So many commentators talk about the UK’s public debt as if we were still operating a gold standard economy (and claim that debt is at unprecedented and dangerous levels) that it is worth looking at whether their concerns would be valid even if we were still on the gold standard.

They usually argue that because our debt is at staggeringly high levels, we are close to a magic tipping-point after which the ratio of debt:GDP will spiral upwards until it becomes clearly unsustainable. So this article asks three simple questions:

1. Is our debt at staggeringly high levels?
2. Will our debt rise without limit?
3. Should we assume that our debt will reach dangerously high levels?

We conclude that even if we were still on the gold standard, the rhetoric about the dangers of debt sustainability would still be nonsense. And that rhetoric is the justification for some of the worst policy blunders in modern UK history.

Is our debt at staggeringly high levels?

The introduction to the House of Lords Inquiry into debt sustainability says:

“Our national debt stands at an incredible £2.6 trillion. A recent OBR report stated that the 2020s were turning out to be ‘a very risky era’ for the public finances. Our inquiry will explore if and how the UK can manage this level of indebtedness.”

The introduction uses the word ‘incredible’ and cites the OBR phrase ‘very risky’ – these are such emotionally-laden terms that they suggest the concern over debt may be deep-seated but not entirely rational.

It is worth looking at the long-term history of our national debt to see how much weight we should give to these concerns.

If you look only at period since the year 2000, it seems believable that today’s levels are unusually high – and that is the picture that is normally reported. But taking a long-term view shows that the debt today is roughly at the average level it has been at since the year 1700. In fact it is fractionally below the average level.

After the Napoleonic wars and WWII, debt:GDP was well over 200% –  indeed it was over 250% in WWII. Did those levels – which were high by our historical standards – cripple the economy? No, quite the opposite happened: the 1820s were followed by the real high points of the Industrial Revolution and WWII was followed by the Golden Age of Capitalism. These were the two most successful periods in our economic history.

Today’s levels are also not high by international standards. Here are the G10:

While high debt does not guarantee a strong economy, it clearly does not preclude it. And we do not have high debt today. There is no reason to be staggered by the current level of debt.

Will our debt rise without limit?

Some people have implied that even if it is not too high today, our debt will rise without limit and therefore at some point become dangerous. For example, in his evidence to the House of Lords Inquiry, one commentator stated:

“The UK’s debt position is a concern. The current level of public sector debt is high, and while it may improve in the next few years there is a serious danger that the UK will fall into a debt trap before the end of this decade. This occurs when two criteria are met. One, is the ratio of government debt to GDP exceeds 100%, meaning the stock of public debt exceeds the size of the economy. The second is that the rate of economic growth is lower than the rate of interest paid on the debt. In such a situation the ratio of debt keeps rising.”

In fact, the mathematics of debt sustainability shows no magic change when debt hits 100% of GDP, it depends on the total deficit (or surplus) not merely the interest costs, and it does not imply that debt will rise without limit.

For those who like such things, here is a quick summary. For those who do not, just skip the box.

Should we assume that our debt will reach staggeringly high levels?

Without going through all the details, what this means in simple terms is that if we can avoid policy blunders – even if only to the extent that we avoided them from 1980-2020 (a low bar when compared with the Golden Age) we should expect debt:GDP to develop over the next 100 years as follows:

Of course, if we were to continue with the level of growth we have seen since 2010, the picture would be worse. But that is a problem of policy blunders leading to weak growth, not one of high debt. Growth 2010-2020 has been only 2.7% as a result of Austerity, Brexit and a poor COVID response, while the deficit has averaged 6%. If we were to continue with policy errors on the same scale for the next 100 years, debt:GDP would develop as follows:

But even in that dismal scenario, worrying about debt would be ludicrous: we would be more than 100 years away from still far from record-breaking debt, while much of the country would be falling into poverty, and our public services collapsing in a matter of just a few years.

Conclusion

This brings us to the extraordinary conclusion that, even if the UK were still operating a gold standard system in which the government and the Bank of England could not create money when it needs to, there would be no basis for debt hysteria. In fact, of course, we run a fiat currency system and much of the ‘debt’ the government ‘owes’ is owned by the Bank of England – ie it is money the government owes to itself. In reality, UK government debt is close to a non-issue.

Most commentary in the press and by politicians raises panic about this minor long-term issue and down-plays the already visible failings of the British economy, of household finances and of public services which have resulted from austerity – itself ‘justified’ by the supposed state of UK government finances – and from subsequent policy blunders.

If you think these issues are important, take a look at The 99% Organisation and join us.

And if you are a politician from any party who would like to see UK policy return to sanity, please reach out.