In particular, let’s look at something called index-linked government bonds. There were, apparently £540 billion of these in issue by the government at the end of June 2022.
On interest rates, if the inflation rate goes up so too does the interest rate. Formulas are used to calculate by how much, but the impact is pretty direct. So, if inflation rises so too does the government’s borrowing cost.
That’s a fact. I do not argue with that. But the amounts involved are not that big, overall. There is a cost, but not enough to change government economic policy.
I dunno really. 10% inflation means £50 billion there. Even with government money that’s an amount to think about.
The 10% inflation rate effectively increases the amount due on repayment of these bonds by 10% or (near enough) £54bn.
The question is, how to account for this?
I’ve not actually read this next bit yet but I am trembling with anticipation at what the shell trick will be.
Firstly, this accounting assumes that the £54bn is all due for payment now. But that is not true. On average it is due for payment in 2040. And for accounting purposes money due in 2040 does not have the same value as money due now.
Aha! He’s discounting. You know, that thing we must never, ever, do?
But I would actually argue the accounting is worse than that. The reality is the £54bn is not a capital payment. Due to the way the bond is designed it is all interest due as a result of inflation, in effect.
In that case, the £54 billion cost that will only be paid in 2040 should be spread over the 18 years between now and 2040. £54bn over 18 years happens to be £3bn a year. And that is precisely the amount by which the national debt should rise this year as a result of this cost.
The bond will never be repaid early by the government. There is, therefore, no reason to provide for the full cost of inflation now. And the bond was designed to reflect inflation over its whole life, not in any one year.
Let us now allow that idea. Just in the interest (Ahahahaha) of exploring it. Now what? Well, now, this year’s accounts should show that same portion of all past inflation adjustments to inflation linked gilts, shouldn;t they? And next year’s must do the same and so on.
It’s not the get out he thinks, is it?