Readers Question. You make the point that the debt to GDP fell in the post war period since the GDP rose faster than the debt but that still left the debt to be repaid and as such there was still the interest to be paid. I was expecting you to explain how the current debt could be eliminated. It is so large that I can’t see how it can be done. Talks of reducing the deficit pale into insignificance in the light of reducing the total debt.
The point is the debt burden was steadily reduced over a period of 40 years. It was becoming a smaller share of national income. That’s how we will pay off the current debt – steadily over the next 30 or 40 years. There is no necessity to completely pay off the debt.
National debt – mortgage comparison
People who struggle with the idea of government debt probably think nothing of taking out a mortgage of up to 400% of their annual income. With a mortgage you pay back your debt over a period of 40 years – and you could continue to roll the mortgage over for a longer period if you wanted.
Suppose you take out a mortgage for £100,000 and have a monthly repayment of £500.
If your income is £2,000 a month – 25% of your monthly pay goes on ‘servicing’ your mortgage debt.
If your income increases to £4,000 a month, then cost of servicing your debt falls to just 12.5% of your monthly income. Therefore rising income is making it relatively easier to pay for your mortgage.
You don’t have to worry about paying off your mortgage all at once. The crucial thing is can you afford the mortgage payments? If your income fell to £1,000, then your debt becomes a real problem because 50% of your income has to go on paying your debt.
There is nothing ‘immoral’ about taking out a mortgage. Similarly there is nothing ‘immoral’ about government borrowing. Government borrowing can be beneficial, e.g. borrowing at 1% to finance public sector investment which gives a rate of return of 10% a year. – In that case society is benefiting from government borrowing.
Cost of servicing debt
A key issue is what % of GDP / % of tax revenues goes on servicing debt
1 thought on “National debt – mortgage comparison”
Are morgages part of the national .