Macroeconomics: UK economy, IB Economics

Kenneth Rogoff writes an interesting piece about the diminishing ability of government debt to help offer macroeconomic stability at a time of higher interest rates. 

The latest IMF research asserts that the rising levels of debt in developed economies now represents a drag on growth, as it rises to an average 120% of debt-to-income in advanced economies. 

Whilst developed economies rarely default on debt, the opportunity cost of higher debt repayment will limit the ability of fiscal policy to help governments achieve their macroeconomic objectives. 

Are the public finances improving? Government borrowing last month was £8.4bn, attributable to higher benefit payments; however, the figure was down £3.4bn on the previous year and the government are keen to portray this as part of a general move in this direction. 

Overall, government debt is currently 97.1% of GDP, and, according to the OBR, the government is on target to hit its pledge to see debt falling as a percentage of GDP in five years' time.

It never rains but it pours for the current government. Not only are interest rates likely to stay higher for longer, given recent inflation data, but today's government borrowing figures make it clear that there's also going to be less room for pre-election tax cuts too.

According to the article, borrowing "reached £120.7bn in the year to March...£6.6bn more than the government's forecaster predicted." As a result, the national debt is still 98.3% of GDP.

The Guardian spell out the options open to the Chancellor in the wake of today's data regarding the public finances, and the level of the government borrowing. 

The key dilemma that he faces is the extent to which the current state of play and the need to reduce the debt: GDP ratio might reduce his ability to reduce taxes in the run-up to the next election. The prevailing wisdom is that the fact that borrowing is £13bn lower than expected implies that there's a little bit of room for tax cuts, but that in the aftermath of the election there's also going to be a need for fiscal tightening.