For every £4 the Government spends, £1 is borrowed. Indeed, this year the Government will borrow £163 billion and that’s not small change either, it’s enough to buy the Royal Navy a new aircraft carrier every four days or to buy a new hospital every four hours.
Keeping our lenders happy
Clearly, in the long run it is unfeasible to spend more than you earn, even for a country. So the people that lend the UK all that money want to be sure we are going to be able to pay it back one day. The happier those lenders are that they will get their money back in full, the less they are going to charge us to borrow it. Right now, we pay about 4%, which means we have to find £42 billion in interest payments this year on our total debt of £950 billion.
In order to reassure them that we can pay, they want to know that we have a credible plan to reduce our dependence on debt. Herein lies the problem. All the political parties are making noises about reducing the deficit after the Election, but predictably they all want to go about it in a way that best fits their vision of politics. The fear is that a hung parliament would demand a coalition government and that this coalition would spend more time squabbling about the ‘how’ rather than taking action on the deficit.
Party Politics
The thinking is lenders are only keeping rates as low as they are (say compared to Greece’s 9.6%, where they have a similar deficit level) because they expect real action soon after the Election. Of course a coalition might offer just such decisive action, but the worst result is that a coalition becomes entrenched in infighting, and the lenders simply refuse to lend. Our nation now relies on these regular injections of debt to pay the public sector wage bills on time. The question is will the election deliver decisive leadership? The electorate has to be the best judge of which party deserves to provide that leadership, or if a coalition is more likely to discharge that role.
What can you do?
Make sure you diversify your portfolio. The Bestinvest Moderate Growth asset allocation has a little over half of its equity exposure overseas. It’s a great way to mitigate country specific risks while actually improving potential return. Go to our client centre to view your portfolio against the recommended asset model.
If there is anything you wish to discuss regarding this article please call one of our Investment Professionals on 020 7189 9999.