The Treasury has no doubt had a word in the ear of the objectionable Harry Coles who works for the Sun, who has tweeted in response:
So, inflation is going to have a direct cost for the Treasury because almost all this increase is down to the cost of index-linked bonds.
But let's not get too worked up here. The estimated cost of interest in the October 2021 statement was £40.7bn. It's up, but compared to the cost of the poverty crisis to come this is a mere incidental. Except to the Sun, that is. And that's because they don't care.
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With the May council elections coming up and a bad result possibly being the point for the Tory party where fear triumphs over greed and they dump Johnson, it is not surprising that they are returning to the lies that worked so well in the past.
First Johnson tries to revivify the Brexit voters, now Murdoch restarts all the Austerity nonsense.
As far as I can see, there are three sources of increased debt costs for the government due to inflation and increased bank base rates:
1. the increased coupon payable on new debt issuances as a result of interest rate increases. The rates will be baked in for some time, and the government could choose not to issue new gilts or replace maturing gilts, but we are starting from a very low level by historical measures.
2. the increased amount payable on central bank deposits. The Bank of England chooses to pay the base rate, but they could decide to pay something lower.
3. servicing index linked gilts. I’ve not yet seen a clear breakdown of the reported “interest cost” for index linked gilts between (a) interest that is actually paid, and (b) changes in the accounting provision for the amount payable on maturity (and what if any assumptions go into this second figure), and how much both have increased compared to say 12 months ago.
Are there other items that should be added?
The first two are entirely within the control of the government. 3(b) is an accounting item (and how much of central government accounting is done on an accruals basis anyway? For example, where is the provision for future state pension liabilities? How much of the cost of decommissioning nuclear power stations is provided for in advance, rather than just paid as the cost is incurred?)
You are right
There are about £1.5 trillion of conventional gilts in issue, net of QE about £675 bn. Annual cost, net of QE, about £15 billion.
£500bn of index linked stock cost around £5bn pa, and will now be around £40bn
And central bank reserves cost £1 bn or less and now maybe £8 bn
So, index linked stock is the problem
But the QE created reserves need have no interest paid on them and almost all the index linked cost is an accrual, subject to change.
In other words, this is being overplayed, nit least by using gross debt figures.
One other item to add – or rather take away – is tax charged on interest.
Do we know what the investor mix is for gilts? There is no withholding of tax on gilt interest, and I suspect a lot of tax exempt investors such as pension funds, ISAs, etc., along with investors not resident in the UK, but most UK taxpayers are subject to tax on any interest they receive. There must be some 19% corporation tax payers and 20/40/45% income tax payers. How much of gilt interest comes back as tax?
I have never been able to determine this
It’s the Sun Wot Not Knows Any Fing – init?
As thick as a pig shit as usual.
I think I’m right in saying forty billion is about 5% of government spending.
Yes
Given that Sun readers are more likely to feel the financial heat of what is to come I have a little advice for them.
Stop buying the Sun and save yourself some money.
I think they can save £213.40 a year. Every little helps and you will be doing the country and yourself a favour by hopefully sending the Sun to the bin where it belongs.
🙂
The stone/bronze age civilisations in the middle east who invented money also invented debt relief because they understood that borrowing with interest results in a few rich people and all the rest ending up as slaves.
So why can’t the government cancel it’s debt?
It is
That’s what QE does