Last month, I opened with Scott Bessent’s idiosyncratic announcement of the joint US-Japan intervention to support the yen – a useful introduction both to single-item to-do lists and the anxiety gripping global financial markets.
I had planned something lighter this month. Unfortunately, my algorithm is having a nervous breakdown. It has stopped trying to sell me golf clubs and holidays in Italy and become obsessed with refinancing global government debt. Every morning, it works methodically through its list: French OATs, German Bunds, Japanese JGBs, British gilts and American Treasuries. At this rate, I worry it might take up smoking.
Its latest particular anxiety is that global government debt has reached approximately $353 trillion and much of it must continually be refinanced. Governments rarely repay their debts; they replace maturing bonds with new ones, rather like refinancing an enormous interest-only mortgage with another enormous interest-only mortgage. This worked rather well while rates were close to zero. It becomes less amusing when yesterday’s cheap debt must be replaced at today’s rates. YouTube is rife with global economic Armageddon videos.
Frankly, it all looks a little unsustainable. Long-time readers may recall Sloan’s Law. Things can be unsustainable for a very, very long time. Exchange rates, government debt, public expenditure and, quite possibly, my algorithm all seem to obey it nowadays.
French borrowing has recently cost more than Italian borrowing. The spread between French 10-year OATs (obligations assimilables du Tresor) and German Bunds has exceeded one percentage point for the first time since the euro crisis. Britain has issued 30-year debt at a yield of nearly 6%, its highest since the Debt Management Office was established in 1998. Japan’s ten-year borrowing cost has reached 3%, startling only because, not long ago, it was borrowing at approximately nothing.
Just as my algorithm appears to be calming down, it remembers artificial intelligence. AI Hyperscalers are expected to spend around $725bn this year on chips, data centres and electricity, increasingly financed through bond markets already absorbing unprecedented government borrowing. Its anxiety is not helped by a book entitled If Anyone Builds It, Everyone Dies. Again YouTube is rife. The title refers to artificial superintelligence, not Guernsey’s tax package, although readers may draw their own parallels. So as it goes, the bond market appears to regard human extinction as a bankable infrastructure opportunity. At this point, my algorithm starts hyperventilating about yields, refinancing risk and the return of the bond vigilantes. I switch off the app and make a cup of tea. Unfortunately, it has a point: governments and hyperscalers are seeking unprecedented sums just as yesterday’s cheap debts must be refinanced at today’s higher rates. A double whammy.
Against this darkening global backdrop, Guernsey is blithely preparing to resume its protracted debate next week on how to raise more money for increasingly expensive public services. Although the debate is being presented as a question of taxation, the deeper issue is spending: how much government should provide, and what level of taxation the public is willing to accept to fund it.
There is a revenue problem, certainly. But revenue and expenditure are not independent variables. The States cannot decide how much it wishes to spend, discover that existing taxes are insufficient and then describe the difference as if it were an unfortunate natural phenomenon. The fiscal gap is the product of political choices. Over the past 15 years, public-sector spending in Guernsey has risen by around 30% in real terms. As Richard Digard recently noted, analysis published by Bridgehead Communications suggests that the States added 822 posts in the decade to 2025. The comparison with an old Yes Minister sketch is painful. In it, Sir Humphrey defends public-sector expansion as evidence of success: ‘If only the private sector could achieve such growth, Minister.’
Former deputy and political sketch writer Richard Graham argued last month that VAT or GST has often been the frontrunner for higher public spending. Up to a point, he is right. But VAT did not create the modern welfare state; it became the machinery needed to finance it.
Some people have wealth. Most people have income. But everyone consumes. As I like to say. Consumption is therefore the broadest and most dependable tax base available. The more revealing point is that VAT did not usher in an age of surpluses: additional revenue supported additional expenditure. Consumption taxes are exceptionally good at raising money but without spending discipline, governments tend to spend whatever becomes available. And then ask for more.
This brings me to the discussion of Guernsey’s borrowing during and after July’s tax debate. A Freudian admission on a deputy WhatsApp group – that introducing GST was as much about protecting the credit rating to afford more borrowing – spilt over in the Chamber. P&R rushed to defend the credit rating, citing it would save ‘millions’ on borrowing not yet borrowed. Much of the aftermath focused on whether Standard & Poor’s had said Guernsey must introduce GST. It had not: credit-rating agencies do not dictate tax policy. S&P’s clarification statement made that clear. It also made it clear that increased spending (and by association borrowing) would require additional revenue to preserve Guernsey’s creditworthiness.
That ‘increased spending is the need for new revenues’ point was what everyone seemed to miss. The inconsistency ought to have stuck out like a sore thumb. Up to that point P&R in its policy letter had gone ‘a bit large’ that it’s the demographics that are ruining today’s finances. I made this point in the scrutiny hearing in July – 2050’s demographics don’t justify 2027 tax increases however thick one ladles on the spin. The cat, I thought, was truly out the bag. GST enlarges the revenue base supporting tomorrow’s increased spending and borrowing, not to fund today’s services. A stronger credit rating may reduce the price of new debt and allow the path of unsustainable spending growth to continue for longer. Sloan’s Law positively guarantees it. But making an unsustainable path cheaper does not make it sustainable; it merely postpones the day of reckoning. On this occasion the trend is not my friend. The inexorable growth in public spending must stop. Sorry, I should say, in my opinion.
And finally, as they used to say, another apparent success of the ‘package’ is that it expands the size of the welfare state. Clarion call, please. All to mitigate the effects of the tax it introduces. One can almost hear Sir Humphrey admiring its administrative self-sufficiency: ‘The tax creates the need for more benefits, the benefits create the need for more administration, and more administration creates the need for more taxes. All very self-sustaining, Minister.’
Deputy Helyar and I have proposed removing the new Essential Costs Relief Payment – for that is what I’m referring to. On the radio, I was asked whether that was cruel. I think the charge gets the argument backwards. GST would make essential spending less affordable and then require some of those affected to apply to the government for part of their money back! Lunacy! If a new tax requires a new welfare payment to make it politically tolerable, that is a red flag. Compassion should mean avoiding preventable hardship when taxes are designed, not constructing an expensive administrative system to repair some of the damage afterwards.
Global debt, AI data centres and Guernsey’s tax package are all, in their different ways, claims on future income. Excuse going all economic textbook. The common temptation is to mistake the ability to finance something today for evidence that it will remain affordable tomorrow. Guernsey can broaden its tax base, preserve its credit rating and borrow more. It can create a new welfare payment to make a new tax more tolerable. Each step lets the existing spending path continue a little longer. Four years ago, I pointed out that public spending had already grown at more than twice the rate of the economy over the preceding decade. Since then, nothing has changed; the unsustainable path continues, and nothing is being done to fix it. P&R’s proposed tax ‘package’ would simply make staying on that path possible for a little while longer.
As I said, Sloan’s Law says this can continue for a very, very long time (GST is, after all, only being proposed today at 3%), but not forever. My algorithm may not be having a breakdown after all. It may simply have reached that conclusion before the rest of us.
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