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.
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.