Two alternative views on UK’s debt problem.
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.
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.
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?