Over recent weeks, a few left-wing commentators have been suggesting that the UK’s level of debt is not so bad after all and that we can live with it without cutting public spending to the bone. Earlier this month Madeleine Bunting said:
[E]ven if the public debt is high, it’s for good reason – and there’s no need for panic. September 2008 saw the biggest economic crisis in 60 years, perhaps a century, and it has – and will – cost a lot of money to weather. No one expected the British government to start to clear its huge public debts in the immediate aftermath of the second world war, with its cities as bombed ruins. In fact, the last of the wartime debts were cleared only a few years ago. Big crises are very expensive, and it takes time to get back on an even keel.
And yesterday, Sunder Katwala at Liberal Conspiracy questioned the need for cuts, pointing out that the UK’s debt was up to 150% of GDP in 1956, yet the government still managed to reduce it over time as the economy picked up.
Articles like these are a welcome antidote to the “Britain is bankrupt! Cut everything now or we’re all going to hell in a NuLabour handcart!” pieces churned out by the Daily Mail, the wilder fringes of the Telegraph and a hundred echo chambers in the blogosphere. Even so, the nothing-to-worry-about tendency are over-stating their case too.
Britain isn’t going bankrupt. This handy chart from the BBC (Hat Tip: Freemania) shows that the UK’s level of debt, while much worse than anything we have been used to in recent years, compares favourably with other G7 economies.
The UK went into the recession with the lowest level of debt and is predicted by the IMF to have debt levels of around 100% of GDP in 2014, putting us somewhere in the mid-table. But while that doesn’t look too bad in relative terms, it also tells us something more worrying. The UK’s debt level is due to overtake those of France, Germany and Canada because, at the moment, we are borrowing a hell of a lot more than they are.
The comments thread in Sunder’s post got into a discussion about the difference between the debt and the deficit. As Rob (No.12 in the comments) succinctly put it:
The debt is the total money owing. The deficit is the amount we’re adding to the debt in a given year – the amount we spend that is greater than the amount we take in revenues.
The UK’s problem is that it currently has the highest deficit in the developed world. In other words, we started off with a low level of debt but we are adding to it a lot faster than anyone else. From a lower starting point, by 2014 the UK will have raced ahead of Germany France and Canada. This graph from the Economist illustrates the problem. Between 2007 and 2014, the UK’s debt level is predicted to increase faster than that of most other G7 countries.
It doesn’t take much imagination to predict what would happen if we carried on borrowing heavily – eventually we would overtake even those with the highest debts. Indeed, that is just what the OECD forecasts show. If you were to re-draw the graph to include the debt levels in 2017 (which some geek is bound to do but I can’t be arsed) the picture would be more worrying. The OECD (which uses slighly different figures from the IMF) estimates that UK debt could reach 120-125% of GDP by 2017. This would put us about where Greece is now and with higher levels of debt than any other G7 country part from Japan. And yes, probably even higher than Italy! (See page 231 here for the detailed table.)
The optimists like to think that, by this time, economic recovery will have restored the government’s tax revenue so that it can start reducing the deficit without too much pain. The problem with looking back to the precedent of 1956, though, is that the UK economy is somewhat different now. The growth which enabled the postwar debt levels to be reduced is unlikely to be repeated. Any recovery is likely to be slow and shaky. If we rely on economic growth to dig us out of our fiscal hole, we will have to wait a long time.
Despite what some optimistic lefties say, public spending cuts are inevitable. The deficit needs to be reduced over the medium term and that implies a serious reduction in spending. That is not to say that we need to go mental and cut straight away, as the shrill voices on the right keep telling us. Slashing spending too soon could endanger the fragile recovery. Even the IMF has warned against large-scale cuts during the next financial year. After that, though, the painful process of deficit reduction will need to start.
Our current relatively low level of debt allows us to avoid immediate public spending cuts but our high deficit means that the cuts will have to be made sooner or later. To paraphrase the Tory election slogan, we can go on like this but not for very much longer.