The reduction of the national debt should be achieved over a generation - not a handful of years.
The reduction of the national debt should be achieved over a generation – not a handful of years
It seems that no-one wants to tell the truth about debt.
This is especially so for chancellor George Osborne who, by constantly stressing that the UK’s public finances are under control by referring to the reduction of the structural deficit, is masking the fact that the national debt has doubled since 2010. It now stands at £1.2tr, or almost 80 per cent of gross domestic product (GDP).
Back in 2010, coalition government spokespeople frequently went on the TV to underscore their contention that the UK was close to bankruptcy unless an unpleasant mix of regressive taxation and public spending cuts, especially to social housing and the welfare budget, were enacted as a matter of urgency.
While this approach undermined confidence in the UK economy with more than two years of resulting flatlining, Osborne clung on to the now discredited Reinhart-Rogoff hypothesis.
The Harvard economists concluded that economies with high public debt to GDP ratios are more likely to stagnate or even shrink. Yet, as it turns out, their evidence was deeply flawed. The fact that the UK economy has returned to growth while there has been a doubling of the national debt confirms how wrong they, and Osborne, were to rush into premature and drastic debt reduction over the lifetime of one Parliament.
Indeed, Osborne’s austerity programme is only half complete with much more pain to follow the next General Election, despite the Autumn Statement announcements of greater investment in public infrastructure and tax cuts.
The reality, of course, is few politicians will admit publicly that reduction of the national debt following such a severe financial crisis should be achieved over a generation rather than a handful of years. This is underscored by the graph, which shows the UK’s debt to GDP ratio since 1692.
Not only does the graph show that the current level of public debt is far from unusual in historical perspective, but also that reducing it cannot, and should not, be considered a short-term objective. For example, while the national debt to GDP ratio was 200 per cent in the late 1940s, the UK avoided default and even managed to expand the welfare state and create the NHS.
Historical perspective also makes nonsense of the Conservatives’ proposed ‘Affordability Commission’, which seeks to monitor fairness between generations. As the graph reveals, in one sense, we are still paying off debts from generations long dead. Intergenerational fairness is a red herring designed to obscure rising inequality.
Strangely, the government and its financial watchdog the Office of Budgetary Responsibility (OBR) have an ambivalent approach to debt dependent on who has run it up. Public debt is seen to be bad and must be reduced at all costs, including reducing support to the most vulnerable in society. Meanwhile private or personal debt is judged to be beneficial to the economy to fuel consumer spending.
Yet household debt is much higher than public debt – both in real terms and starkly so when compared with the past. Household debt is growing again and is predicted to grow further.
Today’s 142 per cent debt to household income is still very high in historical terms but lower than any point since the late 1990s. However, the OBR, in its economic outlook report in March predicted that debt as a percentage of household will rise over the next five years to 166 per cent, pushing many families into crisis as their incomes are squeezed and interest rates may be on the rise.
What is needed is an honest debate about debt reduction over the long-term based upon a sustainable economic model that shares economic dividends more equitably with working people through wages and improving public services. Wealth Tax anyone?
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