Monday, 24 November 2008

UK debt: it's worse than you think

With occasions like the pre-budget report, it's always worthwhile looking at some of the detail which don't get lots of publicity.

A lot of attention has been focused on the mammoth amount the Government is going to be borrowing next year, which is predicted to reach £118bn. The Conservatives have also been trumpeting the total amount of national debt, which is predicted to be over £1 trillion.

But that headline figure is somewhat misleading, as the total has actually increased every single year since the war. It's far more relevant to look at the figure for national debt compared to GDP.

Labour claims the reason it's able to borrow so much is because it reduced the national debt from the level it inherited from the Conservatives in 1997. Indeed it did - the level of national debt was 42.9% in 1997 and that dropped to 31.4% in 2002. But since then it has been creeping back up again - to 36.3% in 2007-08. It's estimated to be 41.2% this year.

And that's not good, because if you look at the full series of stats since 1975, the first year they were collected, the figure has tended to rise during times of economic downturn - as you would expect when the Government needs to borrow more - and fall during economic upturns. But under Labour over the last few years, it's actually been rising during an economic upturn. Labour is not nearly so well placed as it likes to pretend.

And things get worse if you look at where we're heading. The national debt is predicted to rise to a whopping 57.4% in 2013-14 (table 2.2) - significantly higher than the previous record figure of 53.8% in 1976, a year when the UK had to arrange a loan from the IMF to cope with its wretched public finances.

All this assumes that the recession is relatively short, and that this fiscal package works in stimulating the economy. But if the VAT cuts don't work, as I believe they won't due to the massive levels of private debt, then things will be a whole lot worse.

If the Government's forecasts are, as usual, unduly optimistic, then taxes are going to rise by much more than it expects or spending is going to have to be significantly curtailed. But somehow or other, more than one pound in every two of everything we produce in this country is going to have to be spent on servicing our sky-high levels of debt. And that's not good.


Stephen B said...

It also suggests that, unless the criteria are changed, this mess would rule out entry to the Euro for an awfully long time.

And before I get accused of thinking that's a good thing, let me say I would much rather have the debate about whether it was appropriate to enter the Euro in the context of a sound economy than the looming basket-case Gordon has bequeathed us.

Politically, what do you think this crisis leaves us? I suspect that the next election might be a good one for any party to lose and also think that we might be heading into Hung Parliament territory again.

Bernard Salmon said...

I think politically Brown for some bizarre reason has benefited from the current crisis, but I'm not sure it'll be enough to save him, especially if this stimulus package doesn't work. However, I think it's unlikely to be the sort of Tory landslide which seemed possible after Crewe and Nantwich, for instance.
But I agree that it might well be a good election to lose.

Stephen B said...

Just to follow up on your point about the high % of national debt - Market Oracle is suggesting that

"Even if one used the governments preferred measure of recording public sector net debt that excludes all of the bailouts and nationalisations to date, this still shows that UK government debt will rise to 54% of GDP by the end of 2009 and bust through 60% of GDP by the end of 2010.

However taking account of the bailouts and nationalisations government debt by the end of this year will sit at 81% of GDP, rising to 126% of GDP by the end of 2009, onward and upwards to 148% of GDP by the end of 2010.

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