Drop The Shovel

Image source: dani3315 – Shutterstock

What's going on?

The UK’s financial hole is only getting deeper: the country’s Office for Budget Responsibility (OBR) warned of a chunky increase in the government’s borrowing on Monday.

What does this mean?

Everyday Brits are having trouble budgeting, and it looks like the government’s no different. The OBR now expects the UK to end up around £100 billion ($118 billion) short (tweet this) – that’s the gap between what it’s spent and what it’s made in tax – in three years time, a jaw-dropping leap from the £30 billion ($35 billion) prediction it made in March. At least half of that increase is down to higher interest rates: as they ramp up, so do payments on the country’s current outstanding debt – and boy, are they ramping up.

Why should I care?

For markets: Algebra 101.
If the OBR’s number crunchers have done their math right, that gap between government spending and tax earnings will be around 3% of the overall economy by 2027. Now, that isn’t crazy by historical standards, and governments can usually contain debt as a proportion of an economy by making sure the economy grows more than debt. But the UK can’t count on that handy trick right now: its economy has started shrinking while rising interest rates are fattening up its debt, and even the world’s best accountant can’t make those books balance.

The bigger picture: Pick your battles.
The UK’s battling a sluggish economy and runaway inflation, which is a tough twosome to tackle. See, a government can usually puff up an economy by upping spending and cutting taxes, but it’s the opposite tactics – scrounging on spending and pulling up taxes – that can tame inflation. And after the previous government’s economy-boosting, tax-cutting efforts got spectacularly shot down, it seems this new government sees the fight against inflation as an easier win. That means spending cuts and tax rises will probably be on the menu at this Thursday’s autumn statement unveiling.

Originally posted as part of the Finimize daily email.

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