Depending on your preference for maritime references or classical musings, the national debt is weighing our economy down like an anchor and hanging precariously above the head of our GDP like the sword of Damocles, ready and waiting to kill stone dead the already sluggish growth that is crippling the economy.
None of this is news to the politicians who look at the budget and to the economists and think tankers for whom it is prescient within their work. However, for one particular groupof people it sails past, untroubled to enter their psyche. That is of course, our political class.
This should concern us all, because the debt situation will not and cannot go away. In fact, our reluctance to face down the deficit and by extension, the national debt, means that we are setting future generations up to fail with an increasingly high debt burden.
Tackling the national debt is the idea behind the Liberal Reform fringe at this years Liberal Democrat Conference in Bournemouth. We have lined up an expert panel that draws experience from industry, think tanks and the public sector with a view to honing down on what the structural issues facing our country are and how we can maximise growth with a view to developing an economy that is truly functional.
We are pleased to start our panel with the widely respected Sam Freedman, author of Failed State, a Sunday Times Bestseller which looks at how the structural issues facing the state directly led to worsening outcomes and how we fix this problem.
Prior to working on this book, Sam was a policy advisor at the Department for Education and is a fellow at the Institute for Government where he has focused on government structures.
Joining Sam on the panel is the Centre for Policy Studies’ Director of External Affairs, Emma Revell. Emma has worked with the CPS and a number of trade bodies as well as writing a popular column with City AM, a paper aimed at the City of London. Emma brings vital experience from the think tank sector which the Liberal Democrats have often underused due to their policymaking process being highly internally focused.
We are also pleased to welcome Charlie Maynard who is the Member of Parliament for Witney, having gained the seat in the 2024 general election from Robert Courts. Before entering politics, Charlie had a highly successful career in wealth and investment. He brings a high level of industry experience to the table and his voice will be valuable in building an understanding of how industry can help grow the economy.
The panel will be chaired by Callum Robertson, a teacher, lecturer and author of “Education Policy: a commentary on contemporary education issues”. Callum co-Chairs the board of Liberal Reform and sits on the party’s Federal Board.
Liberal Reform look forward to welcoming party members to discuss this issue.
Taking Economics Seriously: How Can The Liberal Democrats Tackle The Debt Crisis. Saturday 20th September, 20.15-21.30, Highcliff Marriott, Blandford Room
* Callum Robertson is a teacher and member of the Federal Board. He is a Watford Borough Councillor.
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19 Comments
@Callum,
The UK National Debt is nothing remarkable by historical standards. It reached over 200% of GDP in the 19th century as a consequence of the Napoleonic wars and close to 250% of GDP in the 20th century due to wartime spending.
According to your line of thinking the post war generation would have had a tough time of it. If you’d be around in 1945 you’d have been looking at the high public debts and saying this “means that we are setting future generations up to fail with an increasingly high debt burden”.
You’d have been quite wrong. The post war generation has done well by all accounts! Go figure 🙂
Your mistake is to think that the government is a household. It isn’t. Everything has to sum to zero. If we want positive numbers on our balance sheet, someone else has to hold the negative numbers. That can only be Government.
Of course this doesn’t mean that there isn’t the potential for an inflation problem. That’s a possibility if everyone starts to spend too much. However, Japan has a Nation debt of over 250% of GDP and the sky hasn’t fallen in on them.
You are right that this is an issue. From 1945 onwards the debt came down, partly because the Attlee government ran a period of austerity (sugar was rationed until 1951, from memory), and partly because inflation averaged 4% for the 20 or so years after the war. With interest rates at current levels, debt at this level obviously impinges on our living standards (Our gilt yields are twice as high as Japan…)
I worry that there is so little data here and lots of nice homilies being put about. For Example Peter Martin “You’d have been quite wrong. The post war generation has done well by all accounts! Go figure”
Well sterling was devalued by 30% in the 1949 crisis. From the end of the war to July 1954 there was significant food rationing and Conscription only ended in 1960. Another forced devaluation occurred in 1967. Inflation peaked in 1975 at about 25% after the 1973 Oil crisis, and the “Three Day Week” and wide ranging power cuts in the winter of 73-74.
Strikes were rampant in the 1970s with the 78-79 Winter of Discontent being the apex. Then North Sea Oil and Gas was discovered just before Margaret Thatcher came to power and that plus mass Privatisation was a massive one off boost.
However there was a sort of social contract with income tax much higher (Basic Rate 33%) which paid for investment in decent investment in the future like the NHS, massive new house building, better education and Grants for students and free tuition fees.
Those born in the late 40s to the late 1950s who were bright did pretty well, but those born in the 1930s and earlier didn’t.
So “The post war generation has done well by all accounts???” Well not well as many want you to believe, Peter.
Debt for current expenditure is a bad idea: debt for investment fr the future is a good idea (if the investment choices are wise.) This is a distinction the government is trying to make and should be supported. Let’s hope the investment choices are wise. HS2 and lots of new submarines give pause for thought.
Remember that most of the national debt is money we owe ourselves. I have a sliver of it myself in National Savings Certificates. I pay my taxes to the government, they pay some of it back to me in interest on my loan to them. What goes round comes round. That’s what money is all about. In the economists’ trade it’s called the “circular flow.”
On a personal level (@ David Evans) I was born in the 1930s and think have done very nicely thank you. I’ve never feared unemployment, after the first few years have enjoyed a comfortable income and now enjoy a luxurious retirement So have most of my contemporaries. On the whole, tough, Britain has done very badly . To get a picture draw a graph of the Dollar/£ exchange rate against time starting with the £1 = $4+ to $2.8 to $2.4 to the current $1 and a bit and you get an an idea of what a mess Britain has made of the post war period. I wouldn’t blame debt: rather FPTP, the two party system and resulting “see-saw” policies, as David Steel put it.
Much of the mis-named “National Debt” is “owed “to the Bank of England, which is part of the governance set up of the U. K., so how can that be classified as debt?
H. M. G., having a sovereign currency, creates its money. How can money creation be classified as a debt as it is not owed to anyone?
Below is an article which might be of interest and/or assistance:
https://www.taxresearch.org.uk/Blog/2024/05/08/why-we-have-a-national-debt/
Sadly this article is built on a totally false assumption. The national debt is a book entry at the Bank of England, a ‘debt’ the UK government owes largely to itself as the BoE is owned by the state.
It is not a debt in the way most people understand debt, for example a mortgage or a loan and Steve Trevethan is spot on in his analysis.
Our party really must get away from treating government expenditure like it is a household. For far too long we have gone along with the talk of black holes and dreadful debt we are leaving to future generations. A currency issuing government cannot go broke, though inflation has to be strictly controlled.
I don’t often agree with Peter Martin, but his analysis is right here.
When the government spends money it is creating a debt on behalf of taxpayers. All financial instruments including money are a form of promissory notes. The debt remains whether it is the form of bonds, currency or other financial instruments. Whether you have a gilt, national savings certificate or cash under the mattress that is a debt owing to you.
When the government buys bonds the debt remains. It is merely transferring one form of debt (bonds) to another form of debt (bank reserves owed to commercial banks ho in turn have debts in the form of deposits and securities owed to clients).
All forms of debt are subject to depreciation in value or debasement through the process of inflation. Interest paid on debt, in part, mitigates the erosion of value by inflation. The higher the rate of inflation the higher the rate of interest or return required to maintain financial instruments as a store of value. The opposite applies in a deflationary environment i.e. interest falls but the value of debt in terms of real purchasing power increased and can become as burdensome as high interest rates for borrowers.
@ Mick, Steve is “spot on” in analysis only if we accept the mainstream narrative on the definition of debt. The BoE could, in principle, create enough ££ to buy up all bonds and other govt securities which count towards the definition of ND and “hey presto!” the government’s debt would disappear completely!
This clearly doesn’t make any sense at all. We’d be just swapping various types of govt IOUs.
So I’m agreeing with Joe when he says “When the government spends money (ie creates IOUs -PM ) it is creating a debt on behalf of taxpayers.” It’s the creation of all money, all govt IOUs, which should be counted as the total debt.
The liability part of the IOU is to accept these back as payments for tax albeit that the government has made the demands for payment in the first place.
But, having said that, you’re quite right that this is not a debt in the normal sense in which we understand debts. We do, as you say, have to stop thinking in terms of the government being a household Occasionally the government does borrow money in a foreign currency and these debts are as we ourselves understand them to be. These, though, are the exception to the rule. Most of the government’s debt is in its own issued currency.
If it wasn’t in debt it wouldn’t have issued any!
@ Peter Wrigley,
“To get a picture draw a graph of the Dollar/£ exchange rate against time starting with the £1 = $4+ to $2.8 to $2.4 to the current $1 and a bit and you get an an idea of what a mess Britain has made of the post war period”
The dollar to pound exchange rate doesn’t define any kind of supposed “mess” nor UK living standards. If it did we’d be much worse off now than we were in 1945!
Despiite disagreeing with Callum Robertson over the content of his article, I thank him for all the direct time, effort and drive that he put into it.
Thanks are also due to C. R. For his indirect and vital contribution to foregrounding a serious problem which harms democracy and results in avoidably poor government, not least in socio-economics/finance.
This insidious problem is the creation and promotion of harmful myths about our socio-econmic and finacial situations and the choices available. The myths about the alleged “National Debt” and the actual reality is but one example.
Here are a few more:
The national economy is like a domestic economy. (It is not because homes cannot create money as the state does.) P. S. If you should meet Rachel Reeves, please tell her this.
Tax comes before spend. (In reality, it is the reverse)
Taxtion pays for H. M. G expenditure. ( The principal purposes of taxation are to manage inflation and validate the currency. At most it contributes to H. M. G expenditure.)
The U.K tax system is equitable and so fair to all tax payers. (The reality is that it favours the wealthy and has the poor paying a disproportional high contribution.)
Thanks everyone for the comments – if you want to discuss how to discuss how to address this issue which is harming growth, then you’ll have an option to hear from our excellent panel on Saturday evening.
@ Peter Martin. True such a graph would not give a strictly proportionate picture of our relative decline, but it would show the trend. If we were still getting $4’s-worth of foreigners’ “stuff” (and services) for every £’s worth we we sold abroad we’d be able to afford all sorts of lovely things: bump-free roads (one of my priorities as a cyclist), social care, non-crumbling schools and hospitals, hectares of affordable housing, well-supported arts, just to name but some that we lack at at the moment.
@ Peter Wrigley,
The pound was worth over $5 in the mid 30’s. It was overvalued and caused UK exports to be uncompetitive. The only way to try to make them competitive was to reduce wages and deflate the economy. I would argue that this decision was based on who should pay for the outstanding costs of WW1. The ruling class determined that it shouldn’t be them as it would have been, at least to a large extent, if their accumulated £££ were allowed to become less valuable. The working classes lived more from hand to mouth so didn’t have the same priorities.
An overvalued pound was a problem at least since Churchill, as the Chancellor of the Exchequer, put the UK back on to the gold standard, fixing the pound’s value to its pre-WW1 parity. This controversial decision faced opposition from Keynes and others, who warned it would lead to unemployment and deflation, particularly impacting export industries.
The move to floating currencies in the 70s was generally a good thing. We saw prior to the events of Black Wednesday in 1992 just how Govts can come a cropper when they try to hold the value of its currency at higher than market level.
The variation in currency value allows economies to adjust to changing circumstances. The big problem of the eurozone is caused because many countries, Italy, Spain, France and Greece, need a cheaper currency whereas others including the Netherlands and Germany would benefit from a stronger currency.
@ Callum,
The problem with your “…expert panel that draws experience from industry, think tanks etc” is that it very much depends on which experts are on it. Economics is a odd academic discipline. In nearly all others, any divergence of views is quite small. Not so with economists. You can obtain whatever “expert opinion” you’d like to your question of whether or not the size of the National Debt is a problem.
The “experts” in the EU have decreed that ND should be 60% of GDP maximum. There’s no theoretical basis for saying this as far as I can make out. Even if we use the flawed household analogy, It’s like saying that someone earning £100k p.a. (after tax) shouldn’t have a debt exceeding £60k.
I can’t claim any formal qualification in economics but as there is no consensus in the subject that doesn’t really matter. We are all on our own. If there is one question I would like to put to the panel it would be:
” why do many Economists, who should really know better, persist with the idea that the Government is a like a household when it is clearly and obviously a currency issuer?”
You could then press them on just what a recognition of the currency issuer status actually means.
Hello Peter,
Good to hear from you, and thanks for your reply where you point out you and most of your contemporaries ‘have done very nicely thank you, … never feared unemployment, after the first few years have enjoyed a comfortable income and now enjoy a luxurious retirement.’, and knowing a little of some of your exploits I simply add “well deserved”.
However, I hopefully add that being a Lib Dem you clearly are one of the sharper pencils in the set (a frequent and fortunate Lib Dem trait) and coupled with living in God’s own county you are clearly twice blessed, and as such you would agree that you and your contemporaries are the among the winners of your generation, just as I do for most of my generation and probably most other Yorkshire Lib Dems do as well.
However, I would contend that those around in the 1930s and earlier who lived through the end of the Great Depression and then WW2 and those of your era old enough to be conscripted at the time of the Korean War had it very tough indeed. In comparison boomers like me had it a fair bit easier, but we also remember that many of those less fortunate ones living near us worked in very tough, physically demanding and downright dangerous jobs like coal mining, steel manufacture and fishing.
For them, Peter Martin’s contention that ‘The post war generation has done well by all accounts’ is certainly not their lived truth.
@ David Evans. Thank you for your kind remarks. I agree with you that those who were adult in the 20s and 30s had a tough time of it, some of them very tough indeed. My own unemployed father emigrated to Canada on the promise of work during the Depression, but the firm failed there too so he returned to Yorkshire. We were rescued by the War – the Heavy Woollen District provided the cloth for the uniforms. My point is that it is not just the post war Baby Boomers who have “never had it so good,” but pre-war babies as well. We had a revitalised eduction as a result of the 1944 Butler Act, free higher education in spite of the fact that the public debt/GDP ratio was in the region of 250%, never feared unemployment as already pointed out, and are mostly siting pretty now – those of us still alive (as a result of NHS care) that is. What I might also have mentioned is that for most of our working lives we paid income tax at around 33% and I can’ remember much grumblng about it: it just seemed a fact of life – what you did to belong to a civilised society.
@ Peter Martin. The alternative to devaluation was increased productivity. We’re still trying.
@ Peter,
“The alternative to devaluation was increased productivity.”
The alternative was to have lower inflation. It’s inflation that causes the value of a currency to fall. We see this everyday when we visit a supermarket. So if currency A depreciates in value faster than currency B it will also fall relatively on the forex markets.
Lower inflation could have been achieved by having the same fiscal and monetary policies as were followed in the interwar period. However, unemployment levels were high and productivity improvements were small.
There is no reason to expect it would have been any different in the post war period.
@ Peter,
“My point is that it is not just the post war Baby Boomers who have ‘never had it so good,’ but pre-war babies as well. We had a revitalised education as a result of the 1944 Butler Act……..”
Yes. You’re right. Those born in the late 30’s and slightly later, and not just in the UK, could well have experienced the wartime loss of a parent or even their own lives, but if they did survive unscathed they would have been young enough to benefit from the economic recovery we experienced in the post war period.
So maybe we could expand the definition of ‘the post war generation’ to allow for this.
We didn’t see a similar recovery after WW1. I would argue that this was largely because many countries followed the economic policies of Keynes (who we shouldn’t forget was a Liberal!) after WW2 whereas such an understanding wasn’t available earlier.
The only alternatives to a repressive western Capitalism in the 30s seemed to be Nazism and Communism.
If we could reach a national concensus on what is an acceptable level of debt for our country it would then be removed from the conversation and allow a better debate about our economy.