Ah, but Willy

He\’s OK today, as far as he goes, is Mr. Hutton:

But as the forecasters say, fortunately our plans to service the debt is within the margins of safety, never rising above 10% of tax revenues even at the peak moment for public debt in 2014/15. It started from a low base and interest rates are very low.

What if interest rates rise a little?

They also remark that whatever the credit-rating agencies may say, Britain has not defaulted on its debt since the 14th century. There is zero risk today.

In the largest study of sovereign defaults, we find that the flash point is when debt interest goes over 12.5% of GDP.

Now yes, tax revenues and GDP are different things: but to get there all we need really is a doubling of interest rates and a shortfall in the growth projections (which would reduce tax revenue and increase current borrowing, boosting the stock of debt).

Looking at Greece, anyone really want to bet that interest rates won\’t double over the next 5 years?

Now I agree that the risk isn\’t huge: this isn\’t a certainty. But the risk ain\’t zero neither.

11 thoughts on “Ah, but Willy”

  1. Brian, follower of Deornoth

    “fortunately our plans to service the debt is within the margins of safety”

    He’s not saying that because there’s a speck of evidence it’s true; he’s saying it because he wants it to be true.

    In the “thought” processes of lefties, if you really really want something to be true, it becomes true.

  2. Whoah, claiming the risk is neither zero or a certainty is going to stir it up!

    I’m not sure you can just assert interest rates doubling would have such a negative effect, for surely if they do, ie the rate on the 10yr gilt goes to 10%, then it suggests inflation will be 6-8%. So nominal GDP growth will be in the same region, perhaps even higher. This is surely going to reduce quite quickly the debt/GDP ratio given 75% are at fixed rates?

    Obviously high inflation will cause other effects too.

    Tim adds: Umm, sorry, you-ll have to explain to me why high interest rates means high inflation. Has the jump in Greek funding costs either caused or been caused by high inflation there? Even correlated with?

  3. Brian, so the lefties are looking at the interest rate the market demands to take on the debt and think it is rather low, note the AAA rating given by the (admittedly tarnished) rating agencies, and also are aware that the debt has a long average maturity and a significant amount is held domestically and you lot are shouting ‘we’re doomed I tell you, doomed’ and its us that is guilty of wishful thinking! I suppose at least that’s some thinking.

  4. The ability of a government to service debt is a simple thing .It is the ability to collect taxes from those who come under its rule at higher levels but delivering far less for it .
    Those countries who default do so because they are unable to maintain control under those circumstances and so political stability is really the key point
    The debts will have to be paid true but whether that will save the country as we know it is another thing entirely , this is not the post war period when we were the most indebted country in the world .(Perhaps the most indebted any country will ever be ?)
    When the left include these levels in their graphs they are talking about Empirical Britain a great and uniquely stable world power , paying back the US the money it leant it to fight the Nazis on its behalf. Many were rightly bitter about the great appeasers behavior… but look at the alternatives.

    Will Hutton and his kind have been those chiefly responsible for breaking the ties that encouraged people to see the \Nation as an extension of the tribe or family with was common purpose . It is increasingly and sadly just a place where a “diverse” group happen to live.We may regret that fragmentation
    It is also often forgotten that taxes in this country whilst lower than some European countries are more redistributive .In fact, according to the IFS, they are as redistributive as they can get .It seems likely to me that an extreme politics of one kind or another is inevitable given the strains that are going ti be caused

    Huttons silly bland optimism is right then , as far as it goes .Sadly it does not go very far at all. Its like saying we may well survive the amputation of an arm. True but the music emanating form the Piano Forte will never sound the same again.
    On the plus side I think Churchill wisdom that wealth creation must precede wealth distribution unless we are to distribute poverty will prevail and the swing will be to the Economic right. It will tale all the resources and history of this place to resist the sort of collapse of civil society we have seen elsewhere

  5. Brian, follower of Deornoth


    The “lefties” (by which I include the current Government, the LibDumbs and Blue Labour) clearly agree with you. I am asserting that this is not because there is any truth in what they say, but because it allows them to continue with their favourite policies, namely pissing taxpayers money up the wall like there’s no tomorrow. They believe what they say because it conforms to their ideological prejudices.

    That it is clearly senseless is neither here nor there., so far as they are concerned. They want it to be true, so it is true.

  6. Brian, you’re claiming it is impossible to say anything about the ability or not of a government to pay back a debt. This is so obviously idiotarian (people have had mortgages for years, and paid them back successfully) it’s hard to know what else to say.

    “Tim adds: Umm, sorry, you-ll have to explain to me why high interest rates means high inflation. Has the jump in Greek funding costs either caused or been caused by high inflation there? Even correlated with?”

    Wel I think down the line they have, yes, but not directly, no. But more generally yields represent both the risk of default and the expected rate of inflation. If you’re saying the real yield on 10yr gilts will be 8% for any reasonable length of time then I think by that point the markets will have already decided that Britain was going to default, not that it would cause a default.

    Tim adds: yes….quite.

  7. Yes but you are both either missing or ignoring here is that the reason we do not default only if the tax payers are prepared to put up with European taxes and US Services.
    I do not see current concensus , such as it is surviving that .

  8. Why do you say that? US debt interest is quite high too, and the military budget is a few % more of GDP, so European provision levels can still be higher on European taxes than in the US?

    Tim adds: well sorta. You’ve also got to consider the efficiency with which services are delivered. We in hte UK, for example, could have much better services for the same money if only we got rid of a few hundred thousand/ couploe of million do nothings in the system.

  9. What if interest rates rise a little?

    Not much. Huge maturity. If there is a 200bps rise, then average annual debt payments rise by, um, £2.5bn. Not debt spiral country.

    More risky is the prospect of another recession. 0.5% lower GDP would be far more costly.

  10. and the military budget is a few % more of GDP,

    The US military budget, is much larger as a of GDP but all this is dwarfed by social payments which is about the size of income tax in the UK . The fact that one out going is big means others are small . Not health though , well not by as much as you might think anyway

    Perhaps you have noticed that the US is a very different country , that’s my point

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