MNI INTERVIEW: UK Borrowing For Investment Risky - OBR's Miles
MNI (LONDON) - It would be risky for the UK government, already on course towards unsustainable debt levels, to borrow more to fund investment, senior Office for Budget Responsibility official David Miles told MNI.
On unchanged policies and demographic trends, UK public debt will rise to 270% of GDP over the long term from around 100% today, Miles said in an interview, adding that concentrating on either increasing taxation or spending controls alone will be insufficient to curb this rise.
"If you try to do it all on tax, so that ultimately it came to match spending, you'd be taking the tax share of GDP on our central forecast to 60% from 40%,” he said in an interview. "There's not many countries in the world that have government raising 60% of GDP in tax. And the idea you could do that without doing some serious damage to incentives to save and to work and to invest seems to me very implausible.”
While a recent OBR paper found that there could be long-run positive returns to the Treasury from additional public investment, and the government has removed investment from its balanced budget rule, Miles was wary. (See MNI INTERVIEW: UK Fiscal Headroom Only Clear After Spending Review)
"You can't just assume that everybody is going to believe us when we say, for example, that our best estimates are that 25 years down the road, there's enough extra tax revenue to pay for all the debt that we're issuing now to finance a big increase in infrastructure,” he said. “There's a bunch of hard-bitten people around the world who are the ones whose money's on the line because they're going to buy the gilts, and some may say, 'Well, maybe in 25 years it pays off, but we want a higher risk premium just in case it doesn't turn out that well.’”
RISKS AHEAD
UK debt dynamics are being impacted by a shift away from defined-benefit pension schemes, which were big purchasers of long-dated gilts, to defined contribution schemes and by the Bank of England’s action to reduce the size of its balance sheet, which has led it to sell GBP100 billion per year in gilts, rather than buying them through quantitative easing.
The OBR’s fiscal risks report assumed an average gilt yield of about 4% and a broadly flat yield curve, but Miles stressed that there were upside risks and issuance maturities could shorten.
"The risk .. with the gilt market is that if you really are on the kind of trajectory where the government does nothing about expenditure rising relative to tax revenue, and the stock of debt starts going up and at an ever increasing rate, the idea that you're going to be able to continue selling gilts at the same yield looks very optimistic," he said.
The OBR's productivity growth assumptions, at 1.5% a year, are more optimistic than the BOE's among others, and Miles pushed back against the view that the exceptionally low growth seen since the financial crisis would continue or that it was inevitable in a services-dominated economy.
"I don't think of it as optimistic. Of course, relative to the most recent UK economic history (since the global financial crisis) it is. But relative to the 50 years before that it is certainly not and it is rather pessimistic," he said, noting that possible boosts to productivity include the incorporation of AI in the service sector.