On Britain’s debt and deficit

The new economics foundation recently claimed that is a myth that Britain is ‘broke’ citing several points in support:

  •  The national debt to GDP ratio is low compared to ratios seen in the last 300 years and low compared to other countries, e.g. Japan, the US and Germany.
  • The amount the government spends on debt interest payments as a %age of GDP is lower than at any time from WWII up to the year 2000.
  • The interest rate of government debt is low and has dropped since 2008.
  • They also cite the fact we have our own currency and central bank and thus more flexibility than places like Greece.

It seems to me that the argument presented fails on several grounds:

  • The fact that we’ve had high levels of debt before does not mean that it was a good thing or that there were not deleterious effects from such high levels of debt. I also note that Britain had an empire for much of the period concerned which will have provided opportunities to mitigate those consequences (in the later stages by letting the colonies go to ease finances by reducing the costs of running the empire) but that’s no longer the case.
  • That some other countries have higher levels of debt does not mean we can assume the current levels of debt are safe or that increasing them won’t cause harm.
  • They ignore the high deficit – spending £120 billion per year more than is received in taxes cannot be sustained for very long before the size of the debt interest payments starts to impinge on the ability of the government to spend money on welfare, public services, etc and on the economy as a whole to produce wealth. This gap has to be closed either through increased tax receipts or reduce spending. Realistically it’ll be a combination of both.
  • National debt effectively represents the total future tax bill that’s been run up by current and previous governments, and thus constrains future governments spending and tax policies. The fact that we have a high debt level implies a drain on national resources stretching far into the future. The fact we have a high deficit implies that the future tax bill is rising quickly too.
  • The official debt figures ignore “off the books” items such as PFI liabilities, pension liabilities, etc that weren’t major issues in the past.
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