When the money runs out
MARTIN DAUNTON discovers that, while there is no easy way to deal with the UK’s national debt, we can gain useful pointers from the past
Should we worry that the UK’s national debt in 2015 was 89 per cent of its GDP? The warning of economists Ken Rogoff and Carmen Reinhart that growth would drop by 1 per cent a year if debt reached 90 per cent of GDP gave George Osborne a justification for austerity. But to others, the 90 per cent rule was ahistorical. Debt reached at least 200 per cent in the Napoleonic Wars and Britain experienced the industrial revolution. It was at similar levels in the First World War, with low growth as a result of the collapse of the global economy, and in the Second World War, when war demand ended the great depression and the global economy grew rapidly.
Critics of the 90 per cent rule also counter that low interest rates after the great recession gave the government an opportunity to borrow and invest in the roads, health care and schools, boosting economic growth.
Fixation on the national debt is only one side of the balance sheet, for the UK has assets of £1,743bn, exceeding governmentt borrowing of £1,261bn. Would any sensible household or business allow its assets to deteriorate rather than use cheap money to keep them in good repair?
Martin Slater’s lucid account of Britain’s national debt tackles these major questions by a skilful blend of historical insight and economic logic. There is no easy answer, but he explains how we might think about the questions. Whether a given level of debt is something to worry about depends on the political context. In the 18th century, Britain had a smaller population and resources than France but its effective tax system sustained a higher debt to pay for successful wars, whereas France faced frequent defaults and resistance to taxation.
High debt at the end of the Napoleonic and world wars could set productive taxpayers against idle rentiers living off their interest from government bonds. The outcome depended on whether the tax system allocated the burdens fairly (it did not after 1815); whether interest rates were high (as after 1918) or low (as after 1945); and whether economic growth was low (as after 1918) or higher (as after 1945). A similar point can be made about current comparisons: a debt ratio in Greece of 177 per cent creates more political concern than a debt ratio of 233 per cent in Japan, for Greece has often defaulted on its debts and lacks an effective tax system.
Should we then reject austerity? Slater warns us to think again. The government has assets to set against debt but has another, even bigger, liability: £1,425bn of public-sector occupational pensions entitlements. And the population is ageing with greater costs of health care and potentially lower economic growth. Current austerity will reduce the debt ratio to 80 per cent by the late 2020s, but the debt ratio will then start to increase to as much as 234 per cent by 2066-67.
What should we do? Do we spend more to encourage economic growth and reduce the debt ratio? Do we increase taxation? Do we pass the costs of old age and health care to the private sector? Slater sees no easy answer, which ultimately rests on our political value judgments. He does, however, make us use history to think in a clear way about fundamental questions for the future.