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Britain ‘may inflate itself out of debt’

Posted by smeddum on April 29, 2009


Britain ‘may inflate itself out of debt’


Britain’s national debt could be headed on an ‘explosive path’ that triggers chaos in the public finances, according to a leading City consultancy.

Alistair Darling
Alistair Darling: The Chancellor plans to borrow £175bn this year alone

Interest payments threaten to reach such stratospheric levels Britain may have to print more money and inflate its way out of debt, Fathom Financial Consulting will say at a conference next week.

The only alternative would be ‘Herculean’ efforts to rein in public spending and raise taxes, but this may prove politically unachievable.

The analysis comes after Chancellor Alistair Darling stunned the City with plans to borrow £175bn this year alone. By 2013 the national debt will be approaching the unprecedented level of £ 1.4trillion.

The profligacy has horrified the City. Economist Richard Jeffrey of Cazenove called it ‘the most shocking Budget of our lifetimes’.

Yesterday Treasury officials dismissed fears over the record borrowing. Dave Ramsden, head of macroeconomics at the Treasury, told MPs:

‘We are confident that in 2009-10 the demand will be there for UK paper (debt), because we have set out a transparent, realistic and credible consolidation plan for the public finances in the medium term.’

He brushed aside claims the Treasury put forward ‘fantasy’ growth forecasts in the Budget last week, calling forecasts of a rebound next year ‘realistic’.

But analysis to be presented at Fathom’s Monetary Policy Forum next Friday will show that even a marginal rise in the government’s cost of borrowing could have shattering consequences for the Exchequer as it prepares to issue £220bn of gilts this year.

Interest payments on the UK’s national debt could end up consuming 6.5% of grossdomestic product, more than at any time since the Second World War.



This would ordinarily demand a draconian fiscal crackdown, including painful tax hikes and spending cuts, as currently being seen in countries like Ireland, Iceland and Hungary.

But as Britain’s national debt is denominated in sterling, it has an alternative. Allowing inflation to rise to 10%, compared with 2.9% now, would erode the debt burden enough to keep the finances under control, Fathom will argue.

This could be engineered through additional money-printing by the Bank of England or a relaxation of its inflation target. But such a step would trigger further dramatic declines in sterling.

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