The Telegraph reports:
Mr Cameron said Labour’s plan to borrow an extra £700 billion over five years and take the national debt to £1.4 trillion was a “disgrace” that exposes the UK to serious economic risks.
Governments borrow by selling bonds — a form of IOU note — to investors, who then receive interest payments on the loan.
The Treasury forecasts that paying the interest on the national debt will cost taxpayers £42.9 billion in 2010/11, more than the annual budget of the Ministry of Defence. Grant Thornton, an accountancy firm, estimates that by 2013, debt interest will cost £58 billion.
Let’s be clear: UK GDP was £1,446 billion in 2008 according to the Office for National Statistics. That’s £1.4 trillion, or thereabouts.
So now let’s face some facts. First, as a nation we’re going to borrow one times our income. Hardly an excessive gearing level. Many states have done so before now.
Second fact: there has to date been no problem in selling UK debt, and nor is there indication that there will be so. In fact, what I’m being told in regular discussions with those in the bond market is that there is a shortage of debt to invest in right now. This will be so for some time to come. Baby boomers are retiring. Their private pension funds will be shifting out of equities into bonds: demand for debt is going to be high for some time to come. And the interest paid on the debt is not going to waste, it’s pensioner’s income. Cameron's one sided thinking ignores this.
Third point: this debt has to be repaid over periods of up to 30 years. Over that time at least half will be written off by inflation even if it runs at only 3%. The rest when due for repayment will be rolled over without problem. It always has been. There is no compulsion at all to repay debt now and to do so would be as mad as a householder taking out a thirty year mortgage and then starving themselves and their family whilst almost freezing to death and refusing all forms of entertainment to repay the loan in five years. We’d think that a householder who did that was mad: Cameron would be the same to do it to the country.
Fourth: we can afford it. Sure government income is down now, but it’s still £496 billion this year. The interest we pay is just £28bn a year now. And yes, of course it will rise as the amount of debt increases. But the real issue is this. If we don’t spend now government income won’t rise — and it is a shortage of income, not an excess of spending that is our problem at present. Reflate the economy and our income will rise. In 2008 the expectation was of income of £575 bn. If reflating creates extra government income in due course of about £80 billion a year isn’t it worth paying £20 billion or so in interest to achieve this?
But before people jump too high, I stress, I’m not asking us to go back to where we were before: we all know there were faults in where we were. And I’m also not saying its right to borrow at all times: it is not. Debt should be incurred cyclically. But the reality is that unless we spend now the depth of the recession into which we will fall will be enormous, and we’ll have a massively bigger problem than having to pay £50 odd billion a year in interest (much of which — as I note — will become the income of UK pensioners — and what’s the issue with that?). Without spending government income will collapse, state support for the 4 million or more Cameron’s plans will put out of work will be cut to a point where desperate poverty will be the norm for many, and the capacity of the economy to pull out of the recession will have been destroyed in much the same way that Thatcher destroyed our manufacturing.
So, what does this say about Cameron? First that he does not understand what he’s talking about.
Second that as prime minister in waiting he has threatened to default on our debt — which can only increase the cost of our borrowing as lenders will not expect him to repay — which therefore means he’s just made the problem a lot worse.
Third, he has effectively confirmed that he does want to cut spending and throw us into deep recession and create at least 4 million unemployed as I have predicted — although that will not cut debt at all — as I have also predicted.
And fourth it shows how incredibly naive he is as a politician.
Now do you see why I am worried?
And he’ll create this mayhem all because he thinks we can’t pay £50bn in interest — just 3.45% of our national income. How mad is that?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
That is certainly a plausible interpretation Richard. Although part of me thinks that Cameron KNOWS he’s talking garbage and this is a calculated political move to regain the political initiative after several days on the back foot over the attacks on the NHS by his own backbenchers and MEPs. He knows his best chance of maintaining a big poll lead is to scaremonger like hell on the economy every chance he gets, thereby frightening people into voting Conservative. The worrying thing about Dave is that he may be less naive than he appears…
[…] the state of play in this country too, Vince Cable excepted of course. For example, read this comment on Mr Cameron’s latest pronouncements on Government […]
Cameron may not be the greatest economist in the world but amongst his achievements he has a 1st from Oxford in PPE, so he is not a complete ignoramus.
He is right that the level of spending and borrowing is too high. Adjusted for inflation public sector activity is the same as it was in 1998 and on a per capita basis it is lower, and yet government spending has risen by 70% on an inflation adjusted basis and yet we see very little difference.
The government raises £496 billion from taxation, yet it is currently spending £200 billion more every year for the next 4 years, which quite frankly is unsustainable, particularly when the private sector, the ultimate source of repayment is flatlining at £700 bn.
The idea that net debt of 100% of GDP is sustainable ignores the fact that so many more government obligations do not show up in the national debt. In the US, many of these miscellaneous obligations (in particular government employee pensions) are passed to government funded trusts that purchase US treasuries to match their obligations. By funding the obligations in this way, the amount of the obligation shows up in the national debt. If the UK did the same the national debt would be 250-275% of GDP in a few years.
Alex
You seem to ignore the fact we are in recession and that is why we are spending more
What would you prefer? Deep recession leading to war?
Of course the current imbalance is unsustaianble if done forever. I’m not suggesting that. But if you think we’ll come out of recession without further spending – spending what is more that pays for itself in terms of savings – then you’re seriously mistaken
Richard
Richard,
We have been spending more in the public sector since 2001, and any impact that government spending might have on the private sector is long past. The idea behind Keynesian spending is not that it increases GDP per se, but that it gives an indirect stimulus to an otherwise moribund private sector. UK private sector activity effectively peaked in 2003 in real terms and manufacturing and other industries have largely declined over the last 12 years.
I think we will come out of recession (defined as a period of falls in GDP) sooner if we cut government spending to sustainable levels with a big drop in GDP and get the “real” economy moving. A government can overspend to stimulate the economy but this government has lost control of its spending to such an extent (140% of revenues), that the economy will never recover by higher government sending because it is in a downward spiral with ever decreasing public sector activity and monstrously high and sustantially debt-financed public sector activity.
@Alex
sorry, that should have read
“…that the economy will never recover by higher government spending because it is in a downward spiral with ever decreasing private sector activity and monstrously high and sustantially debt-financed public sector activity.”