The National Debt

Is the dark shadow which looms over a large part of the election debates.  Every utterance by every party regarding what it does or doesn’t want to do if it is fortunate enough to be elected into power on May 7th is considered and critiqued through the lens of  – ‘Yes, but what does this mean for the deficit?’.
Just to be clear, the deficit is the annual shortfall between government revenue (pretty much entirely made up of tax revenues) and government expenditure (welfare, defence, health, emergency services, MPs’ salaries pensions and expenses claims etc etc).  The National Debt is the cumulative total of all the annual deficits and surpluses to date.  As at December 2014, the National Debt (excluding the monies thrown at certain banks from 2008 to prevent their collapse) was some 81% of GDP.   As I write this, the election manifesto promises of the Conservatives and Labour, according to one economics consultancy, suggest that if we elect them they believe that the National Debt as a percentage of GDP at the end of the next parliament will be 75.5% or 76.6% (respectively). Shades of Grey anyone?


However, it is not only economists of a monetarist persuasion who shudder at the thought of National Debt; Keynesians too point out that Keynes was all in favour of reducing National Debt; but thought it spectacularly muddleheaded for government to focus on doing so during an economic downturn.  For Keynes, the time to reign in and limit government expenditure in order to generate annual surpluses and so reduce the National Debt was during recoveries and booms.  In a recession then the government of the day would need to run deficits and so increase the debt in order to prevent demand levels dropping to fast and too far.  The government must be a consumer of last resort.


Somewhat belatedly in late 2012 the Coalition too realised that the Keynesian assessment of the economic problems we faced was correct and almost overnight the ‘Plan A’ – austerity cuts and the mistaken belief that this would lead to an ‘Expansionary Fiscal Contraction’ and so generate GDP growth  –  was quietly morphed into, well, Plan B; which brought Funding for Lending, Help to Buy and a myriad other smaller schemes and additional funding for areas such as education and infrastructure.


But the damage done in 2010- 2012 when austerity measures were followed and hence demand fell across the UK economy seems to have remained with us.  A recent survey by the Centre for Macroeconomics of 33 eminent UK economists (from Oxford University, London School of Economics, London Business School etc) showed that 2/3 disagreed with the assertion that Government policies since 2010 have had an overall ‘positive effect’ on the economy.  Only 15% agreed that the Coalition’s policies had been responsible for helping to boost GDP and employment; and none agreed strongly.


The Treasury’s own forecaster, the Office for Budget Responsibility, estimates that the austerity programme in these years was a drag on GDP growth.  It also has said that the UK was not in danger of ‘becoming another Greece’.


But, we are where we are.  And whilst it is of course an article of faith that we should aim to reduce the National Debt (the means of doing so are matters of politics) perhaps we have fallen victim to the common human error of ‘catastrophising’ somewhat when we consider the National Debt.


Let’s remember that 81% is currently not bad in relation to other advanced economies –  not bad at all.   In addition it is also worthy of note that it is 70 years since the 1945 General Election which brought Labour to power and allowed them to establish the Welfare State as envisaged by Beveridge in his wartime report.  Although all the three main parties supported the Beveridge report’s conclusions, it was only Labour who said that they were affordable.  And the level of National Debt: GDP in 1945?   It was some 250%.


Perhaps the most important thing to bear in mind when thinking about the National Debt (whatever colour rosette you would choose to wear) is that, as Will Hutton notes, it should be regarded as our servant –  not our master.


To find out more on the topic, please contact Stephen Gregson. Read more of our Corporate Finance blogs by clicking here.