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Public Debt - how bad is it? The long term view

(25 Posts)
knit1purl1 Tue 14-Dec-10 21:20:08

Obviously the cuts have been in the news recently, largely because of the many protests. However it is quite noticeable how stoic most of the public are being in recognising the 'enormity' of the debt crisis. I'm certainly not having a 'crisis what crisis' moment but am curious as to why an insuperable unparalleled debt justification has been so universally accepted.

If one looks at some published data on economic history, it is evident that there have been prolonged periods of far greater debt (as % of GDP). The graphs make for good broad view on this site (not that I especially endorse the individual views of the author).

Interestingly, the post-war period of understandably HUGE debt was also the time in which the NHS was introduced alongside extended rights to secondary education and, of course, student grants.

I'm only raising this topic after reading a number of comments on various threads, for example:

"expatinscotland Sun 12-Dec-10 11:20:29
'Perhaps worth pointing out that these particular changes to student funding will not actually be in place for some time. They will consequently have little effect on the immediate & current financial crisis.'

Immediate and current? Our grandchildren will be paying off this debt. They need to get used to paying for more stuff themeselves and not expecting it for free unless they're willing to pay much higher taxes."

The postwar debt generation was that of my grandparents. I don't feel as though I have spent my life digging out of the pit of wartime hardship. Is that just luck? Would really like to hear some thoughts. Thanks.

BadgersPaws Tue 14-Dec-10 21:32:55

The only time that we'd had a debt this high relative to our GDP has been during war time, for peacetime the current level is exceptional.

The problem isn't really the debt, the problem is the deficit, the rate at which the debt is increasing. It's about 12% this year, which is apparently the highest in Europe and far higher than it's been at any time post WW2.

And while the immediate post war years were times of massive debt the Government actually managed to run the country at a surplus, they earned more money than they spent, from 1948 to 1950. So debt yes, but also some very sensible saving.

So as said the problem isn't the debt. Go and look into the figures for the deficit, the amount by which the Government is living beyond its means.

That is the problem, and it's genuinely quite scarey.

Chil1234 Wed 15-Dec-10 10:18:42

I agree with BadgersPaws. The deficit... the ongoing overspend... is more concerning than the total debt per se. The fact that the last government ran a deficit (overspent) even when the economy was booming should have set alarm bells ringing more than it did at the time. Unlike the post-war government, if they hadn't been so naively convinced that there was 'an end to boom and bust', if they'd set something aside for the future and not wasted so much cash on frivolous measures (Tax Credits for the wealthy, for example) then the correction wouldn't be so great now.

Britain's postwar debt to the USA was only paid off in 2006.

claig Wed 15-Dec-10 10:46:59

I don't really undertsand it, but are the interest payments on the debt part of the deficit?

Chil1234 Wed 15-Dec-10 11:06:51

Yes they are. The bigger the national debt, the bigger the interest payment. Think of 'national debt' as 'overdraft'... a monthly payment has to be stumped up proportionate to the outstanding amount. If you're overspending/under-earning every month (deficit) & financing the overdraft at the same time the overdraft gets bigger and bigger. In national terms, normal economic growth/decline cycles usually offset the effects of normal deficit and surplus. But this time the numbers are too big and intervention is necessary.

claig Wed 15-Dec-10 11:21:35

Thanks Chil1234.
What is our annual interest payment on the national debt in millions and what is it as a percentage of the deficit?

siasl Wed 15-Dec-10 11:25:57

Current interest payments are based on the yield of our debt. 5y bonds yield 2.35% and 10y bonds yield 3.65%.

The problem becomes really serious if bond yields rise substantially. The government would then have to issue gilts at much higher yields levels to fund its deficit.
Imagine gilt yields went to 5%, 7% or 10% ... we would end up having to borrow more and more at worse and worse interest rate levels to fund our interest payments on our debt. Most of the deficit would be due to paying this intetrest. This can rapidly become unsustainable.

This could happen because the market believed UK inflation was out of control (the market is already very worried about this) or the debt burden was impossible to repay. Think Greece and Ireland!

siasl Wed 15-Dec-10 11:28:47


Interest payments for this year are around £43bn (larger than defence budget). This will rise to £73bn by 2014.

claig Wed 15-Dec-10 11:30:51

So is it right to say that in order to pay our national debt, we have to borrow more via gilts i.e. to pay our national debt, we have to get into even more debt?

Litchick Wed 15-Dec-10 11:31:49

As others have said, it's the defecit that is the problem.

We have to deal with it for the sake of our children.

My understanding is that we spent more last year on interest repayment than we spent on the education budget. That's a fuck of a lot.

claig Wed 15-Dec-10 11:32:43

Thanks siasl. Wow, that is a huge figure. Isn't our deficit in the order of £150bn? so about a third of that is due to the interest payments on our national debt.

siasl Wed 15-Dec-10 11:33:48

That is what we are currently doing. Problem is that is just borrowing from the future to pay for now. That way leads to default.

The real way to reduce the deficit is to either increase revenues (tax, higher growth) or reduce spending.

claig Wed 15-Dec-10 11:35:18

yes. Let's hope the economy recovers so that we get more growth and tax revenue, otherwise we will just end up getting more and more into debt.

Chil1234 Wed 15-Dec-10 11:36:24

The UK National Debt is around £953bn. Financing the National Debt at the moment costs about £43bn/year. The deficit (annual borrowing) is about £149bn. So the interest on the debt accounts for roughly 29% of the deficit.

siasl Wed 15-Dec-10 12:07:26

The UK national debt will be £1.1 trillion next year. That isn't the problem per se. It's really the interest and the fact it makes us vulnerable to higher bond yields (which is why the bond vigilantes are after countries like Greece, Ireland, Portugal and Spain).

10-year Gilts yields were 9% in the mid 1990s. People seem to think this can't happen again. However, I disagree. Given the recklessness of the BoE who is allowing inflation to get out of control and keeping rates far too low just to keep house prices up, I think either gilt yields go higher or the currency devalues.

I also think the article linked above talks rubbish about the real problem which is the pension deficit. The Institute of Economic Affairs has calculated that including pension liabilities into the calculations for gross national debt, the figure rises to £4.8trn. The state pension deficit is around £2 trillion and public sector pension deficit £800bn (total £2.8trn). However, government accountants are still using the wrong discounting curve (they asssume gilts yields above 5%), so the total pension deficit could be up to £1 trillion higher than their calculation at £3.8 trillion.

Frankly, the UK pension liability is the elephant in the room. Everything else is tinkering around the edges.

claig Wed 15-Dec-10 12:17:08

If they ever defaulted on their pension obligations, would it affect financial markets and business or would it only affect pensioners?

siasl Wed 15-Dec-10 12:28:17

I don't think you need to think about default on a pension obligation that isn't funded. Politically/legally of course it's a minefield.

Eventually governments in most Western countries will be forced to reduce the unfunded liability by raising the pensionable age (already happening), reducing pension indexation (RPI to CPI for example), moving away from final salary defined benefit to defined countribution pensions and taxing pensions at a higher marginal rates. Problem is this is happening far too slowly.

The impact on financial markets depends on how you do things. Most of the above changes would be taken positively since it reduces the sovereign's debt burden.

claig Wed 15-Dec-10 12:34:03

yes, we'll probably never be able to retire. They'll have abolished it by the time we get there. Marvellous, the crystal ball looks very gloomy.

siasl Wed 15-Dec-10 12:49:02

It's only feels gloomy because we had the illusion of more wealth (when it was just debt) and a higher standard of living than was really the case. People will need to work harder for longer for less money. Standards of living will fall.

However, this is being offset by improvements in the wealth and standard of living for a far greater number of people in the emergng countries. I don't think we can complain. Our standard of living has been way way higher than most of the global population. It was never sustainable for us to expect that to continue indefinately. This is the impact of globalisation.

3seater Wed 15-Dec-10 12:51:36

siasl, who are the 'bond vigilantes'? Can you explain for me (sorry if a bit dolly dum)

claig Wed 15-Dec-10 12:53:50

Yes I agree with you. It seems that equalisation of the global population is in fact a deliberate policy by the leaders of the industrialised countries and is one of the goals of globalisation. The global warming taxes are part of that socialist style redistribution for the global dream.

siasl Wed 15-Dec-10 13:02:44

The term refers to the bond market's ability to place a restraint on the government's ability to over-borrow. Or the central bank to run deliberately inflationary policies.

A bond vigilante is thus an investor who protests against government/central bank policies by selling bonds (thus potentially increasing yields). Bond prices move inversely to yields. When investors perceive a higher inflation or credit risk they demand higher yields to compensate.

The problem comes when central banks have the ability to print money to buy government bonds (Quantitative easing). This keep bond yields artificiully low. Typically investors show their displeasure by selling the fiat currency.

3seater Wed 15-Dec-10 13:12:22

I see, thank you for explaining to me. I have found it difficult to understand who exactly all this money is owed to.
In your view, do you think that such investors consist of a small minority of people. Or does it not work that way???
I can't help but wonder if somewhere there are a group of people doing very nicely out of all of this.

siasl Wed 15-Dec-10 13:31:16

The bulk of these investors are real money managers (pension funds, life insurance companies etc etc). They own govt bonds to provide pension annuities or hedge life insurance liabilities. These investors don't short the bond market, they just sell what govt bonds they own. They would be hurt by Ireland or Spain defaulting.

Another big investor will be large central banks, Treasury desks of banks. They would get hurt aswell.

A smaller proportion of investors are hedge funds and prop desks of banks. They might be outright short and "be doing very nicely out of all of this". Their influence, however, is generally overestimated and has waned over the last two years as leverage has fallen.

3seater Wed 15-Dec-10 14:08:30

thank you, v interesting, will mull that over for a bit.....

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