Isn’t that nice?

The government has prepared the markets for an extra £80 billion of borrowing over the next five years to fund ambitious spending on infrastructure and green energy.

Investors in government bonds, or gilts, are signalling to Rachel Reeves that they can lend her that sum without prompting a Liz Truss-style panic in the markets as long as she sets out clear annual spending plans and explains the economic benefits of the projects to be funded.

And, well, yes. Going out and borrowing more - as the government finds out that it’s at or near the Laffer Curve peak on those taxes it will allow itself to increase - is something that has become part of the general conversation in the past month or so. This is also the period of time that the yield on the 10 year gilt has risen from 3.8% to 4.05%. Markets are forward looking, prices change when people say they are going to do things rather than awaiting that thing being done.

Now, it isn’t true that borrowing more is the only reason gilts yields have changed - it’s never true that there’s an omnicause in something so complicated as an entire economy. But let us just pretend for a moment - we might want to assign at least some of that price change to this cause after all. So, that’s a quarter of a percent. On a national debt of what, £2 trillion? £3 trillion? Yes, we can all argue about exactly what should be included in that but let’s plump for the lower, £2 trillion, as that’s closer to what the gilts market is.

It’s also true that the coupon on extant gilts doesn’t change as a result of this yield change. It’s only the borrowing of new money that changes the cost to the Treasury. But, in time, all of that is going to get rolled over - actual repayment of the national debt, even in part, is one of those aha, aha, aha, jokes - so just as a modelling exercise we can say 0.25% of £2 trillion. Which is, you know, quite a lot. £5 billion extra in interest a year to borrow £80 billion. To “invest”. There’re going to have to be some pretty startling returns on government spending - well known in its efficiency as it is - to cover a 6.25% funding cost. But it gets worse - because it’s necessary to pay both the extra interest on the new issuance as well as the increase in total interest costs. So, 10.3% then.

Sure, the markets are willing to lend but is it entirely sensible to be borrowing at such rates? We’ve had credit card offers better than that in our time.

Yes, yes, yes, this is not a fair model. Like all models it’s being used to illustrate, not to claim eternal truth. But it is true that borrowing more will have an effect upon the price that has to be paid, over time, for all borrowing. Therefore the cost of borrowing more is the interest to be paid on the new borrowing plus the extra that must be paid upon all borrowing. Anyone who wants to quibble with the exact numbers here is welcome to put their sums in the comments.

All of this before we even get to that elephant in the corner - the markets want to buy more gilts so, sooo, much that the Bank of England still owns £700 billion of them that it can’t sell as yet because prices would go wholly doolally.

So, yes, government can borrow more. But should it? Informed opinions differ on this……

Tim Worstall