‘Nothing wrong with debt’, economists argue

MPs have voted in favour of a law requiring Britain to ‘live within its means’. Governments and individuals in the developed world have taken on large sums of debt. Should we be concerned?

In the early hours of this morning, Britain’s national debt crept past £1.6 trillion. The UK government owes around £25,000 on behalf of each citizen in the country and over £50,000 for each payer of income tax.

MPs want these numbers to fall and last night they voted in favour of the Charter for Budget Responsibility. This requires the government to run a budget surplus (meaning they raise more money, in tax (and other income), than they spend) in ‘normal times’ from 2019-20.

The bill provoked a bitter political row. Labour has dismissed it as a ‘gimmick’, but Chancellor George Osborne said Labour had ‘confirmed they want to go on borrowing forever — loading debts onto our children that they can never hope to repay’.

Western societies historically have viewed debt with suspicion. The Catholic church, interpreting the Old Testament ban on usury strictly, prevented Christians from lending money at all until the 16th century Reformation. Jewish people often filled the role of money lenders — giving rise to anti-Semitism and the character Shylock in Shakespeare’s play The Merchant of Venice.

Rich countries now tend to be the most indebted, as lenders trust they will pay money back. Japan, whose GDP per capita is similar to the UK’s, has the highest debt-to-GDP ratio in the world.

Personal debt is also high: the average British adult now owes more than they earn in a year. Mortgages — the money people borrow to buy houses — are the most significant source of debt in most homeowners’ lives. But by the end of next year the average UK household will also have cash debts (mainly from personal loans, credit cards and overdrafts) of nearly £10,000. And a study last year said the average student would owe £44,000 on leaving university, largely as a result of rising tuition fees. Labour MP Stella Creasy believes the UK faces ‘a massive looming personal debt crisis’.

Payback time

Fiscal conservatives are suspicious of debt. Borrowing money means promising to pay it back later. If you cannot afford it now, you should not assume you will be able to afford it later, particularly when you add interest payments. Governments, and people, must live within their means. For evidence of what happens otherwise, look no further than the fiasco in Greece.

Keynesian economists disagree. There is a reason why the US government has been in debt for 180 years and the British one for over 300. Taking on debt can present an opportunity for investment — governments can build infrastructure, or individuals can take degrees or start businesses. These are the things that make us richer. If nobody took on any debt, nobody would spend anything — and the world economy would grind to a halt.

You Decide

  1. Would you take on debt to pay for something you really wanted?
  2. Do you support George Osborne’s law?

Activities

  1. Write five questions on debt which you would like to know the answer to (and, if you have them, any ideas of what the answers might be).
  2. Write an email exchange between a Keynesian economist and a fiscal conservative. What might they say to each other about debt?

Some People Say...

“Lending money is cruel.”

What do you think?

Q & A

So some people argue about figures on balance sheets. Why should I care?
The amount of money the government spends is important because it keeps public services (including schools) going. But governments may also have to raise taxes to pay off their debts. This means people will have less money to spend.
Should I be worried about getting into debt?
The first major debt which many people take on is a student loan. If you’re going to university, it can be easy to see this as free money, but you will have to pay it back with interest. You should also make sure a mortgage is realistic before taking one on and be careful with credit cards — a late payment can cost you heavily. And beware payday loan companies, who have been known to charge exorbitant interest rates.

Word Watch

Normal
This will apply when the economy is growing by 1% per year or more.
2019-20
Until then, the government will be required to reduce the national debt as a percentage of the nation’s GDP.
Labour
Shadow Chancellor John McDonnell instructed Labour MPs to vote against the bill, having indicated last month that he would do the opposite. Some MPs reacted angrily to this about-turn, with one calling it a ‘huge joke’ and another a ‘total shambles’.
Gimmick
This view of the bill has support from people on the left and right wings. The Taxpayers’ Alliance, a group which calls for low, simple taxes, called it a ‘meaningless political gimmick of the most transparent kind’ when the bill was first proposed in January.
Reformation
When Protestantism emerged, the Catholic church’s strictness was challenged. Theologian John Calvin said that a distinction should be drawn between ‘usury’ — lending at high interest rates — and lending money at all.
Owes more
The average UK personal debt of £28,578 per person is 112% of the average annual earnings.
£10,000
This is according to accountancy firm PwC.

PDF Download

Please click on "Print view" at the top of the page to see a print friendly version of the article.