Was austerity necessary in 2010?


Readers Question If one looked at the UK’s Historical Debt to GDP ratio; at the time austerity was introduced; the Debt to GDP ratio was last at this 2010 level in 1966. Having lived in 1966 there was no massive economc requirement to reduce public spending at that time ie everything was fine. So was …

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Government debt under labour 1997-2010

Government debt under Labour was a major factor in the elections of 2010 and 2015. But to what extent did the Labour government really plunge the economy into debt during 1997-2007?

Usually, when people say ‘it’s debt that got us into this mess’. They tend to view all types of debt as the same – equating government debt to financial debt incurred from selling sub-prime mortgages in the US. However, this is deeply misleading. The consequence of bad debt defaults in the financial system is very different to government debt financed through selling bonds.

Government debt


In 1997, public sector debt as % of GDP:

  • 1997/98 – 40.4% of GDP
  • 2007/08 – 36.4% of GDP
  • 2010/11 – 60.0% of GDP.
  • May 2019 – 82.9% of GDP

At the start of the great recession in 2007, public sector debt had fallen from 40.4% of GDP to 36.4% of GDP. This was despite increased real government spending. After the start of the crisis, public sector debt almost doubled in the space of three years.

If we look at just actual government debt, there is a significant increase.

In 1997, the total public sector debt was:

  • 1997/98 – £352 bn
  • 2007/08 – £527 bn
  • 2010/11 – £902 bn


Debt to GDP statistics were helped by the period of strong economic growth – a reminder that economic growth is as important at debt levels. It is also worth bearing in mind UK public sector debt in comparison to the post-war period.

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Does a lower budget deficit lead to lower interest rates?

Readers question: Keeping a lower deficit of the National Budget would benefit Americans as interest rates would remain stable and allow new businesses to grow. Would you say this statement is correct? In theory, there is an argument that a rising deficit can cause a rise in bond yields and interest rates. Similarly, there is …

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Does government debt lead to lower economic growth?

Readers Question: To what extent are higher government debt levels a constraint on economic growth? There has been much debate about the extent to which high levels of government debt might slow down rates of economic growth. In particular, a 2010 paper “Growth in a Time of Debt,” by Carmen Reinhart and Kenneth Rogoff seemed to suggest that GDP growth significantly falls once government-debt levels exceed 90% of GDP. This paper was used as a justification for austerity in both the US and EU, but the paper has recently received substantial criticism. Firstly because an excel coding error left out several countries data. Secondly, because it is not clear whether high debt causes low growth or low growth causes higher debt levels. In 2010 two American Economists Carmen Reinhart and Kenneth Rogoff, circulated a paper,  this paper suggested that once government debt reached 90% of GDP it led to a sharp drop off in economic growth. It was very influential in 2010 as there was a political interest in reducing debt. However, the paper was later criticised on numerous fronts
  • They omitted some data
  • There was an excel coding error
  • They used questionable statistical analysis.
Later researchers couldn’t replicate their results and only found a very weak link between debt and lower growth rates. Also, they were criticised for their assertion that
“growth drops off sharply when debt exceeds 90 percent of GDP”.
Because even if there is data suggesting a relationship between growth and debt. It remains another question of which factor causes the other factor. It could be that countries with slow growth tend to accumulate debt to GDP (in a recession, you expect debt to GDP to rise. A fairer statement is to say
“countries with debt over 90% of GDP tend to have slower growth than countries with debt below 90% of GDP”
Public debt and Growth OECD There is a reasonably good summary at the Economist here – relationship between growth and debt.
Source: De Long. The relationship between growth and debt amongst G7 in post-war period. However, you have to be careful from reading too much in this. E.g. Japan’s post-war miracle with growth of 10% + is different era to today’s situation.
But, it is worth mentioning other papers have given a mixture of results.
  • A 2010 IMF paper turns up “some evidence” of a 90% threshold.
  • A 2011 study by the Bank for International Settlements identifies a threshold of 85%.
  • A 2012 IMF paper found “there is no particular threshold that consistently precedes sub-par growth performance.”

Theory behind Growth and debt link

Let us examine the theory behind the possible link between government debt and economic growth Firstly, how might high government debt levels constrain economic growth? Crowding Out. Higher government debt usually requires the government to borrow from the private sector. Therefore, with higher government debt, there is likely to be a fall in private sector investment as the private sector use funds to buy government bonds. In addition, some economists argue that government spending tends to be more inefficient than the private sector. For example, if the government borrow to finance higher pension commitments, there will be less impetus to boosting economic growth than if the private sector had been free to invest itself.
  • However, crowding out is only likely to occur if the government borrows when the economy is close to full capacity. If the government borrow when savings are high and the economy is stuck in a recession, then there will not be crowding out, but an actual injection of spending into the economy. The government debt is financing spending which otherwise would not occur. In other words, in a recession, higher debt could cause higher growth rates than countries who try to cut budget deficits. The fact European economies have entered a double-dip recession after pursuing austerity policies, suggests there is empirical support for this.

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Does higher debt lead to higher interest rates?

Is there a link between government debt and the interest rate on government bonds? One argument we often hear is that if government borrowing increases – we can expect higher bond yields. Investors demand higher yields to compensate for the risk of government default. However, other economists argue this is misleading. If inflation is low, …

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Japanese National Debt

Readers Question: How is Japan able to run a national debt of nearly 240% of GDP? (from: List of National debt by Country) In 2017, Japanese public sector debt rose to one quadrillion yen ($10.28 trillion) representing 239% of GDP.   This compares to 2013, when government debt was 227% of GDP. This is significantly …

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Solutions to national debt

Readers Question: Please is there any solution to national/public debt? National (public sector) debt is the outstanding level of debt owed by the government to the private sector. It is the accumulation of annual budget deficits. Do we need a solution? Firstly, it is worth evaluating whether we need an actual ‘solution.’ National debt has …

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Effects of a budget surplus

A budget surplus occurs when government tax receipts are greater than government spending. It means the government can either save money or pay off existing national debt. It is worth noting, that budget surpluses are quite rare in the past 120 years. Politicians have sometimes attempted to enshrine budget surplus into law but what are …

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