HAMISH MCRAE: Watch out! Inflation may increase

In Britain we are waiting to see how hard Rachel Reeves is going to hit us in her budget in ten days’ time. But governments in almost all major economies find themselves in the same bind: a struggle to cover daily spending with tax revenue and the rising cost of financing the national debt.

This pressure was highlighted by the International Monetary Fund ahead of its annual meeting this week in Washington. He noted that total public debt would exceed $100 trillion (£77 trillion) by the end of this year, and would account for more than 100 per cent of global output – or gross domestic product – by the end of the decade, perhaps much earlier.

The UK surpassed that particular milestone in August, with our national debt standing at £2.7 trillion, up more than 4.3 percentage points on the previous year.

The Office for Budget Responsibility expects servicing that debt to cost £89 billion in this financial year, or 7.3 per cent of all public spending. We will face this because we have no other choice. We have to borrow from the markets and right now it is costing us more than 4 percent for ten-year money.

France and Italy are also raising taxes, although it is unclear whether French Prime Minister Michel Barnier will pass his budget. The challenge for everyone is to contain spending and get more money out of the tax system without harming growth.

There is a clear danger of getting the balance wrong, as demonstrated by the work of the Center for Economic and Business Research. But something has to be done.

However, there is one country that has not taken any measures to curb its national debt, and it is the most important of all: the United States.

The debt is already higher than here (the Federal Reserve Bank of St. Louis puts it at 120 percent of GDP) and is expected to rise even more if the policies of either presidential candidate are implemented without changes. . Under Donald Trump, the main driver is lower taxes, with Kamala Harris more spending, but the result would be more or less the same.

Projections show a slightly larger deficit under Trump, but rising almost as quickly under Harris. So while the old saying is true – the president proposes, but Congress disposes – at this point everything seems to indicate that the US national debt will continue to rise.

That is, until something stops him. What could that be? That’s a difficult question. For the moment, the scale and momentum of the US economy, plus the dollar’s safe-haven status, mean global investors are happy to continue funding the government. The dollar is still almighty: where else do you put your money? But there have been periods when investors have lost confidence in dollar assets.

The most dramatic episode occurred in 1980, when Federal Reserve Chairman Paul Volcker raised interest rates to 20 percent to crush inflation and restore confidence in the currency.

The United States is not going to default. You can print money. But there are warning signs, including the record price of gold, that investors are nervous.

Global debt is an issue that worries people, as reflected in those comments from the IMF, but what will drive change will be something that causes investors to lose confidence in public debt.

We can’t know what will cause that – or when it will happen – but we do know that when something is unsustainable, it will not continue.

So what does this mean for anyone trying to protect their savings? The prevailing and worrying conclusion is that we must be aware that inflation will probably rise again. They can’t say it, but governments everywhere like it, as it reduces the real value of public debt and allows taxes to creep up. We are seeing the latter now that the tax bands are frozen.

That suggests buying real assets, particularly property, and shares of companies with pricing power: those that produce goods and services that customers have to buy.

It means not keeping cash in low-interest bank accounts. And it means not having public debt. Let someone else take the risk.