Thursday, May 21, 2020

As debt soars, the cost of servicing it keeps falling

Good news for the British government’s finances

An awful lot has changed since Rishi Sunak, the chancellor, unveiled his budget in March. Britain’s economy looks set to experience an unprecedentedly rapid and deep recession. What is more, the government, through actions such as the furlough scheme to support employment, is choosing to bear an unusually large share of the initial costs. The result will be much higher government debt than previously anticipated. And yet the actual cost of servicing that higher debt may well turn out to be lower than was expected back in March.

There is now so much uncertainty that the official government forecasters—the Office for Budget Responsibility (obr) and the Bank of England—have declined to issue their usual forecasts, instead presenting what they call “scenarios”. More detailed modelling by the Resolution Foundation shows what may be to come. According to the think-tank’s three-month lockdown estimate, the debt-to-gdp ratio will soon head back to the 100% mark—a level not seen since the 1950s, when Britain was still burdened with the costs of fighting the second world war.

The Economist


Ralph Musgrave said...

As the debt soars, the cost of servicing it keeps falling.... I bet Kenneth Rogoff and Carmen Reinhart are scratching their heads over that, if not having nervous breakdowns...:-)

Andrew Anderson said...

The debt of a monetary sovereign like the UK is inherently risk-free and should return no more that ZERO percent MINUS overhead costs = NEGATIVE.

So it's no wonder if Mr. Market finds welfare proportional to account balance (positive yields on risk-free assets) attractive - especailly in uncertain times like these.

It's past time we end welfare for the rich and even ZERO percent is welfare, especially for the shortest maturity sovereign debt, account balances at the Central Bank- ZERO wait, which should return the most negative.

Mike Norman said...


The supreme arrogance of those two (Reinhart and Rogoff) along with other mainstream economists in that category, will NEVER allow them to question their theories. They will just double down.