# TL;DR

Government interest rates are approaching zero. What are the risks to borrowing large sums in the current enviroment? Would inflation occur?

# Full Story

I was recently reading an article about Rishi Sunak's (UK Chancellor) aim to rein in public spending in the UK post pandemic, the implication being he was planning to do this much earlier than other countries.

Since the interest rates are so low borrowing appears very cheap. Conventional gilts (fixed interest) make up 75% of the UK government portfolio and the interest rates on these are approaching zero (see graph above). There is strand of thought that government ought to borrow lots while it can, this opinion appears to be widely held. The spending so far is short term stimulus such are furlough payments, not medium/long term investment.

## Inflation

A turbo charged economy with low unemployment could lead to higher demand, higher prices and then inflation. However for countries hit hard by the pandemic unemployment is high (5% in the UK) and likely to increase as furlough measures are removed.

## The Question

What are the risks to continuing to borrow large amounts (\$100Bns)to spend on short term stimulus right now?

What economic reason would there be to not do so?

This carries some potential risk. For example, suppose for the sake of argument government could borrow now $$£ 1000$$ with coupon rate $$0\%$$ (coupon rate is essentially the interest paid on face value of fixed income security), for 5 years. That is great deal now but in 5 years government will face the following problem, it will either have to repay the debt (which could be difficult to do for country with high level of debt) or instead roll it over meaning the government issues another $$£ 1000$$, but this time if interest rates are higher and government is forced to issue it with, let us say $$20\%$$ coupon rate that would be a problem because suddenly the cost of servicing debt to the government would skyrocket.