The UK government faced a barrage of criticism over its National Insurance hike this week.  The tax – which theoretically pays for public services, pensions, and benefits – was in creased last autumn, before the political class became aware of the massive increase in gas and electricity prices coming later this year.  However, with cost-push inflation rising across the economy, and with rises in local taxes due to be announced, millions of British households are facing a massive squeeze on their standard of living.  This has given more weight to the idea that government should extend its pandemic borrowing until the economy has recovered, rather than raising new taxes at this point.

It goes without saying that nobody welcomes tax increases.  Nevertheless, as a consequence of the way this currency-creation system works, the government is rapidly running out of room to manoeuvre.  In the UK, around £500bn worth of government bonds are index-linked, so that as the inflation rate rises, so the cost of servicing the debt increases.  As James Sillars at Sky News reported this week:

“Interest payments on government debt hit a record £8.1bn for the month of December because of surging inflation…  The Office for National Statistics (ONS) said the cost of servicing the country’s £2trn+ debt pile was almost 200% or £5.4bn up on December 2020.

“It is because half a trillion pounds worth of government bonds are linked to the Retail Prices Index (RPI) measure of inflation which stood at 8.4% in December – its highest level since 1991.”

The problem will worsen in the spring as the new energy price cap comes into force, and as prices continue to rise across the economy.  This sets up one of contemporary democracy’s greatest flaws.  It is precisely during inflationary periods that the people begin to demand more government spending and less taxation…

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