The UK Debt Crisis

All governments borrow money and so have a national debt. This is usually expressed as a percentage of the value of the output of the country GDP (Gross Domestic Product).

In 1997 Labour took office with a national debt of 43%. Labour reduced this to 29% by 2002. From 2002 Labour invested heavily in the public sector (schools, hospitals) through borrowing, so the national debt rose to 37% by 2007, still less than what we inherited from the Tories.

The 2008 recession caused the national debt to worsen as we were still spending money on increasing the public sector yet getting less money in from taxes and also paying out more in unemployment and other benefits. The debt is now roughly 60% of GDP – about £1,000 billion.

If however we include the money spent on rescuing the banks the debt comes to just over £2,200 billion which is almost 150% of GDP.

However one day we’ll sell off the banks for a profit as we bought them cheap when their share prices were low because of the banking crash.

So the real ongoing debt we should be discussing is that without the bank intervention which from above is 60% GDP or £1trillion.

Japan, Italy, France, Germany and the US have higher levels of debt than our 60%, some like Japan have extremely high levels of debt.

We also have in our favour that we borrow money for the long term which means we don’t have the same pressure as say Greece to borrow money at short term high interest rates, so our debt is relatively stable.

How bad is our debt? Actually not as bad is it may seem. As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the past 250 years! The graph gives the debt over the last 80 years and a shows relative small increase in the last 3 years. So why do the Tories bang on about the debt? Because it gives them an excuse to cut public services.

What should Labour do?

If we cut public services too much, we depress the economy because of the effect of the cuts on all those firms that provide goods to the public sector. We also increase unemployment and spend more on benefits and so increase the debt. People fearful for their jobs will spend less, slowing the economy even further
and giving the Government less taxes (VAT), a vicious circle.

Some Tories like Boris Johnson want tax cuts to stimulate growth, but in an uncertain economic climate people don’t spend more – they just save more.

The only way forward is that recommended by Ed Balls, slow down the public sector cuts and decrease the rate of VAT. Because VAT is a tax on spending, this will encourage more people to spend and so kick start the economy as Labour did when it reduced the rate of VAT to 15%. The Tories increased VAT as from January this year to 20% which has caused the current slow-down in the economy.

Economists such as Keynes recommended after the Wall Street Crash and the Great Depression that Governments must invest in the public sector in times of recession so as to stimulate those companies who sell to the Government to invest and produce. It also gives workers money with which to buy goods and pay taxes – a virtuous, positive circle.

If for example a Labour Government invested in Council Housing, this would stimulate the construction industry and would also have a positive effect on the furniture, household fittings, household electrical and gardening sectors which would then have a knock-on effect elsewhere in the economy – besides reducing council waiting lists – just one example of public sector investment that could stimulate economic growth.

My Experience: Studied Economics at London Business School, Worked in industry and business in international strategy and development.

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