Throughout this week we’ve compiled a special Jury to answer five questions:
- How alarmed should we be at the growth in the total debt burden?
- It may not be unprecedented by historical standards but isn’t today’s UK borrowing significant by international standards?
- Is there a danger that the most talented young Britons will leave high taxed Britain in future years for less indebted nations?
- What can and should still be done now to reduce the danger of a future debt burden?
- How long can Britain continue to borrow at the current low interest rates?
Here are two answers to the second question — from Philip Booth of the Institute of Economic Affairs and ConservativeHome columnist Andrew Lilico:
“In considering the burden of debt, there are three big issues in my view. It is true that we have had debt levels like this before and ‘grown’ out of them. However, this is the first time that such huge debts have accumulated in peacetime to finance current government spending (though, under the Brown days, you could argue that at least some of the problem was caused by the “one-off” banking crisis). Even in the 1970s debt did not change much as a proportion of national income. Wars come and go, but the political pressures for big government in a democracy, predicted by public choice economics, just intensify. Secondly, we are close to our taxable capacity – increases in tax cannot be used realistically to deal with the deficit/debt. Thirdly, we have huge forthcoming social insurance obligations due to having pensions and health systems that rely mainly (in the case of pensions) and totally (in the case of health) on taxpayer funding on a pay-as-you-go basis. Such obligations, calculated in inter-generational models, probably come to about four times the explicit national debt. Even if one ignores those calculations, at the very least it is fair to say that the coming fiscal headwinds are huge (as, indeed, is indicated in the OBR’s fiscal sustainability reports).”
“Britain’s debt burden is only not unprecedented if measured solely in terms of direct liabilities through government bonds. But in the past when government’s had higher debt to GDP ratios than today they did not have our implicit liabilities – they did not have unfunded public sector pension liabilities, or state pension liabilities, or guarantees to the banking sector. Furthermore, when our debts were higher in
the past things did not turn out happily.
Remember: our post-World War 1 debts may have been higher on narrow gilts definitions, but (a) nominal GDP fell 28% from 1920-1923 and did not exceed its 1920 peak until 1938; (b) we had a ‘voluntary’ bond swap in 1932 which vastly wrote down our first world war liabilities; (c) the US first overtook us as the major world power and then dismantled our Empire; even after all that we still gave up and inflated our debts away in the 1970s. I think
saying ‘Our debts were higher in the past and it turned out okay’ is wrong on both counts – they weren’t higher then; and it didn’t turn out okay then.”
> Tomorrow: Is there a danger that the most talented young Britons will leave high taxed Britain in future years for less indebted nations?