Do governments really pay off their debts?

Everyone is talking about debt at the moment. “The only way out of a debt crisis is to deal with your debts,” said David Cameron on Wednesday. He was going to tell us all to get into the spirit by paying off all our personal debts too until someone suggested that it might sound a bit condescending and, actually, it might not be such a good idea.

Ed Balls was on the case too. He plans to use the profits from the sale of the nationalised banks to pay off part of the national debt. Good luck with that one Ed.

So politicians on all sides are talking about paying off the country’s debt but do governments ever really do it?

Look at the total debt over the last 50 years. Apart from the odd dip, it goes ever onwards and upwards.

The total amount of debt reduced a bit in the early 1970s, early 1990s and early 2000s but, on the whole, it kept going up.

But now look at the same period with the figures adjusted for inflation.

By the standards of the time, those small amounts of debt in the 1960s and 70s were actually huge. Until the recent financial crisis, the public debt was lower, in real terms, than it had been in the 1960s but that wasn’t because governments had paid it off. Most of the ‘debt reduction’ was due to inflation.

Finally, let’s look at the debt as a percentage of GDP, the most commonly used measure of public debt.

This gives a completely different picture. The debt in the 1960s was massive compared to the country’s GDP. This was the long-tail left over from two ruinous wars and a depression. But, although the amount of debt went up over the next few decades, relative to GDP it went down because GDP was rising at a faster rate than the country was borrowing. An increase in GDP means you have more taxes so you don’t need to borrow as much and it also increases the number you are dividing the debt by, making it look smaller.

When politicians boast about reducing debt, this is what they mean. The amount of debt still increases but a combination of inflation and growth makes it smaller relative to the rest of the economy. If you can increase your GDP at a faster rate than you increase your debt, you are laughing. If it’s the other way round you’re stuffed.

And that’s our problem now. As I said last time I wrote about this, we are struggling to manage any growth at all, let alone anything like that which we achieved over the last half-century. PwC reckons that, even with further spending cuts, it will be 2050 before the UK gets back to the 40 percent pre-recession debt level. Low growth and increasing demands on the public purse will severely constrain the country’s ability to reduce its debt-to-GDP ratio. ‘Paying off the debt’, even in the way politicians mean, will be a very long haul.

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6 Responses to Do governments really pay off their debts?

  1. Jim says:

    An the GDP growth+inflation method relies on things that may not be possible now.

    a) the growth that was possible in the 50s and 60s due to technological innovations (many wartime created) and the fact that most of Europe was rebuilding from being bombed to b*ggery may not be repeated this time. The growth from 1980 to date is largely debt fuelled. No more debt = no more growth or low growth, unless we unleash some as yet undiscovered new wave of technology, that we manage to exploit, but not our competitors.

    And b) our creditors may not take too kindly to having their capital eroded by inflation, and may demand higher rates to continue letting us run a large overdraft.

    The most obvious example of what can happen is Japan. Their GDP was 440 trillion yen in 1990. In 2010 it was 477 trillion yen. They have had 20 years of stagnation after their credit boom and bust, with still no end in sight. We will be lucky if we get a similar 2 decades without a massive crisis at some point.

  2. Pingback: Do governments really pay off their debts? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  3. Frances Coppola says:

    And of course personal and corporate debt levels are much higher now than they were in the 1960s. The move away from social housing towards home ownership effectively transferred large amounts of debt from the public to the private sector. Figures for debt/GDP should take these kinds of transfers into account – but if they do the numbers are frightening. See the BIS report for a horror story!

  4. Bina says:

    So what are we doing as a nation outsourcing work to any country abroad rather than employing our own people in this country? Why are we buying googols of crap from China? Why are we encouraging people from the outer reaches of Europe to come here to work at below min wage so that they can scarper back to their relatively poor countries after saving as much of their hard earned £’s as they can? – leaving us with what? No work. Shoddy plastic products. Overused public services – not paid for by the people using them. Debt. More debt. Social problems. Alienation of the ‘voting’ public. Balance of payments nightmare etc etc etc.

  5. Frances Coppola says:

    BIS report “The Real Effects of Debt” presented at Jackson Hole. See Appendix 2 for a breakdown of household, corporate and government debt by country (2010 figures). UK’s household debt is very high, which is consistent with a property-owning society. Corporate about the same as Italy. http://www.bis.org/publ/work352.pdf

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