A couple of weeks ago on Kiss FM (I know, I know, but it’s piped through the speakers at my gym) they were asking for examples of things you’ll say which will shock future generations. The primer was “I was born before Google was invented.” As I sat there, recovering from my workout, I thought of one: “I can remember when the public debt was less than 40 percent of GDP.”
Because, even if you look at the most optimistic projections in the last OBR report, I will be older than my mum is now by the time we get back to pre-recession debt levels. Going by most of their scenarios, I will probably never live to see it. For most, if not all, of the rest of my life, the public debt will be well over 40 percent of GDP.
Are the OBR just being a miserable bunch of doomsayers? Probably not. As I’ve noted before, their projections of ageing costs are less pessimistic than many others. Then last week, the IMF came up with growth forecasts significantly below the OBR’s, as this table from Duncan Weldon shows.
So, if anything, it looks as though the OBR may have under-estimated the costs of ageing and/or over-estimated GDP growth, so even their ‘Central’ debt-t0-GDP projections may be optimistic.
What’s the problem with that? We had debts of 100 percent of GDP as recently as the 1960s and at the end of the Second World War it was over 200 percent.
True enough but the reason it came down so rapidly during the postwar years was because our economy grew. And growth, of course, is almost always how governments reduce their debt levels.
Politicians who talk about ‘paying down the debt’ should, to borrow John Band’s phrase, be taken out and horsewhipped. Governments rarely pay down debt at all. Since the Second World War, governments have reduced the total amount of debt by small amounts in the early 1970s, early 1990s and early 2000s. For the most part, though, the amount of debt has risen.
There are two ways you can reduce a percentage. You can reduce the number on the top of the fraction, in this case the amount of debt, or you can increase the number on the bottom, in this case the GDP. And that’s what we did after the war, with a sustained 25 year period in which growth averaged around 3 percent per year. As time went on, the growth periods were punctuated by recessions but the booms still averaged something close to 3 percent annually.
Most of the reduction in our debt to GDP level, then, has been achieved by reducing the number on the bottom of the fraction. The debt has, for the most part, kept on rising but the GDP has risen faster so, relative to the size of the economy, the debt has come down.
All we have to do to get the debt down, then, is to grow the economy like we did after the war. And that’s where the problem starts. Based on current projections, growth rates of 3 percent over a sustained period don’t look very likely. The chances of seeing any repeat of those 4, 5 and 6 percent growth years we saw in the past are slim. Even the OBR’s 2.3 percent between now and 2020 is looking optimistic. In short, the boom, if and when it comes, is unlikely to be as boomy as those we have been used to.
There are all sorts of reasons for this, not all of which can be blamed on Cameron/Osborne or Blair/Brown. Some of it is caused by factors which affect many western economies. To avoid this piece becoming too long, I’ll discuss them in a later post but these pieces by Chris Dillow, Tim Worstall and Edward Hugh explain much of it.
Combine already high debts with low growth and increasing spending pressures and the debt graph goes ever upwards.
Is high public debt a problem? Again, one for another day but debts of over 60 percent of GDP don’t leave us with much room to manoeuvre, or much of a buffer against another recession or financial crisis. For the public sector, high state debt means that, even under a left-wing government, spending increases that can’t be shown to contribute to economic growth are likely to be vetoed. Ed Balls almost said as much earlier this year.
What is almost certain, though, is that, for the foreseeable future, we are stuck with a level of public debt we thought we’d left behind in the 1960s. Most people reading this probably won’t live to see the debt back at its 2007 level. It is just one more indication that we are now into an economic scenario quite different from that which most of us have been used to. Lower growth, higher debt and, for the public sector, permanent austerity. Gordon Brown’s 40 percent debt ceiling has been well and truly smashed. Most of us won’t live to see it rebuilt.