Perils of high public debt
WHEN it comes to putting names to advisers or numbers to policy proposals, Labour leader Jeremy Corbyn and his beguiling economic cohort John McDonnell like to keep things vague.
But as Richard Sharp of the Bank of England’s Financial Policy Committee argued in his University College London speech on Thursday, when debt levels are high, nations can ill-afford crisis or a new splurge of borrowing.
In Britain, the ratio of debt to national output or GDP will have jumped from 50.2pc in 2008 to a peak of 88.9pc in 2018, according to the International Monetary Fund. This is by no means the worst among the G7 industrial countries. Japan’s debt stands at 240pc of GDP, Italy at 131pc and the US at 107.9pc. Top of the class is Germany, with debt at 61.8pc of GDP.
Japan and Italy have been historic outliers because citizens in both countries are inclined to trust government bonds for their savings. Britain is generally able to sustain higher debt levels than its competitors because it borrows medium and long term, so it is not constantly having to replace older bonds or gilts with new ones. The UK’s vulnerability is different. Because we are such an open economy, a larger proportion of our debt tends to be in the hands of foreigners who can be easily scared off.
There is no ideal level of debt. Economists Carmen Reinhart and Kenneth Rogoff reckon that 90pc – perilously close to where Britain is now – is not a line to be safely crossed. Latest forecasts from the Office For Budget Responsibility show a steady decline in debt to 79.1pc of GDP by 2022-23. That takes no notice of the Brexit bill or a Labour government.
It is simple for Labour to suggest that railways could be nationalised by issuing bonds to existing owners. But that would raise Government debt and transfer borrowings made by the train companies from the private to the public sector. The cost of doing this for water, power, the National Grid, Royal Bank of Scotland and much else would be off the map.
That is before Corbyn even starts to contemplate forgiveness of student loans, £250bn extra of infrastructure investment and a splurge on public sector pay.
Just keeping Government borrowing ticking over is hard enough, with a financing requirement of £59bn over the next five years. The financial crisis demonstrated how quickly the national debt can surge in times of slowdown or bursting bubbles.
If countries are close to the limits (as Britain is now) the lack of fiscal space can destroy economies.
It can be no accident that Sharp raised the spectre of how Marxism destroyed Venezuela’s ‘AAA’-rated economy.
Voters need to be careful about what they wish for.
Fibre diet
AS BRITAIN seeks to close the productivity gap with its competitors, there is no better cause than ultra-fast broadband.
This is accepted by Liberty Global, owners of Virgin Media, which is ploughing £3bn into a scheme designed to increase cable speeds up to 300 megabits per second.
Virgin needs to make sure that it has service standards to go with it and not leave customers high and dry, as was the case in the Surrey suburbs last weekend.
Virgin, Vodafone and others are making a great push on fibre. Ofcom boss Sharon White is far less enamoured with the investment being made by BT. It has unveiled plans to bring fibre to 10m homes by the mid-2020s, dependent on higher bills. White notes BT has other priorities, such as investing in sport and content. Stealing the Ashes from under the noses of the terrestrial rivals is seen by many cricket fans as sabotage, not smart marketing.
The national priority is for business and households to get fibre. Jan du Plessis, appointed in March as BT chairman, has a chance to reset with Ofcom, speed up ultrafast roll-out and provide less chaotic customer service. It must be made to happen.
Digital bully
APPLE uses its clout to defenestrate those with whom it does business. Imagination Technologies has been blown out of the water and Reading-based Dialog Semiconductor is the latest UK victim.
In the US, Qualcomm has filed three new patent infringement notices against Apple, claiming there are 16 more of its patents being used in the iPhone.
Abuse of market power should be an obvious target for US trust-busters.