We have to cap the national debt

July 15, 2011 10:25 AM

On July 12th Sajid Javid MP proposed a ten minute rule bill to cap the UK's national debt. Ironically, he is seeking to enshrine in law what Gordon Brown originally established as his two fiscal rules. First was the ‘Golden Rule’ that the government should only borrow to invest in capital investment, such as infrastructure. Second was the ‘Sustainable Development Rule’ which dictated that the national debt should not exceed 40% GDP and the budget deficit 3% GDP. Though these fiscal rules are sound in principle they were not adhered to in practice. One of the key problems was the lack of accountability; the Chancellor decided whether or not they applied and ultimately tore them up after the financial crisis. This is the problem Sajid Javid MP hopes to remedy.

[caption id="attachment_39140" align="alignright" width="211" caption="Sajid Javid MP proposes capping the national debt"][/caption]

Politicians are by nature short termist. They think about the electoral cycle rather than the boom and bust cycle. Gordon Brown was not the exception. He spent billions of taxpayers’ money and then left it to the next government to foot the bill for his excess. At first it might seem George Osborne is reversing this situation as public spending will fall from 47.7% GDP in 2009-10 to 39.9% GDP in 2015-16, borrowing will fall from £156.4bn to £29bn, and the budget deficit will fall from 11.1% GDP to 1.5% GDP. This would make it easy for a 3% budget deficit target to be introduced and new borrowing rules to be drawn up.

However, upon closer inspection we can see that fiscal prudence isn’t being pursued in every area. In cash terms public spending will actually increase from £669.7 billion in 2009-10 to £763.8 billion in 2015-16. When inflation is taken into account the cut to public expenditure being made by George Osborne is only 3.4%, less than Barack Obama is cutting in one year. Furthermore, the budget deficit will not be eliminated by 2015. It is the ‘structural budget deficit’ which is being eliminated. In practical terms this means the national debt will only stop growing in 2015 after increasing to £1.4 trillion. Fiscal responsibility cannot stop in 2015.

Sajid Javid MP’s ‘National Debt Cap Bill’ lays a clear path beyond 2015 with the suggested 40% GDP target for the national debt by 2025. However, the official Treasury figures do not reflect the true nature of the UK’s national debt, as this TPA report and video (below) demonstrate, as they do not include ‘hidden liabilities’ such as state funded pensions, nationalised banks, Network Rail, or PFI contracts which put the real national debt at £7.9 trillion (560% GDP). That’s £300,000 for every UK household. The official figures only make up 10% of the real debt. If Sajid Javid MP’s bill does not include these hidden liabilities within the Treasury’s national debt figures then we will fail to get to grips with the situation.

[iframe http://www.youtube.com/embed/jGAdzE13qMI 500 405]

One of George Osborne’s most significant innovations has been to establish the Office for Budget Responsibility to maintain honest and transparent forecasting. If the fiscal targets set out are to be maintained then the OBR has to publish hidden liabilities on the government’s balance sheet. The existing targets also need to be supplemented by an expenditure target, as we recommended in our book How to Cut Public Spending.

Of course merely passing a law capping the national debt will not actually reduce the debt in itself, just as the Bank of England’s inflation target and monthly letter to the Chancellor haven’t kept down inflation. That law can always be changed if it is felt to be necessary. It does however help to keep the state of the nation’s finances in the public debate and force politicians to think more long term when making fiscal decisions instead of pursuing short term electioneering.On July 12th Sajid Javid MP proposed a ten minute rule bill to cap the UK's national debt. Ironically, he is seeking to enshrine in law what Gordon Brown originally established as his two fiscal rules. First was the ‘Golden Rule’ that the government should only borrow to invest in capital investment, such as infrastructure. Second was the ‘Sustainable Development Rule’ which dictated that the national debt should not exceed 40% GDP and the budget deficit 3% GDP. Though these fiscal rules are sound in principle they were not adhered to in practice. One of the key problems was the lack of accountability; the Chancellor decided whether or not they applied and ultimately tore them up after the financial crisis. This is the problem Sajid Javid MP hopes to remedy.

[caption id="attachment_39140" align="alignright" width="211" caption="Sajid Javid MP proposes capping the national debt"][/caption]

Politicians are by nature short termist. They think about the electoral cycle rather than the boom and bust cycle. Gordon Brown was not the exception. He spent billions of taxpayers’ money and then left it to the next government to foot the bill for his excess. At first it might seem George Osborne is reversing this situation as public spending will fall from 47.7% GDP in 2009-10 to 39.9% GDP in 2015-16, borrowing will fall from £156.4bn to £29bn, and the budget deficit will fall from 11.1% GDP to 1.5% GDP. This would make it easy for a 3% budget deficit target to be introduced and new borrowing rules to be drawn up.

However, upon closer inspection we can see that fiscal prudence isn’t being pursued in every area. In cash terms public spending will actually increase from £669.7 billion in 2009-10 to £763.8 billion in 2015-16. When inflation is taken into account the cut to public expenditure being made by George Osborne is only 3.4%, less than Barack Obama is cutting in one year. Furthermore, the budget deficit will not be eliminated by 2015. It is the ‘structural budget deficit’ which is being eliminated. In practical terms this means the national debt will only stop growing in 2015 after increasing to £1.4 trillion. Fiscal responsibility cannot stop in 2015.

Sajid Javid MP’s ‘National Debt Cap Bill’ lays a clear path beyond 2015 with the suggested 40% GDP target for the national debt by 2025. However, the official Treasury figures do not reflect the true nature of the UK’s national debt, as this TPA report and video (below) demonstrate, as they do not include ‘hidden liabilities’ such as state funded pensions, nationalised banks, Network Rail, or PFI contracts which put the real national debt at £7.9 trillion (560% GDP). That’s £300,000 for every UK household. The official figures only make up 10% of the real debt. If Sajid Javid MP’s bill does not include these hidden liabilities within the Treasury’s national debt figures then we will fail to get to grips with the situation.

[iframe http://www.youtube.com/embed/jGAdzE13qMI 500 405]

One of George Osborne’s most significant innovations has been to establish the Office for Budget Responsibility to maintain honest and transparent forecasting. If the fiscal targets set out are to be maintained then the OBR has to publish hidden liabilities on the government’s balance sheet. The existing targets also need to be supplemented by an expenditure target, as we recommended in our book How to Cut Public Spending.

Of course merely passing a law capping the national debt will not actually reduce the debt in itself, just as the Bank of England’s inflation target and monthly letter to the Chancellor haven’t kept down inflation. That law can always be changed if it is felt to be necessary. It does however help to keep the state of the nation’s finances in the public debate and force politicians to think more long term when making fiscal decisions instead of pursuing short term electioneering.

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