Apr 2009 27

Repaying The National Debt. Not.5


These days you don't even get a nice certificate to keep
A question we've been hearing a lot over the last few days is how on earth is the government ever going to repay all this debt it's taking on?

The short answer is that it's not going to.

Consider the history of HM Goverment debt.

On today's definitions, we've got statistics going back to 1974-75. And this is how they look, including the latest frightening Budget projections up to 2013-14:

As we can see, it's basically four decades of increase.

The only exceptions were two short periods in the late 80s and late 90s. Between 1986-87 and 1990-91, we managed to repay £16.5bn, constituting about 10% of the National Debt. And between 1997-98 and 2000-01, we repaid £40.9bn, around 12%.

But both of those periods saw exceptionally strong economic growth combined with falling interest rates. Moreover, in the overall scheme of things, neither actually made much of a dent in what we owed.

So HMG's record of debt repayment in the recent past is pretty weak.

But to get a fix on today's problem we really need to look further back - to the period after WW2 when we were struggling with the massive debts we'd accumulated in two world wars.

By 1946, our national debt was 250% of GDP – even worse than the 100% we're facing now. Yet, although it took us three decades, by 1974 we'd got it down to a manageable 50% of GDP. So how did we do that?

For this period we have to use the traditional definition of the National Debt, which comprised the liabilities of the National Loans Fund (for further detail read this). Here's how it looks for the three decades from 1945 to 1974:

So although we reduced our debt burden from 250% of income to 50%, we actually made no net repayment at all. In fact, we doubled our outstanding debt.

The trick?

Yes, that's right.

Over those three decades, money GDP increased nearly sevenfold, so as a percentage of GDP, debt fell sharply.

But here's the scary bit – of that sevenfold increase in money GDP, the vast bulk comprised inflation. In fact, over the period as a whole, inflation eroded the real value of government debt by nearly three-quarters.

Or as HMG's creditors might say, by debasing the currency, the government defaulted on three-quarters of what it owed.

Today's gilt investors are well aware of this history, and will not want to make the same mistake again. Which is why at the first sniff of inflation lifting off, they are likely to demand much higher higher yields (interest rates) on government debt to protect thmselves.

 
Taxpayers should be very concerned. The combination of high debt and high gilt yields could impose a debt servicing burden even greater than the burden we faced following WW2.
 
PS For a longer perspective, here's the Tresury's long series for the National Debt (old definition) as a percentage of GDP (1858 – 2004):

As we've said before, the two World Wars imposed a huge debt burden on the public finances. It was one reason why the UK economy struggled relative to our competitors right up to the 1980s.

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  • MP

    What about sparing a thought for the “fat cat” public sector workers of the Armed Forces representing you lot in Afghanistan?
    Pull us out if you don’t want to pay for war – or our hard fought for pensions!!
    Lets see some “wealth creators” fix bayonets…….

  • Steve Robson

    …or addressing the challenge of swine flu.
    I’m afraid our TPA friends are wedded to their obsession with “wealth creators” and just not bright enough to understand that some things have to be done in the public sector and that there would be no wealth creation at all without the public sector to back it up and underpin it.
    remember if they got their way, we’d be back to the days of cholera, typhoid, diptheria etc. Public Health officer…another non-job!

  • Brian Smith

    Steve
    Here we go again.
    Open umbrellas cause rain. The public sector underpins nothing and certainly doesn’t back up wealth creation.
    The public sector is the economic activity we can afford because we have a private sector.
    You cannot have a public sector without a private sector – look at the USSR, East Germany, North Korea etc – but you can get by perfectly well with just a private sector.
    Life just isn’t quite as nice as it could be. It’s all about balance.

  • MP

    Brian
    With respect – you are wrong – in my opinion of course.
    Both sectors need each other – if purely from a Defence, Law & Order & Health point of view enabling lawful and peaceful commerce.
    Perhaps you would prefer to work under a foreign invader, or under anarchy or plague? Would that not affect shares & trade?
    The private sector will not police our streets as effectively as public bodies. And you cannot say that private security firms that transport criminals to and from prison are shining examples of private enterprise.
    The USA – a country that I like and have close relatives resident in – is NOT a fair country when it comes to health provision for ALL irrespective of ability to pay for care.
    The last private sector armed force that I can think of was the East India Company: they did a lot of good didn’t they? Dragging the regular “public sector” army into a war with China over Opium and Tea.
    Finally – “efficiency savings” driven by PPI practices. I note the charge that the Treasury failed to provide the requisite equipment eg body armour in time for the Iraq invasion. The MOD has admitted liability over the Nimrod MR2 accident. The first SA80 Rifle was a joke. Private sector practices have limited applicability in some areas and can be downright dangerous – and helpful to our foes.
    MP
    PS Public sector workers pay tax too.
    PPS I am Ex-private sector & part-time self-employed.

  • Cyberman

    Have you ever seen somebody lick the chutney spoon in an Indian Restaurant and put it back? This would never have happened under the Tories.