Last chance saloon? Why Britain might be heading for a 1970s-style debt crisis – Paul Wilson
Too many of our politicians have for too long subscribed to the ostrich school of macroeconomics
Have you been living beyond your means for decades, paying for things on the never never through credit as you build a mountain of debt? Sadly, no matter how prudent you are with your personal finances, if you are a citizen of the UK the answer is, on one level, “yes”.
The national debt is just shy of £3 trillion and rising – almost 100 per cent of gross domestic product (GDP). That is more than three times the rate it was 25 years ago, the last time any British government ran a surplus. And each year we have a deficit, the national credit card bill gets higher.
Last year saw a £130 billon deficit, meaning that for every £10 the government took in revenue, it spent roughly £11. Borrowing was even higher than expected in August, at £18.3bn. We’re now spending around £109bn a year on debt interest – roughly double what we put towards defence.
READ MORE: 'Get real': Andy Burnham must heed dire warnings about UK's eye-watering £3 trillion national debt
International markets are starting to take note. Global investors – foreign governments, central banks, pension funds and insurers – are increasingly concerned about UK sovereign debt. We are losing their confidence, which is why the government borrowing rate is the highest on record.
The £4.25bn sale earlier this month of 30-year bonds drew a yield of 5.82 per cent – the highest for any bond sale since the Debt Management Office was created nearly 30 years ago. The average yield on newly sold UK debt has been stuck at a 30-year high for the past two years.
The Tories left the economy in a terrible state two years ago, but Labour has only succeeded in making things even worse.
In her 2024 Budget, Rachel Reeves ramped up spending, borrowing and taxes. The UK’s tax burden is now on track to hit 38 per cent of GDP by the start of the next decade – the highest level since the Second World War.
‘Too little prosperity’
Human beings respond to incentives. Amid capital flight, it seems highly probable we are through the Laffer Curve to the point at which high taxation has become counter-productive for raising revenue. US economist Arthur Laffer said this month: “I have never heard of an economy being taxed into prosperity. What’s happening is Britain is taxing itself to death. Your problem is not too little revenue. Your problem is too little growth, too little prosperity.”
Yet in next month’s Budget, Chancellor John Healey is widely expected to raise taxes even more, with ‘stealth’ measures that could include increasing capital gains tax to 45 per cent.
The song remains the same: ever higher borrowing, at ever higher cost, to fund ever higher public spending while taxpayers are milked dry. It’s a vicious circle. Or, as Laffer described it, a “tailspin” and a “death spiral”.
READ MORE: The joke's on John Swinney as Laffer Curve sees Scotland raise less money from higher taxes
We desperately need to rein in spending but so far Andy Burnham has shown little appetite to do so. Before his Labour comrades crowned him Prime Minister, he said: “We’ve got to get beyond this thing of being in hock to the bond markets.” Unfortunately, we have little choice while the nation is so heavily in debt. All Burnham achieved was to damage investor confidence.
Then, in one of his first performances at Prime Minister’s Questions, he said national security “can’t come at the expense of social security”, as though the existence of the latter is not dependent on the former.
The effect was to suggest Burnham will do nothing to bring down Britain’s burgeoning welfare bill, which now accounts for a quarter of UK government spending, and is forecast to balloon to £408.6bn in 2030/31.
The ostrich school
Burnham and his team appear to belong to the ostrich school of macroeconomics, which teaches that you should bury your head in the sand and hope for the best, ignore scary numbers and duck difficult decisions. Adherents believe in big government – the bigger the better – and the Keynesian conviction that there is no problem which cannot be solved by state intervention and public spending.
At the other end of the spectrum are those who agree with the point Ronald Reagan was making when he said: “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” Aside from a handful of key roles, such as defence, the government should stay out of the way.
At both Westminster and Holyrood, there’s very little stomach for shrinking the state or slashing the welfare bill and so the death spiral continues.
Friedrich Hayek of the Austrian School of Economics – the Alien to John Maynard Keynes’s Predator – said: "Politicians lapped up the argument when Keynes told them that if you outspend your income and run a deficit you're doing good to the people in general. The politicians didn't want to hear anything more than that – to be told that irresponsible spending was a beneficial thing. That's how the thing became so influential.”
Back to the 1970s?
Some economists now fear we are hurtling towards a debt crisis like that of 1976, when Jim Callaghan’s Labour government was forced to go cap in hand to the International Monetary Fund for a rescue package that caused huge economic turmoil.
People talk of “austerity” during David Cameron’s premiership. But that government was still living well beyond its means, with George Osborne spending like a drunken sailor on shore leave compared to Denis Healey during the Winter of Discontent.
The IMF bailed out Greece in the 2010s, triggering a deep depression from which the country is only now recovering.
If the UK does need to be rescued, Healey will be an IMF puppet, Chancellor in name only. At that point, if you thought the Cameron years represented “austerity”, you should gird your loins because you ain’t seen nothing yet.
Comments
Want to join the conversation? Please or to comment on this article.