Roger Bootle
Last week we saw yet again the power of the financial markets. Pretty much as soon as Rachel Reeves’s tears were seen in the House of Commons, or Reevesgate as I shall call it, both the price of gilts and the pound fell, echoing on a much smaller scale what happened in reaction to the Truss/Kwarteng mini-Budget in 2022.
Behind the human drama and the obsessions of the political class, there lurks a much more important problem. The elephant in the room is the appallingly high level of government debt, which is running at about 100pc of GDP. Last week’s mini-crisis may simply be the harbinger of much worse to come.
According to many on the Left, supported by some economists, nothing like this should happen.
Do you remember the Magic Money Tree (MMT) that briefly flourished when Jeremy Corbyn was leader of the Labour Party? Conveniently, the initials MMT also apply to the economic doctrine known as Modern Monetary Theory, which avers that governments can borrow from the markets willy nilly without consequence.
You don’t hear much about that idea these days. And with good reason. It is perfectly plain that there are limits to the markets’ appetite for government debt. We have reached them.
The UK’s awkward position on public debt is by no means unique in the world. In the US, the so-called “ One Big Beautiful Bill” has just passed Congress.
The consequence is going to be an increase in the US budget deficit. Indeed, it is difficult to see how this is going to come down anytime soon from its current rate of about 6pc of GDP. At present, the US debt ratio is running at about 100pc, but if the deficit continues at current levels, it is reasonable to suppose that the debt ratio will reach 120pc by the mid-2030s.
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