Strikes reveal Britain is getting poorer – but we haven’t run out of money

Ben Turner
Jack Kessler @jackkessler121 December 2022
WEST END FINAL

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Government borrowing surged to £22 billion last month due to higher debt interest and cost-of-living payments to households. This represents the largest monthly figure for November borrowing since records began in 1993.

One significant driver was a 50% rise in interest payments to £7.3bn, driven by debt interest payments linked to Retail Prices Index (RPI) inflation. Ok, very briefly: the UK was at the vanguard of issuing inflation-indexed bonds in the early 1980s, which tied the cost of some gilts to inflation, specifically RPI. Wait, why RPI? More on that here from the BBC’s Andy Verity but I warn you it’s spectacularly geeky.

From the mid-1990s until 2022, this worked out rather well for the government as RPI generally stayed below 4 per cent. At present rates, it is less helpful. But that is the pretext for the government’s tough/intransigent/soon-to-fold (delete as applicable) line on public sector strikes. That steep pay rises would risk a wage-price spiral, in which high inflation gets locked into the economy.

This is somewhat of an exaggerated fear. The Bank of England is much more worried about higher wage rises in the private sector. The government’s position on strikers – that they must lose – has much more to do with tax, spending and borrowing than inflation. As Torsten Bell, chief executive of the Resolution Foundation think tank, writes:

“[I]t’s wage-tax spirals that really worry the government. Having already announced plans to raise the tax take to its highest level since the second world war, [Jeremy] Hunt wants to avoid further major tax rises before a 2024 general election.”

But to be clear, the UK government has not ‘run out of cash’, either levied or borrowed. Sure, tax as a percentage of GDP is set to rise from 33.1 per cent in 2019-20 to 37.1 per cent of GDP in 2024-25, the highest sustained levels for 70 years. But this still leaves the overall tax burden significantly lower than in Germany, France and Italy.

Nor have we run out of people prepared to lend to us. The government can continue to borrow at reasonable rates as the bond market remains, mini-budget hiccup notwithstanding, moderately comfortable with the UK’s fiscal trajectory. And anyway, reducing the overall level of debt (as opposed to the debt to GDP ratio) would be a poor use of money when the UK has so many problems.

Essentially, and despite everything, the UK still has options when it comes to how much we should pay public sector workers. We could tax more, borrow more or even boost growth by building more houses (though not in Beaconsfield, obviously).

But those options, to raise taxes or borrow more money, start to feel ever more uncomfortable in a world, post-Brexit, Covid and Russia’s invasion of Ukraine, where we keep getting poorer. Indeed, this is what getting poorer feels like.

Elsewhere in the paper (and I hate to employ that pro forma language for such an important and appalling development) the Taliban has confirmed that women have been banned from universities in Afghanistan with immediate effect, marking the latest crackdown on the rights and freedoms of Afghan women.

In the comment pages, Ben Judah warns Rishi Sunak must decide how far he can support President Zelensky in 2023. On his 100th day in the job, Met Commissioner Sir Mark Rowley says that under his leadership, Scotland Yard is taking on violent drug gangs like never before. While Anna van Praagh admits she has PCPD* (*perpetual Christmas party dread).

And finally, from Dolly Parton to Mario Kart, London has enough to keep you busy between Christmas and the new year. Millie Milliken scopes out what to get up to. Whatever you do, it can’t be worse than Omicron Christmas.

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