The National Debt is Money the Government Owes Us
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The national debt is money the government owes us
George Osborne's scare stories about the national debt are a cover for ideologically driven cuts that threaten the economy
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Paul Segal
Chancellor George Osborne is preparing a budget that will include a wide range of public spending cuts. Photograph: Oli Scarff/Getty Images
Politicians on the right love to scare us. George Osborne, in his Mansion House speech cited "fears" over government solvency and sovereign debt crises. David Cameron has declared the fiscal deficit a "threat" to "our whole way of life," and "a clear and present danger to the British economy". This is nonsense. The threat we face is ideologically driven cuts that risk causing a double-dip recession. The fiscal deficit seems scary because it is debt. Cameron argues that within five years the national debt will rise to "some £22,000 for every man, woman and child in the country". This may be true, but what he doesn't tell us is that it is money the government owes to us – not money that we owe to anyone else. That's right: 80% of our government debt is owed to the
British people. What is called "national debt" is our own savings, looked at from the other side of the balance sheet. Given that most of us do not knowingly buy government debt, how do our savings end up as the fiscal deficit? We put our savings in banks and pensions funds. But they are just intermediaries: they invest our savings by buying bonds and other securities that pay interest. Some of these bonds will be from private sector companies that want to borrow for investment. But when private companies do not want to invest as much as we, the people, want to save in a given year, then the only alternative is to invest the money in government bonds, ie public debt. The fiscal deficit is just the lending that we make to the government. The fiscal deficit is so high because we are demanding more bonds – that is, we want to save more – than the private sector is willing to invest. Incidentally, this is not Keynesianism: it's just accounting, familiar to any macroeconomist. The fiscal deficit adds to the stock of government debt owed to us, and it is true that we do not want that debt to grow as a proportion of GDP forever. But relative to GDP, the stock of national debt in the UK remains below that of the US, France and Germany. And when the economy starts to recover, the deficit will decline in any case, as investment and tax receipts rise. Household saving will also decline with time from its current high rate: saving rose because we became so indebted during the boom years, running down our savings and buying goods on credit. Having built up so much debt we now want to pay some of it off. But once we have paid off enough of that debt, our saving rate can decline and private spending pick up, further helping reduce the deficit. What if the government insisted on cutting the fiscal deficit while we tried to save, before recovery is secured? That would imply that the country – households, the private sector and the government together – would be trying to buy less than we produce. But this means that aggregate demand would be lower than aggregate supply: some companies and workers would be producing things that no one wants to buy. What do they do? They stop producing: companies go bankrupt and workers get fired. With unemployment already at 8% and GDP well below capacity, this would spell double-dip recession. Ironically, this would lower tax receipts and could make the deficit even worse. What of the argument that the fiscal deficit crowds out private investment? This can only happen if the fiscal deficit pushes up interest rates, making investment more expensive. When the economy is doing well, this can certainly happen. But we have a fiscal deficit precisely because the private sector doesn't want to invest as much as we want to save, whatever the interest rate – which remains extremely low. The government still faces nominal interest rates
of only 3.5% on 10-year bonds because we the people are demanding these bonds – ie, we are demanding the fiscal deficit so that we can save. What, then, of Osborne's complaint in his Mansion House speech about "annual debt interest payments that will soon exceed what we spend on schools"? Is this a "terrible, terrible waste of money", as Cameron has called it, taking money from our schools and hospitals? No. The vast majority of those interest payments are going back to us, the people, who lent the money to the government in the first place – since only 20% of UK public debt is held by foreigners (one of our major differences with Greece) . Cameron's claim that "for every single pound you pay in tax, 10p would be spent on interest" is frankly dishonest: 8p of the 10p is cashback for us! If we, as a democracy, decide that we are not spending enough on schools and hospitals, we can simply have the government tax the equivalent of that interest back again. This reveals the underlying reason why politicians on the right really want to reduce the deficit: expenditure cuts today imply tax cuts and smaller government in the long run. And once we see that the fiscal deficit is our saving with the government, it becomes obvious that Cameron and Osborne's claim that the deficit has us "living beyond our means" is nonsense. Any politician who cares more about public services than tax cuts should be relaxed about a few years of fiscal deficits.
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© 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved.
George Osborne's scare stories about the national debt are a cover for ideologically driven cuts that threaten the economy
• • •
Paul Segal
Chancellor George Osborne is preparing a budget that will include a wide range of public spending cuts. Photograph: Oli Scarff/Getty Images
Politicians on the right love to scare us. George Osborne, in his Mansion House speech cited "fears" over government solvency and sovereign debt crises. David Cameron has declared the fiscal deficit a "threat" to "our whole way of life," and "a clear and present danger to the British economy". This is nonsense. The threat we face is ideologically driven cuts that risk causing a double-dip recession. The fiscal deficit seems scary because it is debt. Cameron argues that within five years the national debt will rise to "some £22,000 for every man, woman and child in the country". This may be true, but what he doesn't tell us is that it is money the government owes to us – not money that we owe to anyone else. That's right: 80% of our government debt is owed to the
British people. What is called "national debt" is our own savings, looked at from the other side of the balance sheet. Given that most of us do not knowingly buy government debt, how do our savings end up as the fiscal deficit? We put our savings in banks and pensions funds. But they are just intermediaries: they invest our savings by buying bonds and other securities that pay interest. Some of these bonds will be from private sector companies that want to borrow for investment. But when private companies do not want to invest as much as we, the people, want to save in a given year, then the only alternative is to invest the money in government bonds, ie public debt. The fiscal deficit is just the lending that we make to the government. The fiscal deficit is so high because we are demanding more bonds – that is, we want to save more – than the private sector is willing to invest. Incidentally, this is not Keynesianism: it's just accounting, familiar to any macroeconomist. The fiscal deficit adds to the stock of government debt owed to us, and it is true that we do not want that debt to grow as a proportion of GDP forever. But relative to GDP, the stock of national debt in the UK remains below that of the US, France and Germany. And when the economy starts to recover, the deficit will decline in any case, as investment and tax receipts rise. Household saving will also decline with time from its current high rate: saving rose because we became so indebted during the boom years, running down our savings and buying goods on credit. Having built up so much debt we now want to pay some of it off. But once we have paid off enough of that debt, our saving rate can decline and private spending pick up, further helping reduce the deficit. What if the government insisted on cutting the fiscal deficit while we tried to save, before recovery is secured? That would imply that the country – households, the private sector and the government together – would be trying to buy less than we produce. But this means that aggregate demand would be lower than aggregate supply: some companies and workers would be producing things that no one wants to buy. What do they do? They stop producing: companies go bankrupt and workers get fired. With unemployment already at 8% and GDP well below capacity, this would spell double-dip recession. Ironically, this would lower tax receipts and could make the deficit even worse. What of the argument that the fiscal deficit crowds out private investment? This can only happen if the fiscal deficit pushes up interest rates, making investment more expensive. When the economy is doing well, this can certainly happen. But we have a fiscal deficit precisely because the private sector doesn't want to invest as much as we want to save, whatever the interest rate – which remains extremely low. The government still faces nominal interest rates
of only 3.5% on 10-year bonds because we the people are demanding these bonds – ie, we are demanding the fiscal deficit so that we can save. What, then, of Osborne's complaint in his Mansion House speech about "annual debt interest payments that will soon exceed what we spend on schools"? Is this a "terrible, terrible waste of money", as Cameron has called it, taking money from our schools and hospitals? No. The vast majority of those interest payments are going back to us, the people, who lent the money to the government in the first place – since only 20% of UK public debt is held by foreigners (one of our major differences with Greece) . Cameron's claim that "for every single pound you pay in tax, 10p would be spent on interest" is frankly dishonest: 8p of the 10p is cashback for us! If we, as a democracy, decide that we are not spending enough on schools and hospitals, we can simply have the government tax the equivalent of that interest back again. This reveals the underlying reason why politicians on the right really want to reduce the deficit: expenditure cuts today imply tax cuts and smaller government in the long run. And once we see that the fiscal deficit is our saving with the government, it becomes obvious that Cameron and Osborne's claim that the deficit has us "living beyond our means" is nonsense. Any politician who cares more about public services than tax cuts should be relaxed about a few years of fiscal deficits.
•
© 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved.
