The debt delusion

Cameron's Conservatives are economic illiterates

I am sick and tired (tired!) of listening to Tory politicians, free-market economists and right-wing pundits go on and on about our national debt, pushing the ludicrous idea that we are going to default on it. These are the same close-minded ideologues who spent years promulgating the virtues of the neoliberal, deregulated, financial capitalist model that so utterly and miserably failed in the autumn of 2008. So you can imagine how my stomach churned this morning as I read the Guardian's front-page headline: "Cameron: UK could default on its debt".

I'm sorry, but this is nothing short of economic illiteracy and political posturing. The Conservative leader said:

You can get to a level of government debt where, not that it becomes certain that people will cease to lend you the money, but you start running risks of them demanding higher premia, higher interest rates. Or you run the risk of not being able to meet your obligations.

This is pure and utter nonsense. Suffice it to say that we are not going "bust" and David ("I have never predicted that it is going to happen") Cameron knows this. However, as I have neither the time nor the inclination to deconstruct the Tory position on debt in any detail, let me point you in the direction of others who are far more knowledgeable on this subject than the Tory leader and his ill-informed speechwriters.

1) The economist Paul Ormerod, writing in the New Statesman in May:

Why . . . have the media become fixated by the projected increase in debt? The figures are big, almost unimaginably so. But when the British experience is put into an international context, the hysteria does not appear to be justified. As I write these words, for instance, I read that the Italian government has revised upwards its forecasts for public-sector debt relative to GDP. In 2009, Italian debt will be 114 per cent of GDP, rising to 118 per cent in 2011. On a comparable basis, Britain's figures are 72 and 87 per cent, respectively. These Italians, we may shrug, they do things differently. But what about the prudent Germans? In the 1997-2006 decade, before the present problems started to materialise, German public-sector debt relative to the nation's economy averaged 64 per cent. In the United States, the average was 61 per cent, and in Japan (due to its own recession of the early 1990s) a huge 164 per cent. In the UK, it was just 46 per cent. And literally every government is projecting large increases in debt.

Again: should this worry us? Well, we can usefully think of the ratio of debt to GDP as being similar to the size of an individual's mortgage relative to his or her income. And just like a domestic mortgage, there are two separate components, the interest payments and the eventual repayment of the capital sum.

So, in the UK, for example, the government offers for sale what are known as gilts -- from the phrase "gilt-edged", meaning that if the British government and not Johnny Foreigner backs them, you are certain to get your money back. The gilt states the interest that will be paid, and the date the government will repay the holder (who may very well not be the original purchaser, as gilts can be traded just like shares). The repayment date could be in just a year, or two or three decades hence.

But unlike with a personal mortgage, repaying the capital sum isn't something governments, at least those in stable western democracies, have to worry about too much. When one tranche of gilts comes up for repayment, it isn't usually a problem for the government just to issue a new set if it wants to. Obviously, if all the £1.4trn debt came up for renewal at the same time, there might be problems in persuading investors to refinance the whole lot. But provided the Bank of England is reasonably professional and astute, the repayment dates can be spread out over time.

Since the Second World War, all governments have had an important ally in their programme of rolling over and refinancing their debts -- inflation. When a pension fund, say, buys part of a new issue of gilts, the amount that the government agrees to repay on the due date is fixed in money terms. But inflation means that when payback time comes round, this fixed amount is worth much less.

2) The Nobel Laureate and Princeton University economics professor Paul Krugman, writing on his New York Times blog in July:

Hmm. My attention has been on other things, so it's been a while since I looked at British bond rates and CDS spreads. But here's where they are right now: ten-year bond rates at 3.737, compared with 3.337 for Germany; CDS spread at 71 versus 35 for Germany. Really not so bad. But, but, wasn't Britain supposed to be hurtling toward bankruptcy?

3) The former director of the Institute for Fiscal Studies Andrew Dilnot, writing in the Times in December 2008:

It's a record! Debt here, debt there, all greater than ever -- and the recession scarcely begun. Well, yes, if you take cash figures, if you ignore the effect of inflation and ignore the size of the economy, as if a £10 debt meant the same to your granny in childhood as it would in 2008 to someone in their earning prime. Only then is the number of pounds of debt "a record". Play this game with the National Debt and we find that it has hit "a record" in about 50 of the past 60 years.

4) The chief executive of the government's Debt Management Office, Robert Stheeman, speaking to Channel 4 News's economics correspondent, Faisal Islam, in May:

It [the challenge of weekly auctions of government debt] is a major one, and the numbers are extraordinarily high, I wouldn't want to pretend otherwise. At the same time we do have one big advantage and that is that the major government bond markets have become extremely liquid and extremely efficient . . . and I'm often asked: can the market take this -- and the answer is, yes it can . . . I'm genuinely confident that it will be doable and that everything that makes our market work -- not just ourselves, but the banks who help us sell our debt and the whole investor community, domestic, internationally -- will support the programme.

5) The Financial Times's chief economics commentator, Martin Wolf, writing in the FT in April:

. . . why should such a temporary increase in the fiscal deficit be terrifying? UK net public debt -- forecast at 61 per cent of GDP this year -- remains well below the average of advanced country members of the G20. At the end of the Napoleonic and second world wars, UK public debt was close to 2.7 times GDP. Yet even this triggered none of the hyperinflationary consequences now widely feared. As the IMF also notes, even a 100 percentage point increase in the debt ratio should require an offsetting shift in the primary fiscal balance (with interest payments removed from spending) of no more than 1 per cent of GDP, provided fiscal credibility is maintained.

6) The Financial Times columnist Samuel Brittan, writing in the FT in March:

Nothing I have said will convert people who have an instinctive fear of governments getting into debt. Let me therefore cite the distinguished English historian Lord Macaulay: "At every stage in the growth of that [national] debt the nation has sent up the same cry of anguish and despair. At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt kept on growing; and still bankruptcy and ruin were as remote as ever." Harold Macmillan, as chancellor of the exchequer, quoted Macaulay in his 1956 Budget speech and remarked how the national debt had risen from £6bn in 1914 to £27bn in 1956, representing 27 and 146 per cent of gross domestic product respectively -- about twice what is now in prospect. Yet these percentages were reduced in the postwar phase without any heroic reserve or 'sinking' funds, through the simple forces of economic growth and inflation creeping at a rate not much above current inflation targets.

Of one thing I am sure. If we had the misfortune to engage in a major war, we would have far higher deficits and debts than anything now in prospect and few except some pacifists would worry. The second world war was financed in the UK with a 0.5 per cent bank rate. Why should it be more alarming for governments to get into debt to put people into useful work satisfying human needs than to borrow for guns and tanks whose only aim is to kill other human beings?

So Cameron and Osborne would do well to brush up on their Macaulay, if not their Keynes.

On a side note, much of the media coverage of this story has focused on how the leading credit rating agency Standard & Poor's lowered its outlook on Britain from "stable" to "negative" on 21 May and said the nation faced a one-in-three chance of losing its AAA rating. However, far fewer papers devoted column inches to the fact that, on the same day as the S&P warning, the other two major credit rating agencies, Moody's and Fitch, affirmed the UK economy's "stable" outlook and said they had no plans to review that outlook. But even if they did, and they joined S&P in issuing gloomy warnings about potential downgrades, the man in charge of raising money for the government by selling debt, Robert Stheeman, seems remarkably unperturbed:

A credit rating is a significant factor, looked at by international investors in particular. At the same time, a credit rating is ultimately just that: it's an opinion by the credit rating agency. I don't think it would fundamentally change the way international investors view our debt. It could mean they might demand fractionally more in terms of yields, [but the difference] could easily be imperceptible.

Then there is the issue of the agencies themselves - when will they be downgraded? Their failure to predict defaults on mortgage-backed securities, and their doling out of triple-A ratings to what turned out to be junk assets, helped cause the global financial crisis in the first place. As Professor Kevin Gallagher of Boston University pointed out last month:

The rating agencies have serious conflicts of interest, face little-to-no competition, constantly fail to predict defaults and accentuate the financial crises they've played a big role in creating. These issues need to be addressed to put this crisis behind us and prevent the next one.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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Is TTIP a threat or an opportunity?

TTIP offers potentially huge opportunities to both Europe and the US - we should keep an open mind on what the final agreement will mean.

Barack Obama made it abundantly clear during his visit to the UK that if Britain left the European Union then it would be quite some time before we would be able to negotiate a trade deal with the United States. All the more reason to examine carefully what the Transatlantic Trade and Investment Partnership (TTIP) will mean for the UK. For Labour this is especially important because a number of trade unionists and Party members have expressed concerns about what TTIP could mean.

The economic worth of such a partnership between the European Union and the US has been questioned and it has been frequently stated that TTIP could give multinational companies unprecedented influence and undermine the British NHS.

With regard to the economic benefits of TTIP there are few that would argue that there are no economic gains to be achieved through the partnership. The question is to what extent economic growth will be stimulated. On the positive side the European Commission has argued that an agreement could bring economic gains of between €68 billion to €119 billion per year to the EU (0.3% to 0.5% of GDP) and €50 billion to €95 billion (0.2% to 0.4% of GDP) to the US. For Britain, this means that an agreement could add up to £10 billion annually to the UK economy.

On the negative side, a study commissioned by the European United Left/Nordic Green Left Group in the European Parliament has maintained that TTIP would bring only “limited economic gains”. These gains have to be weighed, it was argued, against the “downside risks”. Those risks have been identified as coming from the alignment of standards in areas such as consumer safety, environmental protection and public health.

These are important concerns and they should not be quickly dismissed. They are made all the more important because the existence of already low tariffs between the EU and the US make the negotiations to reduce non-tariff barriers to trade all the more significant.

There are a number of areas of concern. These include food standards and the regulation of GM crops and the worry that the EU’s focus on applying the environmental precautionary principle might be weakened. The European Commission, which has a responsibility for negotiating TTIP on behalf of the EU, is however acutely aware of these concerns and is mindful of its legal responsibility to uphold, and not to in any way weaken, the agreed legal standards to which the EU adheres. A concern has been expressed that irrespective of what European law may say, TTIP could undermine those standards. This I find difficult to accept because the ‘rule of law’ is absolutely central to the negotiations and the adoption of the final agreement.

But the EU is mindful of this concern and has brought forward measures which have sought to address these fears. The latest proposals from the Commission clearly set out that it is the right of individual governments to take measures to achieve public policy objectives on the level that they deem appropriate. As the Commission’s proposal states, the Agreement shall not affect the right of the parties to regulate within their own territories in order to achieve policy objectives including “the protection of public health, safety, environmental or public morals, social or consumer protection or promotion and protection of cultural diversity”.

Of course, this is not to suggest that there should not be vigilance, but equally I believe it would be wrong to assume the theoretical problems would inevitably become reality.

The main area of concern which has been expressed in Britain about TTIP relates to the NHS and the role of the private sector. Under the Investor-State Dispute Settlement (ISDS) provisions investors would be able to bring proceedings against a foreign government that is party to the treaty. This would be done in tribunals outside the domestic legal system. If a Government is found to be in breach of its treaty obligations the investor who has been harmed could receive monetary compensation or other forms of redress.

The concern is that the ISDS arrangements will undermine the ability of democratically elected governments to act on behalf of their citizens. Some have maintained that measures to open up the NHS to competition could be made irreversible if US companies had to be compensated when there is a change of policy from a future Labour Government.

In response to these concerns the European Commission has proposed an Investor Court System. This would be based on judgements being made by publicly appointed and experienced judges and that cases would only be brought forward if they were precisely defined. Specifically, it is proposed that cases would be limited to targeted discrimination on the basis of gender, race or religion, or nationality, expropriation without compensation or the denial of justice.

Why, you might ask, is there a need at all for a trans-national Investor Court System? The reason in part lies in the parlous state of the judicial systems in some of the relatively recent EU accession countries in Eastern Europe. To be frank, it is sadly the case that there are significant shortcomings in the judiciary of some countries and the rule of law is, in these cases, more apparent than real. It is therefore not unreasonable for investors to have an international framework and structure which will give them confidence to invest. It should also be noted that there is nothing proposed in TTIP which contradicts anything which is already in UK law.

We need to remember too that this is not only about US investment in Europe, it is also about European investment in the US. No US-wide law prohibits discrimination against foreign investors, and international law, such as free trade and investment agreements like TTIP, cannot be invoked in US courts. The Investor Court System would therefore benefit European companies, especially Small and Medium Sized Enterprises. 

It is of course impossible to come to a definitive conclusion about these provisions because the negotiations are ongoing. But it would surely be unwise to assume that the final agreement would inevitably be problematic.

This is especially true regarding the NHS. Last year Unite the Union commissioned Michael Bowsher QC to provide an opinion. His opinion was that “TTIP does pose a threat to a future government wishing to take back control of health services”. The opinion does not express a view on whether TTIP will “force” the privatisation of the health service (as some have claimed) and Bowsher admits that much of the debate is “conducted at a rather speculative level” and he has been unable to produce any tangible evidence to support his contention about future problems. On the other hand, it is the case that there is nothing in the proposed agreement which would alter existing arrangements for compensation. There are of course many legal opinions which underpin the view that existing legal arrangements would continue. While I accept that it is theoretically possible for the Bowsher scenario to occur, it is nevertheless extremely improbable. That is not to say that there ought not to be watertight safeguards in the agreement, but let us not elevate the extremely improbable to the highly likely.

A frequently heard criticism of TTIP is that the negotiations between the US and the EU are being conducted in ‘secret’.  Greenpeace, for example, has strongly sought to make this a central part of their campaign.  Although the Commission publishes EU position papers and negotiating proposals soon after they are tabled, it is impossible to see how complex negotiations of this kind can be practically conducted in public.  However, I believe that the draft agreement should be made public well before the final decisions are taken.

Once the negotiations have been concluded, the draft agreement will be presented to the European Council and the European Parliament, both of which have to agree the text. The European Council is, of course, made up of representatives of the governments of the EU and the European Parliament is democratically elected. Both Houses of the British Parliament will also debate the draft and there will need to be parliamentary approval of the agreement.

Transparency and democratic scrutiny are two things which there cannot be too much of. But, in practical terms, it is difficult to see how there could be more of either without making it nigh on impossible to secure such a complex agreement. Unite, of which I am a member, and others are quite right to express their concerns about TTIP, but let’s not exaggerate the potential difficulties and let’s not assume that the worst case scenario will always come about. TTIP offers potentially huge opportunities to both Europe and the US, and we should therefore at least keep an open mind on what the final agreement will mean.

Wayne David is the Labour MP for Caerphilly and is Shadow Minister for Political Reform and Justice. He is a former Shadow Europe Minister and was a junior minister in the last Labour government.