With GDP figures today showing economic growth grinding to a halt
with no growth in February and a fall in GDP in March, Labour
today reveals the Chancellor ignored serious warnings on
protecting the public finances from inflation and rising interest
rates.
It comes against the backdrop of the Conservatives’ Queen’s
Speech, widely criticised for a lack of action on the cost of
living, and as the Government comes under increasing pressure
from Labour to urgently bring forward an Emergency Budget to
tackle the crisis.
The Chancellor was warned in October 2020 by the Institute for
Fiscal Studies that incorrectly financing the large sums needed
during the pandemic – even with just small errors – could have
huge costs.
They recommended the Chancellor reduce this risk by selling more
long gilts, which at the time had extremely low yields.
Labour also argued at the time that the Chancellor should learn
from the example of the Second World War and look into issuing
gilts with much longer maturities.
But the Chancellor chose to borrow huge amounts with a riskier
approach to gilts that have to be re-financed quicker when
inflation goes up.
With inflation spiralling and expected to reach 10% the risky
approach puts far more pressure on the public finances, and was
branded by Labour as irresponsible and unnecessary.
, Labour's Shadow
Chancellor of the Exchequer, said:
“Today’s GDP figures will add to the worries families already
face as prices soar and pay packets are crunched.
“That the Chancellor ignored serious warnings undermines any
claim he couldn’t have done more to protect the British economy
from soaring inflation.
“The Government's Queen's Speech this week was out of ideas and
out of touch, devoid of any real economic plan for growth or to
tackle the cost of living crisis.
“Anything less than coming back urgently with an Emergency Budget
to help ease the pressure from the cost of living crisis is a
failure by this Conservative government.”
Ends
Notes to editors:
- The Chancellor often refers to debt interest costs, which are
rapidly increasing, as a constraint on the public finances. But
one of the reasons why debt interest costs are spiralling is the
Chancellor’s approach to financing deficits throughout the Covid
pandemic. The OBR forecast that there will be record debt
interest costs in 2022/23.
OBR
Economic and Fiscal Outlook March 2020 Paragraph 1.26
- In October 2020 the Institute for Fiscal Studies Green Budget
noted that, with Government having to borrow large amounts to
finance the response to Covid-19, “the costs of financing it just
slightly wrong will be large”. The paper went on to argue that
“one way to address this risk is by selling more long gilts”,
which at that time had extremely low yields of as little as 0.5%
a year for 50-year gilts.
https://ifs.org.uk/publications/15082
- In January 2021 then Shadow Chancellor argued that government
should learn from the example of the Second World War and
investigate issuing gilts with much longer maturities.
https://labour.org.uk/press/anneliese-dodds-mais-lecture-to-the-business-school-at-city-university-london/
- However, throughout the pandemic the Government has continued
to issue roughly equivalent volumes of short and long maturity
gilts. In fact during 2020/21, more than a third of gilt issuance
was at short maturity. This is more risky in a high inflation
context as it needs to be re-financed more quickly at higher
rates than longer-maturity debt.
- In addition, after one year of relatively low issuance of
Index-Linked debt, where repayments are tied to the Retail Price
Index measure of inflation, the Government went straight back to
pre-covid proportions of index-linked debt issuance, when they
could have maintained low index-linked issuance due to the threat
of inflation. The OBR in March revised their October estimate
finding that £31.5bn in additional debt interest is due next
year, because of rising inflation. Table 3.27.
https://obr.uk/docs/dlm_uploads/CCS0222366764-001_OBR-EFO-March-2022_Web-Accessible-2.pdf
Breakdown of debt issuance by maturity
|
|
2019/20
|
2020/21
|
2021/22
|
2022/23
|
|
Short
|
31%
|
35%
|
27%
|
32%
|
|
Medium
|
25%
|
31%
|
28%
|
23%
|
|
Long
|
27%
|
28%
|
31%
|
30%
|
|
Index-linked
|
17%
|
7%
|
14%
|
16%
|
