The public are “burying their heads in the sand” about Britain’s surging national debt, a leading economist will tell MPs on Tuesday as they debate the legacy of Covid-19.
Philip Booth, of the Institute of Economic Affairs, will say that unless an axe is taken to public spending, the UK’s debt-to-GDP ratio could overtake that of Japan, the most burdened country in the G7 group of advanced nations.
Booth, who is due to appear before the Treasury select committee, cites Office for Budget Responsibility reports which forecast a potential rise of public sector net debt above 300pc of GDP by about 2060. By comparison, Japanese debt now stands at 268pc, Italy owes 166pc of annual economic output and US debt is 141pc.
The huge figure suggested by the OBR defies historical comparisons. After the Napoleonic wars, Britain’s national debt reached about 160pc. It then fell below 40pc by 1913, before the First and Second World Wars pushed it to 240pc of GDP. By the early 2000s it had dropped below 40pc, but then the financial crisis hit.
Following a £150bn coronavirus borrowing blitz, in May, the ratio rose above 100pc for the first time since 1963. It climbed above an unprecedented £2 trillion to boot. In a decade’s time, consultant Oxford Economics expects Britain’s debt to be virtually unchanged at 101.2pc of GDP.
Booth claims the post-Covid recovery will require deeper spending cuts than in the aftermath of the banking meltdown. “We should look at those areas that remained totally untouched in the period of so-called austerity – health and pensions in particular,” he says.
It is a warning which goes against the grain of economic thinking. Most experts are unfazed by governments’ record levels of spending in response to the pandemic. Even the Harvard professor Kenneth Rogoff, a former chief economist at the International Monetary Fund who has previously argued that higher levels of debt are associated with lower rates of economic growth, believes an exception now applies. “The pandemic is an emergency situation, and not a normal recession, so there has been little choice but to run massive deficits for as long as needed and markets permit,” he says.
Others claim that if governments do not spend now, they will face bigger bills later, an argument which could also apply to plans for a tax raid to pay for the borrowing blitz, as this could destroy wealth and hold back growth.
Kallum Pickering, senior economist at Berenberg Bank, says: “Unemployment will rise, tax revenues will go down, welfare payments and transfers will go up, and there’s a risk of scarring, which limits the economy’s ability to generate tax revenues in the long run.”
Historically low interest rates are an incentive to borrow more, it is argued. In the past, higher debt-to-GDP ratios would push up borrowing costs to a point where interest payments alone became a huge weight on the public finances. But investors are now desperate to lend to stable countries as they seek a safe haven for their cash.
“It’s possible to borrow these massive sums and not be crippled by the interest costs,” former Conservative cabinet minister Sir John Redwood says. “I hope we borrow as long as possible at these current rates.”
George Buckley, chief UK economist at Nomura, says that an economy’s absolute debt matters less in the “new normal” than how it relates to others. “All countries have had to put their hands in their pockets,” he says. “Look at Italy: it’s going to have a deficit of about 150pc, where it was about 120pc less than a year ago. Maybe 150 is the new 120.”
Pickering argues that a privilege of having a well-run economy is that markets are willing to lend to the Government to speed up the recovery.
“The GDP-to-debt ratio tells you nothing on its own,” he says. “Arbitrary numbers are irrelevant. If Jeremy Corbyn had won, and John McDonnell was Chancellor, I doubt very much that markets would have given the Government such permission to borrow as they have.”
Even if Britain does overtake Japan’s debt-to-GDP ratio, Lord Jim O’Neill, the former Tory Treasury minister and former Goldman Sachs chief economist, asks: “So what? I lose count of the number of well-known investors who’ve lost huge amounts of money trying to short the Japanese bond market, believing their debt was out of control.”
Regardless of whether Britain is borrowing too much compared with its own record or with other countries, Buckley warns that cuts are still likely.
“There will have to be some austerity, more targeted than we saw in the last decade, probably more at the wealthy,” he says.
Boris Johnson may have repeatedly ruled out a return to what he calls “the A-word” as the Tories fight to keep the former Labour seats which won them last year’s election.
But whether debt is a problem in the short term or not, a day of reckoning – and cutbacks – is ultimately sure to come.