Some silly ideas don’t disappear. We’ve seen one of them in recent days with economists claiming that better than expected government borrowing in December gives Chancellor Rishi Sunak “fiscal room” to delay April’s planned rise in National Insurance Contributions.
The problem with this is that the Chancellor has always had the fiscal room to do so. The limit on government borrowing is not set by his own fiscal rules – which change so often they are not worth wasting time upon – but by the gilt market. And, this offers plenty of room to postpone the NIC rise. Twenty year index-linked gilts still yield minus 2.4 per cent, implying that for every £100 the government borrows it must repay only £60 in today’s money. Which tells us that, despite the recent slight rise in yields, there is still abundant demand for safe assets.
Sufficiently abundant to accommodate extra borrowing. £760bn of the government’s £2.3 tn of net debt is held by the Bank of England. That means privately-owned government debt is equivalent to only two-thirds of GDP. There’s no evidence from history or from around the world that such a debt/GDP ratio is unsustainable.