But now the dark times are to arrive. We have put it off, but the total failure to make austerity work (i.e. to actually do it) means there is no escape...here's why:
|Bank of England Implied Inflation Curve|
|Bank of England Implied Gilts Yield curve|
This means that the Government, whatever the Bank of England rate maybe, will have to pay more and more debt interest on its borrowing. And our borrowing are now over £1.1 trillion. Debt interest in the current was a mere £43 billion (for 2012) or 16.% of Government spending.
This year the debt will have gone up 10%, so that cost will be at least £4.3 billion higher. But instead, with the Yield curve increasing, payments will start to increase. Now Britain has a very long-term debt profile, the longest of any country. So a doubling of rates does not double the payments as it would with one's own mortgage. However, it will add 1% or so to bill for each 100 basis point rise as a rule of thumb. So next year, in addition to the extra cost of borrowing due to the debt being higher, we can expect another £5.05 billion to be added to the cost of the debt with a 50 basis point rise which is what is predicted.
That is £9 billion, the 2016 Budget cuts are looking at try to cut £16 billion off the following years spending...We are not in 2016 yet. The cuts in budgets to just pay for the extra debt costs - let alone actually reduce the deficit or the nirvana of the total debt - are going to be impossible.
Then of course we know that private debt int he UK is the highest in the OECD, as is corporate debts due to our large banks and the Government does not allow for the debt commitments like pensions which it pays for out of its own funds.
With private consumption hit by the cost of rising rates and inflation and also by public expenditure cuts, the economic outcome is very gloomy.
Suffice to say, I am very bearish now. We had a chance to recover from 2008 by now and we have blown it. The UK finance don't stack up. The answer will be painful. Over the coming months we will need to explore what the Government will try to do such nationalise pensions, currency restrictions and big tax increases are on the cards as we know from the eurozone crisis. Potentially they could monetise the QE debt or embark on a drastic devaluation of the Pound. 3