Rees-Mogg: Britain is ‘on the cusp of a really serious financial crisis, with very little firepower to answer it with’

Sir Jacob Rees-Mogg has said the country is “on the cusp” of a serious financial crisis and that raising taxes is unlikely to help.

He said on GB News: “I’m very worried about this because it’s very easy for this to get out of control. There’s been a big move in gilt rates to 6% on the 30-year.

“That threatens the pound. If the pound gets into trouble, interest rates go up. If interest rates go up, economic activity goes down. That reduces tax revenues. That makes the deficit worse. That pushes up interest rates further.

“We seem to be on the cusp of a really serious financial crisis, with very little firepower to answer it with.”

He added: “We’re already spending £120 billion on debt interest. At 6% we would have to pay £180 billion on debt interest.

“Now I know government debt has, I think, on average, a 12-year duration, so it doesn’t come in immediately, but it gives an idea of the scale of what is happening, and that if the pound were to weaken, which is very often stage two when interest rates are going up like this, then short rates have to go up, and that affects business investment and mortgages very immediately.

“And the global situation. If you go back to 2008 and you go to Covid. In 2008, the UK balance sheet was very strong. We’d had a growing economy for best part of 20 years. We’d got interest rates that had been falling and low levels of government debt.

“The Government could absorb the cost of bailing out the banks, and the inflation rate could absorb the quantitative easing. When you got to Covid, the government balance sheet was still all right. It could take on the extra debt to see us through Covid.

“Now, not just the UK, but the US, Japan, France, they’ve got no flexibility. They’ve had no recovery from the last attempt to bail out an economic disaster…

“AI risk goes up because that’s all done on debt. There’s not a lot of profit going into the AI companies at this stage, so that is very sensitive to interest rates; the funding of that is sensitive to interest rates.
“Raising taxes seems to me to be very unlikely to do any good because if the economy is declining, taxes, tax revenues tend to fall faster than economic growth, don’t they? There’s a gearing effect if there’s a weak economy on tax revenues.”

He added: “The fiscal position here and in other countries is very bad. The only silver lining is that our debt is all Sterling denominated, and therefore the Chancellor won’t need to go to the IMF. Other than that, it is very, very bad.”