Last night - in an effort to calm the markets - the Treasury issued a rare statement, but today the pound has continued to fall (slipping by 0.9% to $1.226 against the dollar) and borrowing costs rose further.
This morning the Chancellor was summoned to the House of Commons to answer questions about soaring borrowing costs. As the Chancellor is preparing to visit China this weekend, a Treasury Minister was sent to the Commons in her place.
What’s happened?
The BBC explains this well: “The Government generally spends more than it raises in tax. To fill this gap it borrows money, but that has to be paid back - with interest.”
However the cost of 30yr Government bond rates are now at the highest level since 1998, and 10yr bonds are at the highest level since 2008.
Which means tax revenue is increasingly being spent on interest payments, not public services.
What can the Government do to fix this?
There are three options available to the Government; cut public spending, increase taxes or borrow more.
On November 25th the Chancellor promised there would be no “more borrowing or more taxes.” Today, in the Commons, the Treasury Minister repeated this pledge.
As Sir Bernard Jenkin MP pointed out today: “By underlining that there will not be any tax increases and there will not be any increases in borrowing, [the Minister] is effectively saying austerity is back.”
So what does this mean?
The more that it costs for Government to borrow money, the less the Government can spend on public services.
As the Shadow Chancellor, Mel Stride, said this morning “Every pound we spend on debt interest is money we cannot spend on the public’s priorities.”
