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saw Andrew Marr on television asking when we will pay down the national debt. When do we do it?
We don’t. He should stick to politics. National debt is not like a family credit card. We are paying down debt rather than paying it down, almost always the key is what it costs to service that debt. At the moment, it is cheap because the interest rates are so low.
Ok, but how much do we owe? Wouldn’t it be better if the debt was zero?
The total debt is £ 2.1 trillion. We’re adding around £ 30 billion a month to it at the moment. It’s not typical, it’s a Covid problem. 10 billion pounds per month is more common.
If the debt is zero, well, if a business has no borrowing, the City would consider that business to be under-leveraged and say it is not taking advantage of growth opportunities.
So if we had zero debt, if it was even possible, we would all be a lot poorer. Cautious, perhaps, but poor.
We grow, we enrich ourselves by borrowing. Only extremely wealthy people never borrow. They want high interest rates, low debt, and low inflation. To orient economic policy towards them would be crazy.
Let’s say you’re 40 years old and you have the option of paying off your mortgage. Great, maybe you should. But you’re more likely to borrow again and buy a bigger house.
The national debt is the same, we are investing in the future.
I thought you said we should reject financial comparisons of households against national debt?
It’s a battle I seem to be losing.
Forget the credit card analogy, maybe the national debt is a mortgage we’ll never pay off. We will always expand it because we want a new patio, a swimming pool, a greenhouse.
Debt increases, as does property value, more than debt in all likelihood.
Perhaps a better analogy for those tough times is: it’s winter, your boiler bust, your back door is hanging on the hinges, and some of your windows are broken. Ideally, you wouldn’t increase your mortgage to pay for the home improvements needed to get you through the cold snap, but the alternative is worse.
So we should borrow, all the time?
No, but when times are tough, it is in governments’ interest to step in and support the economy until the private sector returns.
Have we ever paid off a debt?
A few chancellors succeeded, for short periods. Nigel Lawson did this in the late 1980s for a few years, while Gordon Brown did so briefly in 2000-01.
Didn’t George Osborne pay off an old 1932 war debt in 2015?
Yes, but he did it by issuing new debt. This is what the Chancellor does. Political television commentators speak as if government surpluses are normal and deficits are an oddity. The reverse is true.
But you mentioned the cost of servicing the debt. If inflation goes up and interest rates follow, those service charges skyrocket, right?
They go up, from very low to always historically cheap. And whether that is good or bad, it depends on WHY rates and inflation are increasing.
If it’s because the economy is growing, businesses are confident, and people are spending what is right. Or at least, as economist Julian Jessop notes, a nice problem to have.
We fear that this is the case, but it remains very low. In the United States, where Congress is set to pass a $ 1.9 trillion relief bill, bond yields have risen, potentially raising government borrowing costs, but not by much. . Again.
Markets believe US interest will rise next year and then more aggressively in 2023. The Federal Reserve may have to push back on that expectation, but it can do it easily if it wants to. The rise in inflation could also fall into the “nice problem to have” box, compared to the difficulties endured over the past 12 months.
Inflation is also eroding debt.
But don’t we leave a huge liability for our children? He said it on the phonely.
You can’t pass up that credit card thing, can you? Another way of looking at it is that we are investing in the future of our children. We are improving their heritage.
It is perfectly possible to view public debt as an asset, an advantage that is treated as a problem.
But what if we default on the debt?
I will defer to John Weeks of Open Democracy (he is unfortunately no longer with us):
“Whether the economy is strong or weak, the UK government can never default on its debt. Debt is nothing more than pieces of paper that the government promises to buy back on a specific date.
“These pieces of paper can be redeemed with new pieces of paper (new bonds) with subsequent redemption dates. If the private owners of the debt security don’t want the new bonds (new debt security), our government can sell these new bonds to the Bank of England for cash and use the cash to pay the bondholders. “
So are we saying we should ignore the national debt?
No, no one is saying that. The question is how to deal with it. Borrowing more now might be cheaper later. Households run out of debt margins quite quickly. The British government does not.
Another way of looking at it: we borrow from our future self. So if we have to “pay back”, well, we’re good at it.
If these TV people don’t know what they’re talking about, why are they on TV?
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