Debate on UK Debt

Two alternative views on UK’s debt problem.


Debt Hawk
debt
Source: ONS

The UK has seen a rapid deterioration in its budget deficit. At £146bn (12.5% of GDP) this is the biggest peace time budget deficit on record. (Apart from Greece) this leaves the UK with the largest annual budget deficit in the OECD. Given the recent European fiscal crisis (Greece, Spain, Ireland) e.t.c. and the nervousness of bond markets, this level of borrowing is unsustainable and likely to lead to a higher interest rates, a run on the pound and a long term undermining of the UK economy.

Debt Dove
The size of UK debt is mainly a rationale response to the Great Recession of 2008-09 and the realistic threat of the worst depression since the 1930s. Without allowing a rise in government borrowing to offset collapse in private spending and private investment, the UK would be facing a persistent fall in spending, output and even higher unemployment.

debt

By historical standards, UK debt is significantly lower than previous periods when debt as a % of GDP was much higher (reaching over 200% of GDP in early 1950s). Compared to other countries, UK’s public sector debt as a % of GDP is not high – List of Countries debt as a % of GDP.

Furthermore, debt interest payments as a % of GDP (3-4%) are also low by UK’s historical standards (see: What Debt Crisis?).

In a liquidity trap, there is no reason why interest rates on debt will rise rapidly (they didn’t in 1940s and 1950s). To cut spending at the start of a fragile economic recovery will merely reduce economic growth and make it much more difficult to gain strong economic growth. It is a strong economic recovery which is the most important factor in reducing the long term debt to GDP ratio. The current austerity packages could easily be self-defeating like in Ireland and Greece (who have cut spending only to cause a fall in GDP) and the need for further cuts.

Which view do you prefer?

Are you a debt hawk or a debt dove?

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4 thoughts on “Debate on UK Debt

  1. Can someone explain to me where I am wrong? The view amongst the people that I talk to is that recession was caused by the banking crisis, which itself was caused by bankers selling each other ‘packages’ of investments that they did not really understand, and which turned out to be ‘toxic debt’. So the Government had to bail out the banks – ie they lent the banks money, which they borrowed from……er ? …. the banks? So we have a large national debt because we have had to borrow money from the banks to lend to the banks.

    So to try to pay off this national debt we are now going to cut all services for poorer people, while the people who got us into this mess, (the bankers in case you forgot) continue being supported by the government, and continue giving themselves unwarranted pay cheques.

    Why can we not pay off the debt by asking for our money back from the banks, and if that is not enough, we put a high level of income tax so that the rich (ie bankers in case you forgot) contribute in a fair way.

    Can you tell me what is wrong with the logic here?
    Thanks

  2. I think we’re whistling in the wind here. The government is going to do what it always does. Make a mess and leave it for the rest of us to clean up as they pop off on holiday with the bankers to discuss who will be funding the next election campaign or offering the best consulting package.

    When are we going to waken up and realise, we’re just being exploited and that’s never going to change because for all the sword rattling by the MPs on all sides – they are all the same – gangsters in pinstripe.

  3. First of all, the recession was caused by a false housing market bubble. The bankers were the politicians scapegoat following decades of unnecessary heavy regulation. The government had not regulated the banks to the degree it wished to do, hence why the banks now have some absurd levy in place.

    Secondly, recession is inevitable and should be embraced, as it clears out businesses that has insufficient demand, and thus strangling an economy. If you simply nationalise a dying business, you’re only wasting tax payer’s money on an unwanted service. The biggest disaster was Northern Rock in this case.

    The best way to deal with the debt? More austerity. The budget still has dangerously high amounts of unnecessary spending. The worst part of the budget? The absurd rise in VAT.

    Again on banks, the levy and rise in VAT will only encourage bigger bonuses, legally or illegally. But I have no issue with bankers giving themselves bonuses at all.

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