The one group I’d most expect to be drawing up a roadmap to a debt-free Britain would be true-blue Tories. Some of them at least understand the problem. In a new book by five Conservative MPs – After the Coalition: a Conservative Agenda for Britain, dubbed by the Independent as the Bible of the new Tory right wing, there is an entire chapter on the National Debt and the risk it presents.
As I have argued elsewhere, it is wrong to think that debt doesn’t matter… that so long as you can keep getting enough out of Peter to pay Paul then you’re fine. Where’s my evidence for that? One word: Greece. The country has become little more than a vassal state to its creditors. Being free of the debt that gives the markets their power means being free of being the next Greece.
The authors of After the Coalition make the right diagnosis – that the National Debt is a problem and a risk – but they issue the weakest of prescriptions: “Over the course of an economic cycle, Britain should run a balanced budget.”
Put another way: they want the Government to make no attempt to pay down the National Debt. That is what a balanced budget would mean; sure, no net deficit over an economic cycle to add to the existing debt, but no surplus either. Remember, this debt stood at just short of a trillion poundsat the end of August.
I find the Conservative MPs’ balanced budget prescription to be peculiarly weak as it appears in a book that is supposed to be a brave policy platform for Conservatives to embrace once free of us pesky Liberal Democrats.
If the Tories won’t grasp this nettle then Lib Dems should. The party has a long history of being honest about public spending. In the 2010 Liberal Democrat manifesto, we listed how we’d raise taxes (page 100) and how we’d cut spending (pages 102/3) to bring down the deficit. We were honest enough (page 97) to say that even all these tax rises and spending cuts wouldn’t be enough, and we’d have to find more.
This is nothing new. A quick search of the BBC News website unearthed a report from the 2001 election where Charles Kennedy explained what taxes would rise to pay for our spending priorities. If only Gordon Brown had followed our example rather than shortly afterwards starting his debt-fuelled spending spree.
Rather than the lukewarm policies proposed by the authors of After the Coalition, the Liberal Democrats should go into the next election with our own, tougher prescription – that over the course of each economic cycle, Britain should cut its National Debt.
In the short term that might mean taxing a little more or spending a little less, but over time interest payments will fall and also the power of the markets to hold us to ransom will be dramatically reduced.
Let’s make sure that what is happening to Greece never happens to us.
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19 Comments
It has been said many times, but I guess it needs repeating. If you try to cut the national debt too quickly, that will inhibit growth. With less growth (which in today’s circumstance will mean a recession), then less revenue will be collected through the exchequer and more will be spent on benefits as unemployment rises. So the national debt will get worse.
This appears to be happening now by the way, just like we said it would during the 2010 general election campaign if the Tories got elected. Many of us have been scratching our heads ever since when the party leadership decided to agree to Osborne’s strategy and timetable for deficit reduction on the day after the general election.
Everyone wants to reduce the deficit and the national debt, but we disagree on how to do it.
Good article Stuart. The idea that higher taxes will inhibit growth, is an argument put about by Conservatives who do not want to pay higher taxes. Higher taxes are absolutely necessary. Tax revenue can be used to stimulate growth, reduce the national debt, to maintain services, such as the health service, providing employment which helps to sustain the recovery, and improve the infrastructure of the country which will be good for the economy, providing employment and boosting efficiency. The idea that higher taxes inhibit growth is only true if the taxes are unfair ones which people cannot easily afford to pay. The idea that there is no spare money in anyone’s bank account is obviously nonsense. There is lots of spare money which people do not want to spend, which the Government needs to have recourse to in a national emergency, which is what this recession is.
Debt isn’t a problem, servicing the debt is the problem. It is accepted wisdom that when interest payments total 12% of GDP the risk of default is virtually inevitable. At the moment the UK’s debt interest is around 4.5% of GDP. Way below anything that would signal that the UK is heading towards a sovereign debt crisis. Yes we should pay down our debt, but not at the risk of investment, and growth.
I would be interested to know Stuart, what level of debt to GDP ratio you think the UK government should aim for.
@Geoffrey, yes indeed the way to reduce our debts is to ….borrow more money. It worked so well for Greece.
@ Michael so anyone who has any ‘spare money’ (otherwise known as savings) should have it confiscated by the government ?
I think cutting our debt is unnecessary, and as Geoffrey points out dangerous this early into our recovery (can we call it that yet?). Cutting our deficit is necessary, probably close to if not down to a balanced budget by fairly soon after the next election, but, with growth, a balanced budget would mean our debt to GDP ratio did fall so there is no need to immediately cut our debt directly. And not only is this proposal unnecessary but I think from a electoral point of view trying to out right-wing the Tories on this one may not be the best strategy.
@Simon – I think Geoffrey’s whole point was that we need to keep spending up to some extent in order to GDP & tax revenue’s falling, and so to avoid borrowing more (in fact that definitely and fairly clearly was his point). If our tax revenue’s go through the floor we will have to borrow more and frankly to shout “Greece Greece Greece” at anyone who suggests a moderate and balanced path out of this isn’t a valid argument against a rational economic point of view; we are in a different situation to Greece in many fairly vital ways.
“The one group I’d most expect to be drawing up a roadmap to a debt-free Britain would be true-blue Tories.”
I don’t know why you should think that. The previous Tory government had a very poor record in terms of the national debt, particularly during the Major years.
Funnily enough After the Coalition was outsold by a book by the Tory Old Right, namely The Future of Conservatism.
A couple of years ago and before the last election I wrote an article published here https://www.libdemvoice.org/if-you-go-down-to-the-woods-today-16448.html about why we were entering and going to remain for a long time in bear country because of a strange moral repugnance about debt. This quoted these words of Robert Reich, the USA’s 22nd Secretary of Labour and Professor at the University of Californ-I-A, Berkeley), they are worth publishing again:
“When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. … My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again… We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.”
It also pointed to an article by the Free Thinking Economist (who is now I think a SPAD to Vince Cable) here
http://freethinkingeconomist.com/2009/09/28/how-cutting-the-deficit-can-increase-the-deficit/ which showed exactly why cutting the deficit can increase the deficit.
What I find amazing is that neoliberals always bang on about the market, but they never accept what the market tells them.
For instance, the usual suspects came out to condemn QE2 this week, but the stock market which probably thought QE2 was coming in November went up 250 points in two days when it came in October. Up, not down!
The same usual suspects bang on about inflation, yet the money markets are charging 2.5% to lend to the government for ten years which tells us what people who stake money actually think is going to happen.
Tesco, in a fierce market, is launching a price war. The only organisations able to drive up prices are the monopolies (generally created by privatization) because they are as badly regulated as the banks were previously.
It may seem counter intuitive (but then when has intuition had anything to do with rationality?): we have very tight money at the moment (recognized again by the introduction of QE2) but the way to provide fiscal stimulus and monetary expansion is by funding the PSBR by paying for services with cheques written on the Government’s account at the Bank of England – QE through public investment.
In the first phase of recovery it is the public sector that has to step in to the void created by the private sector, and not the other way round.
Stuart you really need to educate yourself better, The UK is not Greece and looking at the two to discuss Debt is simply meaningless. The problems in Greece are so different, it is chalk and cheese and only the right wing media attempt to link the too, certainly no serious economist sees any link.
The total debt of the UK is still by international comparisons low, although it is growing fast, but as we are experiencing the worst fiscal crisis in 70 years this is not a surprise. UK debt is very mature and does not need to be rolled over all the time so the prospect of a funding crisis remains distant. We are not in the Eurozone (no thanks to the libdems) so we have a sovereign currency which is free floating and a central bank that can do what it did this week and create money to buy debt. Our debt is in pounds and not in another currency. Inflation will erode the debt anyway over a relatively short period which is what always happens (the UK debt was over 250% following WW2 today it is around 60%)
Greece has few levers to attack the debt and none of the above, the same is true of Ireland. Do not compare them to the UK as it is a totally different set of circumstances with the need for different responses.
Thanks for all the comments so far. TBH I think those that disagree with me seem to be misunderstanding my point, but let me respond to all of you:
@Geoffrey Payne – I think my prescription actually allows for the slow, gradual reduction of the debt, so I don’t think what I am saying contradicts your point. I am just concerned by the overall direction, not the speed. I think too many people think of the National Debt as meaningless. I think as we are seeing in Greece shows that it can be a ticking timebomb.
@Michael Hall – Thanks for the support. I think also it’s worth saying that tax revenue should at least cover public spending, over the course of the economic cycle. Requiring every annual budget to be balanced would be madness (and I think that’s what some commenters think I am arguing for, which I am not). Take Sweden – they have no National Debt at all, in fact they have a surplus… they have done this presumably because they don’t spend more than they get in over time (and those last two words are important). They can do it, and have a big social democratic state… what I am saying is not a prescription for a libertarian’s night watchman state.
@jayu – Again, as with Geoffrey Payne, my point doesn’t contradict yours… as you say, we both want to pay it down over time. As I said above however – this needs saying as some ppl seem to think it’s irrelevant. As to the overall %, I just want it to be less than now and falling (please note: this isn’t an argument for the % of GDP made up of public spending to be falling; Sweden has a big, fat state and no National Debt; it can be done).
@Scott – Where do I say this must happen fast or immediately? All I call for is the acknowledgement that it is a problem – Greece didn’t think it’s National Debt was a problem a year or so ago, how things can change very quickly. Get rid of the debt and you get rid of the fear. Sadly, because of the mess we are in this may take a long time, but as with any big problem, it begins with a single step… and that can be slow and small.
@Stuart Mitchell – The caricature of a Tory is someone who believes in sound money; yes, that might be wrong, but I had to start the blog post somehow and refer to the book I have been reading (written by Conservative MPs) that made me think about this… but I take your point.
@Richard – It has a very dull cover that one, but as they say… etc.
@Bill le Breton – If that is the case (what one might term the Labour argument) why is it that if you go back over the records we build up debt in the boom years just as much as the bust years? I don’t have a problem with government borrowing (please read what I wrote), merely that over an economic cycle we should have numbers that add up. As I have said above, Sweden can do it, Finland can do it. Yes, I agree with you that in the boom years you can pay off the debt, but boom years on their own don’t automatically pay it off… if (as Labour did and indeed as Tory governments before that did) you spend more in the boom years than you bring in and you spend more in the bust years than you bring in then you have a problem. Boom years don’t in and of themselves cut debt, that depends on what you spend. I suspect that what happens is that in boom years under Tories they cut taxes more than they should and in boom years under Labour they up spending more than they should. We should be the prudent party.
This discussion is too theological for my taste. The national debt is a means to an end. There can be very good reasons for increasing it, decreasing it, or keeping it roughly the same. It depends on where the country is. Right now the problem is less the national debt (easy to finance for the time being) than the budget deficit, which threatens to spiral the whole thing out of control if not handled convincingly.
But there is a good reason for thinking that we should be cutting the national debt over the long term. And that is the deteriorating demographic profile. As the working population shrinks, so does the tax base. But public commitments, especially health and pension, will rise. Cutting the national debt does not solve this problem – but it makes it easier to manage. Or to put it another way, our hidden liabilities are racking up, so a good idea to reduce the visible ones, unless backed by assets.
As Matthew Green has pointed out Stuart is asking the wrong question in his article; he should be asking ‘who will sort out our huge budget deficit’. A deficit that is higher as a percentage of GDP than either Spain or Portugal, and only marginally lower than ireland or Greece. In the month of August the UK deficit was £15.9 billion. In simple terms, we cannot pay off our debt if we are spending more than we earn ! If we cease to have a credible plan to reduce the deficit, borrowing will become increasingly more difficult and expensive. This is the Greek position, their government is unwilling or unable to cut public expenditure, and therefore has no hope of servicing the national debt.
@Matthew – A good point. Sadly, over the last few decades, in which we’ve had a generational anomaly – lots of baby boomers all earning with relatively few people at the start and end of life for whom they have had to pay – we didn’t (in the words of George Osborne) fix the roof whilst the Sun was shining. Perhaps this is another thing to add to the list of complaints that people from younger generations have against the baby boomers.
@Stephen – In fairness to me, I am talking about a different issue, not the wrong one. I’ve taken a step back and looked at the bigger picture. Yes, we need to fix the deficit before we can address the debt, of course.
Stuart you write, “Boom years don’t in and of themselves cut debt, that depends on what you spend. I suspect that what happens is that in boom years under Tories they cut taxes more than they should and in boom years under Labour they up spending more than they should. We should be the prudent party.” and I entirely agree and made almost the exact point here: https://www.libdemvoice.org/opinion-agreeing-with-nick-25352.html
when I wrote, “the country especially can’t afford a Labour Government in a time of plenty and certainly can’t afford a Conservative Government in a time of paucity ”
For much of that last 100 years the political cycle has lagged the political cycle delivering exactly this kind of combination, cycle after cycle – as you would expect.
The job of Liberal Democrats having worked themselves into a position of (limited) but real power is to break that cycle. But sadly instead of countering the role of Conservatives in this cycle we have reinforced it – the foot is firmly on the brake, monetarily and fiscally, at a time when it needs (subject to it being part of a global strategy) to be on the accelerator.
It is where we are now that should determine our policy: deflationary forces dominant, money supply stagnant and aggregate demand in retreat. The interesting point is that at this moment in time both Keynes and Friedman would be advocating the same policy.
B
sorry, that should of course be ‘over the last 100 years the poltical cycle has lagged the economic cycle’
Given that most of the debt has interest fixed in nominal terms, and that new debt can be issued at less than the current rate of inflation, moderate inflation (5%) is eroding the debt in real terms by about 2.5% a year. This gets rid of a chunk every decade – just as happened in the 1950s, when inflation was c. 5%. If or when the economy returns to growth, the ratio of debt to GDP will fall even faster even if we balance the budget.
http://www.huffingtonpost.co.uk/matthew-harris/new-wets-and-confused-tha_b_991057.html
You’ve built a straw man. A balanced budget doesn’t preclude the paying off of debts. Paying off debts is an expense, and a balanced budget is one where revenue matches expense.