Johann Hari has posted on his blog an article that originally appeared in GQ. In it he argued that concern about the national debt is the "biggest lie in British politics". There are a few other arguments which we'll come onto later but this is the central one:
"As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the past 250 years. Read that sentence again."
This is one of those facts that sounds really impressive as a soundbite, but as a serious argument that we shouldn't take the debt issue seriously doesn't stand up to scrutiny at all. Here are just two big reasons why, and then some other problems with his article.
It isn't true if you look at the real national debt
These days that official debt figure is only part of our total liabilities. We will also need to pay for the unfunded, gold-plated pensions of public sector workers. For incredibly expensive PFI deals struck to keep them off the balance sheet. And for other items like deficits in the funded Local Government Pension Scheme and decommissioning early nuclear plants.
Mike Denham, a former Treasury and City economist, looked at the real national debt for us. Depending on whether or not you want to include the liabilities of nationalised banks the real national debt is somewhere between five and eight trillion. Most of that unofficial debt is new. PFI wasn't around in the 19th century and neither were old nuclear plants or significant public sector pensions (the public sector was much smaller). Comparing the official debt 100 years ago, let alone 200 years ago, with the official debt today isn't meaningful.
Why did we borrow money before?
The pattern of the public finances for most of that 250 years was pretty simple. We borrowed to fight wars and paid the money back in peacetime. When we wanted to defeat a bloody dictator like Napoleon, the Kaiser and then Hitler we borrowed a staggering amount of money. We could get away with high spending on the understanding it was only for a limited period. Thankfully wars end and, when they did, we would slash spending on Spitfires, artillery shells and all the other things we needed to fight the war. The credibility that we would always do so meant that investors were willing to give us a lot of leeway.
While we are involved in a number of wars today, defence spending is only about six per cent of total expenditure. The huge public sector deficit is the result of spending on welfare, health, education and other services. That won't "end" in the way a war does.
The only reason why investors are still confident they can lend us money and then get it back is that they trust that we take it seriously and are willing to make necessary cuts. Before the election last year the credit rating agency Moody's (like them or loathe them, their judgement is critical) wrote that:
"Moody's assessment that the UK government exhibits a high degree of debt reversibility is supported by the trend over recent months towards an apparent consensus among the public that fiscal retrenchment (including cuts in expenditure) is both inevitable and desirable."
If that trust is lost our debt will get a lot more expensive a lot more quickly. We will then face a very real prospect of the kind of crisis that Portugal is facing. There is no particular level of debt that the economy can sustain before we face a fiscal crisis. It's all about when investors conclude that they might not get their money back, that we will default or print the money. If it looks like we are a nation of Johann Haris our credit rating will collapse in days and the bond vigilantes will materialise.
Are we going to be paying off the debt?
Pete Hoskin has written a brilliant article for the Spectator Coffee House where he points out that when Hari says we are being asked to "pay off our debt rapidly" that is flat out wrong. Actually, we are going to "add somewhat less to our debt each year". After all, we will still be borrowing in 2015-16 according for the Office for Budget Responsibility. Confusing debt and deficit is one of the worst vices of British politicians and commentators today. In historical terms, the deficit is huge, as Pete showed in a graphic I've included to the right.
That is the thing about the claim above. Our deficit is so large that our debt is growing by leaps and bounds every year. The debt this year is only part of the problem we're facing.
Cuts haven't worked in Europe
Ireland, Greece, Spain and Portugal are in trouble because of the euro, not responsible fiscal policy. Combining overheating economies with an interest rate set for bigger, sluggish member states like Germany led to a massive asset boom. When that turned to bust, and they bailed out their banks, they were left with enormous liabilities. The alternative to austerity there isn't pain free Keynesian stimulus but at least partial default and probably breaking up the eurozone. And austerity there doesn't just mean cuts in spending, it means very substantially reducing wages as well because they can't devalue their currency and need to improve their competitiveness relative to Germany. Again this is a result of the euro and not analogous to the Government's programme of spending cuts here.
Guess who recommended that we make the same mistake as Ireland back in 2003? That's right. Johann Hari. He's the one who should be embarrassed about how his policy recommendations are playing out there, not us.
We need more borrowing as a Keynesian response to avoid a Depression
Hari makes grand claims for the achievements of Keynesian stimulus in ending the Depression:
"Wherever it has been tried, it has worked. Look at the last Great Depression. The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt. The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shriekers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it."
By contrast, here is a key economic advisor to President Obama, Christina Romer, in an article for the Encyclopedia Brittanica:
"Fiscal policy played a relatively small role in stimulating recovery in the United States.
United States military spending related to World War II was not large enough to appreciably affect total spending and output until 1941."
The critical thing in ending the Great Depression was expanding money supplies, as a result countries like ours that left the Gold Standard early recovered more quickly. Romer's account isn't uncontroversial, but it's a good guide to the academic mainstream view. Probably why she and not Johann Hari was asked to write the Encyclopedia Brittanica entry.
He also attacks the idea that spending cuts will improve economic confidence. What he is getting at is Ricardian Equivalence, though he doesn't mention it. I've discussed the evidence on that in earlier posts.
If we want to be Keynesians then fair enough, but Keynes would be horrified at the amount we were borrowing going into the recession. If Johann Hari can point me to his articles calling for fiscal restraint in the years before the financial crisis and recession then I'll take his appeals to the spirit of Keynes a bit more seriously.
Why are the Government making "massive cuts"?
The Government aren't making massive cuts to overall spending. They're reducing it in real terms by less than four per cent over four years. At the end of the period it will be at about the same level as in 2006-07, after a decade of Gordon Brown. The reason why the cuts for some services are sharper than that is that we're spending on different things. We are sending more money abroad in the form of international aid and contributions to the EU. But we are also paying a huge amount in debt interest.
That's why taking Johann Hari's advice wouldn't, in the end, mean less draconian spending cuts. If we let the debt rack up then so will the amount we have to pay in interest and that will mean even more money that isn't available to pay for services. Along with the weekend's marchers, he is promoting fiscal policy which will avoid cuts now but mean cutting more, later.