Britain’s debt – cause for alarm but not panic

The news that October’s budget deficit was the highest since 1993 had all the Labour-hating newspapers jumping up and down with barely concealed glee. The suggestion that this is all Gordon Brown’s fault is being relentlessly pushed by his enemies. He spent lots of cash he didn’t have on public services so now we’re all in a mess, or so the story goes.

It is perhaps an indication of just how far gone the government is that it doesn’t try to challenge any of these assertions or, if it does, no-one seems to be listening. Even the traditionally Labour-supporting newspapers apparently no longer try to put this news into context, simply telling their readers the same story as all the other papers; that the UK has borrowed a hell of a lot of money recently.

Now it is true that the financial situation is dire but none of these figures make sense unless you look at what has been happening in other countries. The latest OECD Economic Outlook does just that and, for the first time since the financial crisis, its debt predictions for the UK are slightly better than those for the USA and France. Well, the short-term ones are; the long-term ones are still pretty horrendous, although not as bad as they were in the summer.

As this graph shows, the UK’s debt in 2007, just before the financial crisis, was considerably lower than that of France, Germany and the USA. By the end of 2011 the OECD estimates that it will be ahead of Germany’s but a little way behind France and the USA. The dark blue bar on the graph shows why. Since 2007, we have borrowed more than anyone else. This is where the stories about the UK being ‘the most indebted in the world’ are coming from. Yes, we’ve borrowed more recently but we were starting from a relatively low base.

Labour profligacy is a minor cause of this sharp rise in debt. Even the public spending of the mid-2000s didn’t take our debt up to the levels of other developed economies. What screwed us was the financial crisis. Our tax revenues collapsed and we had to bail out the banks. We have (or had) bigger banks and a greater proportion of people working in financial services than most other countries, therefore we got screwed even worse than everyone else. As this not-very-good ONS graphic shows, the financial sector interventions alone have added around 10% of current GDP to our public debt.

Of course, it would have helped if the government had not made spending commitments on the assumption that economy would continue to grow, but that is not the main reason for the spiralling debt.

The OECD has given the UK a warning about its debt but it has said pretty much the same to the French too. With debt levels projected to be close to 100% of GDP in two years time there is no room for complacency but most other large western economies are in a similar position.

If there is a lesson from the financial crisis, it is not about reining in public spending, although that will clearly have to be done over the next few years. Britain’s disproportionate hit from the events of the last two years has been largely due to our over-reliance on banking. Regulation will, to an extent, insure us against another shock in the world’s financial system. In the longer term, though, if we want to avoid another crisis like the last one, we should learn to make more of our money by doing something other than banking.

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2 Responses to Britain’s debt – cause for alarm but not panic

  1. Vince Lammas says:

    Great article drawing attention to OECD document (that I would never have read otherwise) putting the financial squeeze into real … if quite dense … perspective.

    Your narrative is helpful after hearing a representative of IOD talking about the spending squeeze on Wednesday.

    I also wonder how levels of debt now compare to those incured in the early part of the the 20th century when the UK faced the choice of “spending or destruction”.

    I know the British government spent decades paying off its war debts to the USA … and this was never even a story in my lifetime until the debt was paid off.

    Of course six years of 1.3% spending reductions will feel pretty tight and it could be worse if projections of growth are over-optimistic. If inflation remains low I guess a period of restraint won’t seem as bad as it sounds.

    I suspect it might be no worse than the recent recession or that in the 1980s.

    Moves to reduce government waste and improve efficiency are a sensible strategy and I have no worries about privatisation in priinciple, though each case must be taken on its merits.

    Panic measures which damage the economy, our society and value for money provided by public services must be avoided.

    As you point out though, this is a common problem and not one that should be blamed on the current government or poor, helpless Brown.

    Might an alternative to destructive cuts result in my (as yet unborn) grandchildren hearing a story in 30 years time about the UK paying off debts incurred to survive the crash of 2008?

  2. debt says:

    Britain went into this recession with one of the lowest debt levels in the developed world. According to the International Monetary Fund, Japan’s debt in 2008 was 198 per cent of national GDP, Italy’s was 104 per cent, Germany’s was 76 per cent, France’s was 65 per cent, the US’s was 61 per cent, and Britain’s was 43 per cent. All countries have rapidly increased borrowing during this recession – for very good reasons we’ll get to in a second – and Britain has nudged closer to the middle of the league table.

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