Public debt – how does the UK compare?

The OECD published its latest economic outlook yesterday. As usual, it’s packed with interesting information, to which I will probably refer in the coming months.

Among other useful stuff, it contains the most recent government debt projections. I have stuck these on a graph, together with the historical data for the previous 4 years, plotting the UK’s debt against that of other economies. I have included those countries against which we usually compare ourselves, leaving out Japan because its debt level is bonkers (200% of GDP) and it would screw up the graph. In any case, Japan is something of a special case because most of its debt is owned by Japanese people. For comparison, although their economies are much smaller, I have also included Greece and Ireland, because everyone is talking about them at the moment.

 Government debt as a percentage of GDP

As these figures show, in 2006 and 2007, immediately before the financial crisis, the UK’s debt, as a percentage of GDP, was considerably lower than that of most other major economies. Ireland’s was lower still at under 30 percent of GDP.

The financial crisis gave governments a triple whammy. With fewer businesses and employees paying tax, revenues dropped. Then, as unemployment rose, welfare payments went up so more had to be borrowed to make up the shortfall. Finally with GDP falling rapidly, the public debt as a proportion of GDP was magnified.

Look what happened when the financial crisis hit in 2008. The debt levels of all countries rose but the UK, with its large financial services industry in ruins, saw its debt increase more quickly than most. Ireland, its economy dependent on a boom fuelled by an unholy alliance between banks and property developers, saw its GDP collapse and its debt shoot through the roof.

This shows clearly that the jump in debt came about mostly as a result of the financial crisis rather than excessive government spending. Sure, Gordon Brown’s spending commitments, which were made on the assumption that the economy would keep growing, made the problem worse but the spending of the mid 2000s wasn’t the primary cause of the rocketing debt. The deficit was on its way down in 2006. It was the loss of tax revenues and GDP from 2008 onwards that racked up the steep rises of the last three years. In Ireland’s case, this is even clearer. To achieve such a debt hike through public spending alone, Ireland’s government would have had to be on a drunken shopping spree. It was the catastrophic collapse of its main industries, banking and construction, that did for Ireland.

These figures also show how spurious the comparisons with Greece were. Greece was in the fiscal poo well before the financial crisis and is even deeper in it now. The UK has nowhere near the Greek levels of public debt, nor is it ever likely to have. 

Compared to other countries, the UK’s debt is not especially bad. Of course, no-one wants to have a debt which is forecast to approach 100 percent of GDP by 2012, but most other economies are in a similar position. We also don’t want to keep adding to it, which is why the government is keen to get the deficit down. Whether it is best to do that by cutting, so spending goes down, or stimulating the economy, so that GDP and tax revenues go up, is the crux of most political debate at the moment. Even the OECD, which broadly supports the need for spending cuts in the UK, warns that the government may be doing too much too soon.

Where the debt graph goes after 2012 depends on how far public spending cuts and increased tax revenues can reduce the rate at which we add to the debt and how far GDP growth can reduce it relative to the size our economy. By then, we will know whether George Osborne’s gamble has paid off or just made things worse.

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27 Responses to Public debt – how does the UK compare?

  1. Pingback: Public debt – how does the UK compare? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. David Goddin says:

    Interesting to see the comparison and it makes it very clear of the challenge to reduce through austerity measures but also grow through economic stimulation.

    To me this talks about greater onus on the individual (Big Society?) but is probably only a prelude to what we should expect in terms of pensions. The World Bank produced an interesting report during the crisis on this http://bit.ly/7SwpVK . Take a deep breath first then think very carefully about whether you really want to put on your long term goggles!

    • If a nation (UK) exports c40% into a declining economy (Europe) how is it expected to commercially climb its way out of debt?

      While austerity is key, it looks like the financial sector will be the commercial area that broke the nation and might yet make the nation strong again. Never before has its raw material been available at such reasonable costs.

  3. Rick says:

    Thanks for that David. I’ll read and digest it later. I’ve got some vague ideas for a post around this so your linke was very timely.

  4. Jez says:

    There’s a lot of sophistry in the current government’s focus on debt – or more specifically, on “deficit”. At the risk of sounding pedantic, George Osborne (in his first Budget, for example) has specifically made reducing the “structural deficit” the core of his cost-cutting policies. That’s an important bit of spin as structural deficit is not the same as the actual deficit and he seems to have got away with it.

    This government actually took on an improving situation in terms of deficit. Structural deficit, however, is an artificial concept that depends on assumptions chosen – including some which are pretty arbitrary and can therefore be chosen to make the picture appear as rosy – or as bleak – as one wants.

    I’m sure someone more economically literate than I can explain further, but as a simple spin doctor, I’d suggest that by focusing on structural deficit, Osborne can spread alarm and justify cuts more easily – but not for true economic reasons.

    • People are still waking up to the complex realities of national debt and unreliable commercial prospects which may be in the doldrums for over a decade.

      Many still hail the idea’s of LAB’s toxic top tier. Yet its obvious they should never be allowed remotely close to policy and economic decision-making in the UK ever again.

  5. Rick says:

    Jez, did you ever see this from Chris Dillow? He describes the structural deficit as a pseudo-scientific myth.

    http://ow.ly/53F2Q

    The government has pledged to reduce the deficit but, to justify this, they often cite the high level of government debt. Many people don’t know the difference and assume that because UK deficit is the 3rd biggest in Europe our debt must be the 3rd biggest too. (I’ve had arguments with some intelligent and otherwise well-informed people on this subject.) This confusion serves the government well. As you say, it helpd to spread alarm and justify cuts. The fewer people there are who understand this stuff, the better for politicians who want to pull the wool over their eyes.

  6. Paul Clarke says:

    Beautifully clearly put. We’d be so much better off if these simple messages were hammered out to the general public. But how to do that, hey, when there’s so many vested interests stacked against doing so?

  7. Jim says:

    “the jump in debt came about mostly as a result of the financial crisis rather than excessive government spending”

    So how would you describe government spending that is based on the unsustainable revenue from a financial/property bubble?

    Prudent? Wise? Sustainable in the long term?

    Gordon Brown spent not only the unsustainable revenues from a property bubble (that would be bad enough) but also exceeded those revenues and had to borrow at the height of an economic boom. How can that be described as anything but excessive?

    Public spending was £362bn in 2001. Had it increased at 5% pa for 10 years (remembering inflation was often under 2% at the time) it would now be about £587bn. Tax revenue was approx £545bn in 2010/11. Thus our deficit for the year would be c. £40bn, and as we would have paid down debt in the previous decade, would now be in an enviable position to borrow what we needed to boost the economy and bail out the financial system. Now THAT would have been prudent.

  8. ian brooks says:

    Can’t even begin to tell you how stupid and flawed using debt as a proportion of gdp is, when the gdp figure itself was inflated by a credit bubble and unsustainable and rocketing house prices. Both of which then contributed to the crash. The gdp figures were not predicated on sound growth so to use them to massage debt figures is downright stupid.

    • Rick says:

      I find this comment rather strange. You clearly know a lot about this, so much that you dismiss a measure used by the OECD and IMF as ‘stupid’, yet you fail to give us the benefit of your wisdom.

      How would you measure public debt then and how would you compare it to that of other countries?

      • ian brooks says:

        Well the total debt figure (adjusted for inflation) would be a start when comparing the uk economy at point a with point b, now as far as i know the debt figure in the uk grew at a far bigger rate than inflation over that period and that’s before you factor in ‘off the book’ borrowings on pfi etc etc. What i also know is that at a time when tax receipts were at a high to run a deficit and borrow but then simultaneously claim that you are reducing debt is disingenuous.

        In fact Ed Balls has just been on c4 claiming that before the financial crisis labour ‘reduced debt’ – he is being deliberately slippery, he is talking about debt:gdp but the average punter wouldnt know that and Balls is quite happy to give the impression that the net debt figure shrank when infact he knows that debt as a figure has increased. Its downright dishonest.

        The problem with debt:gdp ratio is that it ignores the economic cycle, and the same figure of debt will be a different proportion dependent on the stage of the cycle.

        Maybe stupid was too harsh but i think its not far wrong IF you use it as the only measure and as a justification for borrowing at the height of the boom. You quote the IMF and the OECD which is fine but they dont just use this measure in isolation and there are other measures and considerations that go alongside it.

  9. Iva C Rogers says:

    Yes an interesting post well illustrated by that graph. So what about your stance on Greece and whether we should all put our hands deep into our pockets for the odd bit off change that might be hidden there?;)

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