I have threatened several times to write a piece on the National Debt, so here goes. I think part of the problem with thinking about this topic is simply the word Debt. Funny we’ve never thought up anything better. Politicians and industrialists are very savvy when it comes to creating the right word. Ministers never increase spending, they always raise investment. Firms don’t put up prices, they announce a revised tariff. To point this out is not whimsical humour: many public debates are warped by the phrases chosen. What would people think of genetically modified plants* if they were described as ‘scientific agriculture’ rather than ‘Frankenstein Foods’? How would we react to local discretion in public services if it was described as neighbourhood choice rather than postcode prescribing ? You get my point. Not that there’s much wrong with being frank. The National Debt does indeed involve one group of people owing money to another group of people, but then so does your mortgage. No-one calls that the family liability. To look at another linguistic master-stroke, cards that increase your debts are actually called credit cards, as if spending money you haven’t got establishes you as a financially sound person.
Enough with my obsession with political English, and into the jungle. To start with, let’s consider what are we talking about. The National Debt is the amount of money owed by the British government to people or institutions (companies and banks) within its borders or abroad. So, first fallacy – it isn’t what we owe foreigners, though some of it is indeed owed to foreigners. The amount owed to foreigners is the external debt, the larger amount owed to British residents is called the internal debt. About two-thirds of the National Debt is internal – that is, it is money we owe to ourselves. How does that happen ? Well, the government issues bonds which are certificates that pay a certain level of interest until they ‘mature’ (come up for repayment). Short term government debt – repayable in three months – comes in the form of Treasury Bills, which are sold below face value, the difference between the purchase price and the maturity price showing the interest you get. There are other ways the National Debt is funded – you may own part of it in the form of a Premium Bond, for example.
Why do we have a National Debt ? Economists generally mark our National Debt as starting in 1694, when a group of Scottish merchants set up the Bank of England with a £1m loan to the government to fight the latest war. Economics textbooks tell you that governments borrow for capital spending, like a company or a family: “it makes good sense to spread the cost of a new airport or hospital over a period of years, so all the people who benefit from them pay for them” I said in my majestic 1988 masterwork Approaching Economics. In fact, until the last fifty years or so, the history of the National Debt has been the history of our wars. The diagram below shows that in 1945 our National Debt came to more than twice our national income (the total value of the whole economy’s output). Remember this when you are told that we have to make historic cuts in welfare entitlements to solve the debt problem. We established the welfare state and the National Health Service with a National Debt proportionately three times bigger than we have right now.
Oh, and attempts to cut the National Debt by raising taxes and reducing government spending are rarely effective. If you do that (you may have heard of ‘austerity’, which has been tried many times, and never worked), then people have less to spend, reducing the growth of the economy, reducing the tax take and requiring higher social security spending. Cutting capital spending makes the economy less efficient, again reducing the ability to grow the economy and raise more taxable income. But I think I’ve said that elsewhere. “Many times” as they used to sigh in ‘Round The Horne’, “many, many times”.
Footnote from the future (added May 2020):
I speak many times in my blogs about the vampire beliefs that arise from the grave when you think they’re dead. Laffer curve, wealth creators, directing students to courses the economy needs, things like that. Sadly the ‘burden of the national debt’ is now shuffling out of the crypt. The Covid19 pandemic that necessitated shut-down of many industries, labour subsidies and higher social security spending meant the government raised its spending at a time when its receipts were falling. Indeed, some of the anti-recession measures involved cancelling or delaying tax payments. And so, and so … we get the newspaper columnists saying we’ll have to pay this all back, so we need higher taxes and government cuts when the pandemic ebbs. No, we bloody won’t. I’ll include a few of the rebuttals here, and hope it goes away. It won’t, but I can hope.