I think recalling the debt level of the immediate post-war period is helpful, up to a point.

In those days the international system (Bretton Woods) was really geared up to deal with the transition from a war to a peace-time economy. There were certainly nothing like the free flows of capital (let alone labour) there are to-day – and no ratings agencies to scare Finance Ministers, either.

The other reason I think the comparison to be of limited use is that it is far from clear that we can grow our way out of the debt this time. The reason that we became so dependent on financial sevices in the last 20 years is because that is where the absolute advantage was. (Economists will talk a lot about “comparative advantage”, but it’s absolute advantage that creates serious wealth.) Our real trouble is that, for any given economic activity, there is someone else who does it better for the same price or just as well for a lower price.

This means that our living standards have to fall dramatically. There is no precedent for this happening in a democracy. That is not to say that we couldn’t be the first, but given the current health of our political and civic culture I’m not sure what the grounds for optimism are.

But #1 the proportion of debt is so much smaller than it was post-war and we’re at war now (though it’s not in the discourse) so trying to cut our debt back is rather naive. The TA is out in Afghanistan, that’s full mobilisation of troops isn’t it?

Unless I’m mistaken, weren’t taxes relatively lower after WWII and therefore there was more scope to raise them to pay off the debt?

It’s not the debt, it’s the deficit dummy. In 1956, Harold Macmillan’s budget produced an overall budget surplus – the debt was being paid down both by economic growth and by running budget surpluses. If we can get our deficit down to zero, I’d fully agree that we don’t need spending cuts.

It has been more credibly argued that, if Britain was to expand domestic public spending, it needed to move more quickly from a global power to a European one.

Incidentally, how? Within 2 years of the end of the war, the centrepiece of British global power had been granted independence, within 10 years moves were underway to give independence to much of the Empire in the East, and within 20 years all African colonies had also become independent. A frequent criticism of the African experience in particular was that the pace of independence was too rapid – Botswana became independent with, I believe, 5 qualified doctors in the entire country, Tanganyika was in a similar condition.

So, where should decolonisation have happened more quickly?

I think there’s also a distinction to be made between the types of cuts on offer. There is a difference between cutting, say, Trident, ID cards or overseas military commitments and cutting spending on health, education or local government grants. Part of the reason that the Tories are falling in the polls is that they’ve so overdone the rhetoric of cuts that nobody believes their “we’ll protect the NHS” line. All parties are admitting that lower revenues will ultimately mean lower spending, but there is a difference over the pace of adjustment and the priorities for cutting/protecting spending. Labour and the Lib Dems are seen as being more likely to protect public services and cut less progressive elements of government expenditure, but few people trust the Tories to act in our best interests in the same scenario.

Cameron’s appeal was largely predicated on the idea that Labour really had ‘solved’ boom and bust, and that Cameronism would be about maintaining Labour’s public service spending with some tax cuts when affordable. And what’s not to like about that? But the rhetoric from the Tories these days is about debt, cuts and emergency budgets. Imagine the next five years as being like one big trip to the dentist for some root canal work, who would you rather have wielding the drill – George, Alistair or Vince? Cameron’s Conservatives would have been a great political offering in the boom years, but they’re a scary one in more difficult times.

p.s. Tim J @4 is correct. Not understanding the difference between the debt and the deficit is a fairly elementary mistake.

“At every stage in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand; yet still the debt kept on growing, and still bankruptcy and ruin were as remote as ever.”

just for the recond, both David Hume and Adam Smith were worried about public debt in the 18th Century – because of its close connection to war.

And whilst Britain was not bankrupted or conquered due to its public debt, the French suffered tremendously as the year 1789 showed – a resistance to declaring voluntary bankruptcy and denying the creditors their money eventually led to revolution as the King had to call the Estates General in order to finance the crown.

So it’s a little disengenuous to go back to the 18th Century – a lot of the complaints made then about national debt were highly contextualised, and related to the problems of national emergency in a European system of conflict, which we have now largelly transcended (though, in part, we’ve transcended it because of a huge amount of conflict we first had to go through). It’s a bit disengenuous to imply “oh, people have always been worried about national debt, and they’ve always been wrong”. Because people in the past were worried about it for different reasons – and in the case of France, they weren’t wrong.

“It’s not the debt, it’s the deficit dummy. In 1956, Harold Macmillan’s budget produced an overall budget surplus – the debt was being paid down both by economic growth and by running budget surpluses.”

Correct as far as it goes. There was also a very helpful little shove from inflation. No debt then was index linked. So inflation did indeed inflate it away.

Now most debt is index linked (no, not most gilts but even so a substantial portion is….and all of the true horrors like public pensions etc are indeed index linked) so inflation won’t get rid of them in the same manner.

I agree that by the accounts of several polls, voters have become sceptical about the Conservative pressure for early sweeping cuts in public spending – as I’ve suggested several times before, George Osborne is an electoral liability for the Conservatives.

That said, there is something seriously wrong in the NHS with this in the news:

“The number of managers in the NHS in England rose by nearly 12% last year – more than five times the rate at which qualified nurses were recruited, sparking concerns that cash was being diverted from frontline staff.

“Despite claims that NHS bureaucracy has been cut the health service has seen an explosive growth in management. The survey shows that the NHS now employs 44,660 managers and senior managers – an annual average increase in their employment of 6.3% over the last decade. This is faster growth than consultants, doctors, nurses and midwives.”
http://www.guardian.co.uk/society/2010/mar/25/nhs-management-numbers-frontline-staff

Btw these IFS surveys are easily the most accessible and dependable sources on taxes and public spending in Britain:

A Survey of the UK Tax System
http://www.ifs.org.uk/bns/bn09.pdf

A Survey of Public Spending in the UK
http://www.ifs.org.uk/publications/1791

No, I don’t know the difference between debt and deficit. Or perhaps I did, and I’ve forgotten. What I think really matters is that the rest of you should jeer at my stupidity rather than explaioning the difference between the two concepts.

[8] The index-linking of public sector pensions was scrapped earlier this year.

“It was primarily growth what did it” – moved us out of debt in the 1950s. Now however, we are beginning to realise that growth in the orthodox sense – blind, profit-driven growth that consumes resources at one end, and pumps out waste at the other – is not an option. This truth, which Basil Fawlty would characterise as a statement of the bleedin obvious, is now acknowledged by such luminaries as Nicholas Stern and Adair Turner.

However, all is not lost. Green Development – to avoid the growth word – is an option for us, in the shape of the Green New Deal. This is an investment in energy conservation and renewable energy supplies, that will create hundreds of thousands of jobs, and will provide us with an energy supply with a zero fuel cost.

The problem is – where does the money come from? Does Government have to borrow from the very banks that we bailed out at such huge cost to pay for it? Or dare the Bank of England restrict the money creation monopoly of the banks, and issue the money as grants, or loans at low or zero interest?

Already I hear screams of “Hyperinflation!!”. This is a knee jerk reflex when it is suggested that Government has a right to create money, as well as the banks. However, hyperinflation tends to take place in special, abnormal conditions, such as civil war. If the outcome of government grants is a secure national energy supply, and if Government is also prepared to withdraw money from the economy if inflation rises, hyperinflation can be prevented.

No, I don’t know the difference between debt and deficit. Or perhaps I did, and I’ve forgotten. What I think really matters is that the rest of you should jeer at my stupidity rather than explaioning the difference between the two concepts.

The debt is the total money owing. So long as we can afford the interest payments, we don’t really need to pay it off, though if we allow the debt to grow too much then those interest payments may start to hurt. For most countries, there will always be a national debt. Actually reducing the debt is often impractical, since it involves taking money out of the economy, so our best bet is normally to keep the debt stable relative to GDP.

The deficit is the amount we’re adding to the debt in a given year – the amount we spend that is greater than the amount we take in revenues. There isn’t always a deficit – some years we have a surplus, though these are relatively rare. The deficit is something that we generally do want to reduce, because failing to do so would increase the size of the debt.

For these reasons, anyone talking about reducing the debt at the moment is likely to be a nutter or badly misinformed. Reducing the deficit is what most parties are in favour of (for example, Sunder says that “the budget deficit is a problem that needs to be dealt with”), but arguments rage about how quickly to do it and by what mechanism. Pretty much everyone accepts that the debt will continue to grow over coming years, by virtue of the fact that we have a deficit. This makes Sunder’s quoting of Macmillan dubious, because Macmillan didn’t have a deficit at all. If anything, this backs up Cameron’s argument that if spending had held down over the last decade, we could afford to be as relaxed about debt levels as Macmillan was.

[12] Thanks, Rob. I sort of vaguely believed that debt was capital account and deficit current account but Sunder kinda threw me.

The question I guess we need to ask Darling – or even Sunder – is this: if it is now fiscally necessary to reduce government spending to 1997 levels (which is what I understand Darling to be saying, but hey, what do I know) and Labour believed back then that such spending levels were too low to produce/sustain social justice, does this mean that Labour have now abandoned their claim to be able to deliver social justice at all?

If so, WTF is the point of the Labour Party and if not, WTF are they saying, precisely?

@12 “The debt is the total money owing. So long as we can afford the interest payments, we don’t really need to pay it off, though if we allow the debt to grow too much then those interest payments may start to hurt. For most countries, there will always be a national debt”

Yep for dynamic economies like Greece and Argentina, high levels of debt and the high taxes, sluggish growth and low living standards which go with it are accepted. But not for this one – we had a suplus between the mid 80s and the mid 90s, which is why nulab inherited the most benevolent economy (low interest rates, low taxes and low uneployment) in post war europe.
Your argument is like me saying “I can allow my credit card debt to grow until the interest payments equal my income”. Yes I could in theory but the amount of income I had left after interest payments would gradually reduce until it took all my income and the size of the debt would stay the same. Plus the credit card company might raise the rates if they perceived me to be a higher risk – which is what the money markets will do to UK govt borrowing if they perceive borrowing to be out of control It’s the right approach if your aim is turning a competitive economy into a basket case in a decade.

“The index-linking of public sector pensions was scrapped earlier this year.”

It was? I recall the Tories saying they “would” do that, but I must have missed the massed strikes and public disorder I’d expect if it was actually implemented.

Accrual rates were changed I think but not index linking.

“if it is now fiscally necessary to reduce government spending to 1997 levels (which is what I understand Darling to be saying, but hey, what do I know) and Labour believed back then that such spending levels were too low to produce/sustain social justice, does this mean that Labour have now abandoned their claim to be able to deliver social justice at all?”

Clearly the Labour Party aren’t saying that, no.

Personally, I’d say that one particular method of trying to deliver that social justice has been shown to be empty and unaffordable.

That is, the Brown approach: let’s just throw money at the problems for of course what was creating the problem was not enough money.

We can see that public services didn’t get all that much better (some, in places, but not all that much) and we cannot afford that approach anyway. So, in the future, people are going to have to come up with methods of producing those better desired public services in a manner that doesn’t include simply throwing money at them.

Which is a good thing of course.

@ 13 Turn it around the other way – the only way nu labour could create the imposed, artificial egalitarianism which they call “social justice” (whatever the f~*k that actually means) is by bankrupting the country – Socialism doesn’t work (again) , shock horror.

I have collected figures on debt, deficit &c here:
http://greenerblog.blogspot.com/2010/03/uks-parlous-financial-situation-tough.html

Matt,
You forget that £107 billion of the National Debt comes to us courtesy of the bank bailout, caused by stupidity of free market fundamentalists operating in the financial system. Yes, Labour didn’t notice what was going on, but neither did the Tories.

And do not disparage egalitarianism out of hand. Greater equality will go a long way to mend our “broken society”. http://www.equalitytrust.org.uk/resource/the-spirit-level

[15] Well, I’m a public sector pensioner & I’m not getting a rise this year. Of course, it may only be the local government scheme. Retired admirals etc may be A-OK as in the past.

I have some sympathy with the rest of your position, but it has to be asked why neither Tory nor Labour governments have tried your idea in the past. Perhaps it is because the latter are only interested in their payroll vote (which doesn’t actually exist, but that’s another story) and the former – with a few more or less over-fruited exceptions – couldn’t give a flying f*ck about social justice anyway.

“Well, I’m a public sector pensioner & I’m not getting a rise this year. ”

Ah, now I understand. The inflation rate for September is used to calculate what the rise should be for index linked pensions. Last Sept (as far as I remember) the inflation rate was minus 1.4%.

So no rise this year….but the indexation is still there in principle.

As to why few try other approaches….well, because all of these things are complicated. And they’re all complicated in very different ways. Something like the Swedish system of school choice might drive up standards. But that’s verboeten to a large part of teh education establishment. Something like the Finnish (or German and many other countries) system of splitting schools into vocational and academic at 15 or perhaps 16 might be a good idea but that’s verboeten because we’re committed to Comprehensives.

And so on through every other particular problem. Maybe co-payments (like in France) for medical treatment would be a good idea: that’s verboeten because the NHS is free at the point of use.

I’m not saying that these are necessarily good ideas (well, not here and now I’m not) just that what does work well in other countries cannot even be tried here without huge amounts of political effort being expended. M<uch easier instead just to throw more money at the problem.

[20] Thanks for the clarification on pensions.

As you say, the other methods of service delivery you instance might or might not be better than what we have. But it’s not only hard to say, it’s even harder to draw a route map from here to there.

The general thrust of your case – that service providers form a more coherent lobby than service users – must be sound. Service providers’ livelihoods are at stake and few things are more salient than livelihood. I am not sure how you deal with that one.

The only alternative to providing services by paid workers is to provide them through volunteering, so far as I can see. How you then enforce quality standards (given that a volunteer can simply walk out without penalty to themselves) I have no idea. There aren’t enough nuns to go round these days…

@18 Yes, but that doesn’t disguise (at least not to me or the more financially astute among the electorate, in other words anyone except Robert Peston) the fact that the public finances were in a mess even before the banking crisis, caused by years of government profligracy with money we didn’t have.

Quite how GB got a reputation as a “prudent chancellor” is beyoind me, must have been a conspiracy by the right wing press…………………

@ 20 I don’t think anyone outside the vested interests in the educational establishment and a myriad of quangos would actually the mourn the end of comprehensives. I would have though a voucher system was actually very nu labour (drive up standards through competition and give more choice)

I think the media are starting to realise that public opinion is not with them on this one. They really played up Darling’s “bigger cuts than Thatcher” quote. It suggests they are uneasily aware that the poll gap has been narrowing because Labour is perceived as going easier on public spending. Had the papers thought Darling’s comment was a vote-winner for Labour, they would have downplayed it.

I’m not sure the public has quite appreciated yet that budget deficits to the tune of 12.5% of GDP cann’t be run indefinitely. Darling is correct, there will have to be spending cuts.

The special reasons why we have particular need to worry about the current scale of the government’s budget deficit are discussed in these two recent articles in The Economist:
http://www.economist.com/business-finance/displaystory.cfm?story_id=15498265
http://www.economist.com/business-finance/displaystory.cfm?story_id=15545882

See from the data table in the first of the links that the UK’s *cyclically-adjusted* primary deficit is larger than that of almost all the other countries shown.

The second link assesses financial market data to show that the yield on 10-year government bonds is higher for UK bonds than for German government bonds. This is a clear warning sign of steeper borrowing costs for Britain because of perceived lending risks.

Thanks for comments. The final two sentences of the piece were intended to be clear that the deficit matters – “Today, the budget deficit is a problem that needs to be dealt with …. But, if only progressive Conservatives knew their own history, they would realise that claims of an existential crisis of national debt are bunk”.

Darling’s projections depend on a return to growth and a tight fiscal squeeze, of which we have not many of the details yet. But as Martin Wolf wrote in the FT yesterday, “Public sector net borrowing would be 5.2 per cent of GDP in 2013-14 while net public debt would reach 75 per cent of GDP. This would be well below the UK’s average public debt ratio over the past three centuries“.

I appreciate that the historical examples reflect a range of significant differences, and that it would be necessary to secure and finance that borrowing Nonetheless, claims of an unprecedented national debt crisis (eg Cameron using the nominal £ values from the post-war period on Tuesday) are in some cases stupid, in others knowingly cynical, and in any event, rather clearly wrong as a matter of fact. So that should certainly be challenged when it is made.

So much advocacy from the right (political, and perhaps especially in the media) has been through wittering apocalyptically about Greece, financial meltdown, default and national bankruptcy. Perhaps this may be part of why the Conservatives haven’t often made a sound or convincing argument about why the deficit matters.

—
PS: It would be interesting to see any polling or deliberative evidence on the % of people who immediately grasp the difference between the budget deficit and the national debt in the national policy debate (well under 10%?), though I think most people would grasp that if eg they were watching the 10 o’clock news and the difference was set out, perhaps by using the (somewhat dangerous) household analogy.

Those projections of Martin Wolf are contingent – as he makes clear – on Treasury GDP growth assumptions (“not impossible”) and a return to buoyant tax revenues – which could fail to materialise on the scale envisaged. He also makes clear that Darling’s budget was virtually opaque on where the spending cuts would fall.

Only later did this come out:

“Chief secretary to the Treasury Liam Byrne has confirmed a re-elected Labour government would make bigger public spending cuts than Margaret Thatcher.”
http://news.bbc.co.uk/1/hi/uk_politics/8588673.stm

“the public are yet to be convinced by arguments for very heavy cuts in public services”

——————————–

Interviewer: “Mr Public, do you think kittens are nice”

Mr P: “Oh yes”

I: “Are you aware that CUTTING PUBLIC SERVICES will kill thousands of kittens?”

Mr P: “Oh no!”

I: “Do you support CUTTING PUBLIC SERVICES?”

Mr P: “No”

—————————–

Until we can get beyond this mentality the public are bound to be wary of spending cuts. There needs to be a general recognition that cutting public spending does not inevitably mean a reduction in services, particularly the core services that people value so much. There is a great deal that the state does that we either wish it wouldn’t or that we can happily live without. If you were to ask Mr P whether he would prefer lower spending or more Play Strategy Managers then the response will tend to be different compared to insisting that any minor cut in spending will leave dead babies piled in the street.

“There needs to be a general recognition that cutting public spending does not inevitably mean a reduction in services”

Well it usually does.

There are certainly savings that can be made, but cuts along the levels suggested usually cant be achieved without reducing services. So it really is about deciding which services are essential, and which are not.

[28][29] I suspect different services are essential to different people.

@29: “Well it usually does. ”

Amazingly, apparently not in the NHS:

“The National Health Service can make the £15bn to £20bn of savings needed during the next three years without damaging the quantity or quality of care – indeed while even improving the latter – according to David Nicholson, the NHS chief executive.”
http://www.ft.com/cms/s/0/6fba7dfe-e683-11de-98b1-00144feab49a.html

If £15bn to £20bn can be cut from the annual NHS budget of £104 billions or so without that making much difference to the quality of patient care, what implications does that carry for other public spending?

According to this from Thursday’s Budget news on departmental pledges to cut costs:

“The Department of Health says it is to make cuts of £4.35bn over three years in an ‘efficiency savings’ drive. It is the biggest contribution to £11bn of government savings announced in last year’s pre-Budget report.”
http://news.bbc.co.uk/1/hi/uk_politics/8586016.stm

Evidently, the government is not avoiding cuts in spending on the NHS.

[31] Obviously this chap doesn’t know what he’s talking about. Fortunately our Bob, despite a regrettable tendency to believe what government officials say, does.

@32: Thanks for that.

When I retired from the civil service more than a decade ago, aged 60, the official policy of the department in which I worked favoured Britain joining the Euro. I didn’t – largely as the result of reading this enlightening article in 1996 by the late Rudi Dornbusch of the MIT (sorry, summary only):
http://www.foreignaffairs.com/articles/52431/rudiger-dornbusch/euro-fantasies-common-currency-as-panacea

Prior to Gordon Brown’s official announcement as Chancellor in June 2003 that Britain wouldn’t be signing up to join the Euro because of his “five tests” (*), I had two phone conversations with past colleagues – the last I had with past colleagues.

With one, our respective views about joining the Euro converged. With the other, he said, “Oh! you’re not one of those opposed to joining the Euro, are you?” And our otherwise amicable conversation ended shortly thereafter. The tone of his question suggested personal contempt.

The curious fact is that civil servants are not monolithic and nor are government departments. There is always a prudent question about which official to believe.

Btw Walter Eltis – who was Michael Heseltine’s economic adviser when he was DTI minister – didn’t advocate joining the Euro even though Heseltine was a high-profile enthusiast for joining. See Eltis’s book: Britain, Europe, and EMU (Palgrave 2000).

(*) “Key economic tests for ditching the pound and joining the euro have not yet been met, Chancellor Gordon Brown has told MPs.”
http://news.bbc.co.uk/1/hi/uk_politics/2975560.stm

31. Bob b. Perhaps it is time government departments provided tables of numbers of types of employees and their costs ( salary plus pension, cost of building ) etc, etc. Admin costs for each department should be listed. Northcote -Parkinson commented on the increase in office workers of such organsiations such as the RN and Colonial Office although their duties declined . I think NP quoted that the RN had more office workers in the 50s than in 1918 , even though it had a fraction of the ships.

Labour do not understand the difference between quality and quantity, between input and output. If the 10 worst science and engineering faculties at universities were the closed adverse impact on the UK’s R and D capability would be minimal , if the 10 best were closed down it would cripple the nation.

Green technology requires large numbers of caftsmen, technicians, scientists and engineers which we are not producing in large enough quantities. The numbers of administrators and managers on the government pay roll which have greatly increased under Labour 1997 are not going to grow the economy .

When people talk about the ability to grow out of debt in the 18 and up to the mid 19 centuries, the UK was the only industrialised nation in the World: we probably accounted for 25% of international trade.

In 1956 the UK still had the luxury of the sterling market and Japan had not become the second largest economy and Germany was still growing .

The international competition in trade is the toughest it has ever been and we have not trained enough people with the relevant skills for the wealth creating industries .

Someone of Radio 4 yesterday was pointing out that despite recent increases in managers and the widespread perception that the NHS has too many “bureaucrats”, the number of managers is 3% of the total workforce which is quite a low ratio considering its size and complexity, and compares favourably with many private sector organisations.

The problem that the NHS faces is that for quite a few years now funding increases have not been matched by productivity increases, in fact productivity now negatively with funding, this suggests;

a) Cuts could be made without affecting “front line services” – problem being defining exactly what a “front line service” is

b) It has become as efficient as it can be without major capital investment/restructuring

As the latter is unlikely to happen any time soon, the “ring-fencing” of NHS funding at the expense of other, potentially more effiicient departments, makes no sense at all.

@ 26 “So much advocacy from the right (political, and perhaps especially in the media) has been through wittering apocalyptically about Greece, financial meltdown, default and national bankruptcy. Perhaps this may be part of why the Conservatives haven’t often made a sound or convincing argument about why the deficit matters.”

They can’t because a large chunk of the public – those that grew up under the blair/brown economic bubble, have known nothing but ever rising house prices, endless credit and easy employment, are unable to comprehend a world in which the government cannot protect them from economic reality.

The last government that came in on a “cutting” agenda was Thatchers’, but the problems then were more apparent (strikes, riots, oil shocks, sterling crises, IMF loans, 3 day weeks etc) so the public were more prepared for the medicine. Gordos devaluation of the £ (aka quantiative easing) and a massive expansion of the public sector (on borrowed money) have insulated the public from the current crisis. Its mass denial, the real pain is yet to come, whoever gets elected.

@34: “Perhaps it is time government departments provided tables of numbers of types of employees and their costs ( salary plus pension, cost of building ) etc, etc. Admin costs for each department should be listed.”

For reasons I can only speculate about, the previously hugely informative Civil Service yearbook will no longer be available:
http://www.civil-service.co.uk/

But this source is still available – last updated November 2009:
http://www.civilservant.org.uk/numbers.pdf

And so is this – last updated in February 2010:
http://www.civilservice.gov.uk/about/facts/statistics/index.aspx#

@36: “The last government that came in on a “cutting” agenda was Thatchers’, but the problems then were more apparent (strikes, riots, oil shocks, sterling crises, IMF loans, 3 day weeks etc) so the public were more prepared for the medicine.”

By 1992, tax revenues as a percentage of Britain’s GDP were about the same as when Mrs Thatcher had become PM in May 1979.

The NHS does a good job with the budget it gets. That does not mean it can’t be improved. Have a look at this graph where it compares internationally.

http://pjep.org/uploads/resources/1262014762.jpeg

Arguably any country with a downward slope is getting bad outcomes for money spent. Those with an upward slope are getting good outcomes for money spent. You will notice the US is off the scale in terms of money spent and crap outcomes.

‘ The response from much of the commentariat, especially on the right, is to charge the public with denial: ‘

I think you are wrong here. I am not on the right and I believe the public are in denial. Many on the left seem to want to believe that a crack down on tax evasion and a squeeze the rich policy will suffice. The right believe we don’t need tax rises if we only cut down on spending by employing less diversity officers. I think they are both wrong and it is the left and right in denial.

It is very difficult to explain this without drawing a model of the economy. We have an economy providing public services. However, the costs and budgets for those services are based on an economy that no longer exists. Our national income fell with the fall in output. Therefore, even with the economy growing again, it is on a different trajectory to the one the public services budgets were based on. That means even if and when the economy returns to trend growth then there is still a structural deficit.

Many people believe the recession will have done permanent damage to the UK economy and our trend growth will be lower. We could have a short-term above trend growth rate because of inventory bounce back effects. However, almost no one believes we can grow our way out of a structural deficit. That would take a sustained period of above trend growth. The other way we could eliminate the structural deficit without cuts is inflation while keeping pay public sector pay settlements below the inflation rate. That means everyone in the public sector getting poorer rather than just the ones who lost their jobs in a cuts option. However, the bond market does not react kindly to inflation and would raise considerably the cost of government borrowing.

The bottom line is we are not as prosperous as a nation as we were 2007. I quite agree there is ridiculous deficit-phobia and idiotic scare stories about the national debt. How will we pay this debt is a regular question. We don’t and never have paid the national debt is the answer. The Treasury still pays interest for the Napoleonic wars and we have had a few wars in the interim period. The national debt is nothing to worry about as inflation and growth will deal with that.

The Tories harking back to the early 1980s when they cut and the economy grew does not inspire confidence. The rather large elephant in the room that they have not spotted is at that time monetary policy had traction. At the current zero-bound it does not. I completely agree with supporting the economy until the private sector recovers. However, in time the structural deficit does need to be eliminated and that means cuts.

(Macmillan threatened to close the stock exchange and nationalise the whole British banking sector.)

“The Treasury still pays interest for the Napoleonic wars”

Are you sure about this? I seem to remember that we finished paying off the debt from WW2 a few, (late 90s?), years ago so this seems unlikely.

What you are probably referring to is the debt from the lend-lease programme to the US and Canada for WW11 war debts. The last payment to clear that debt was just 2006. We were six years late clearing the debt because of deferring payment due to FX problems 1956, 1957, 1964, 1965, 1968 and 1976. We still owe the US for WW1 debt, but Keynes told the Treasury in 1931 to give the Americans no more and we have not paid since 1931. The debts from the Napoleonic wars are in the form of consols, which have no maturity. Some consols go back even further to the 18th century. The same bonds are mentioned in David Copperfield and the UK Treasury still pays the coupon in the 21st century.

For sure, an engaging diversion about paying off past national debts but how about these reported leaked details of proposed NHS cuts to save £20bn:

http://www.telegraph.co.uk/health/healthnews/7529454/Hospital-wards-to-shut-in-secret-NHS-cuts.html
http://www.timesonline.co.uk/tol/life_and_style/health/article7078566.ece

Yep,

I’ve heard whispers that Labour will be looking for cuts of between 30-40% of managment in the NHS if re-elected.

The problem the public has in accepting cuts is that they perceive the injustice of bankers carrying on regardless after causing all the mess. If Gordon nailed Sir Fred to a tree and pissed on him then people might be less unhappy. However, Gordon has never met a banker he didn’t like.

@Yurzem; A more constructive approach to Fred Goodwin would be take him to court, and make him responsible for his erroneous purchase of AMRO, on the basis that his bonuses are a recognition of his personal responsibility for his choices. If successful, Goodwin will be made bankrupt, and several billions of debt, otherwise on the accounts of the part-state-owned RBS, will be annihilated.

@22 Matt “the fact that the public finances were in a mess even before the banking crisis, caused by years of government profligacy with money we didn’t have. ”

Agreed, debt financing is wrong. It is unethical, committing future generations to pay for our present demands. Everyone has been doing it though: This list of countries by National Debt
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
shows the UK about midway on the OECD list, and midway/worse on the general list.
In terms of external (foreign) debt, we do far worse, being fifth from bottom of the list in terms of percentage of GDP. This means that we are more in hock to foreign banks.
The interesting thing is that the vast majority owed by all countries is not to one another, but by countries to private banks.

The root of all of this debt lies in the fact that money is created by lending at interest. The money supply is doubling every 10 years or so. Doubling growth is exponential, and therefore unsustainable. The solution to the debt problem is to issue at least a fraction of the money on the authority of institutions acting on behalf of the ultimate source of power (i.e. the people). Such issues should be only for investment into physical processes designed to benefit the nation in the long term, the principle candidate in 2010 being the Green New Deal.

This suggestion is certain to produce hysterical comments about hyperinflation, but hyperinflation is caused by ill-considered short term printing of money, usually in conditions of civil disruption or civil war. There is no intrinsic reason that private corporations should have a monopoly on the creation of money.

Despite the cold winter an’ all, they tell me that the cuckoos are out early this year, so listen carefully.

44. Richard Lawson

‘ @Yurzem; A more constructive approach to Fred Goodwin would be take him to court, and make him responsible for his erroneous purchase of AMRO, on the basis that his bonuses are a recognition of his personal responsibility for his choices. If successful, Goodwin will be made bankrupt, and several billions of debt, otherwise on the accounts of the part-state-owned RBS, will be annihilated. ‘

Without wishing to defend Goodwin, how can you hold one individual responsible? The takeover of ABN Amro was agreed by all shareholders and approved by the FSA. Therefore, by what legal definition is Goodwin personally responsible? I fail to see how making Goodwin personally bankrupt changes the structure of the RBS balance sheet.

‘ Agreed, debt financing is wrong. It is unethical, committing future generations to pay for our present demands. Everyone has been doing it though: ‘

The problem with this type of thinking is one of incentives. Why should present generations meet the costs of investment in infrastructure through taxes when most of the benefits accrue to future generations? For example, imagine building a bridge or a hospital with a lifespan of 100 years. Is it fair to ask the present generation to meet the full cost upfront when future generations get equal benefit but contribute nothing to the cost? The future would be free-riding on the present. If governments could not spread the costs into the future then they have no incentive to spend money today, as they would in effect be financing future governments.

‘ This list of countries by National Debt
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
shows the UK about midway on the OECD list, and midway/worse on the general list.
In terms of external (foreign) debt, we do far worse, being fifth from bottom of the list in terms of percentage of GDP. This means that we are more in hock to foreign banks.
The interesting thing is that the vast majority owed by all countries is not to one another, but by countries to private banks. ‘

Do you have any evidence that the vast majority of sovereign debt is in the hands of private banks? Private commercial banks tend only to be holders of short-dated debt issues. Moreover, even when they are recorded as the buyers they are often proxy buyers for third party purchasers. Usually state owned central banks who wish to transfer their foreign currency reserves into yield bearing instruments. For example, the Fed often record the UK as the 3rd highest holder of US Treasuries. However, most of these purchases are just proxy buying for third parties who use London institutions to buy on their behalf. Many of China’s buying of UST is through London.

Richard Lawson, Richard W,

My point was a political one. Sir Fred is an easy scapegoat, as you say there are many more reasonable targets. However we’re talking about public perceptions here. People will ask why the public should be hurt when they do not consider themselves responsible for the current predicament.

Various points:

@18 Richard Lawson

The government has accounted £10bn for the cost of bank bailouts, not £107bn as you suggest.

@44 Richard Lawson

Most government debt is held by pension funds, not banks. Banks only tend to hold enough to manage their capital adequacy requirments – so not a large amount.

Debt acts as a drag on growth, and there is basically no chance we are going to be able to grow our way out of this mess. Comparisons with the 50s are all well and good, but;

- it was war debt at very low interest rates
- inflation was much higher, inflating the value of the debt away
- tax rates were much much lower, so a rise in taxes didn’t damage the ecnomy as much
- the government was running surpluses.

Compare that to now, and only the first point is (partly) true. We can’t inflate our debt away, and we already have very high tax rates. What is also worth noting is that unfunded public sector pensions are not included in our debt numbers, when really they should be – they are a fixed obligation which the government is forced to pay – its effectively (and is certainly modelled as) debt. Add that into the mix and debt looks more like 150% of GDP.

As for the whole deficit/debt/growth argument; yes, even the massive increase in debt under Labour is affordable. That doesn’t make it a good thing though – it will act as a huge drag on growth. It is also not hugely helpful to talk about debt/GDP sometimes – its better to look at debt servicing costs/tax reciepts. in 2007 about 3-4% of tax reciepts were used to pay for debt servicing. By 2015 this will have increased to 10-11%.

Long term debt does also definately have a detrimental effect on growth. Every £20bn of debt serving costs (which are due to increase for ~30bn a year in 2007 to ~£75bn in 2015) is effectively 1% of GDP.

The argument the Left use is that we should bolster growth by providing a Keynsian stimulus. What they ignore is that Keynes said that this stimulus should be paid for by running surpluses in times of growth, and NOT by running up long term debt, as this would have the aforementioned negative effect on long term growth.

So, when people, predominantly of the Left, talk about “not jepordising the recovery” or “investing for growth” they are frankly being facetious. What they are really doing is making excuses for fiscal ill-discipline. We are softening the short term pain, purely for political capital, at the cost of long term economic growth.

@44 Richard Wilson – Bonus responsibility
The point to be decided in the courts would be to what extent the receipt of a bonus is in recognition for the individual’s responsibility for his decision. The salary is paid in recognition for the executive’s work for the institution. The bonus must be in recognition for individual actions. There is a parallel with the merit awards given to medical consultants. So if Sir Fred, (together with his board – yes, let’s bring them in also, it was a collective decision) decides to buy a bank, and it turns out in the end that the bank contains a £16.2 billion black hole of debt, they have clearly made an error. They have been negligent. Now as things stand, that debt belongs to RBS as an institution. Govt decides that the institution is too big to fail, and bails is out, acquiring shares in RBS, and the debt comes to us, the taxpayer, adding to our National Debt.

Say for the sake of simplicity that Fred Goodwin and the board are paid bonuses equal to their salaries. 50% of the acquired debt goes to the institution, and therefore to us, as above. If the court decides that bonuses do in fact reflect individual responsibility, then that 50% of the debt should be attributed to the Board as individuals. They are made bankrupt, and in bankruptcy, the debt is annihilated. Which takes a big slice off the National Dent.

Worth a try, surely?

@46 Richard W
“Why should present generations meet the costs of investment in infrastructure through taxes when most of the benefits accrue to future generations? For example, imagine building a bridge or a hospital with a lifespan of 100 years. Is it fair to ask the present generation to meet the full cost upfront when future generations get equal benefit but contribute nothing to the cost? The future would be free-riding on the present. If governments could not spread the costs into the future then they have no incentive to spend money today, as they would in effect be financing future governments”.

I fully agree; for a valid, solid piece of infrastructure that will benefit future generations, it is ethical to pass some of that cost onto future generations through debt. On balance though, we are passing on huge net costs to future generations, primarily through the effects of global warming caused by our addiction to fossil fuels.

Do you have any evidence that the vast majority of sovereign debt is in the hands of private banks?

The evidence lies in the fact that in the list of countries by external (=Foreign) debt, only 5 tiny countries have no foreign debt. If the debt were owed from country to country, then approximately half would be in debt, and half in credit.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

@48 Tyler
“The government has accounted £10bn for the cost of bank bailouts, not £107bn as you suggest ”
I wish you hadn’t said that:
Government support for Britain’s banks has reached a staggering £850bn and the eventual cost to taxpayers will not be known for years, the The National Audit Office public spending watchdog says today.
http://blogs.reuters.com/financial-regulatory-forum/2009/12/04/uk-bank-bailout-cost-hits-850-billion-sterling-watchdog/

Today’s overview of the government’s response to the crisis shows that the purchases of shares by the public sector together with offers of guarantees, insurance and loans made to banks reached £850 billion, an unprecedented level of support.
http://www.nao.org.uk/publications/0910/uk_banking_system.aspx

I guess that the £850 bn figure would include our exposure to a further bank failure, in the amazing insurance scheme that they have been offered.

“The Treasury have made some provision in their forecasts for the losses we’re likely to make on the bank bailouts. As of April 2009, unrealised losses from financial sector interventions account for £134.5 billion of the national debt. Northern Rock and Bradford & Bingley account for £123 billion, with a further £9 billion going to compensate depositors with the Dunfermline Building Society.

If this wasn’t bad enough, the picture is going to get considerably worse. The Office of National Statistics has classified the Royal Bank of Scotland and Lloyds as public corporations but hasn’t yet included their liabilities in the national debt. When they finally crunch the numbers, expect the results to be ugly. According to EU figures, Britain has pledged £781.2 billion in capital injections, liability guarantees and liquidity support to the banking system”.
http://www.debtbombshell.com/measuring-national-debt.htm

“Without wishing to defend Goodwin, how can you hold one individual responsible? The takeover of ABN Amro was agreed by all shareholders and approved by the FSA. Therefore, by what legal definition is Goodwin personally responsible? I fail to see how making Goodwin personally bankrupt changes the structure of the RBS balance sheet.”

You can’t but, but to put it bluntly by all accounts the bloke was a wanker of the first degree, even by banking standards. If there has to be a fall guy, then it couldn’t happen to a nicer person. And I think some would swap the word “agreed” for “bullied into”. Anyone who questioned the wisdom of the takeover (even in the context of the bubble, ABN was obviously over valued) was shouted down, sidelined, or sacked. In terms of governance the buck (for RBS not the whole economy agreed) stops with him, and if it doesn’t then what was he getting paid for ?

@ 51 Richard Lawson

Why don’t you read the articles you yourself link to?

From the NAO:

“As or The scale of the loss to the taxpayer will not be known for years to come. The Treasury estimated in April 2009 that there may be a loss to the taxpayer of between £20 billion and £50 billion, the wide range reflecting the inevitable uncertainty involved in such an estimate. Total losses will depend on losses from the Asset Protection Scheme and the price at which the government sells its holdings in RBS and Lloyds.”

So in April 2009 the treasury estimated the cost to the taxpayer as £20-50bn, which they have since downgraded to £10bn as equities have recovered.

The £850bn figure you quote was mostly short term liquidity, mostly 3 month or less money market interventions, which have all been repaid. That £850bn has NOT been added to the national debt.

I will reiterate, jsut to make myself clear – the net cost to the taxpayer of the bank bailouts is currently estimated, by the Treasury, to be £10bn.

@ 53 Tyler
The NAO _estimates_ that if all goes well, and the banks come back into solvency, the net loss to the taxpayer may come down to £20-50 bn, which you say has been revised down to £10 billion. Let’s hope that happens.
In the meantime, however, from the .pdf linked on the page I gave, the Treasury is carrying the following commitments:
*purchased £37 billion of shares in RBS and Lloyds Banking Group (£2.5 billion of preference shares in Lloyds Banking Group were subsequently redeemed), and in November 2009, agreed to purchase up to an additional £39 billion of shares in both of these banks;
*indemnified the Bank of England against losses incurred in providing over ¬¬£200 billion of liquidity support;
*agreed to guarantee up to £250 billion of wholesale borrowing by banks to strengthen liquidity in the banking system;
*provided approximately £40 billion of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and
*agreed in principle in January 2009 to provide insurance covering nearly £600 billion of bank assets, reduced to just over £280 billion in November 2009.

I make those purchases to come to £123 bn.
Whatever the final details, that is still a helluva lot of money. There is also £100 million on advisor’s fees, and another £5 million in success fees, which will again come from the banks in the end, when they are solvent, but at the moment is carried in the National Debt.

We could argue forever about the details, but the bottom line is that the banks, through gargantuan mismanagement, both systemic and specific, have delivered a huge hit to the public purse. Remember that the fat lady ain’t sung yet. We are not certain that we are not facing a double dip recession, and that the financial system does not have further surprises in store for us. The derivatives market was “valued” at ten times the global GDP, and that, being in part at least, a Ponzi scheme, may yet implode.

At the end of all this complexity, I would say that Sunder is right with his “Keep calm and Carry On” message, that we must bring down the debt smoothly without endangering the recovery with drastic cuts to public services, but that we should hoard cowrie shells in case things really go tits up.

@Richard Lawson

‘ This list of countries by National Debt
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
shows the UK about midway on the OECD list, and midway/worse on the general list.
In terms of external (foreign) debt, we do far worse, being fifth from bottom of the list in terms of percentage of GDP. This means that we are more in hock to foreign banks.
The interesting thing is that the vast majority owed by all countries is not to one another, but by countries to private banks. ‘

Do you have any evidence that the vast majority of sovereign debt is in the hands of private banks?

The evidence lies in the fact that in the list of countries by external (=Foreign) debt, only 5 tiny countries have no foreign debt. If the debt were owed from country to country, then approximately half would be in debt, and half in credit.
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

The first wiki link you gave was about public debt. The second link is about external debt i.e. public debt and private debt aggregated. Those countries where financial intermediation is a large part of the economy will show up as having a high percentage of external debt. The exception is Switzerland who operate different to other financial centres. See for example, Luxembourg where the percentage of external debt is nearly 5,000%. However, most of the private debt in these external debt figures are financial institutions dealing with each other. What I was asking you for was evidence that our external public debt was held by private banks. Internally to the UK most of our public debt i.e. gilts are held by the pension funds and insurance companies. The UK does not provide detailed figures for the overseas external buyers. However, it is unlikely that foreign private banks are holders of the debt. It is usually foreign central banks who hold the debt as part of their sterling reserves. Although they may purchase the gilts from a foreign bank who are primary dealers at UK DMO auctions.

The Debt Bombshell site gives a breakdown pie chart here:
http://www.debtbombshell.com/bond-market.htm
Insurance Companies: 40%
Overseas investors 35%
Other financial institutions 18%

We would need a breakdown of overseas investors to know whether or not they are private institutions or other states.

So I admit that I do not fully know, and would be grateful for help on this from an expert.

Whatever, the fact that remains is that the whole world economy is running on debt, which is not surprising given that new money is created by banks making interest bearing loans. It also means that the wold economy is a species of Ponzi scheme, because it requires ever-increasing economic growth to service the debt + interest. Ever increasing economic growth requires ever increasing inputs and out puts. Since it is impossible to take forever from a finite resource, and expand forever into a finite space, it follows logically that the present debt-based economic model is unsustainable.

As a matter of interest, on public (national) debt the UK is 22nd from bottom of the list, but on external debt (public and private) we are 5th from bottom.

This suggests, does it not, that the Govt has been more “frugal” than the private sector in racking up debt?

@54 Richard Lawson

*purchased £37 billion of shares in RBS and Lloyds Banking Group (£2.5 billion of preference shares in Lloyds Banking Group were subsequently redeemed), and in November 2009, agreed to purchase up to an additional £39 billion of shares in both of these banks;

These shares are assets, and do not sit in the debt line.

*indemnified the Bank of England against losses incurred in providing over ¬¬£200 billion of liquidity support;

Insurance, not debt.

*agreed to guarantee up to £250 billion of wholesale borrowing by banks to strengthen liquidity in the banking system;

Insurance again, and the short term liquidity provided has already been repaid.

*provided approximately £40 billion of loans and other funding to Bradford & Bingley and the Financial Services Compensation Scheme; and

Mostly repaid.

*agreed in principle in January 2009 to provide insurance covering nearly £600 billion of bank assets, reduced to just over £280 billion in November 2009.

Insurance.

None of the above are debt, and only a difference in value of the shares bought in the banks is being acocunted for as debt in the UKs deficit – see the NAO, or the budget statement.

I won’t go into the derivatives market, but you are quite wrong. The face value of derivatives does not mean you have exposure to that full amount. I might have $100m of a 10y swap, but i can’t lose $100m on it as I could on a bond.

As I said in one of my earlier posts, Sunder’s “keep calm and carry on” mantra of running up huge debt now to lessen the short term pain will be at the cost of long term growth. It is entirely a political decision, and not the best for the economy. Look at Japan and their lost decade if you want more prrof.

@56 Richard Lawson.

“Since it is impossible to take forever from a finite resource, and expand forever into a finite space, it follows logically that the present debt-based economic model is unsustainable.”

No, thats just nonsense.

@57 RIchard Lawson

Doesn’t suggest government has been more frugal, just suggests households have borrowed too much on their mortgages (about £900bn outstanding) as well.

[58]

@56 Richard Lawson.

“Since it is impossible to take forever from a finite resource, and expand forever into a finite space, it follows logically that the present debt-based economic model is unsustainable.”

No, thats just nonsense.

Thank God for that. I thought for a giddy moment that it might be necessary to refute RL’s proposition with a coherent argument. Luckily, this turns out to be untrue.

“Ever increasing economic growth requires ever increasing inputs and out puts. ”

That’s where the error is.

Economic growth is defined as the adding of value. That’s what GDP measures: the value added in an economy.

It’s certainly possible to get economic growth by consuming more resources, yes. But it’s not a requirement that more resources get used for there to be more economic growth.

All that is required is that more value is added. So, as long as we continue to work out new methods of adding value (ie, as long as technology continues to advance) then we can continue to have economic growth.

The limits of the physical world are not the limits to economic growth simply because economic growth is not wholly reliant upon consumption of physical resources.

[66] It’s nice to have evidence from time to time that people are getting more intelligent.

For Adam Smith, Ricardo and Marx – to say nothing of John Ruskin – the nature of “value” was problematic, both technically and ethically. A later generation was driven to the concept of the “util” which represents the final disconnect between economic theory and reality through the grovelling admission that two-dimension geometrical modelling depicts a world which can exhibit change in time or variation in tastes, but not both. (Equations representing three-dimensional modelling would be more plausible as descriptions of reality, but much harder to understand and do not lend themselves to the kinds of policy prescription politcally parti pris economists want to promote.)

Fortunately our Tim knows better – value is just value and that’s that. He should get a Nobel, really…

@60 Tim Worstall

“Economic growth is defined as the adding of value. That’s what GDP measures: the value added in an economy”.

I had a look at some dictionary definitions, and none of them mentioned added value.
InvestorWords.com:
Economic growth: A positive change in the level of production of goods and services by a country over a certain period of time. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces.

Bloomberg:
An increase in the nation’s capacity to produce goods and services. Usually refers to real GDP growth.

Nearest to Tim is Glossary of research economics:
1) Investment, meaning increases in the capital stock (Solovian growth)
2) Increases in trade (Smithian growth)
3) Size or scale effects, e.g. by overcoming fixed costs, or achieving specialization
4) Increases in knowledge, most of which is called technological progress (Schumpeterian growth).

However, it is indeed possible to have “green” economic growth, as we make a transition to renewable energy, and close down the throughput of materials by moving towards 100% recycling, making durable goods &c. The Green New Deal is an example of this, offering a huge increase in good work that will result in our being more energy wealthy as a nation. Ultimately, green growth is moving towards Herman Daly’s Steady State Economy. Within this economy, we could say that there could be an increase in value, as non-material qualities such as art and literature grow, so yes, I suppose that value-based growth can continue indefinitely. But economic growth based on throughput of materials is not sustainable, and even mainstream economists (Nick Stern and Adair Turner) are beginning to wake up to this fact.

“Ultimately, green growth is moving towards Herman Daly’s Steady State Economy.”

My point exactly. Even within Daly’s economy, economic growth is still possible. Thus the statement that “continued economic growth is impossible” because of the constraints of the physical world, its finiteness, is simply wrong.

The Green New Deal is still howling nonsense however.

Tempted though it is to demonstrate that the GND makes very good economic sense, that would be to go too much off topic, which was about the media being out of touch with the public on cuts.