The tax and spending choices facing Andy Burnham

Interested listeners will have, uh, heard a very in-depth discussion of this a few weeks ago on, on this podcast, but Max, can you start by giving us a high level overview of where things stand?

So when we talk about the public finances, we kind of mean three things that are all interrelated.

We mean how much revenue, particularly tax revenue, is the government raising, how much is it spending, and if there's a gap between tax and spending, how much is the government borrowing and how much debt has it accumulated over time? So we'll probably talk about all of those throughout the podcast, so I'll talk a little bit about debt and borrowing perhaps to start with.

So government debt is his- by historic standards high in the UK.

Depending on the exact measure you use, it's about 80 to 90% of national income.

That is higher than pre-pandemic, and if we zoom out over the last kind of 25 years, in the early 2000s, debt was about a third of where it currently is.

It's about three times higher now.

So we've got a lot higher debt, and that limits the government's room for maneuver and limits the room to borrow more.

One particular consequence that the government and the next prime minister will really feel is debt interest.

So just like a business or a household, when the government borrows, it has to pay interest on that debt.

And since the pandemic, essentially because of mainly higher inflation, higher interest rate expectations, the debt interest that the government has to pay is much, much higher.

So right now, the government is spending about 8% of all its budget is going towards debt interest.

That's about the same as we spend on education.

So that's a really quite large amount of money going on servicing our existing debt, and that's one of the reasons and one of the big constraints that he's gonna be facing, the next prime minister.

Debt is high, debt interest costs are high, and that limits the remove, room to maneuver when it comes to further borrowing.

I think that's a really important point because often we think about fiscal rules and borrowing as, well, what can we get away with? What's the most that we can sort of allow ourselves to do? And that debt interest figure, 8% of the government's budget, that's a really important reminder that there are real consequences to that borrowing as well.

I think that's a really important point, actually.

Like, often people think about, well, any borrowing within the fiscal rules is essentially free, and then, you know, we have to worry, but that, that's not true.

There can be good reasons to borrow, but any borrowing will have debt interest costs, and that particularly at the moment is a big cost for the government.

So we've, we've talked about the fiscal rules a couple of times, and I think they, these have come up as a specter in the debate, sort of haunting, haunting Andy Burnham.

Can you remind us what they are and where the UK currently sits against them?

So the government currently has two main fiscal rules, and Andy Burnham has indicated he's going to stick with those.

So the first rule concerns the current budget deficit.

So as I mentioned before, the government raises revenue and it spends money, and this rule says three years out, so in three years' time, it should be forecast that the government revenue is more than enough to pay for day-to-day spending, so spending on benefits, pensions, debt interest, uh, and public services.

Now, the government can still borrow to invest, but that current budget, you know, the difference between day-to-day spending and tax revenue should be, should be positive.