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 first question – from Dr Eamonn Butler of the Adam Smith Institute and from Ryan Bourne of the Centre for Policy Studies:
Butler: “Last time we had a debt burden this
high, at least we had use the money to save Europe from Nazi tyranny. This
time, there is not a lot to show for it. We've actually borrowed the money to
fund our own past extravagance, and to bail out overstretched banks that should
have been broken up and reconstructed by market forces. It took a very long
time to pay off our war debt, and it will take a very long time to pay off this
one. The difference is that we are simply adding and adding to our present
debt, and have scant plans ever to pay it off.”
Ryan Bourne: “Newspapers often focus on
the effects of the rocketing debt burden on our immediate ability to borrow.
Though this is important, the main reason we should be concerned about the
current high debt burden is because economic evidence suggests debts at our
current levels lead to protracted economic stagnation and slow growth. The
Chancellor knows this. His Mansion House speech cited the important work of
Reinhart, Reinhart and Rogoff, who found that during episodes in which
gross government debt crossed 90% of GDP, the typical episode lasted 23 years
and was typically associated with slower annual growth to the tune of 1 percentage
point per year. The cumulative cost of this over the whole period on income is
stunning. And the alarming fact is that the UK's gross debt was this week
forecast to peak at 97% of GDP in this Parliament.
The question then becomes: why does high
debt lead to slow growth? Might the causation work the other way? Of course,
this is possible. Large exogenous shocks can lead to huge increases in debt.
But the duration suggests high debts and slow growth are self-reinforcing. The
problem is that the policies typically used to deal with the debts slow growth
through the discouragement of investment: whether it be because of a burst of
unexpected inflation, higher taxes, financial repression or the confiscation of
wealth. Many of these policies have been mooted or attempted across the Western
world in recent years, and we're likely to see a variety of them in the coming
years. This means that without other substantial supply-side measures to raise
the medium term growth rate (including restraining government spending in
itself), and with the demographic pressures round the corner, it could be a
tough couple of decades.”
> Tomorrow: It may not be unprecedented by historical standards but isn't today's UK borrowing significant by international standards?