All this piece tells us is that the City Editor of The Standard apparently doesn’t understand the difference between the national debt and the deficit. *yawn*

Oh dear! Only a fortnight ago, Nick Clegg nailed the LibDem colours to supporting George Osborne:

“Nick Clegg has urged business leaders to hold their ‘nerve’ and back spending cuts programme in an effort to turn the UK economy around.”
http://www.bbc.co.uk/news/uk-politics-13434599

But Vince Cable seems to have had more sense: People do not understand how bad the economy is
http://www.guardian.co.uk/politics/2011/may/20/vince-cable-economy

@1

Neither does the government, then.

And the article says:

Actually, it is not just affordable but it can be useful. Interest paid on government debt does not disappear into some black hole in the North Atlantic where it is lost to the nation and never seen again. Government debt is mostly held by British pension funds and insurance companies. They rely on those interest payments for income and the cash is what they use to pay people’s pensions and annuities.

Which finally challenges Cameron and Osborne’s argument that debt payment finances foreigners. It’s our debt and it pays for our pensions. Or maybe we should pay it all off now and ask our grandkids to pay for us when we get old?

@1. paul ilc

I don’t believe that you actually read the article. The entire article was about the debt, the word “deficit” was only mentioned in the last paragraph that Sunny reproduces above. And yes, if you have growth then the deficit will sort itself out because when Wilkins Macawber said:

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

when you increase growth the government increases its income, and the result of higher growth, as we all know, is happiness.

“when you increase growth the government increases its income, and the result of higher growth, as we all know, is happiness.”

Providing that growth is genuine and not credit-fuelled. Keynesian expansion merely delays the inevitable. The fact is that Brown’s saving of the banks has resulted in the economy being propped up by stagnating zombie banks and businesses. The only effective long-term solution is to take the bull by the horns, plunge back into recession and liquidate all the investments that should have been liquidated, and in doing so lay the ground for genuine long-term growth. Of course such a path is not politically possible so we are stuck where we are. My only hope is that the limited growth we are achieving under Osborne is genuine – I would much rather have slow genuine growth than fast artificial growth,

It’s nice to read an article about the national debt that cuts through the silly scaremongering.

“Even today, though Napoleon has been taken care of, the Kaiser hasn’t. ”

Is not strictly true. We still pay for the fight against Napoleon in the form of Perpetuals, which as the name suggests have no maturity. In fact, some of the UK national debt in Perpetuals relates to the American War of Independence. It is cheaper for the Treasury to just pay the interest than retire the principal. Moreover, some people in the market likes those type of securities. The point is we never repay the national debt, we just grow out of it and as the economy gets bigger the corresponding national debt gets relatively smaller.

” In fact, the whole saga shows up our politicians at their worst. ”

Indeed. The Coalition has been relentless in scaremongering by taking advantage of people’s ignorance on the subject.

Richard Blogger

” Which finally challenges Cameron and Osborne’s argument that debt payment finances foreigners. ”

This also is a daft argument by the Coalition. Overseas holders of gilts are paid in sterling. The only place that one can spend sterling is in the UK. So, the only thing an overseas holder of sterling can do with sterling is reinvest it in other sterling assets or exchange it with someone else who is now the holder of sterling. The world can only reduce its net sterling exposure by selling less stuff to us. That is what the Coalition actually want and is the effect of export?led growth. In contrast, a holder of euro periphery assets can reduce their exposure to the periphery by reinvesting in other euro areas. The UK is effectively the only sterling area so the world on a net basis can’t reduce their sterling exposure whilst exporting to us. The money always eventually comes back to you when you send it overseas by importing and we are importing capital when foreigners buy gilts.

However, we do have a structural deficit that will not go away with GDP growth. The thing about the structural deficit is no one accurately knows how large it is. Therefore, reductions in the pace of government spending growth are necessary to close the structural deficit or the ratio of debt to GDP would continue to rise even with GDP growth. Supply side reforms such as raising the retirement age more and earlier than planned would do more for the ratio than shortsighted measures like cutting capital expenditure.

@5, it is touching to see the spirit of Secretary Mellon still at large.

Good article.

Should have been written 12 months ago.

http://www.youtube.com/watch?v=GTQnarzmTOc

I love the fact that you seem to be applauding an article which contains this gem: However, if things turned out much worse than that and debt rose to 100 per cent of GDP, the interest would still only be about five per cent or 5p for every £1 earned in the country. Eminently affordable, so why the panic?

I’d say the panic is because that 5% is money that could be better spent either by the people earning it or by government rather than on interest. We don’t know what the future will require – maybe we will need huge floodwalls around much of the coast for example – and it becomes much more difficult to build those if you are spending 5% of the national income paying off past spending.

Furthermore, that 5% does not take into account the fact that by continuing to spend more than we earn we continue to increase the debt, and that 5% will increase.

10 Watchman

Pretty feeble, even by your standards.

5% is 5% – it puts the wailing of the rightwing debt hysterics into perspective.

Besides, that interest gets paid as income into our pension funds, it doesn’t just disappear.

BenM,

Not all of that 5% gets paid as interest into our pension funds – some does get transferred to other bond holders you know. And, to be honest, I somehow doubt redistributing 5% of GDP to pension funds is equitable – the poor lose out, since the poor at least likely to benefit from pension funds. If you are happy to support a position whereby we continually try to fund the poor now by funding the rich in retirement, fair play – me, I’d prefer to break that particular status quo and have more choice about how we spend the money (say, perhaps even have that 5% available for redistributive policies?).

Furthermore 5% of GDP is equivalent to over 10% of the government tax take – which kind of limits government action (or requires higher taxation). Since taxation is a drain on the economy (unless someone can show me a government which is turning their economy round by taxing more and spending more…) then perhaps a policy that requires higher taxation is hardly sensible.

A bit of historical perspective with regards to interest as a percentage of GDP.

http://www.ukpublicspending.co.uk/downchart_ukgs.php?chart=90-total&year=1900_2011&units=p&state=UK

Gilt holdings up to 2010. These figure have since changed with UK banks and building societies buying up 90 per cent of net issuance over the last six months. Why? Reduction in growth prospects in the UK economy and as a consequence credit demand is weak. As can be seen from the chart the Old Lady holds over £200 billion, so that interest goes from the Treasury to Threadneedle Street and back to the Treasury. Moreover, interest on gilts for UK holders is taxed, so again the headline interest budget is not a true cost to the Treasury.
http://av.r.ftdata.co.uk/files/2011/02/Gilt-holdings-IFS.jpg

Watchman, the best thing we can do for the poor and everyone else is to have a well functioning economy with healthy employment growth. That does not mean I am advocating that the government should indulge in ever increasing spending. However, it does mean that growth is more important than deficit phobia. If GDP growth slows, which it has since last year the interest burden as a ratio to GDP will rise even in the face off reductions in gilt yields through investors fleeing risk assets to government bonds. That scenario is not in the interest of anyone.

@11 Ben M,

This 5% of GDP is based on historically low interest rates – they are unlikely to stay this low forever.

The argument that part of the interest goes to pension funds seems a bit ridiculous. As has been stated, people have differing levels of pension pots meaning they get different levles of ‘benefit’. I don’t see this as much of a benefit – people with pensions will be taxpayers – effectively recieving the benefits of this interest are also the ones who have funded it – how is this a benefit?

@13 Richard W

“However, it does mean that growth is more important than deficit phobia”

So what is your suggested growth strategy? Presumably you believe that by not reducing the deficit as fast we will see higher GDP growth.

Do you have any analysis backing this up? How much faster will GDP and therefore tax revenures grow compared to the resulting increase in debt levels?

I will get back to you later, Fungus.

Are we beginning to see the start of the u-turn?

Osbornes Debt Panic was good for the election, but it is bad for the economy and he won’t meet his targets. So sooner or later he will need to move ever so quietly to Plan D (that’s D for Darling – a reduction of around 50% of the deficit in four years)

Osborne will however be able to look back at the History books, to see how Thatcher ditched Monetarism while she was not for Turning. History repeating itself???

@16: “Osborne will however be able to look back at the History books, to see how Thatcher ditched Monetarism while she was not for Turning. History repeating itself???”

Monetarism wasn’t finally ditched until the autumn of 1985.

And what followed led to Lawson’s unsustainable boom with resurgent inflation and a house-price bubble – before Britain was forced out of the European Exchange Rate Mechanism in September 1992.

It wasn’t until the final quarter of 1995 that Britain’s standardised (ILO) unemployment rate came in below the standardised rates of France, Germany and Italy.

Debt and deficit by OECD country % of GDP.
Country 2010 deficit, % of GDP, followed by 2010 public debt, % of GDP
SOURCE: OECD PROJECTIONS

United States -10.7 65.2
Japan -8.2 104.6
Germany -5.3 54.7
France -8.6 60.7
Italy -5.4 100.8
United Kingdom -13.3 59
Canada -5.2 32.6
Australia -3.5 -1.3
Austria -5.5 42.9
Belguim -5.6 85.4
Czech Republic -5.6 5.3
Denmark -5.4 1.6
Finland -4.8 -46.4
Greece -9.8 94.6
Hungary -4.1 62.1
Iceland -10.1 43.9
Ireland -12.2 38
Korea 0.4 -33.4
Luxembourg -4.3 ..
Mexico .. ..
Netherlands -5.9 36.5
New Zealand -3.3 -10.9
Norway 9.9 -143.6
Poland -7.8 32.4
Portugal -7.6 62.6
Slovak Republic -6.3 13.3
Spain -8.5 41.6
Sweden -3 -13.1
Switzerland -1.3 11
Turkey .. ..
Weighted average of Euro 13 countries -6.7 57.9
Unweighted average of above OECD countries -5.7 29.6
Weighted average of above OECD countries -8.3 57.6

See: http://www.guardian.co.uk/news/datablog/2010/may/27/debt-deficit-oecd-countries-data

as small point, but in the sentence “the City cheered the cuts” – who is “the City” and where would we have to look to check if that sentence is true or false? For example, if those words refer to the opinions of analysts and macroeconomists working for investment banks, I’d say that sentence is false. Lots of banks have published negative takes on the UK economy. It’s not obvious to me who else in the City cheered on the cuts – traders? Why would traders care? Perhaps you just mean rich people prefer cuts to tax increases?

ah – silly me – most likely you refer to the opinions of credit rating agencies.

Always nice to see another person coming to sense with 80 years of raw economic theory. Honestly it is quite amazing the case of mass denial that has gone on in the conservative party, its like they psyched themselves up into a frenzy and now believe the hype. Thing is its hardly conservative thinking lately, you go back to… well, any previous conservative government, and granted it was hardly a state of investment but they weren’t exactly hawks either, they got that debt isn’t the ultimate evil of mankind, rather its capital flight, inflation and unemployment, something this government is somehow managing to give us all at the same time.

I think Chris Blackhurst is the current City Editor at the Standard, but Hilton did hold that post in the past (and may have been editor, if I recall correctly).

Anyway, very good article. He’s a fair-minded and reliably interesting journalist.

One in seven care homes ‘rated badly’ by watchdog amid industry crisis

One in seven privately-operated care homes in Britain have been rated “poor” or “adequate” by the health services watchdog, an investigation has found.
http://www.telegraph.co.uk/health/elderhealth/8546864/One-in-seven-care-homes-rated-badly-by-watchdog-amid-industry-crisis.html

But not to worry, Britain is the fourth greatest military power in the world in terms of defence expenditure:

List of countries by military expenditures
http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures

8 – Mellon was ignored by Hoover who encouraged businesses to keep wages up and even engaged in stimulus spending, contrary to the myth that he was some sort of laissez-faire fanatic.