8 things about Britain’s debt
1) How big is it?
We have had a higher debt: GDP ratio for 200 out of the last 250 years – historically, our debt is very small compared to the size of our economy (ie how rich we are). We also have one of the lowest debt: GDP ratios in the western world.
2) Who do we owe it to?
Mostly, ourselves.
Roughly 80% of British government debt is owed to people in the UK – our pension funds, and the like. As Oxford economist Paul Sagar puts it:
“80% of our government debt is owed to the British people. What is called “national debt” is our own savings, looked at from the other side of the balance sheet.”
If interest rates did go up on government debt, this would just mean our pension funds would get fatter. Essentially, British people have lent money to the British government to make up for the money lost through unemployment. This is good for the government – they need the money to ride out the recession. It is good for pension funds – the government is a safer bet than a company at a time of recession. If interest rates do go through the roof – which the Tories say is the worst thing that could happen to the British economy, we could even tax the money back off ourselves, if we really wanted to.
3) How much interest do we pay for it?
At the moment, we pay about 3.75% interest on our government debt. Given that inflation is running at between 4% and 5%, depending on how you measure it, that is very cheap money. As mentioned above, British government bonds are as safe a bet as you’re likely to find in the middle of the economic storm the world is going through. People are pretty keen to buy bonds from us (ie lend us money). So we can borrow pretty cheaply.
4) When are we due to pay it back?
On average, in 14 years: plenty time to get employment levels up, and/or work out how to tax big businesses and the mega-rich. This matters, and the right don’t want you to know about it.
5) Are we going to have our AAA credit rating downgraded?
Credit rating agency Moody’s have said that they are worried about the UK’s low rate of growth (and high rate of inflation). So, as the cuts hit our economy, it seems it may be possible that our credit rating will drop – ie, because of the cuts.
6) And what if we do lose our AAA rating?
Italy are at AA2 (two rungs below AAA). They paid a rate of 5.06% for €3bn they borrowed in January – just over 1% more than us, still not much more than inflation, and really not the end of the world. And remember, we’d have to be downgraded twice for that to happen. And if it did, most of the money would go to our pension funds.
7) Will cutting jobs & public services reduce our historically small, relatively cheap debt?
No.
The main reasons that we have a deficit (that is, we are spending more than we take in taxes) are that:
a) lots of companies and rich people dodge their tax (and aren’t charged a fair rate in the first place),
b) we have high unemployment, so fewer people are paying tax and more are claiming benefits and,
c) the UK has had historically slow growth for the last 25 years, as we’ve entrusted more and more of our economy to a de-regulated corporate sector interested primarily in asset stripping. In particular, the wages of the people who can’t afford tax dodging accountants have become pretty stagnant (an effect that was hidden for many by the rising ‘price’ of their house). This means lower tax reciepts.
The cuts will do nothing to fix tax dodging (especially as those collecting the taxes are losing their jobs too). They will, however, make unemployment much worse as public sector workers lose their jobs, and spend less, meaning shops lay off more staff – as we are already seeing. They will certainly do nothing at all to re-structure our economy – handing even more of it to the newly liberated corporations who caused the credit crunch in the first place.
In Ireland, they tried to cut their way out of their economic crisis. And they destroyed their economy in the process, and so they ended up needing a massive bail out. Portugal started an attempt to cut their way out of crisis last May. Now they too find themselves in a much deeper mess.
The UK isn’t in crisis at the moment. But it is, perhaps, possible that the government is creating one.
8 ) What will cuts do to household debt?
There is a big difference between government debt and the household debt that people owe individually. While the former had nothing to do with causing the crisis, the latter had lots to do with it. What will the cuts do to household debt?
It is spiralling back out of control. As economist Duncan Weldon puts it: “By 2015 UK households will have amassed over two trillion pounds worth of debt.”
I every time emailed this weblog post page to
all my friends, because if like to read it then
my friends will too.
A good article. One minor nitpick: the economist whose article you cite is in fact call Paul *Segal*.
I wouldn’t mention it except that Paul *Sagar* is a political philosopher who has been affiliated with Oxford University and I wouldn’t want his good name to be tarnished with the suggestion that he has performed economics.
Oh and this…
“If interest rates did go up on government debt, this would just mean our pension funds would get fatter.”
… is wrong. The interest rate on a government bond is an inverse function of the price of the bond. If interest rates on long term government debt rose it would just mean the value in the portfolio has fallen.
This doesn’t undermine your central thesis that “government debt is no big deal and nothing to worry about and unemployment is a much bigger problem than the deficit.”
OK, I’ve updated that link now…
Hi David,
thanks, good point – I should have checked that link more carefully. The point, as Ali says, still stands though. We have lower debt to GDP than France, Germany, and Italy – the main comparable, Western European economies (and Japan, of course, but they aren’t exactly an economic success story at the moment).
It also, of course, depends on whether or not you count the debt we incurred in buying up the banks. This isn’t normal debt, as we got some of the biggest banks on earth in exchange – including RBS – at the time the world’s biggest company by assets. As a result, the assets we got in exchange for that debt were huge, and things we can sell off. So it isn’t really normal debt.
I think the issue is that the link Adam points to is a little out of date (though the broad pattern, that our debt is lower than other countries, is still true). I’d use the figures from the OBR in the budget. They say that in 2010/11 our debt to GDP ratio is 60.3%, that should peak just over 70% by 2013 then start to fall. Obviously that prediction depends on what cuts, revenue changes and growth happen.
http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf
page 24 – Table 1.3 : Overview of OBR central fiscal forecast
Hi Adam,
Don’t suppose you could explain (or point me in the direction of a post that explains) where the two sides of the argument are getting their figures from regarding the size of Britain’s debt. The link you provided above says Britain’ debt is 47.2% of GDP whereas I’ve heard the Tories quote it at something like 73%. Who’s right and why the discrepancy?
Thanks!
I’m no economist but the total liabilities of the public sector being £3.8 trillion seems substantial to me.
(sorry, 3rd sentence should say ‘was not an attempt to do that’)
Hi Sean,
thanks for your point – though I am not particularly making an argument here. I have written lots on Bright Green about what I think the government should do. This article was an attempt to do that – it is just outlining some parameters for the conversation. If I was outlining what I would do, I wouldn’t start by talking about debt, I’d start by talking about unemployment, and I’d talk about the things we should and shouldn’t do in order to solve unemployment and, ultimately, close the deficit. But this blog was just an attempt to get down some things – mostly facts, though it strays into specific arguments/analysis – about Britain’s debt. I could go into more depth pointing out why the stats Tories use are dodgy, etc, but that is kind of secondary to my point – which is, here are what I see as the most important facts about Britain’s debt: a debt which is at once historically very small, cheap and long term, and at the same time being used by the government as an excuse to dismantle the welfare state.
This seems a slightly lazy argument. In that you don’t question some of your own views and address the counter points to your argument.
Surely you don’t believe all public spending to be intrinsically good?
For example: Trident, or other military spending. Police spending on covert operations, such as spying on the Green movement. Certain welfare benefits. Or, and most importantly, spending public money on debt interest.
I understood that your argument is that borrowing more, or at the same rate as now will grow the economy faster but, there are so many other factors which add to economic growth this cannot be the sole measure we take.
Why not argue for a restructuring of spending, i.e from guns to butter, so that you’re not arguing for essentially spending more on debt interest than education? Shift public money to things which boost growth. Not all public spending leads to growth.
I think it is this willingness to not question the morality of spending money on debt which leads to some of the hostile criticism you receive. It also encompasses some great risk.
I know this is what blog spammers say, but in this case it’s true: excellent post, brilliant, told me a lot of things I needed to know.