David Cameron, prime minister, gave his big speech on his economic inheritance (bad) and plans (bold) today. And the one piece of news in the speech was the following number regarding debt interest:
“Based on the calculations of the last government, in five years’ time the interest we are paying on our debt is predicted to be around £70 billion. That is a simply staggering amount.”
This is a very useful number, one which the previous government shamefully hid from the public. What does this mean? For a start it implies the Treasury expects to pay an average interest rate of around 5 per cent on the £1,406bn deficit it expected in 2014-15. But Mr Cameron had a more vivid explanation of the figure’s relevance.
“Let me explain what it means. Today we spend more on debt interest than we do on running schools in England. But £70 billion means spending more on debt interest than we currently do on running schools in England plus climate change plus transport.”
Though these figures of departmental spending are extremely difficult to get, there are ways to make his claim add up with the combined total of the three spending groups coming in just below £70bn. I won’t bore you with them. But the important point is that the prime minister has just announced the new coalition government’s first fiscal rule.
If debt interest in five years’ time is more than 2001-11 spending on schools, transport and climate change, this is terrible. But if it is lower, things are fine. This fiscal rule is weird.
If you think I am exaggerating about the new rule, Mr Cameron came back to it at the end of his speech:
“Unless we act now, interest payments in five years’ time could end up being higher than the sums we spend on schools, climate change and transport.”
How much has the new government done to pass the rule so far? It has cut £6bn from this year’s spending total and plans to give that money back in tax cuts next year, so it has reduced 2014-15 projected debt by £6bn, which reduces the interest burden in that year from £70bn to …. er … £69.7bn. This might be just enough to pass Britain’s new fiscal rule. Well done.
The serious point is this. Everyone in Britain knows the purpose of the speech is a softening-up exercise before the 22 June Budget, so the spending cuts do not attract accusations of betrayal and lying. The prime minister has to go through this process precisely because he does not have a clear mandate for swingeing public spending cuts.
He, alongside all other politicians, refused to acknowledge the obvious about public spending in the election campaign and that timidity has made the politics of government considerably more difficult.