Afternoon:
15°c
A favourite gripe of my father's generation back in the Fifties was that their taxes were being used to pay for the Napoleonic wars.
In truth, it was not a very serious gripe, and certainly not the biggest thing to worry about in those times, but it has a certain resonance.
Politicians today talk about the burden of public debt being passed on to our children and grandchildren. In truth, every generation of taxpayers has had to pay the bills of its predecessors.
Even today, though Napoleon has been taken care of, the Kaiser hasn't. Today's taxpayers may neither know nor care but a small slice of what they hand over to Her Majesty's Revenue and Customs every year goes to pay the interest on a couple of billion pounds of debt run up to pay for the First World War and still outstanding. Have a look some time at the Government securities section on a stock market prices page and locate War Loan. Launched in 1916 it is still going strong. And it is you who is paying the interest.
We did rather better with the Second World War. The last of the millions lent by the US was paid off in 2006.
In fact, the whole saga shows up our politicians at their worst. Listen to Chancellor George Osborne and you could easily believe government debt was invented by Gordon Brown. In fact, he made a pretty big reduction in the debt levels he inherited from his Conservative predecessor John Major - fixing the roof while the sun was shining, to coin a phrase - until he was knocked hopelessly off course by the financial crisis and the need to bail out banks.
There are many things to criticise Brown over but debt management before the crisis is not really one of them. It does rather underline the pettiness behind the refusal of Osborne and David Cameron to put Brown forward as a potential head of the International Monetary Fund. But that's another story.
Again, though, you would never guess from the political rhetoric that the national debt as a proportion of GDP has been an awful lot higher in the past than it is ever likely to be this time round. In the aforementioned Napoleonic wars it hit 250 per cent of GDP, and it was there or thereabouts again at the end of the Second World War.
On current projections, debt is expected to stabilise at around 70 per cent of GDP or, shedding the jargon, it will be the equivalent of just over two- thirds of all the output generated by the entire nation in one year.
However, if things turned out much worse than that and debt rose to 100 per cent of GDP, the interest would still only be about five per cent or 5p for every £1 earned in the country. Eminently affordable, so why the panic?
Actually, it is not just affordable but it can be useful. Interest paid on government debt does not disappear into some black hole in the North Atlantic where it is lost to the nation and never seen again. Government debt is mostly held by British pension funds and insurance companies. They rely on those interest payments for income and the cash is what they use to pay people's pensions and annuities.
Nor will debt necessarily stifle economic growth. Throughout the Victorian age, hailed as the golden age of British power economically, militarily and politically, debt did not drop below 100 per cent of GDP until just before the First World War when, of course, it immediately shot back up again.
But there clearly does come a point where it all gets too much. Modern-day Japan does seem to be stuck in a low growth environment with a debt of 400 per cent by some measures and more than 200 per cent even on a conservative calculation.
However, even here there is a case for saying the Government's debt is a consequence of deeper problems in banking and elsewhere throughout the economy, rather than the primary cause of the malaise. You could say that of this country too.
In fact, it is not normally the amount of debt which causes the problem. Instead, because governments rarely actually pay off loans but prefer instead to roll them over by taking out new borrowing to pay off the old, they get caught out when they find no one will lend to them any more.
This is the pinch point for Greece and the other troubled eurozone countries - but it is a much lesser problem for the UK because our debt is much longer-term, giving us much more time to set our house in order.
It would be wrong to say debt does not matter but we need a sense of proportion - and having made the point, the Government must move on. Talking tough on cuts may keep financial markets onside, but the Government's priority should be to restore economic growth, not fixate about the deficit. Get growth right and the deficit will take care of itself; but a government which defines itself by cuts stands a very good chance of making things worse.
Reader views (5)
Hilton is using a flawed argument. And indeed spreading lies. He says Brown did not run up debt 'until he was knocked hopelessly off course by the financial crisis and the need to bail out banks'.
This is just plain untrue.
Brown followed tory spending plans (and sold the 3G licences) and cut debt.
Then he started to spend again and the deficit grew; all before the credit crunch.
Mr Hilton is a disgrace to his position.
- Trevors Den, Oxford, 03/06/2011 13:48
Report abuse
Hilton is completely deluded and deliberately misleading. Even if growth returned to the 30yr average it will still not generate sufficient tax revenues for the Govt to be able to control our mammoth debt, which officially hides our huge public sector pension liability and PFI. At current expenditure levels the State will still be spending more than they receive. The debt is only manageable because the interest rat on the debt is relatively low. Anyone who manages their personal finances prudently will know the bigger the debt the more vulnerable we are to external influences beyond our control.
Hilton continually propagates failed socialist, financial dogma from his column in the knowledge it won’t be him paying the price for such economic incompetence in the future. He should take a less selfish view and care about the disastrous legacy we are leaving our children.
- Dennis, N London, 03/06/2011 10:57
Report abuse
Anthony Hilton is either very badly informed or intentionally mendacious about Gordon Brown's record as Chancellor - either way Hilton should be ashamed of himself. To say that Brown "made a pretty big reduction in the debt levels he inherited from his Conservative predecessor John Major...until he was hopelessly knocked off course by the financial crisis and the need to bail out the banks" is quite far from the truth. Yes National Debt did go down in the first few years of Brown's Chancellorship, but mostly because he kept going with Conservative policies on tax and spending and it was heading that way anyway as we continued to recover from the 90's recession and enjoyed imported deflation from China and thus low interest rates. From 2002 onwards Brown, thinking he had banished boom and bust, went on a spending spree and our National debt rose rapidly in both nominal and real terms and as a % of GDP. In 1998 UK Net Debt stood at £353bn, in 2002 it had reduced to £315bn then Brown abandoned his friend 'Prudence' and debt shot up to £500bn by 2007. If he had fixed 'the roof while the sun was shining' as Hilton falsely claims we would not be in nearly the position we are currently in after the bank bail outs. Not to mention that a large part of the crisis can be blamed on Brown not regulating the Banks properly in teh firs place. In my view one of the worst Chancellors we have ever had.
- Ben, Haywards Heath, UK, 03/06/2011 08:54
Report abuse
At last, some truth about government debt in the media. Its the way modern governments work - they sell government debt, the government gets the funds they need, the investor gets a steady and reliable stream of income, plus their money back - everyones happy.
If only Labour politicians would point this out when the coalition/Tories start another of their cost-cutting exercises which they explain away with the stock explanation of "we've maxed out our credit card". (Luckily enough the government doesn't have to pay back at credit card interest rates which really would be time to worry)
- Paxton Pat, London, UK, 02/06/2011 17:35
Report abuse
More debt is the very last thing we need!
- Dan, London, 02/06/2011 13:13
Report abuse
