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24 January 2012

Why the UK’s £1 trillion debt is no cause for panic

The national debt has actually been higher for most of the last century.

By George Eaton

At every stage in the growth of that [national] debt the nation has set 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.

Lord Macaulay, The History of England, 1849

The news that Britain’s national debt has topped £1 trillion for the first time has prompted much soul-searching among conservatives. But what they won’t mention is that our current debt levels, measured as a percentage of GDP, are historically unremarkable. As the graph below shows, the national debt has actually been higher for 54 of the last 100 years.

In 1956, for instance, it stood at 141 per cent – more than twice its current level – but was gradually reduced, not through draconian spending cuts, but through economic growth, tax rises and moderate inflation. In the Budget that year, Conservative Chancellor Harold Macmillan, noting that the national debt had risen from £6bn in 1914 to £27bn in 1956, reflected on the truth of Lord Macaulay’s observation (quoted above).

This isn’t to say that our current debt levels are satisfactory. The failure of Osborne’s plan means that the government is planning to borrow £158bn more than forecast in November 2010. While Labour would have borrowed to stimulate growth and jobs, Osborne is borrowing to meet the cost of higher unemployment. But the Chancellor is right to ignore the calls for even greater cuts and to allow the automatic stabilisers (welfare payments etc) to operate. Unlike the Tea Party, Osborne, mercifully, isn’t calling for the imposition of a debt ceiling.

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Were the coalition to tighten fiscal policy again, it would only further squeeze demand, reduce growth and increase unemployment. With a million young people unemployed, the government’s priority should be creating jobs, not reducing the debt. Indeed, if it succeeds in the former task it will have a better chance of achieving the latter. As Keynes remarked, “Look after unemployment and the Budget will look after itself.”

Unlike the eurozone countries, Britain, with its own currency and its own independent central bank, can afford to borrow to stimulate growth. Osborne continues to boast that our ultra-low market interest rates are evidence of the success of his deficit-reduction plan. But, as in the US, they owe more to monetary activism than to fiscal conservatism. The Bank of England’s programme of quantitative easing has allowed it to buy up hundreds of billions of pounds of gilts and keep yields artificially low. Rather than complacently declaring the UK a “safe haven” as forecasters warn that it is already back in recession, Osborne should take advantage of historically low rates to borrow more to create jobs.

Contrary to conservative myth, there is no prospect of the UK going “bankrupt”. As I’ve noted before, the UK’s debt profile is longer than that of any other major economy. Moreover, because Britain, like Japan (whose national debt is 226 per cent of GDP), does most of its borrowing at home (73.3 per cent of GDP), it is less exposed to the vagaries of the foreign bond markets.

The programme urged on Osborne by the debt hysterics – austerity piled on austerity – would plunge the UK into a death spiral from which it would take years to recover.