Britain’s debt shows just how bad a kicking we’ve had

The OECD published its Economic Outlook on Wednesday. If you are too tight-fisted to buy it you can read it online by clicking this image:

OECD Economic Outlook, Volume 2013 Issue 1 | OECD Free preview | Powered by Keepeek Digital Asset Management Solution

There’s plenty of interesting stuff in there but, as it’s something I haven’t written about for a while, let’s start with the public debt comparisons.

My graph from last time I looked at this has done the rounds on the interweb. I see it popping up in all sorts of places. So I decided to update it. This time, as the OECD report has figures which go further back and further forward, we can look at the debt over a longer period of time. Here, then, is a graph of government debt for the G7 economies against which we usually compare ourselves. I have used gross rather than net debt as the OECD says the figures are better for comparison and it’s the comparison that is the point of this post. Once again, I have left Japan out as its debt level is bonkers and it would mess up the whole graph.

Government gross debt as a percentage of GDP

2004-2012 with projection to 2014

OECD Debt 2013

Source: OECD Economic Outlook

This clearly shows the impact of the financial crisis on Britain’s economy and fiscal position. In 2004, Canada, France, Germany and the USA had debts of just below 70 percent. The UK’s was around 44 percent. That was pretty much the position until 2007. Then came the banking crash. Every economy’s debt went up but the UK’s rose faster than most. Having started from a much lower level, Britain’s debt to GDP level is now similar to the USA’s and not far short of France’s. The OECD predicts the UK’s debt ratio will overtake America’s by 2014. In short, then, all the major economies had a good kicking from the financial crisis but Britain had more of a kicking than most.

Why should this be? Well our bank bailouts didn’t help but the main cause, as this graph from the IMF’s Regional Economic Outlook shows, was a catastrophic collapse in revenues.

Screen Shot 2013-05-30 at 17.43.53

Financial services drove our economic boom and paid a lot of our taxes. When it crashed we suffered a double-whammy. A major part of our economy disappeared and it also happened to be the bit that needed bailing out. It is very unlikely that financial services will deliver the same growth, and taxes, as it did in the past and the bailed out banks are will probably be a millstone around our necks for some time yet.

But it’s also interesting to look at what has happened over the last two years. When I looked at this in 2011, the OECD were predicting UK government debt to be 93 percent of GDP in 2012. According to their most recent calculations, it was 104 percent. Britain’s debt has turned out to be higher than most people predicted. The government’s forecasts were revised by an extra £103bn in the three months before the budget.

It’s also worth remembering that there are two parts to a debt-to-GDP calculation. It can go up because debt goes up and because GDP goes down (which is what happened in 2009). The rapid rise in the UK’s debt is a reflection of its low growth as well as its high debt.

Compare this with the US, which has kept on pumping money into its economy to a point where its level of public spending will soon converge with ours. As you might expect, America’s debt-to-GDP level has kept on rising too but, by 2014, it will probably be lower than ours because its economy has grown much faster.

Now that’s not to say the UK would have done the same if George Osborne hadn’t turned the spending taps off so quickly. The collapse of one of our major industries was always going to hammer us and, as Chris says, there are some signs that the economy was running out of oomph anyway. That said, if we could have kept even some of the growth momentum we started to see in the dying days of the Labour years, that red line on the graph wouldn’t look quite so bad.

As Ed Conway noted yesterday, the longer-term projections in the OECD report are quite optimistic for the UK. It predicts that growth rates in the 2020s will outstrip those of Germany and the USA. Let’s hope it’s right. In the short-term, though, its forecast for our economy is crap. Consequently, it has the UK’s debt level overtaking that of France by the end of the decade! (A prediction even I view with some scepticism but that’s one for another day.)

Of course, there are arguments about how much of a problem government debt really is. If you have been following the Reinhart and Rogoff row you’ll know that opinion is divided to say the least. That’s a question I will return to at some point.

Regardless of whether or not (or how much) debt is a problem for governments, the sheer speed of the increase in the UK’s debt-to-GDP ratio after 2007 is a measure of how badly our economy was hit by the recession and the impact it has had on our government’s finances. If the OECD is right, we will recover sometime around 2020 but we will go into that decade nursing the wounds of the previous two. Better times will come but we still have a while to wait for them. It seems that those who predicted a lost decade will probably turn out to be right.

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10 Responses to Britain’s debt shows just how bad a kicking we’ve had

  1. Pingback: Britain’s debt shows just how bad a kicking we’ve had - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. SK says:

    US has also allowed the housing market to correct while UK government/BoE are doing all they can to support it (FLS/HTS or HTB).
    The high housing costs (see rents/house prices) could be the reason why the economy is not growing.

  3. Shane O'Mara says:

    Worth noting that R&R have taken probably their most serious pounding yet, as they did not address issues with respect to causality: http://www.slate.com/blogs/moneybox/2013/05/30/reinhardt_rogoff_debunked_yet_again.html

    To quote (but read the underlying links):
    “This does not have the fun dramatic flair of an Excel spreadsheet error, but this empirical analysis from Miles Kimball and Yichuan Wang is much more devastating to Reinhardt and Rogoff than anything we’ve seen yet. What Kimball and Wang did was actually set about to try to answer the causal question of whether high debt levels cause slow growth. And what they found is that there is no such evidence.

    This is important, because as Kimball writes on his blog it really does seem like there ought to be at least a little evidence of this. The same Keynesian theory that predicts that increasing your deficit during a recession can spur growth also seems to say that high debt levels will create “crowding out” when you’re not in a recession. But they ran the numbers and they don’t find it. The statistical association between a high debt to GDP level and slow GDP growth appears in their data to come entirely from the fact that slow GDP growth leads to a high ratio. You rarely get a definitive empirical study, but this is pretty striking evidence.” (see http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/)

    It seems clear the only time for austerity is during booms; austerity during busts is a disaster. There are clear policy lessons here. Will pols stop citing this 90% threshold story now?

  4. jayarava says:

    It is interesting to see how UK government debt was low till the crisis hit. This means that the government have been lying about Labour habitually over-spending. I’ve also contemplated that IMF chart showing the the problem with government finances is one of reduced of revenue not over spending. Obviously we are spending more than we earn, but the reduction in revenue is the causal factor. And thus we would expect policies aimed at increasing government revenue (through tax reforms or public investment for example) but all we get are public spending cuts that further depress the economy and therefore govt revenue.

    I think your story would be better fleshed out if you included data on private debt. It helps to make sense of the crisis and the changes in government debt and revenue. With private debt at ca, 440% of GDP (according to the 2013 Budget Report, but higher according to the European Commission and McKinsey Group) we can see why spending on goods and services is low – we’re paying down debt. Except the other thing that the chart in the Budget Report shows is that private debt did not fall in 2012 but stayed stable for the whole year. Deleveraging has stalled, and the only substantial reduction in debt has occurred in the finance sector (thanks, I think, mainly to the government’s QE strategy). Thus we can expect low spending for some considerable time. Suggesting that zero growth is the new trend and tax revenues will stay stagnant for some time.

    Without a very different kind of intervention (a radical version of what the IMF recently nodded and winked at) this depression will become entrenched.

    • benfitzg says:

      PFI

      Also it’s not hard to keep your tax receipts up when you are allowing, through “light touch regulation” due to the end of “boom and bust”, your banks to run fraud like mad and housing to get out of control. It all looks fine, until it’s not.

  5. Charles Cotton says:

    Things don’t look much brighter when you add in private debt and demography into the mix.

  6. madjay says:

    You argue that UK government debt surged between 2007 and 2011 (from about 45 -100% of GDP, by your graph) because tax receipts collapsed. Really? I just can’t believe that. Tax receipts would have had to shrink by enormous amounts, and they simply haven’t. If anything, they have been growing (see http://www.guardian.co.uk/news/datablog/2010/apr/25/tax-receipts-1963).

    • Rick says:

      Madjay, the graph you linked to shows tax as a percentage of GDP. If GDP falls (as it did after 2007) the slight fall on this graph then represents a serious drop. Even if the line stayed the same, tax would still have fallen.

      • madjay says:

        Hi Rick,

        The absolute amounts are there too, I’ve pasted them below. It’s true that tax receipts fell a bit in 08/09 and 09/10 compared with 07/08, but they were still comparable with receipt in 2006/07, and no way near low enough to explain the massive increase in debt since 2007. In absolute terms debt has increased by £500-£600 billion since 2007, and tax receipts can only explain a small fraction of that amount.

        Year Tax Revenue £billion
        2006-07 487.8
        2007-08 514.3
        2008-09 500

        2009-10 485.7

        2010-11 522.4

        2011-12 542.9

  7. Dipper says:

    “In absolute terms debt has increased by £500-£600 billion since 2007” so thats around £10,000 per person. or for a family of five, £50,000. With no end in sight.

    Is it just me or is that a truly terrifying number? There seems little chance that we will ever repay this in any meaningful sense, and ultimately we will simply turn on the printing presses and hand people back some newly minted notes. Inevitably this will cause the value of said currency to plummet and unleash inflation.

    Aren’t we in a very deep hole and digging as fast as we can? Isn’t the notion of borrowing to increase expenditure and magically stimulate us into recovery just obvious nonsense, about as sophisticated an argument as suggesting sprinkling magic money beans that will cause a gold tree to grow in our gardens?

    And isn’t there an obvious data point in central Europe that sticks out like a sore thumb, a country that didn’t borrow but worked hard at becoming skilled and productive? I mean, generally, if you want to succeed at something then finding a successful example and following it is a good starting point isn’t it?

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