UK debt spiral sparks economic collapse fears
Yesterday the UK chancellor delivered his autumn statement. Even with Brexit, he will allow the national debt to increase — and some warn of impending financial and social catastrophe.
That is how Philip Hammond, the UK chancellor, has described his country’s national debt. At first glance, it seems hard to argue with him. Britain currently owes £1,640,000,000,000 (1.6 trillion) to its creditors: the equivalent of £25,000 per person in the country. This does not even include commitments to future pensioners, at a time when people live longer than ever.
The government had hoped those numbers would start falling this year. But a sluggish global economy and the shock of a vote to leave the EU have changed that. Yesterday, Hammond said the country will borrow an extra £122bn over the next five years.
By 2018 the money Britain owes will pass 90% of the amount it generates each year. And that could be a watershed moment. In 2010, economists Ken Rogoff and Carmen Reinhart wrote an influential paper arguing that at this point, countries put their long-term growth at risk of significant damage.
Could this have disastrous political and social consequences? High levels of debt have been associated with significant unrest and upheaval in history. In late 18th-century France, taxes were raised to pay off debts — fuelling the resentment which led to a bloody revolution. Russia’s Bolsheviks and Hitler in Germany rose to power amid anger at public debt levels.
Economists have paid particular attention to debt-to-GDP ratios since the 2008 financial crash, when governments took on large debts to bail out failing banks and businesses. But some dispute the urgency of doing so: writer Ian Tarr, for example, questions the methodology behind Rogoff and Reinhart’s study.
And bestselling author Paul Krugman goes further. ‘There’s a reasonable argument that part of what ails the world economy is that governments aren’t deep enough in debt,’ he says. He argues government investment encourages others to spend and funds infrastructure, which is vital when a downturn arrives. He adds that high levels of government debt create safe assets, which lenders can rely on.
Cutting debt is a priority, say some. Governments must live within their means; the alternative is unfairly passing debt to future generations. Investors can only have confidence if countries control their public finances. When debt is too high, lenders charge higher interest rates, so more money is wasted. Eventually, public tolerance for this snaps.
Others say it is not important. Governments in many rich Western countries have been in debt for centuries, overcoming challenges including wars in the meantime. They can roll their debts over as lenders know they will pay them back. It is more damaging to stop spending, and spook others into doing so, than to get into debt.
- Would you be willing to go into debt?
- Should cutting debt be one of the government’s priorities?
- Write down five open-ended questions this article inspires you to ask. If possible, pick the most interesting one and research a possible answer.
- Find out more about a time when debt contributed to major political and social upheaval (some examples are mentioned in this piece). Write a two-page essay assessing how significant a factor it was in the change.
Some People Say...
“Nobody should spend money until they have received it.”
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Q & A
- Does it matter when powerful people fiddle with financial figures?
- When debt is high, governments are more likely to raise taxes — meaning people earn, and so spend, less. This could have a knock-on effect on your chances of getting a job or earning money. But if governments do not spend enough, it may mean services you care about — like the school you go to, or the hospital you or your family may need — losing funds. And if it government decisions have an impact on economic growth, it could affect the money you or your family can make.
- But I’m not motivated by money.
- Major economic changes have been closely linked to social changes throughout history. If people in your local area become poorer, for example, crime is likely to rise — and you or people you care about could be affected.
- That is just a fraction of total public and private debts, which some estimate are over 500% of GDP.
- The government’s forecasts were made while predicting a Remain vote in the referendu, which it advocated.
- Hammond will use some of this to build houses and infrastructure, but he also aims to avoid a ‘spending splurge’. He says the national debt will begin falling as a proportion of GDP by 2020.
- Ken Rogoff
- Former chief economist at the International Monetary Fund.
- Hammond’s predecessor, George Osborne, said it strongly affected his drive to cut the UK’s budget deficit.
- Taxes were raised on the ‘Third Estate’ — the majority of the French population — to pay off debts incurred during the seven years’ war. This increased anger towards the nobility, clergy and monarchy, all of whom were targeted in the subsequent revolution.
- The Bolsheviks seized power in October 1917. Adolf Hitler became chancellor of Germany in 1933.
- This contrasts with some privately-created assets which turned out to be worthless, helping to cause the 2008 crash.