Transcription
Is the government facing a fiscal a financial crisis right now? Is the IMF going to have to be called in to rescue the UK? These are all big questions that are knocking around at the moment. And I want to show you a few charts that, well, they underline what's going on right here.
Starting with this one. This is showing you the 30-year government bond yield. And what is that? It's the long-term interest rate the government has to face. The higher that is, the more it's having to pay for interest. It us basically. Uh, and that is the highest level now that it's been since 1998. So, you're talking about a generational high in the 30-year government bond yield.
And of course, there's another question. Is the UK alone in facing high uh bond yields right now? Well, yes and no. Okay. So, this is the the the dark lines here in this kind of dark this area is showing you the rest of the G7. So, other industrialized nations that the UK compares itself to a lot of the time. And what's striking about this is in this period, the kind of 2020s, early 2020s, you can see the UK is kind of middle of the pack. It's around the middle of there, isn't it? Then you have the mini budget and look at that red line that spikes higher and a lot of people out there in the market going, "Oh, suddenly I'm a bit worried about the UK debt. I'm not going to price it at the same rate that I would price everyone else." And so for a period that red line is kind of at the top rather than in the middle. Then Labour come into office and they've got big plans to spend more money and invest more and actually that red line is going above the others.
Now it's worth just saying there are various different ways you can skin this. This is one way of looking at it. It's looking at the total kind of levels, but you we can also look at something else. So, if we look just in the last year or so, it's a very different picture. Okay, so this this line it's the same data, but we're literally just looking at the change since the start of the year. So, for instance, in the UK's case, since the start of the year, we're up by 0.48% in terms of that same that same line. Now, compare the UK with the rest of the G7. So, each of these is a different line, different country in the G7. And this is pretty striking, isn't it? Look, instead of being above everyone else, the UK is kind of middle of the pack. And there are other countries which are considerably higher. So for instance, look at Germany. Germany up 0.73%. Japan up by 0.92%. So actually since the start of this year, which is kind of the period when everyone is starting to fret about what's going on, the UK doesn't look all that bad versus everyone else. It's just that the level is considerably higher uh to start with.
Now that that was yields. Uh another thing that the chancellor will always get nervous about is if the pound starts falling and what happened to the pound just now look at this. It went down really sharply against the US dollar. So you put those two things together and that is the kind of combination the the toxic cocktail that a lot of finance ministers would get quite nervous about raising the question what is behind this and what can she do about it?
Well part of it is about inflation. This is showing you the UK's inflation rate. Okay. And it's just the rate at which prices are changing each year. And generally speaking, the higher inflation is, the more people think interest rates are going to go up in the future. And so they're going to assume that you're going to have to have higher borrowing costs going off into the future. And the UK's in inflation rate is not just above the Bank of England's 2% target. But look at this. So we're doing the same exercise that we did with those G7 economies when it comes to guilt yields. This is UK versus everyone else when it comes to inflation. And look, we are way out of whack with everyone else. And so if you're looking at that and you're thinking, well, it looks like inflation's a bit kind of, you know, stuck in in the UK, maybe you're going to charge a higher interest rate uh for the UK. So inflation is potentially part of it, but as is what's going on with the public finances.
And when it's what's going on with the public finances is what this chart tells you a pretty stark story. Okay, this is showing you the projections for how much tax revenue is going to come in in the UK in the coming years and what's going to happen to spending. Okay. And so up until recently, spending that's that's the pandemic here, that little spike. Spending has mostly been above taxes. And that's why we have all these deficits. And the bigger the gap between those two lines, the more you're having to borrow. And the more you're having to borrow, the more people want to charge you for that borrowing. This is what's projected in the future. Have a look at that. Look at what happens to the gap between these two. And if you're kind of worried about the chancellor being able to cut back on spending, then you get very worried about a line like that.
And if we kind of break it down the kinds of things that are responsible for this, we'll take that bar and we'll kind of disagregate all of the things that are driving higher debt. It's health spending. It's pensioner spending. It's actually some of the things that the chancellor says she wants to try and bear down on, but we know that she's struggled. So you've had all those U-turns about things like winter fuel. They've struggled to cut back on the difficult stuff. Raising the question, what happens to that red line? What happens to that red line? And what does it do as well for the total national debt? Because if you take those two lines I showed you a moment ago, take one away from the other, work out what it means for the total national debt, the total amount that the UK owes, this is what happens. Going off into the 70s, you are talking about a national debt that is higher than we have ever seen outside of war. 274% of GDP.
But the final thought I want to leave you with, okay, is the power of productivity, which I know that sounds strange. What is productivity? It's just how efficient we are at creating extra income out there in the economy. A little bit of productivity makes a big difference. Well, I'm going to show you why that matters. Because if productivity, and right now the Office of Budget Responsibility thinks the economy is growing at a certain rate, 1.5% in terms of productivity off into the future. If it turns out that we are growing less fast than expected and so you've got less money being generated and less tax revenue going into the excheer. Look at what happens instead. It's not 274% of GDP you're talking about. I've changed the axis on this. Instead with weaker productivity, you were talking about the national debt going into crazy into stratospheric territory. 640% uh 47% of GDP. really quite scary stuff just because the economy is growing a little bit more weekly each uh each year. And if the economy grows a little bit more strong, a little bit more rapidly each year, look at what happens. 2.5% productivity and all of a sudden you're not seeing the national debt going up, you're seeing the national debt going down. And that is why productivity is actually at the heart of this. And we're going to hear a lot more about those little things you might be able to do to make a massive difference over time uh in the UK economy.