The big hike in new public borrowing over the summer – nearly £3.5bn more than forecast - came as a nasty surprise in the latest ONS figures out this morning, and adds to the growing sense that we are by no means out of the economic woods yet. News on the manufacturing, bank lending and house price fronts has been similarly downbeat in recent days.
So what went wrong? In a word, inflation. In particular the refusal of the Retail Price Index to play ball. It’s now running at getting on for 5%, compared to CPI inflation (which does not include housing costs) of just over 3%.
RPI is often ignored by commentators, especially government ones, because it is no longer used as the official indicator for interest-rate setting decisions. But it is far from being as insignificant as some would have us believe, not least because it is still used to calculate the interest due on index-linked government securities - Gilts.
In consequence the interest the government has had to pay on Gilts has almost tripled from £1.3bn last August to £3.8bn this. It all makes Bank of England governor Mervyn King’s claims that we are living in permanently low-inflation economy rather hard to swallow (although King’s pronouncements do seem to have had some beneficial effects, not least in keeping pay claims in check).
So does it mean we’re staring a double-dip in the face? Well, not necessarily. Overall borrowing is down year-on-year, at £58.1bn compared to last year’s £61.9bn, and the forecast for the year as whole is unchanged at £149bn, down from £155bn last year.
Tax receipts are also still rising, as the ONS is keen to point out, which suggests that spending is still holding up reasonably well.
The other piece of good news is that leading credit ratings agency Moody’s has decreed that UK plc’s coveted AAA credit rating should remain. Albeit with a stern warning that should planned austerity measures fail to materialise, all bets could be off.
This is particularly important at present for two key reasons. Firstly, any downgrade would seriously damage the government’s capacity to borrow money on the open market because it would have to offer a better interest rate to attract takers in the first place.
And secondly because, despite all the big-brained economists and their sophisticated models and theories, so much of international finance comes down to confidence. Confidence in political leadership, confidence in institutions and confidence in financial systems. Confidence, ultimately, that as an investor your money isn’t unexpectedly going to vanish into thin air.
So the AAA rating means that we are still allowed out to play with the big boys, and don’t have to join the Greeks, Portuguese, Irish and Spanish in the downgraded Dunce’s corner. At least not for now.