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Higher debt interest costs should not prevent tax cuts, says IEA economist

Julian Jessop, Economics Fellow at free market think tank the Institute of Economic Affairs, commented on the latest ONS public finances data 

“Today’s bad news on the public finances will provide more ammunition for those arguing that the government cannot afford to cut taxes, but the arguments are far more nuanced.

“The government borrowed £14 billion in May, £3.7 billion more than the OBR forecast, reflecting both lower-than-expected tax receipts and higher spending. What’s more, debt interest costs also hit £7.6 billion in May.

“These figures will get worse before they get better. In particular, debt interest costs will almost certainly top £20 billion in June, because the inflation uplift on index-linked gilts will be based on the jump in the RPI between March and April.

“This OBR was already forecasting that debt interest payments will cost the government over £87 billion in the current financial year (2022-23). A figure of £100 billion is now plausible.

“Nonetheless, it is misleading to compare this figure to annual spending on, say, defence or education. The RPI uplift applies to the principal value of index-linked gilts and will only be paid out when these bonds are redeemed. The average maturity of these gilts is more than 18 years. It is therefore unhelpful to compare this bill to the budgets for departmental spending in a single year.

“The fact that these higher debt interest payments will be spread over many years also undermines the argument that the government cannot afford to cut taxes now. Looking instead at actual cash flow, higher inflation will still provide a windfall to the Treasury as rising nominal incomes and higher prices feed through into higher tax receipts.

“It is therefore still right to view every proposal for tax cuts – or spending increases – on their own merits, rather than rule everything out.”

Notes to editors

Contact: media@iea.org.uk / 07763 365 520

Public sector finances, UK: May 2022

Original article link: https://iea.org.uk/media/higher-debt-interest-costs-should-not-prevent-tax-cuts-says-iea-economist/

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