Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

The Scarecrow Of National Debt

Robert Skidelsky 26th August 2016

Robert Skidelsky

Robert Skidelsky

Most people are more worried by government debt than about taxation. “But it’s trillions” a friend of mine recently expostulated about the United Kingdom’s national debt. He exaggerated a bit: it is £1.7 trillion ($2.2 trillion). But one website features a clock showing the debt growing at a rate of £5,170 per second. Although the tax take is far less, the UK government still collected a hefty £750 billion in taxes in the last fiscal year. The tax base grows by the second, too, but no clock shows that.

Many people think that, however depressing heavy taxes are, it is more honest for governments to raise them to pay for their spending than it is to incur debt. Borrowing strikes them as a way of taxing by stealth. “How are they going to pay it back?” my friend asked. “Think of the burden on our children and grandchildren.”

I should say that my friend is extremely old. Horror of debt is particularly marked in the elderly, perhaps out of an ancient feeling that one should not meet one’s maker with a negative balance sheet. I should also add that my friend is extremely well educated, and had, in fact, played a prominent role in public life. But public finance is a mystery to him: he just had the gut feeling that a national debt in the trillions and growing by £5,170 a second was a very bad thing.

One should not attribute this gut feeling to financial illiteracy. It has been receiving strong support from those supposedly well-versed in public finance, particularly since the economic collapse of 2008. Britain’s national debt currently stands at 84% of GDP. This is dangerously near the threshold of 90% identified by Harvard economist Kenneth Rogoff (together with Carmen Reinhart and Vincent Reinhart), beyond which economic growth stalls.

In the face of criticism of the data underlying this threshold Rogoff has held firm, and he now gives a reason for his alarm. With US government debt running at 82% of GDP, the danger is of a “fast upward shift in interest rates.” The “potentially massive” fiscal costs of this could well require “significant tax and spending adjustments” (economist’s code for increasing taxes and reducing public spending), which would increase unemployment.

This is the financial leg of the familiar “crowding out” argument. The higher the national debt, according to this view, the greater the risk of government default – and therefore the higher the cost of fresh government borrowing. This in turn will raise the cost of new private-sector borrowing. (That is why Rogoff wants the US government to “lock in” currently low rates by issuing much longer-term debt to fund public infrastructure). Maintaining low interest rates for private bank loans has been one of the main arguments for reducing budget deficits.

But this argument – or set of arguments (there are different strands) – for fiscal austerity is invalid. A government that can issue debt in its own currency can easily keep interest rates low. The rates are bounded by concerns about inflation, over-expansion of the state sector, and the central bank’s independence; but, with our relatively low levels of debt (Japan’s debt amounts to over 230% of its GDP) and depressed output and inflation, these limits are quite distant in the UK and the US. And as the record bears out, continuous increases in both countries’ national debt since the crash have been accompanied by a fall in the cost of government borrowing to near zero.

The other leg of the argument for reducing the national debt has to do with the “burden on future generations.” US President Dwight Eisenhower expressed this thought succinctly in his State of the Union message in 1960: generating a surplus to pay back debt was a necessary “reduction on our children’s inherited mortgage.” The idea is that future generations would need to reduce their consumption in order to pay the taxes required to retire the outstanding debt: government deficits today “crowd out” the next generation’s consumption.

Although governments have endlessly repeated this argument since the 2008 crash as a justification for fiscal tightening, the economist A. P. Lerner pointed out its fallacy years ago. The burden of reduced consumption to pay for government spending is actually borne by the generation which lends the government the money in the first place. This is crystal clear if the government simply raises the money it needs for its spending through taxes rather than borrowing it.

Furthermore, the idea that additional government spending, whether financed by taxation or borrowing, is bound to reduce private consumption by the same amount assumes that no flow of additional income results from the extra government spending – in other words, that the economy is already at full capacity. This has not been true of most countries since 2008.

But in the face of such weighty, if fallacious, testimony to the contrary, who am I to persuade my elderly friend to ignore his gut when it comes to thinking about the national debt?

Project Syndicate 2016 The Scarecrow of National Debt

Robert Skidelsky

Robert Skidelsky, professor emeritus of political economy at Warwick University and a fellow of the British Academy in history and economics, is the author of a three-volume biography of John Maynard Keynes and a member of the British House of Lords.

You are here: Home / Economy / The Scarecrow Of National Debt

Most Popular Posts

Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
dissent,social critique,identity,politics,gender Delegitimising social critique and dissent on the leftEszter Kováts
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto
Credit Suisse,CS,UBS,regulation The failure of Credit Suisse—not just a one-offPeter Bofinger
Europe,transition,climate For a just and democratic climate transitionJulia Cagé, Lucas Chancel, Anne-Laure Delatte and 8 more

Most Recent Posts

Barcelona,feminist,feminism Barcelona: a feminist municipalism now at riskLaura Pérez Castaño
Spain,elections,Sánchez Is Spain on the right track?Bettina Luise Rürup
CBI,Confederation of British Industry,harassment Crisis at Britain’s CBI holds lessons for othersMarianna Fotaki
central and eastern Europe,CEE,renewable Central and eastern Europe: a renewable-energy win-winPaweł Czyżak
Cape Town,inequality Tackling inequality in the city—Cape TownWarren Smit

Other Social Europe Publications

Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis

Foundation for European Progressive Studies Advertisement

The spring issue of the Progressive Post magazine from FEPS is out!

The Special Coverage of this new edition is dedicated to Feminist Foreign Policy, to try to gauge its potential but also the risk that it could be perceived as another attempt by the west to impose its vision on the global south.

In this issue, we also look at the human cost of the war in Ukraine, analyse the increasing connection between the centre right and the far right, and explore the difficulties, particularly for women, of finding a good work-life balance and living good working lives.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ETUI advertisement

The four transitions and the missing one

Europe is at a crossroads, painfully navigating four transitions (green, digital, economic and geopolitical) at once but missing the transformative and ambitious social transition it needs. In other words, if the EU is to withstand the storm, we do not have the luxury of abstaining from reflecting on its social foundations, of which intermittent democratic discontent is only one expression. It is against this background that the ETUI/ETUC publishes its annual flagship publication Benchmarking Working Europe 2023, with the support of more than 70 graphs and a special contribution from two guest editors, Professors Kalypso Nikolaidïs and Albena Azmanova.


DOWNLOAD HERE

Eurofound advertisement

Unaffordable and inadequate housing in Europe

Unaffordable housing is a matter of great concern in the European Union. It leads to homelessness, housing insecurity, financial strain and inadequate housing. It also prevents young people from leaving their family home. These problems affect people’s health and wellbeing, embody unequal living conditions and opportunities, and result in healthcare costs, reduced productivity and environmental damage.

This new report maps housing problems in the EU and the policies that address them, drawing on Eurofound’s Living, working and Covid-19 e-survey, EU Statistics on Income and Living Conditions and input from the Network of Eurofound Correspondents.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube