Rishi did not waste £11bn in debt blunder, Treasury insists
TREASURY ministers have hit back at claims from a Remainer think-tank that they wasted £11 billion of taxpayers’ money by paying too much interest on the Government’s debt pile.
John Glen, economic secretary to the Treasury, said it was ‘inaccurate’ to suggest the Government could have saved on its massive £895billion money-printing programme by insuring against rising interest rates.
It follows allegations from the National Institute of Economic and Social Research (NIESR), which said on Thursday that ministers had over paid around £11billion by failing to insure against Bank of England interest rate hikes.
NIESR director Jagjit Chadha told the Financial Times that Chancellor Rishi
Sunak’s actions had left the country with ‘an enormous bill and heavy continuing exposure to interest rate risk’.
But Mr Glen said: ‘The Treasury has inaccurately been accused of wasting billions of pounds. This is not true and the proposed measures come with huge economic risks and could undermine the Bank of England’s independence.’
He added that the £11billion figure ‘is based on almost impossible scenarios and implementing the proposals would have a significant impact on market prices and credibility’.
Experts were quick to support Mr Glen. Simon French, chief economist at City investment bank Panmure Gordon who worked in the Cabinet Office from 2008 to 2014, said he struggled ‘to see validity in criticism being thrown at the Treasury’.
He added that the Government should not be expected to act ‘like a hedge fund’, and take potential risks in the hope of reducing its losses.
Rupert Harrison of asset manager Blackrock called the criticism of the Treasury ‘wrong-headed’.
It isn’t the first time that NIESR’s claims have been shot down by experts.
In the run-up to the Brexit vote in 2016, it was accused of fuelling Project Fear when it warned low-income households would lose more than £5,500 a year if Britain left the EU. The controversy comes as the Treasury faces spiralling interest payments on its broader £2.3trillion mountain of debt, which rocketed during the pandemic amid record spending.
As interest rates climb to combat the red-hot rise in the cost of living, the cost of servicing the debt is set to rise from £53.5 billion in 2021-22 to £83 billion in 2022-23.
Boris Johnson made a speech on the economy this week, unusual for him because economic policy is not his natural terrain. More predictably, he had nothing of substance to say.
‘The answer to our current economic predicament,’ he declared, ‘is not more tax and spending’ — this from a prime minister who is the premier league leader when it comes to tax and spend.
‘The answer,’ he continued, unabashed, ‘is economic growth.’
he was speaking only 24 hours after the oECD, a club of rich countries, had downgraded UK economic growth for this year and forecast no growth at all in 2023. only the heavily sanctioned, global pariah russia was predicted to do worse.
Mr Johnson, of course, offered only the vaguest generalities about how to boost economic growth. his claim he was ‘confident things will get better’ will have reassured nobody.
Musing on why we have tariffs on bananas and olives when we don’t grow any ourselves is what now counts for insight from the Government. But it’s not a trade policy — and despite what was billed as a major speech, he still doesn’t have an economic policy.
More worryingly, neither does the Chancellor. rishi sunak was widely and rightly praised for his sure-footed response to the pandemic. But as the Covid threat has diminished, so has his reputation. These days he seems all over the place.
he gave plenty of advance warning about raising national insurance contributions (niCs) for employees and employers. When he saw how unpopular that was, rather than scrapping the rise, he raised the threshold at which people start paying niCs, to sweeten the pill. it didn’t work.
Perversely, while raising the niCs’ thresholds, he decided to freeze the thresholds at which you start to pay basic and higher-rate income tax. That didn’t go down a storm either, so he tried to make it more palatable by promising a cut in income tax — in 2024. People shrugged their shoulders.
Let us not underestimate the damage these tax rises are doing.
higher niCs mean workers’ take-home pay is squeezed when they’re already reeling from rising prices.
Freezing income tax thresholds when inflation is soaring means low-paid workers paying no income tax suddenly find themselves pushed into the basic 20 per cent tax bracket as their pay rises, while those on middling incomes are propelled into the higher rate 40 per cent bracket, which was only ever meant to be for those on high incomes. it undermines their spending power when households are already struggling with food and fuel bills.
Business confidence, which has been faltering for some time, is also being undermined.
Employers face higher niCs too, which raises the cost of doing business and deters hiring. And the nonsense isn’t over yet. After a decade in which the Tories argued — with some justice — that cutting corporation tax (on company profits) would actually raise revenues, Mr sunak announced that next year the tax would rise from 19 per cent to 25 per cent.
Cue more panic and a plethora of rushed tax incentives for companies to avoid the new rate if they invest in ways that have the Treasury’s approval.
Mr sunak styles himself as something of a Thatcherite. But Margaret Thatcher was infuriated by the predilection of governments of all hues to give with one hand and take with the other.
The Chancellor has proved to be something of a master at it. As this column has remarked before, he is truly the hokeycokey chancellor.
The fiasco over corporation tax, on top of the recently announced windfall tax on energy companies, makes employers wonder if the Tories really are the party of business any more. Many have concluded — no.
The Government is stuck in denial by refusing to admit that none of its tax rises is necessary. The Chancellor raised taxes to be able to fund extra spending on the nhs and social care while still reducing the budget deficit. But he did so on the basis of official forecasts from the office for Budget responsibility (oBr) which were far too gloomy.
Tax revenues have turned out to be far more buoyant than the oBr assumed. The budget deficit falls even without the tax rises which, because of inflation, are taking billions and billions more than the Chancellor envisaged — or needed.
A few weeks ago former Brexit minister David Davis told me the Chancellor had headroom to scrap all his tax rises, fund his multibillion pound cost of living package, restore the £20 cut in Universal Credit — and still look fiscally prudent.
When even right-wing Tory fiscal conservatives are saying this it’s a fair bet the Chancellor is on the wrong track.
The oECD agrees. it points out that the UK is cutting its budget deficit faster than any other country in the G7 group of the world’s biggest economies.
it is under no compulsion from lenders who finance the UK deficit to do so. The oECD thinks the Government should take a more relaxed approach to deficit reduction. so does the international Monetary Fund. neither is known for advocating profligate policies.
it is dangerous to tighten fiscal policy too quickly when the economy is on the precipice of a major downturn — again, as this column has pointed out before — because it’s likely to throw it over the edge.
That’s all the more likely when you’re also tightening monetary policy by raising interest rates, which is what the Bank of England is doing.
The prospect of overdoing the hair shirt when bad times beckon is a major reason why sterling is slumping against the U.s. dollar and other major currencies. The foreign exchange markets see the UK mired in stagflation — a combination of low or no growth and high inflation — through the rest of this year and into 2023, just as the oECD predicts.
so they dump our currency and the pound falls, which only fuels inflation further by making imports, including fuel and food, more expensive.
however you cut it, the Chancellor’s approach is self defeating.
There is another way. Understand the threat of recession is real. Unwind all the recent tax rises to put more spending power in people’s pockets, which will be doubly beneficial because it will mitigate any downturn and help with the cost of living.
Continue to funnel cash to those who most need it. And, rather
The Chancellor gives with one hand and takes with another
Michael Gove is numerate, bursting with fresh ideas, radically-minded and would relish the challenge
Tory MPs’ minds are turning to an alternative
than promising a meaningless 1p cut in income tax sometime tomorrow, begin a major overhaul of our appallingly complicated tax system to reduce the overall tax burden, simplify it (low rates, few deductions) and increase incentives to work (which, in turn, will raise productivity).
it amounts to a progressive and radical Tory economy policy. But an increasing number of Tory MPs are concluding that it won’t happen under Mr sunak.
They like him, admire his work ethic and felt sorry for him when he was engulfed by his wife’s non-dom tax status.
But they think he’s too wedded to existing policies to execute the major U-turns that are required.
so Tory MPs’ minds are turning to an alternative.
in truth the pickings are not rich. Jeremy hunt is a nonstarter after his recent blatant leadership manoeuvres. Mr Johnson would never appoint him anyway.
But one name is emerging as favourite because he would be tantamount to a fresh start: Michael Gove.
he is numerate, always bursting with fresh ideas, radically-minded, a famous foe of departmental orthodoxies — and he would relish the challenge.
Whether Mr Johnson would have the guts and foresight to make such an appointment is another matter. he would probably not relish having such a formidable figure as his neighbour, in charge of an area in which he himself has no expertise.
But unless there is a clear change of direction and a discernibly different economic policy, from the excuse of one currently being pursued, Mr Johnson is unlikely be around for long enough to have any say on who the next Chancellor should be.