Labor Party politician Denis Healey pictured in 1975. Photo: Maurice Hibberd/Evening Standard/Hulton Archive/Getty Images
In other words, the government responds to crises such as wars and pandemics by opening its checkbook, and then allows economic growth and reduced borrowing to subsequently reduce the burden.
The problem facing Britain today is that this is no longer the case.
It is not surprising that the House of Lords Economic Affairs Committee has announced a new inquiry into the sustainability of the economy. our national debt and whether the government's fiscal rules are fit for purpose; we now expect to borrow large sums in times of peace and plenty.
The OBR's baseline forecast suggests that the primary balance (the deficit excluding interest payments) will rise to 10 percent of GDP by 2070.
These debt interest payments will reach 13 percent of GDP, and the Total Debt is a staggering 310 percent and is still on an upward trajectory. And if anything, this understates the problem; As the last few years have shown, the assumption that nothing bad will happen is optimistic to the point of recklessness.
How debt became unsustainable
The scale of change is dramatic. Speaking to MPs on Thursday, Robert Styman, head of the Debt Management Authority, noted that in 2003, its first year of operation, “the total value of the gold portfolio was £300 billion.” We are borrowing £240bn this year and the entire gold portfolio is worth approximately £2.5tn.”
In other words, the value of the UK's outstanding debt is now eight times higher than it was 20 years ago.
Robert Steeman, head of the Debt Management Authority, on Thursday estimated that Britain's outstanding debt is now eight times what it was 20 years ago. Photo: Christopher Roche
James Bowler, Permanent Secretary of the Exchequer, added that if interest costs were “a department, it would be the second largest department.”
The reasons for this sharp increase in debt are well known. The population is aging, the ratio of pensioners and people of working age is increasing from 1:4 to 1:3.
Spending on health care, social assistance and benefits is expected to rise even as tax revenues begin to fall. . Meanwhile, the government accumulates spending obligations without seriously thinking through how to pay for them; The transition to net zero and rising defense budgets will be much stronger if the sharp reduction in real terms planned for the 2020s does not occur. After all, history shows that this will not happen.
The situation is so bad that the OBR is outright calling the current path unsustainable. Again, he's been saying this for a while; the very first financial strength report in 2011 contained the same warning, as have the reports almost every year since. Despite these worries, the great ship of state calmly continues to move towards the iceberg.
The root of the problem
The biggest contributor to our financial situation is not our demographics, our healthcare system, or our desire to have more than 157 operational main battle tanks. It's the reluctance of our politicians to make difficult decisions.
Britain's mountain of debt may be growing at an alarming rate, but Westminster is surprisingly calm. Given the financial opportunity created by inflation, which reduces the value of tax thresholds, Chancellor Jeremy Hunt decided to use them to fund a round of pre-election tax cuts.
That much of this room was framed by a heroic set of assumptions about curbing spending after the next election did little to create the impression that we have a government more interested in making noise about fiscal prudence than actually demonstrating it .
Again, Mr Hunt is hardly unique in his behavior. We may have only had one prime minister who was clearly a speculator, but we have had a long line of chancellors who are “jam today.”
The Cameron and Osborne years, when debt and deficits dominated the national conversation, there were emissions. Even then, rhetoric and reality did not always line up perfectly.
Cuts, as in the Cameron-Osborne years, are difficult to implement in a politically attractive manner ways. Photo: Kirsty Wigglesworth/AP
In the run-up to the 2010 election, Lord Cameron was a vocal critic of Labour's profligacy, but all he achieved was to slow spending growth. Declaring that Gordon Brown's plan to double the national debt to £1.4 trillion was a “disgrace” that risked a repeat of the Healey fiasco of 1976, he led a government that achieved that milestone anyway.
This was not the case. Not because his government did not want to make cuts, but because they are difficult to implement in politically attractive ways. As Lord Cameron wrote in his memoirs, in retrospect they “could have done more, even faster… Given all the fuss and hostility and sometimes hatred, we might as well have torn off the plaster… we only cut £1 off.” for every £100 spent, but you would think we had restored the workhouse.”
The challenges facing politicians who want to make the state more fiscally sound are numerous, but they can be boiled down to two simple statements: people like someone else to pay the bills, and legislators would very much like to keep their seats.
Westminster Parliament. wastefulnessAs a result, Westminster is rarely faced with a spending proposal that at least a few MPs don't like. These range from small ones – like chess tables for local authorities – to supported employment schemes for disabled people, Network North to replace High Speed 2, access to talk therapy, pay rises for NHS staff; the list goes on.
Spending proposals such as Grid North to replace High Speed 2 often appeal to MPs. Credit: Darren Staples/Bloomberg
Rishi Sunak, the prime minister, suffered his first defeat in the House of Commons when his own party rebelled and demanded that a planned compensation scheme for victims of the tainted blood scandal be fast-tracked.
It would be one thing if we were to increase these deficits to finance investments that will (eventually) pay off. Motorways, airports, bridges, railway lines, desperately needed MRI and CT scanners for hospitals, functioning 21st century IT systems for government departments – the list goes on and on and on – would all make a huge difference to the situation in Britain. record performance and deliver much-needed growth.
However, only about 11 percent of government spending is considered “capital,” with a significant portion of that amount consisting of business loans and student loans. The rest is expenses for everyday consumption.
Margaret Thatcher's habit of comparing government to household budgeting may have been criticized by economists, but her observation that “when there's not much money to spend, you have to make choices” rings true. We are jumping to the wrong conclusions.
Margaret Thatcher poses in the kitchen of her Chelsea home, 1975. Photo: AFP/Getty Images 300 years of borrowed money
It was the fear of this kind of behavior that caused the House of Commons to relinquish their right to initiate expenditure in 1706. All of these suggestions are worthy efforts, and that's the point; politicians have to make difficult compromises and instead have an easier time getting policies done.
After all, there is a good chance they won't be in power when the bill eventually comes due, much less if they begin to introduce financial discipline.
Cost cutting faces standard collective action difficulties; a small number of people who have lost a large privilege will make a huge fuss, while a very large number of scattered people who have lost a small amount will find it difficult to organize effectively in favor. Raising taxes annoys everyone who pays them. It is much better to spend the money and put that money towards the future.
“It is so easy,” wrote Stanley Baldwin in 1919, “to live on borrowed money; it’s so hard to realize you’re doing it.” This is especially true when you never have to pay that money back.
It may be a sad fact that people don't live forever, but it has its advantages when it comes to government spending: by issuing debt, you can choose to have future generations finance your consumption. This makes debt financing extremely tempting compared to paying taxes.
This becomes even more tempting when you consider the tempting thought that the debt may never be repaid at all. The big difference between people and governments is that governments can effectively last forever.
This opens up a new area of financial opportunity; a government that really wants it can theoretically continue to roll over its debt over and over again without ever paying it off. All he has to do is make sure that GDP grows faster than the amount of debt and it will be sustainable.
The Magic Formula
The magical inequality that creates this is possible: g > R. When the economy's growth rate (g) exceeds the interest rate (r) and the deficit is not too large, the relative importance of debt will naturally decline.
There's a catch, however: inequality can change. As Lord Norman Lamont, the former Chancellor, put it: “The real danger is that interest costs are rising faster than GDP, which would be very, very embarrassing. With high inflation, high interest rates and indexed debt, this poses little problem.”
Former Chancellor of the Exchequer Lord Lamont (1990–1993), pictured here with a budget box during his time in office, says it is “very likely that government spending will have to be cut”
The latest OBR estimates confirm this analysis, noting grimly that r and g are now approximately equal; Barring a sudden surge in productivity thanks to AI, we can no longer rely on economic growth to magically lift our debt burden.
Instead, we will need to find a way to force our political system to face difficult choices, rather than presenting future generations with more difficult choices.
This is easier said than done. As with Hemingway's remark about bankruptcies, Britain's fiscal decline occurred slowly and then suddenly. In a good economy, Labor was running deficits before the twin crises of the 2008 crash and the pandemic tore huge holes in its budget planning.
We now have a population that is accustomed to living beyond its means, resents the degradation of services and is unlikely to respond favorably to proposals for the need to increase taxes or cut spending.
Because many of those who will bear the burden of taxation in 2070 have not even been born yet, our political system has a hard time putting their interests on the same level as ours. It may not be good or wise (to refer again to Thatcher) – “it is neither moral nor responsible for a government to spend beyond the means of the country, even on services that may be desirable” – but it is a limitation that our democracy must overcome. work inside.
Let's fix the roof while it rains heavily
However, it is unclear how we will begin to cope with the growing mountain of debt. One way would be to introduce legal barriers to politicians spending money.
We're used to watching American politicians agonize over the debt ceiling across the Atlantic. Introduced in 1939, it limits the amount of debt the federal government can have outstanding at any one time. Once the limit is reached, the government is prohibited from further borrowing.
This creates dramatic confrontation and confrontation, with Republicans and Democrats pointing fingers at the other side, and this certainly comes with some political costs for funding projects. with borrowing. If you want to push through a new spending project, you need to be prepared for the subsequent clash.
The problems here are twofold. First, there are economic costs; One of the reasons for Fitch's latest downgrade of the US credit rating was persistent brinksmanship in debt ceiling negotiations, which raised the threat that the US would fail to make expected payments and trigger a global crisis.
The second thing is that it doesn't work. The US government has raised the debt limit 78 times since 1960—more than once a year—and currently runs a deficit of about 5.5 percent of GDP.
Political costs have not been enough to force politicians to act responsibly, and the mechanism is too radical to be acceptable to many; collapsing the government due to debt by a couple of percentage points is too far.
UK Chancellor of the Exchequer Jeremy Hunt delivers his autumn statement in the House of Commons on 22 November. Photo: Jessica Taylor/Reuters
Other countries with debt limits tell a similar story. Denmark, for example, managed to avoid brinkmanship by simply setting its debt limit at a level well above its debt stock and then doubling it when the 2008 crisis raised the risk of having to borrow more.
Even the imposition of rules in international treaties has a mixed record; The European Union's Maastricht provision that public debt must remain below 60 percent of GDP has not actually stopped countries violating this limit. Indeed, EU debt now stands at an impressive 84 percent of GDP, with some countries well over 100 percent.
Germany, one of the successful examples of debt limit laws, is also a good example of why this approach is unlikely to work for the UK. Berlin included a debt brake in its constitution in 2009. Once implemented, it limits borrowing to 0.35 percent of GDP.
Although it was suspended during the Covid-19 pandemic, it has been broadly successful in limiting government spending and has recently led to that a Karlsruhe court has blocked the planned €60bn (£51.4bn) project, dealing a heavy blow to the ruling coalition. As a result, Social Democrats are now seeking to reform this rule.
And that, ultimately, is the problem with trying to solve Britain's national debt legally. Parliament is supreme and cannot bind future parliaments. Any legislation aimed at limiting borrowing would be repealed by the normal passage of bills by a simple majority vote. To get borrowing under control, we need to change our political culture so that imposing debt on future generations is seen as unacceptable and where economic growth is a priority.
In other words, we need to return to the traditional way of managing our debt, which Britain carried out. According to Carl Emmerson, deputy director of the Institute for Fiscal Studies, crisis spending is happening “for good reasons – we want to help households, businesses, public services” but “if we want to keep adding to debt every time there's a big shock, I think we have to We really need to look to reduce it when we don’t expect such big shocks.” And that's not the plan now.
Lord Lamont said this makes it “very likely that government spending will have to be cut.” Barring a surge in economic growth, Emmerson says: “I wouldn't be surprised if there's a net increase in taxes in the first 12 months after the next general election.”
The alternative is to continue on an unsustainable path. which makes our final reckoning with reality even more painful.
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