return. She would have been borrowing for operational expenses, which don’t generally speaking lead to higher growth.
Borrowing for capital expenditure / invest should lead to growth, but that’s why I said in my first comment about growth vs interest paid.
Strictly speaking I’m talking about both gilts and bonds, but for these purposes the issues are pretty much the same.
The cost of borrowing - ie the interest rate paid by government - goes up based on the Bank of England base rate, and/or inflation, depending on the loan. Some are inflation linked, some are base rate tracking, some are fixed rate, etc.
So for a simple example, if you are borrowing money at 5% interest (per year) and you’re investing it in to capital projects which grow the economy by 1% (per year), you are actually losing 4% per year, and need to find a way to cover that expenditure. You really don’t want to borrow more money for that, because it makes things worse, so you either need to raise taxes or cut expenditure elsewhere.
This is the real damage both Truss/Kwateng, but also Cameron/Osborne caused. Under Cameron, the UK’s rating was downgraded from AAA to AA and has never recovered. This also causes an increase in borrowing costs as private finance point to it as a reason of supposed risk, even though we’ve never failed to pay back our loans. These things combined had lead us to where we are.
Since about 2010, growth of the UK economy has been around 1 percent. But until Truss, the base rate was practically 0 percent, and inflation was under 2%, so we could have borrowed a lot to fund a lot of capital investment, if only the party in government wasn’t ideologically obsessed with actively damaging the economy through austerity.
But now, with both inflation and the base rate at levels not seen in decades, but growth still around 1 percent at best, and potentially turning negative, getting people (ie bond and gilt buyers) who at their core believe only in monetary policy to consider Keysian approaches to economic recovery, and to fund them, is a difficult thing, and they are easily spooked.
I want this money to be spent, it’s genuinely one of the only things I’m enthusiastic about with their policy platform, but honestlty, I think Starmer/Reeves are taking the boring and sensible approach here. They’ve said how much they want to spend, and have been straight forward in saying that they will need to borrow to fund it. It is reasonable to admit that the amount which can be borrowed depends on factors out of their current control (as opposition), and they will scale down if they are required to do so.
But that doesn’t stop me feeling like it’s a bit of a bait and switch.
I hear the point about the bond market, but is there not a difference when Truss borrowed not to invest but to cut taxes for rich people Vs the idea of borrowing to invest? Surely governments borrow for the purposes of capital investment all the time?
Yeah, there is a difference, but that doesn’t mean it’s a binary.
The core issue with Truss was borrowing without a return. She would have been borrowing for operational expenses, which don’t generally speaking lead to higher growth.
Borrowing for capital expenditure / invest should lead to growth, but that’s why I said in my first comment about growth vs interest paid.
Strictly speaking I’m talking about both gilts and bonds, but for these purposes the issues are pretty much the same.
The cost of borrowing - ie the interest rate paid by government - goes up based on the Bank of England base rate, and/or inflation, depending on the loan. Some are inflation linked, some are base rate tracking, some are fixed rate, etc.
So for a simple example, if you are borrowing money at 5% interest (per year) and you’re investing it in to capital projects which grow the economy by 1% (per year), you are actually losing 4% per year, and need to find a way to cover that expenditure. You really don’t want to borrow more money for that, because it makes things worse, so you either need to raise taxes or cut expenditure elsewhere.
This is the real damage both Truss/Kwateng, but also Cameron/Osborne caused. Under Cameron, the UK’s rating was downgraded from AAA to AA and has never recovered. This also causes an increase in borrowing costs as private finance point to it as a reason of supposed risk, even though we’ve never failed to pay back our loans. These things combined had lead us to where we are.
Since about 2010, growth of the UK economy has been around 1 percent. But until Truss, the base rate was practically 0 percent, and inflation was under 2%, so we could have borrowed a lot to fund a lot of capital investment, if only the party in government wasn’t ideologically obsessed with actively damaging the economy through austerity.
But now, with both inflation and the base rate at levels not seen in decades, but growth still around 1 percent at best, and potentially turning negative, getting people (ie bond and gilt buyers) who at their core believe only in monetary policy to consider Keysian approaches to economic recovery, and to fund them, is a difficult thing, and they are easily spooked.
I want this money to be spent, it’s genuinely one of the only things I’m enthusiastic about with their policy platform, but honestlty, I think Starmer/Reeves are taking the boring and sensible approach here. They’ve said how much they want to spend, and have been straight forward in saying that they will need to borrow to fund it. It is reasonable to admit that the amount which can be borrowed depends on factors out of their current control (as opposition), and they will scale down if they are required to do so.
But that doesn’t stop me feeling like it’s a bit of a bait and switch.