Having seen that the interest payment on UK debt was £19 BILLION in June 2022, up from £9.1 BILLION in June 2021, I was curious to see why this had happened, because the figure of £19 BILLION is unbelievable to say the least. It turns out that, during the pandemic, the UK Government relied on quantatative easing by the Bank of England to pay for its spending.
The Bank of England doesn’t just start printing money, it needs a “Deed of Indemnity” signed by the UK Treasury, which commits the taxpayer to covering any losses suffered by the Bank. Quantitative easing hastens the increase in the cost of government debt because interest on government bonds purchased under quantitative easing is
paid at Bank Rate. At the time the QE programme was agreed to, the Bank Rate was 0.1%. Any increase in this rate increases the interest payments on the debt.
Back in the 60’s and 70’s they called QE, “devaluation”. Printing money (QE) devalues the currency and creates INFLATION. The Chancellor therefore agreed to a contract that guaranteed higher interest payments in the event of inflation rising. Maybe he wasn’t aware that QE causes inflation? Anyway, QE did cause inflation and the Bank of England have raised interest rates on several occasions, so that we now have a Bank Rate of 1.25% with another rate rise expected on the 4th August 2022. We already have a guaranteed inflationary pressure in the UK economy and that is the price cap on electricity and gas bills. We are expecting no less than 60% increase on those bills come October, and so it is highly probable that the Bank Rate will rise in August, to counter a possible 15% inflation rate as measured by the Retail Prices Index.
That means even higher interest payments on UK debt and it’s no wonder that Rishi Sunak wanted a rise in National Insurance Contributions. He was probably trying to pay this loan down as soon as possible before interest payments got out of hand. He didn’t want to spend any more money, remember, he had a “scheme” to pay a sum of £200 per household to the energy companies to ease the effect of price cap rises. This £200 would be paid back by the bill payer over 5 years, £40 being added to annual bill. He was forced by public opinion, and back bench Conservative MP’s, to raise the NIC threshold, levy a windfall tax on energy companies (oil & gas) and borrow £10 BILLION to bail out the energy providers (£400 per household).
There is also a question to be asked of the Bank of England… “why hasn’t the Bank Rate been raised quicker to fight inflation?” Has the Bank been under any political pressure from Government to not take necessary action to maintain price stability? When Thatcher took power in the late 70’s, she had to fight inflation of 25% (RPI) and at that time the Government had control of the Bank Rate, which was raised to 17%. She could easily point to the previous Labour Government and lay the blame for our economic woes at their door, but, it appears to me that Rishi Sunak is the architect of the UK’s current debt problem, and I’m wondering who he is going to blame if he ever makes it to Prime Minister.