I’ve read some utter tosh on the state of the UK public finances in the last few days. Here's an attempt to correct some of the biggest misunderstandings.

Most importantly, government debt does not have to be ‘repaid’, only serviced... (1/19)

#SR20 #SpendingReview #RishiSunak
As long as the government can meet the interest payments (I’ll discuss the risks here later), maturing debt can simply be rolled over. (2/19)
This is what usually happens. The last time the UK ran a budget surplus was in 2000-01, since when public debt has increased by more than £1,700 billion. (3/19)
The key to fiscal sustainability is to avoid a vicious circle where higher interest payments require more borrowing, adding to debt and thus driving up interest payments even further. A higher stock of debt obviously increases this risk. (4/19)
For this reason, it is usually considered desirable to stabilise the debt/GDP ratio, or reduce it, and big jumps are a concern.

Nonetheless, there is no particular threshold for the debt/GDP ratio where debt sustainability becomes a problem. (5/19)
In the OBR’s central scenario, UK gov't debt jumps to 105% of GDP this year and then stabilises close to this level. But this ratio has been much higher in the past, and is expected to remain lower here than in the US, France, Italy, or Japan. (6/19)
Incidentally, this measure of net debt includes loans made by the BoE to the private sector under its ‘Term Funding Scheme’, which are not netted off as assets because they are considered too illiquid. If these are excluded, UK public debt is actually still <100% of GDP. (7/19)
What’s more, the cost of financing this debt (in £bns and as % of revenues) has actually fallen: the increase in the stock of debt has been more than offset by a fall in the average interest rate on this debt (including the lower cost of inflation-indexed debt). (8/19)
OK, what about the risk that interest rates take off? A significant rise in the interest rates on a high stock of debt could be a game-changer and it is right to worry about this. But there are three reasons not to panic. (9/19)
First, the average remaining life of UK government borrowing the gilt market is around 13 years. This means that even if interest rates do rise soon, it will be a long time before this is reflected in the overall cost of borrowing. (10/19)
This is not (as some seem to think) just kicking the can down the road for future generations. This is because in ten to fifteen years the economy will be larger and the burden of a given stock of debt will be smaller. (11/19)
Second, the Treasury now gets a large chunk of the interest back anyway from the BoE which refunds profits from its gilt holdings, minus the interest – currently just 0.1% - that the BoE itself pays to commercial banks on the reserves created to purchase them. (12/19)
Admittedly, this creates some new risks. At some point the BoE may want to sell its gilts back onto the open market. This is a double threat, both because it could drive up bond yields and because the Treasury will then lose the repaid profits. (13/19)
Even if the BoE keeps the gilts on its books, there is the risk that the interest rate that it pays on the reserves (the Bank Rate) increase from its current very low levels. As the OBR explains, QE has effectively swapped gilts for floating rate central bank reserves. (14/19)
As result, the sensitivity of debt interest to a 1 percentage point rise in short-term interest rates has doubled from £6 billion (0.2% of GDP) to (a still low) £12 billion (0.5% of GDP). (This is what @Peston was trying to get at here…) (15/19)

But this is where the third point comes in. If interest rates do rise, we also need to know *why* they are rising. Presumably, it would either be because the economy is recovering more quickly than expected, or because inflation is higher (or both). (16/19)
In either case, nominal GDP would also be higher, thus reducing the budget deficit (excluding interest payments) and the burden of debt as a share of GDP. This is very likely to more than offset any increase in debt interest payments. (17/19)
In fact, I’d go further and suggest that the return of interest rates towards more normal (but still relatively low) levels would actually be a nice problem to have! (18/19)
To be clear, even if the government doesn’t face the same financial constraints as a household, high public spending and borrowing has other risks, including the misallocation of resources - and inflation. But talk of ‘maxing out the credit card’ is just claptrap. (19/19)

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More from @julianHjessop

27 Nov
FWIW, I’ve been comparing my UK economic forecasts with those of the #OBR. There is a much more positive story than the Chancellor told in Wednesday’s #SpendingReview #SR20 📢

Let’s start with the near-term outlook… (1/8)
The #OBR assumes that the economic impact of #lockdown2 will be ‘three-fifths’ that seen during the first lockdown, when #GDP fell by 25% in March and April. This means that lockdown2 would take the level of #GDP back to 15% below its pre-Covid peak… (2/8)
Given that #GDP was 8.2% lower in September than February, and assuming little change in October, this is consistent with a fall of around 7% m/m in November, which is what’s in the #OBR’s ‘central forecast’. This seems about right to me... (3/8)
Read 8 tweets
14 Mar
I see some are arguing that the economic hit from #coronavirus means we should now extend the #brexit transition period (or even #rejoinEU 🙄). They typically make up to four points – but none of them seem at all convincing… (1/6)
First, that it's now much harder for UK and EU negotiators to travel and meet in person. But so what? This is the age of video conferencing and the internet, and we can surely work around this... (2/6)
Second, that government energy spent on #Brexit negotiations would be better spent on dealing with #coronavirus. I have a little more sympathy with this point, but don’t we still have enough ministers, civil servants etc to do more than one thing at a time? (3/6)
Read 7 tweets
11 Dec 19
If Jeremy #Corbyn becomes PM on Friday 13th, here's my rundown of 13 of #Labour’s worst policies which will hurt many, not just the few.

PS. I could have chosen a completely different 13, and these are in no particular order… (thread)

1. Expropriating up to 10% of the value of corporate equity. Employee share ownership is usually a good thing, but dictating the terms would deter job creation and investment, and encourage firms to relocate overseas. More explanation here... capx.co/the-10-share-p…
2. Rent controls. Almost all economists agree that these are a bad idea and, like many of Labour’s policies, would actually end up hurting the very people they are supposed to help. And before replying ‘well, it works in Germany', read this… iea.org.uk/blog/qtwtain-h…
Read 14 tweets
2 Dec 19
The main users of railways are commuters, who are relatively well-off and most likely live or work in London and the South East. So cutting #railfares by 1/3 would increase both income #inequality and regional inequality.

(snips from factsheets here: gov.uk/government/sta…)
To be fair, distributional impact also depends on how lower #rail fares are funded. Higher taxes on car ownership and/or use might even the impact out a little, and could be better for the environment, but plenty of poorer people rely on cars too.
Finally, remember any environmental benefits rely on more people travelling on trains which are already overcrowded. Much better to use the money to improve infrastructure than cut #railfares, especially as users themselves will benefit from this too.
Read 4 tweets
29 Oct 19
Calls for #Votesat16 in all UK elections are widely seen as trendy and progressive. But their arguments are seriously flawed. Extending the franchise without proper debate and preparation would actually be deeply undemocratic... (1/11)
Most 16-year olds are still children living at home and going to school. There is enough pressure on them already. Just imagine the online barrage of political advertising they would face. Their votes are also more likely to be susceptible to influence by their parents. (2/11)
Advocates of lowering the voting age often say that 16 is the age at which you can marry or join the army. But at this age you would still require the consent of your parents or guardians (at least in England), and would not be eligible to serve in combat roles. (3/11)
Read 11 tweets
14 Aug 19
Confirmed: German #GDP also fell in Q2, by 0.1% q/q. Indeed, German GDP is now only 0.4% higher than a year ago, compared to growth of 1.2% in the UK. The equivalent figure of 1.1% for the euro zone as a whole is now likely to be revised down too... (1/4)
The original timing of #Brexit played a part in the fall in German GDP in Q2 too, as activity (eg exports to UK) was brought forward to Q1. But Germany is also more exposed to global trade wars and the #auto crisis, and worried about its currency becoming too *strong*... (2/4)
What’s more, in contrast to the stabilisation in (most) business surveys in the UK, conditions in Germany are continuing to worsen. See, in particular, the July #IFO and #PMIs, and the latest #ZEW Indicator of Economic Sentiment for August (the lowest since December 2011). (3/4)
Read 6 tweets

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