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Higher inflation can still be good for the public finances, says IEA economist

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

“UK government ‘debt interest payments’ hit an all-time high in the last fiscal year, but it is important to look beyond the headlines.

“Around half the record bill of £69.9 billion in 2021-22 was accounted for by the RPI uplift on the principal value of index-linked gilts (£34.7 billion). This will not actually be paid until the individual gilts are redeemed – over an average of more than 18 years.

“This matters for two main reasons.

“First, the ‘debt interest’ bill is not directly comparable to annual spending on, say, defence or education, or the revenue raised from the National Insurance hikes in any single year.

“Put another way, the RPI uplift is not money that the government is spending now, and therefore has very little effect on the ability to cut taxes or pay for frontline services today.

“Second, the economic burden of debt costs that will not have to be paid for many years is likely to be much less than if the same amount had to be paid out now.

“Even though the costs of servicing index-linked gilts will rise in line with inflation, they should still represent a smaller share of national income – as long as there is some real growth in the economy too.

“Instead, the main takeaway from the latest data on the public finances should be the continued buoyancy of tax revenues.

“Higher cash incomes and prices mean that households and businesses are still paying more in taxes than anticipated. This will give the Chancellor more room to help low-income families struggling with the cost of living – without the need for additional increases in tax rates.”

Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731

IEA spokespeople are available for interview and further comment.

Public sector finances, UK: March 2022

Original article link: https://iea.org.uk/media/higher-inflation-can-still-be-good-for-the-public-finances-says-iea-economist/

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