Three centuries of data debunks Osborne’s economic theories

The Chancellor’s record on debt is worse than that of the last Labour government. 

NS

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Here’s a quiz question. How large do you think the UK’s debts over the past three centuries have been, typically, as a percentage of GDP?

While you wonder, remember what George Osborne told us in his first Budget, in June 2010. Britain, he said, was “built on debt” and “unless we deal with our debts there will be no growth”.

Cuts were “unavoidable”, given the scale of debt. “Catastrophe would ensue” if he didn’t act. Only through austerity could Britain rise “from the ruins”.

Debts must have been high. They were presumably at ahistorical heights.

If debt was no greater than it has usually been, or was even lower than its long-running average, Osborne couldn’t possibly have argued that we were on the brink of bankruptcy.

The scale of our indebtedness has been the rationale driving every cut made in the past six years – cuts that have and will hurt the poorest half of the country far more than they hurt the richest.

So what do you suppose our debts have been, on average, since 1716, when Newton was still alive and the South Sea Bubble still afloat?

The answer is: 103 per cent of GDP. More than double the size of our economy, according to data provided by the Bank of England and newly analysed by the New Statesman.

When Osborne took office in 2010, Britain’s debt-to-GDP ratio was 71 per cent, scarcely two-thirds of its long-running average.

It’s now 85 per cent (more than 10 per cent higher than it was ever supposed to be under Osborne’s watch, but that’s another story). Higher, yet still not high.

In fact, in the past three centuries our debt has been greater than 85 per cent of GDP in 155 years, or just over half the time; in 78 of those years, it’s been greater than 150 per cent of GDP.

Our debt wasn’t and still isn’t particularly great. It’s now about average, and if anything still below it.

But was Osborne nevertheless right to say that “unless we deal with our debts there will be no growth”? Though the UK may have been indebted often, Osborne would have had a case if GDP per capita had scarcely grown while it was.

The numbers aren’t nearly as conclusive as his rhetoric has always suggested, or particularly supportive.

In effect, there is no relationship between the rate at which the UK has cut its debts each year and the rate at which it has grown. On a mathematical scale from 1 to 100, the relationship rates as a 16, or as nothing at all.

We can look at things from another angle.

Let’s group all the years when debt was very high (more than 150 per cent of GDP), high (100 per cent-plus), just above average (85-99 per cent), low (50-84 per cent) and very low (less than 50 per cent).

Osborne’s theory implies an economy could never grow if its debts exceeded 85 per cent, let alone 150 per cent. By his logic the UK must have grown much faster when debt was low than when it was very high.

But it hasn’t. In the 240 years in which our debt-to-GDP has been greater than 50 per cent, our growth rate has been completely unaffected by whether the UK’s debt is low, above average, high or very high. In every case, the economy has inched along at 0.9-1 per cent per year.

Only when debt fell to very low levels – less than 50 per cent of GDP – did that change, with growth rising to 1.7 per cent per year, if we average across those six decades.

The 30 years from 1979 to 2008 account for half of that time, and are the real reason the very low debt years look so good.

Growth, which I’ve measured by changes in GDP per capita, chugged along at 2.2 per cent in the long Thatcherite era from Callaghan to the financial crash.

But some other factor – a more globalised world, for instance, or the short-term profits of privatisation – could have been the real driver of GDP. The link with low debt may be largely coincidental.

Either way, nothing in Britain’s history supports Osborne’s thesis. The UK’s debt wasn’t unusual, excessive or imperilling in 2010, and it isn’t now. The Chancellor’s fiscal rules are self-imposed and self-inspired: it’s hard to find data that justifies them.

But all of this – the disingenuous rhetoric, the baseless beliefs – would be forgivable if his plan had somehow worked. It hasn’t. Under Osborne, Britain has borrowed more and grown less than during any other major period since the Second World War.

There have been four important periods of government in the past 70 years: three decades of “postwar consensus”, 19 years of Thatcher and Major, 13 of Blair and Brown, and now nearly six of Osborne.

Between 1948 and 2007 GDP per capita rose on average by 2.5 per cent, year on year on year.

Whether that meant 2.2 per cent under the “consensus” (more, if you put aside the war-plagued recession of 1946-47), an even 2 per cent under Thatcher and Major, or 2.5 per cent under New Labour until 2008, the British economy hummed along, despite huge shifts in its economy and many global shocks.

Yet under Osborne, Britain’s growth rate has been half of that, and was less than 1 per cent until the gentle uptick of the past two years. Even though Labour’s tenure was marred by a 6 per cent collapse in GDP in 2008 and 2009, its overall record on growth still beats Osborne’s.

And perhaps more damningly, Osborne’s record on debt is worse than the last Labour government’s, even though net debt jumped by 29 per cent in both 2008 and 2009: a jump exceeded only five times in the past 300 years.

Before the global financial crisis, New Labour’s record on debt was very similar to Thatcher/Major’s from their long reign (so much for “Labour overspending caused the crisis”). Each of them just about paid down the debt each year, until 2008-2009 made Labour look as if it had added to the debt by 4 per cent per annum.

And still Osborne has fared worse than the predecessors whose record he so derides. On average, he has added nearly 5 per cent to the debt each year so far, a rate that has no historical comparison between the end of WWII and 2008.

Under the many chancellors of the postwar consensus, none of whom imposed an austerity as strict as Osborne’s, the debt fell by nearly 5 per cent a year.

As this new data shows, his approach has always been guided more by a stubborn ideology than analysis of facts.

Harry Lambert was the editor of May2015, the New Statesman's election website.