Brexit

Reality Check: Is the cost of borrowing at record lows?

Stephen Crabb saying: The price of borrowing is at record lows … it’s one of the significant policy levers a developed economy has to improve productivity.

The claim: The cost of borrowing for the UK government is at record low levels. The government should take advantage of this to improve the UK's economic performance.

Reality Check verdict: The yield on UK government bonds has been falling to record lows, making borrowing cheaper, despite the recent cut in the UK's credit ratings. Borrowing to invest has the potential to reduce the need for future borrowing, but that's not guaranteed and it could further damage the UK's credit.

Work and Pensions Secretary Stephen Crabb told BBC Radio 4 on Tuesday that the price of borrowing was at "record lows", and that if he became prime minister he would take advantage of this to invest in infrastructure.

He's right about the cost of borrowing. The yields on 10-year UK government bonds have indeed been at record lows in trading over the past week, and that's a good indicator of the sort of amount the government would have to pay to borrow money.

You can only tell what will actually happen when there is a bond sale, as there was on Tuesday morning.

The government sold £2.5bn of bonds maturing in five years, at a record low yield.

The low bond yield is in some ways a bit surprising, as the downgrades from the ratings agencies S&P and Fitch mean they reckon that lending money to the UK government has become less safe.

But, in fact, what has happened is that the yield on government bonds has fallen because in uncertain times people look for relatively safe investments, such as government bonds.

It's not just the yields on UK government bonds that have been falling. The Swiss 50-year government bond has a negative yield for the first time, meaning that investors are prepared to pay to be able to lend money to the Swiss government. German government bonds also have negative yields, while US 10- and 30-year Treasury bonds are also at record low yields.

Inflation danger

The rate of interest the government pays on its debt is important because the UK is currently in debt to the tune of £1.6 trillion (excluding holdings in public sector banks), so a small rise in interest rates would be very expensive for the public finances. The amount the country borrows each year (the deficit) has been falling, but the total debt has kept rising.

The Office for Budget Responsibility says that an extra one percentage point on the government's cost of borrowing would cost the exchequer an extra £8bn in 2019-20.

It is also likely, given the recent falls in the value of the pound, that inflation will rise, which will increase the amount the government has to pay on loans linked to the inflation rate.

Chancellor George Osborne has been saying since taking the job in 2010 that it is important to have a plan to balance the books because otherwise investors will lose confidence in the UK economy and the rates of interest the government has to pay will rise. Mr Osborne has now abandoned his target to balance the budget by 2020.

Boost productivity

So would extra borrowing at cheap rates be good news for the economy in the long term? It could be.

Mr Crabb was campaigning on a platform of borrowing £100bn to invest in infrastructure, which would probably increase the amount the government was spending on servicing debt, even if the rate of interest fell slightly.

But his plan was that doing so would increase productivity. Investing in infrastructure is supposed to improve productivity because, for example, better transport links mean goods get to market more quickly.

Greater productivity would increase the amount of money the government raises through taxes.

Also, employing people to create the infrastructure would stimulate the economy.

So if the borrowed money were invested well, it could make it easier for the government to reduce the amount it borrows in the future, when the cost of borrowing might be higher.

But it would depend on the government being able to increase borrowing without damaging investors' confidence.


Read more: The facts behind claims about our relationship with the EU


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