“Britain has maxed out its credit card. The level of debt is too high, and the cost of servicing that debt risks bankrupting the UK. We’re in real danger of heading the same way as Greece.”
In the wild
We want to offer people a choice between… a Labour Government that has bankrupted Britain again, and a Conservative Government that will build confidence in Britain’s future.
– George Osborne, Jan 2009
The British Government has run out of money.
– George Osborne, February 2012
The more government borrows . . . the less confidence there is . . . and when confidence in our economy is hit, we run the risk of higher interest rates.
– David Cameron, June 2010
By international or historical standards, the national debt is not high
Supporters of the notion that “Britain is broke” tend to rely on a graph like Figure 1, which shows the UK debt/GDP ratio since 1997. Rather suddenly, a stable ratio of around 40% explodes with the Great Recession to reach almost 80% by 2012. Presenting the data in this way certainly makes the 2012 debt burden look very large.
However, if – as on Figure 2 – a longer time frame is used, we see that UK debt/GDP was above 80% for most of the last 300 years.
If Britain is broke at the moment, then – looking at this longer series – it was also broke for a whole century between 1750 and 1850, and for 20 years after the Second World War. In reality, in neither case did the UK default, and reveal itself as bust – both periods were times of investment and national renewal. Today, our national debt is significantly lower than Japan’s (about 200% of GDP), and comparable to Germany’s (83%) and the US (80%). By international or historical standards, the national debt is not high.
The cost of servicing Britain’s debt is lower than at any point from 1945 – 2000
Others suggest Britain is broke because the cost of servicing debt is bankrupting us. However, Figure 3 shows UK debt interest payments are now actually lower as a share of GDP than at any point up to the year 2000. So if this is the yardstick for being “broke”, Britain has also been broke over the whole second half of the 20th Century.
Of course, modest current costs would be of no comfort if they were liable to rocket soon. The reality, however, is that there is no sign at all of increased public debt pushing up public borrowing costs. Figure 4 charts borrowing costs since the global financial crisis first swelled the debt in 2008. We can see that the general drift has not been up but down. Most chancellors in the late 20th Century would have given their right arm to be able to borrow at anything like the current 2%.
Britain is not Greece – we have our own central bank
All evidence, then, suggests Britain is not ‘bust’. But shouldn’t the UK still fear going the way of Greece – losing control of the public finances, and then – after a delay – being savagely punished by the markets? Not really: the problems of Greece and other stricken continental economies arise because they have no flexibility to unilaterally loosen their monetary policy, owing to euro membership. In contrast, with its own central bank the UK enjoys more freedom to stimulate its economy. Indeed – while inflation remains depressed – if the UK were in a tight corner it could simply print the funds required to avoid outright default.
It’s precisely the right time for the UK government to borrow to invest
Investment spending on productive assets – like renewable energy – can produce steady, long-term returns that more than cover the cost of the interest payments on borrowed money (see Alex Hern’s blog on the New Statesman for some good examples). With borrowing costs at record lows, it would seem precisely the right time for the UK government to borrow to invest. The government likes to claim, however, that record low borrowing costs are because of its unwillingness to borrow.
Research by Jonathan Portes, from the respected think-tank NIESR, suggests a different story – rates are low because the prospects for the economy are so weak. Far from funds flowing enthusiastically into booming Britain, what we would appear to be witnessing are investors with depressed expectations about private industry pulling money out of shares, and then scrambling around to find a safe alternative home for their wealth, however low the return. The falls in interest rates we have seen under the coalition are associated “not with greater confidence or optimism, as the government has argued, but the reverse”.
Britain, then, is not “broke”. The national debt is not high by historical or international standards, the cost of servicing the debt remains manageable, and Britain retains the flexibility of having its own central bank. As for Britain not being able to afford to invest, the truth is the exact opposite: with the cost of borrowing at historic lows, Britain cannot afford not to invest.