Reykjavik on Thames

Is the UK economy moving a little closer towards a crunch point when it comes to financing government debt. Something close to £200bn worth of government bonds will have to be issued this coming year as the budget deficit balloons and the British state makes a big claim on the supply of loanable funds. The Treasury seems to have remarkably sanguine about its ability to find buyers for the debt - the Bank of England has become a major buyer as part of the quantitative easing programme - but this cannot last indefinitely.

Yesterday the (much maligned) Standard and Poor’s credit rating agency downgraded its view of the UK to “negative” from “stable” for the first time since it started analysing its public finances in 1978. It said the UK’s finances were deteriorating faster than expected. Britain is the first of the major developed countries to have this adjustment. It matters because there are genuine fears that the government will have to pay a lot more in interest to service the eye-wateringly large level of debt.

Here is Stephanie Flanders discussing the implications of the decision.

The debt issue will be one that acts as a severe drag on growth and government spending whichever party wins the next general election