The second horseman of the economic apocalypse

Having cast a little scepticism on the first rule of economic management – you can’t keep printing money – it is time to address the second rule: you can’t keep borrowing it. Can’t you? What else have we been doing for the past three hundred years? Has it done us any harm?  

In 1990, the national debt stood at about 25% of GDP. Now it stands at over 80%. Shouldn’t that make anyone rush for the smelling salts? Not necessarily. Those statistics are a good example of why one should be wary of statistics. These particular ones have been selected to dramatise one fact – that, in recent years, UK debt has increased hugely – at the expense of other facts. If I were a politician arguing for austerity policies, I would say no more. The point has been made.

In the years between 1918 and 1962, the national debt was never below 100% of GDP. That’s cheating, you may say: it was a period that included two world wars. What about the heyday of the industrial revolution, then, when Britain created new wealth like an incontinent fruit machine? Well, in the century between 1750 and 1850, the national debt was never below 100% of GDP either. In fact, in the three hundred plus years since the national debt was created in 1694, its share of GDP has been above its present level for over half of them.

The graph that illustrates these figures is like a particularly vertiginous version of an alpine landscape. Debt has soared and plummeted over time. The two highest peaks (both at around 250% of GDP) were produced by wars – the Napoleonic Wars and World War II – and were both followed by dramatic falls, but over a long period of time.

Did Victorian parents complain that governments were burdening their children with crippling debts that could never be repaid? I doubt it. Did parents in the 1950s say the same thing? I can answer that one: they did not. Now, politicians with a point to prove invoke the debt that will be owed by babes as yet unborn in the same way that they used to kiss the ones that were born, and for the same reasons.

Since the debt is not high by historical standards, the interest on that debt is not high either. At about 3% of GDP, interest is at a lower level than for almost the whole of the past century. And, since a third of the debt has been generated by the programme of ‘quantitative easing’, a third of the interest is owed by the government to itself. The effective cost of debt interest is about 2% of GDP.

For most of the years since 1900, debt interest has been above 4% of GDP. Between the two world wars, it stood at about 9%. Of course, extremely low interest rates have contributed to the present position, and they may not last for much longer. But, even with higher rates, there would be nothing abnormal about the level of interest on the current debt.

Translated to an individual level, there are many people in Britain whose personal debt – mortgages, loans, credit cards – exceeds 80% of their income. Most of them do not regard this as a problem, and neither do their lenders, as long as all parties have confidence that the debt can be serviced and one day, if only notionally in some cases, repaid.

And that is surely the key word in any discussion of debt, personal or national: confidence. In particular, the confidence of the lender. The entire international system of debt is based on confidence. When confidence declines (as it would, fairly or unfairly, if Britain had a government led by Jeremy Corbyn), lenders would be more reluctant to lend and would charge higher interest rates for doing so. When there is a government, as there has been since 2010, that treats the debt seriously and has taken unpopular measures to curb its growth, confidence is maintained.

Given the history of the national debt, it is reasonable to say that neither its current level, nor the current level of interest paid on it, should present a problem. (Whether it is wise to have a vast national debt, or any debt at all, is another matter, but that argument was lost several hundred years ago and now belongs outside the realm of practical politics.)

What does present a problem is the nation’s annual budget deficit – the amount by which the government’s expenditure exceeds its income. The theory is that there should be a deficit only in the bad years: times of war or recession. In normal years, the budget should be balanced, and in good years a government should run a surplus that pays for the last bad time and puts something away for the next one.

Our economy no longer works like that. The past few years have, as a statement of fact, been relatively benign, however much people feel that, for them, they have been a nightmare. There has been steady growth. There has been a steady rise in employment. Yet, despite this and despite swingeing cuts to public expenditure, the annual deficit is still huge and is falling at a slow rate. In other words, it has now become normal to run an annual deficit even in fairly good times.

To put this situation into historical perspective, from the peak of the mid-1940s the national debt fell as a percentage of GDP in almost every year through to the mid-1990s, despite several minor recessions and one major one. Since the mid-1990s, apart from a brief period around the millennium, it has grown every year.

In other words, while the current level of national debt may not be a cause for concern, the fact that it is has continued to rise relentlessly, even in good times, is a serious concern. The fact that the target date for eliminating the deficit recedes year by year before us, like Gatsby’s green light, is a serious concern. And the fact that, in the meantime, the public clamours for hugely increased public expenditure is a serious concern.

Smoking is bad for you. But no one can say that one cigarette more, or two, or twenty, will make much difference to your health. No one can say that borrowing one billion more, or two, or twenty, will make much difference to the nation’s financial health. What one can say is that, as with smoking, if one sets off down that road, it is likely to end in catastrophe.

Nothing much wrong with borrowing. Plenty wrong with borrowing more and more, year after year, when the economy is growing. And what will happen when we reach the next recession? The clock is ticking.