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.
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.