Historical National Debt

An interesting question at the moment is how much Debt the government can take on.

Source: IFS

Looking at the history of UK national debt, the current levels of government borrowing don't seem anything particularly worrying. At the end of the Second World War, UK national debt topped over 200% of GDP. In the twentieth century, national debt has rarely been below 40% of GDP.

People assume national debt must be a disaster for the long term performance of the economy. But, it is worth remembering that in the 1940s, huge levels of National debt didn't prevent the UK:
  • Starting a universal National Health Care Service
  • Starting universal welfare benefits
  • Providing three decades of strong economic growth
Current Levels of UK Government Borrowing

debt
source: ONS

  • UK public sector debt is forecast to rise sharply. Ernst & Young ITEM Club, predicted on Saturday that government borrowing would hit £180bn next year (much higher than the government's own prediction of £115bn)
  • Also the borrowing figures are complicated by the financial bailouts. Public sector debt figures are liable to soon rise over 100% of GDP, because statistic rules means we must include the liabilities of nationalised banks. However, these liabilities do not require present government borrowing.
  • There are also uncertainties about how much more the government will need to spend on the financial bailout. The government has secured many 'bank assets'. It is unclear whether it will need to pay for these.
  • There is also a difference between the 1940s and the 2000s. In the 1940s, private sector borrowing was lower. Individuals were willing to do their patriotic duty and buy government war bonds. I doubt there would be the same patriotic fervour to buy 'bonds to save the greedy banks'. The problem today is not just government borrowing, but private sector debt and financial losses.
  • The reaction of the markets, particularly in foreign exchange markets has shown that there is growing uncertainty over the UK's ability to borrow.
  • However, the UK still has a triple A rating for government borrowing (though that may be downgraded in the future)
  • It is a shame and a mistake the government decided to increase public sector borrowing as a % of GDP in the boom years of 2001 - 2006.
Nevertheless, despite the real potential problems of rising government borrowing, it is not quite the end of the world as some suggest.
Public Sector Debt

Source IFS
Perma Link | By: T Pettinger | Monday, March 23, 2009
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