Bank warning over Britain’s debt

More borrowing raises risk of Venezuela-style collapse, official warns days after Budget spree

BRITAIN cannot afford to borrow more without jeopardising the country’s financial stability, a senior Bank of England official warned last night.

Richard Sharp said the Government had already borrowed an extra £1trillion since the 2008 financial crisis.

Borrowing more could put the country at risk of suffering from a collapse similar to that experienced by Venezuela, he suggested. Mr Sharp, a member of the Bank’s Financial Stability Committee, spoke just days after Philip Hammond announced a £25 billion spending spree in the Budget and at a time when the Labour Party is advocating borrowing an extra £250billion.

His comments, which will be seen as a warning to the Chancellor not to loosen the purse strings too far, mark a departure for the Bank, which usually steers clear of commenting on government finances.

Mr Sharp said that there was a danger that the “benign” economic picture, with interest rates at record lows, could breed complacency. He added that if Britain continued to borrow it risked losing “fiscal space”, meaning “financial stability is jeopardised”. His speech at University College London will also be cited as further evidence of the folly of Labour policy on public spending. Jeremy Corbyn announced during the general election campaign that he would ramp up debt by £250 billion to fund plans to nationalise railways and utilities.

Just over a week ago, Mr Hammond announced a surprise Budget package of spending on housing, the NHS and Brexit, largely funded by borrowing.

It was designed to appeal to younger voters who are fed up with austerity, but the independent Institute for Fiscal Studies said that Mr Hammond’s plans meant Britain’s national debt would not fall back to pre-financial crisis levels until the 2060s. Mr Sharp said: “A highly indebted government has less capacity to react to crises: we cannot assume that further shocks do not materialise; and evidence demonstrates that fiscal space is a vital national resource to have available to counteract such a shock. Reducing fiscal space, therefore, means financial stability is harder to achieve.”

The cost of interest payments on the national debt has been held down by ultra-low interest rates – though they still cost £6billion in October alone. Although markets expect rates to remain low, this is not guaranteed. If the average interest rate on the debt rose to 7 per cent, as it was in 2000, then the annual interest bill could hit £100 billion, he said. “Benign markets can deceptively extinguish paranoia and, unfortunately, as we should certainly remember and as Keynes famously said, markets can remain ‘irrational a lot longer than you and I can remain solvent’,” Mr Sharp told his audience.

Mr Sharp’s speech, which he said was a personal view of risks to financial stability, indicates Mr Hammond should not take his eye off the deficit.

Countries’ good credit ratings could turn bad, he said, citing the example of Venezuela. And it was vital to have room to borrow more in a recession.

Mr Sharp also pointed out that the UK was insulated in the short term from a rise in rates because it had the longest average maturities on its debts compared with other major nations. The average bond matures in around 15 years’ time, compared with less than eight in France and below seven in the US. As a result, any sharp rise in interest rates would feed through slowly into extra costs for the Government.

“UK government debt has by far the longest average maturity among comparable developed countries,” Mr Sharp said. “This means any increase in yields on newly issued bonds will take time to feed through to the average interest rate paid on total UK debt.

“If we assume yields returned now to those seen in 2000 – an increase of about 4 percentage points – debt repayments in 2021-22 would be about £55billion in today’s money.”