Monday 30 January 2012

£1 trillion National Debt:. . . so what?

The media and political parties have made a meal of the fact that our National Debt has now reached £1 trillion. The Tories use the figure to "prove" that their public spending cuts are necessary and inevitable, Labour to show that the policy of public austerity is making matters worse rather than better, and the media like to sensationalise any allegedly significant "milestone" in order to attract attention, sell their papers and maximise their profits.

In fact the really significant fact about our National Debt is that it is still, at 64% of our GDP, only marginally above the accepted normal maximum of 60%, which is what is to be expected in a recession, still below those of Germany and France, and less than a third of that of Japan, (226% of GDP.)

The really serious fact about Britain's debts is that, adding together the debts of households, companies, the financial sector and the government the total comes to almost 500% of GDP. This makes the UK economy as a whole the most indebted of the big rich countries. (The total indebtedness of the US is around 280% of their GDP.)

Aggregate household debt is almost 100% of GDP, so all those households who criticise the government for having accumulated debts of 64% need to look to the beams in their own eyes. Company debt is around 110%of GDP and the debts of the financial sector over 200%.

In this scenario government debt is the least of our worries. Most of it is held internally and, if the Tories are really so desperately worried about it, it could be reduced very rapidly by a wealth tax and the closing of a few tax loopholes. I cannot, however, see any similar quick fix for the massive private-sector debts. These have to be reduced somehow and doing so must reduce aggregate demand which will in turn hamper growth and, under present arrangements, cause yet more unemployment and serious misery.

The answer must lie in more sharing, both of the work available and the incomes generated. This will mean more part-time working, more job-sharing, an end to double-income households, and more taxes to help the most adversely affected. As far as I can see, none of the three major parties is even beginning to tackle this problem. The Greens have perhaps made a start.

The alternative is to wipe out the debts by massive inflation, not a prospect which those of us with savings relish.


  1. See Paul Krugman's article in the New York Times (30 January):

  2. Thanks for that, Simon. I am a great fan of yours, regard you as one of the most perceptive and prescient of today's political commentators, and always look forward the your Liberator articles.

    The Krugman article you recommend should be read by all Liberal Democrats in government. It is absurd that the party of Keynes continues to be seen to be supporting the Tories' crazy economic policy. I hope that behind the scenes we are arguing against. At least in public we should stop these lies about it all being the fault of Labour profligacy and, by body language if words aren't permitted, we should be making it clear that it is "them, not us."

  3. Many thanks for your kind comments.

    The basic problem is that political and policy elites won't let go of neoliberal economic ideology, despite the clear evidence for the failure of this orthodoxy, hence the austerity fetish.

    A similar thing happened thirty years ago, when elites clung on to Butskellite social democracy for ten years from the 1973 oil crisis to Thatcher's landslide in 1983.

    I fear that the economic situation will have to get much worse - along with a growing popular revolt against mainstream parties - before the governing consensus finally changes.

    The question for Liberal Democrats is therefore whether they wish lead a debate on the fundamental changes needed to the economic system, or whether they prefer to follow in the wake of events.

    Unfortunately, as last year's policy document 'Facing the Future' showed, the party seems to be content to tinker at the edges.