22 June 2017
Debt
Disaster waits in the wings.
By John Watson
If you go by the newspapers, you will probably think that the central issue of British public life is how to carry through Brexit; how to strike the right balance between our need to participate in European markets and the public’s anxiety to avoid uncontrolled immigration. If you think that you will be wrong. Serious as the issues around Brexit are, and they certainly are, the thing which keeps the politicians awake at night, which they babble about sweating as they cling to their teddy bears, the thing which drives them to drink too much and then drive home, is the national debt and the austerity measures which are necessary to get it under control.
We all know that the 2008 crash and its aftermath left the country with huge debts which it is the fashion to describe as “eye-watering”. It is more helpful to look at a figure, and the latest estimate is £1,730 billion, more than three times the level prior to the crash. Actually, though, it isn’t the absolute figure which is important. In looking at whether debt is too high you have to compare it against the ability of the economy to service it. The most important measure of the size of the economy is the Gross Domestic Product, and the seasonally adjusted figure for the first three months of this year was £471.388 billion. Multiply that by four and you get an annual figure of £1,888 billion. A quick look at the calculator will tell you that debt is between 91% and 92% of GDP.
Everybody owes Somebody… a lot
Economists differ as to when debt levels become unsustainable, and a World Bank study suggested that they damage growth once you go past 77%. Still, it depends heavily on facts and circumstances so perhaps the matter is best tested in another way. Clearly one must not get debt to a level where its relative growth becomes uncontrollable – i.e. the percentage of debt to GDP cannot be stopped from escalating.
The big test, then, is whether the government can hold or reduce the debt/GDP ratio. In times of prosperity that can be done by relying on the growth of GDP, but relying on that will go wrong in times of recession when GDP falls. The safer approach is to balance the budget over the economic cycle so that the debt does not continue to increase. That means the country meeting government expenditure, including interest on the existing debt, out of taxes.
The austerity campaign pursued by the government has brought some results here. In 2009 the deficit (i.e. the rise in debt) was £50 billion. In the following year it was £103 billion. However, the coalition government brought it under control and it is now down to £52 billion, but this budget year’s borrowing is expected to increase by 12% year on year. It is hoped that we will achieve a balanced budget in the 2020s and that after that the debt mountain will begin very slowly to reduce.
To achieve this result a price has had to be paid and one cannot but sympathise with the teacher who told Gavin Barwell “you know I understand the need for a pay freeze for a few years to deal with the deficit but you’re now asking for that to go on potentially for 10 or 11 years and that’s too much”. Wherever you look you see the price of austerity. Cuts in the police, larger classes, reducing standards of living. Move the money around and you rob Peter to pay Paul, but the government has to decide where the burden will fall. Should it be on the NHS? on the armed services? on the police? or should more money be raised through taxation? The latter is a way of moving the burden to the wealthier which seems fair enough but, of course, it will become counter-productive if it goes too far. If centres of profit dry up or move abroad, GDP falls and that is just as deadly as increasing the debt.
What is already difficult is made harder by politics. Bribes have long been the bedrock of UK democracy. No, not the “buy all the voters a pint” type bribes from the 18th century. Those were bad bribes, paid by the candidate or his supporters. Highly corrupt. I am referring to good respectable bribes where you use public funds rather than your own money. You will find examples of these all over the system. Will we see money flowing into Northern Ireland as the price for DUP support? Of course we will. That is how politics works. And before the opposition parties get too cocky on the point, what about the triple-lock on pensions, a measure originally introduced by the Coalition? The idea of this was that pensions, which had fallen back in purchasing terms, should be increased each year by the higher of the rate of inflation, the increase in earnings and 21/2%. A sensible measure you might think and indeed one which in an era of low inflation and low wages pushed pensions up substantially. Has the time come to drop the 21/2% element? At the time of the 2015 election the Conservatives thought not, but by then you had to wonder whether the promise was still good policy following the rises which had already been achieved or merely a bribe to the grey vote. By 2017, the Government accepted the consensus view that the automatic 21/2% element would have to go and made no pledge to renew it. But it would be a shame to waste a good bribe so up it comes again in the Labour and LibDem manifestos. And then what about Cameron’s pledge that national insurance would not rise which so obviously hamstrung the Chancellor at the last budget..?
It isn’t just the need to bribe parts of the electorate which gets in the way of good economic management. There are unexpected events as well. Pitt the Younger once produced a scheme to pay off the national debt which was applauded from both sides of the House of Commons. Then came the need to pay for the Napoleonic war. Pitt’s plan was stillborn.
But the worst threat to the figures comes neither from the need to pay bribes nor from the unexpected. It comes from human weakness, the political equivalent of putting off that training session for another few days because obviously it will be all right if you start properly then. Around the debt question the temptations to weakness are legion. One example is the suggestion that debt is all right if it is spent on capital projects. If the project ultimately pays for itself there will have been no cost but, then, what happens if the project goes wrong? The Government borrowings incurred in order to refinance the 2008/2009 bank rescues are excluded from the national debt. In the case of Lloyds, of course they have their money back. Jolly good. In the case of other banks they will not. Sooner or later any deficit will have to be transferred to the general debt mountain.
Another problem with the “it is capital so it will pay for itself” theory is that it is a slippery slope. As the government sees the political advantages of funding more projects, it will slide into “projects which might fund themselves” and then to those which any idiot (except of course the Government) can see will not. Very very stringent tests would have to be used.
So what happens if all this goes wrong and we do get to the stage where the debt is mounting inexorably and we can no longer stop it? Interest rates rise, of course and the pound falls. We have already seen how the currency movements following the Brexit vote have caused inflation. This would be something of a different order. Tumbling standards of living? The rise of the far right? Goodness knows, but that is what puts the politicians into such a sweat.
Sir Alec Douglas Home lost the 1964 general election because he tried to explain economic theory to the electorate using matchsticks. He was unsuccessful and they opted for the young economics don Harold Wilson instead. Then, economic competence was the core of the campaign. This time, in an era of economic crisis, the parties merely talked about the Brexit negotiating position. That is to miss the ball with a vengeance. Next time the focus should be on the debt figures and the parties should be pressed on how they are to be reduced or at least contained.
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