Maybe more economics than politics...but can you help explain Govt debt to me?

[NoNewsisGood]

I live somewhere where the Gov are pursuing austerity policies because they 'have to balance the books'. This is confusing for me as a country is not a business, long-term investments in things like education, health and crime prevention, etc. seem to be hard to 'balance' as you might not see the benefits for 20+ years. In my mind, these things are investments and giving teachers, healthcare staff, etc. a few bob extra in their pay packet each month to keep them happy and healthy seems like a jolly good idea, and one that is not going to suddenly impact inflation too much.

Happy to be wrong on that - this post is to seek understanding, that is all.

I just cannot work out how they see that reducing social services to nothing is positive for the country in any way. So, therefore, 'balancing the books' must be super important. What I am not seeing is what happens when these 'books' are 'balanced'. Will everything suddenly revert to normal and be rosy again? Is this just a short term situation we have to endure?

I am sure in the past I have read that most countries are in a lot of debt, either to their national banks (?? - like the BoE?) or to other countries and no one seems to really care cos it is not really actual money.

Can anyone help on any of this poorly written post? It is something that has been bugging for me a while, but politics can be a touchy subject, especially when ideology-led parties are involved so not sure who in real life to ask my dumb questions.

I cannot answer you and I'll be interested in the answers you get. However, I'll say this. You have described your post as 'poorly written'. I will accept that you might feel that you've expressed yourself less clearly than you wished to. That's up to you, but to me, reading what you have put, I think your post is well-written, with it's proper sentence construction and punctuation.
Sometimes people put up posts which are just like one long piece of drivel because they don't try any kind of punctuation at all. There might be some good points in there but I give up on them when I can't make sense of them. No, they are not all dyslexic or foreign! They just hurl thoughts down and don't proof read their own stuff to see what a tangle some of it is.

Hi OP,
I’m not an economist but I am someone who is paid to think about this stuff as my job. Last year the UK government received just under £1.1trillion in taxes and spent just over £1.2 trillion. So the “fiscal deficit” was £130 billion. That’s about £2,000 per UK resident. The deficit was just added to our total national debt. We’ve done this for a long time so the total debt is equivalent to about 100% of GDP. Same as if you spent a little bit more than your income every year and just increased your mortgage a little bit every year to pay for it.

So the question is how long can this go on before people stop lending to us? And the answer is nobody knows. There is definitely a point where we can’t borrow any more at reasonable rates and we have a debt crisis, but nobody knows where that point is and it’s dependent on lots of other factors.

RR isn’t aiming to balance the books at all - she’s not proposing to stop adding to the debt and only spend what she raises in tax. She’s just trying to shrink the deficit a bit - i.e. to continue to add to the stock of debt, but at a slightly slower pace. But even this is proving extremely difficult. Because everyone wants to defend or increase existing spending, and nobody wants to pay more tax.

Basically, if gov debt gets too high the bond markets get wary about lending and will demand higher interest payments in return (to compensate for the risk of default). Those higher rates can increase the debt leading to a death spiral. You then get mega austerity imposed on you - like Greece a few years ago, and Argentina a few years before that.

It may also help to appreciate just the interest on the national debt is currently around ...

£275 million per day or...
£8.3 Billion per month or...
£190 per adult per month

It really illustrates we've been living beyond our means for decades, and these current savings are ultimately meaningless in terms of the financial position of the UK.

In addition to the excellent answers above, if the size of the economy grows faster than the debt payments, then the debt is less burdensome. Our economy has been growing very slowly for a long time now.

It's a little like when people take out mortgages hoping the value of the house will go up as the debt decreases. Except this mortgage has no end date and the house value isn't increasing (plus it needs a lot of repairs and some of the occupants are sick).

And there are six people living in the house, of whom two work full time, one works part time, one is retired, one is long term sick and one is a child. The 2.5 workers pay for everyone, supplemented by adding a little bit to the mortgage each year. But one of the workers is planning to take early retirement soon, funded by the other two workers. And one of those workers is a bit miffed by the whole situation and considering leaving the house to move to another house in Dubai.

In the meantime some nasty people from the other side of town have forcibly seized a house done the road from its previous occupants, some of whom they have killed. The six people in our house are a bit worried by this, but not quite worried enough to pay for extra security if it means no trip to Spain this summer.

So who owns the bonds, and where does that money come from?

They’re owned by people like me! Or more accurately by my clients. I’m a professional investor and invest money in things like bonds on behalf of institutions and ordinary people around the world. So the owners are UK and overseas institutions, mostly pension funds, and some sovereign wealth funds etc. You probably own some, indirectly, through your pension.

So in a sense we owe some of this money to ourselves. Unfortunately we also owe a lot of it to other people in other countries too. And every year we ask them to lend us more.

I see. If I understand correctly, a solution is to increase our GDP and/or increase taxes through more people working and contributing?

Yes exactly. Or through developing the economy so the existing workers earn more money. Easier said than done.

This is very interesting - glad you asked the question op!

people who know - do different types of economics take a different approach? Eg what’s China approach to national debt??

China has very little national debt. So does Germany. The US, France, Italy and Spain are in a similar situation to us. For the European countries the situation is a little more complicated because they can’t control their own currency, which we can, so they are little more constrained in how they deal with it.

@SoonTheDaffodilsWillBeOver oh that’s so interesting- can you give a little more insight re Germany and how that plays out within the eu?

I love some of these analogies!

I want to pick up on the point about spending on public sector salaries, because there are two parts to your question I think: one about where they get the money (debt) and one about what they spend in on.

One principle is that borrowing at lower interest to realise a return at higher interest makes sense, but not the other way around. This applies to countries as well as businesses, it's just that countries have much longer timeframes to deal with.

So the question is, will the additional money spent on public sector pay

Sorry, pressed enter too soon:

Will the additional money on public sector pay be an investment which pays off?

I think that's harder to tell, which is why it becomes political (maybe why others haven't answered this part of it).

The way of thinking isn't "aren't these teachers/nurses hardworking and deserving" but "will an additional £ of money spent on them result in the country having more wealth in the future, even if that's in 20/30/50 years".

The usual answer is "yes, you will have a more educated and healthy workforce who can produce things", which is fair to a point. But to play devil's advocate, we live in a country with a lot of people employed in jobs below their current level of education.

How will we make extra money if a few more people are educated to A level? Will it just be wasted?

Perhaps the government should instead spend the money on, say, making sure there are high-skilled jobs in the UK for the people to do, perhaps a subsidy for an oil company or a life sciences research hub?

Which is where the politics comes in. Inevitably. Because different people have different ideas on that paragraph I just wrote.

I actually teach A-level and I think there are too many students taking it who are not suitable.

A-level is supposed to be an advanced course for students with a deep and genuine interest in the subject, not a course for people who can't think of anything else to do.

I've got a friend bringing up two teens in the Swiss system and I've been quite impressed by how she's described it. It seems to be much more career-focused from a younger age, so that young people seem to emerge with a clearer idea of what they want to do with their education.

Back to the govt debt: one of Reeves' fiscal rules is to only borrow (more) for long term investment. So infrastructure yes; increased teacher salaries, no. The latter are supposed to be covered from tax revenue.

That's complicated though with successive governments having built so much off balance sheet with PFIs and the like.

The 6 people in the house have a buy to let that is rented to a local GP surgery. It's falling to bits due to lack of maintenance but that's because the contract was only intended to last 25 years. What will the GPs do now?

Oh and the teacher costs have gone up in large part due to the government's decisions on pensions and NI!

Well it’s changing pretty quickly.

In the 1930s Weimar Germany had massive problems with inflation (wheelbarrows of bank notes to do the daily food shop etc) and it was one of the issues that led to the rise of the Nazi Party. So since the war ended, west Germany (and since re-unification, the east as well) has been obsessed with keeping inflation under control. A big part of that is not running fiscal deficits. So German politics has been obsessed by the “Schwarze Null” (“black zero”, black as in not in the red) which means the budget actually balances - spending is fully funded by taxes. Hence very low debt. Germans mostly carry out this principle in their personal lives too (hence low home ownership - mortgages are hard to get and people are wary of the debt).

It’s changing literally now. Partially because of the low spending, German infrastructure is pretty poor. Their trains, previously very good, are now the laughing stock of Europe. They’ve spent almost nothing on their military for the last eighty years, partly for money reasons but also because of their history. Obviously since Ukraine it’s become clear that this is very risky. In the February elections their new PM Friedrich Merz promised to spend hundreds of billions on infrastructure and rebuilding the military, funded by issuing new debt. So maybe in twenty years Germany’s fiscal situation looks more similar to ours.

All the southern European countries already have big debt problems. But those are less because of the military, and more because of what Americans would call entitlement spending. E.g. in France lots of professions are entitled to retirement in their mid fifties, funded by the state. Their state pension age is also 62 (supposedly rising to 64 soon). Every time somebody tries to change this there are massive protests and the government has to back down. But French national debt is enormous and growing even more quickly than ours. Their national productivity is much better than ours though, possibly because of better education or infrastructure, so maybe they can sustain it. Or maybe not.

So lots of interesting dynamics. Who knows what will happen next. As the OP of this thread noted, in these areas politics and economics are pretty closely intertwined.

Thank you for all the replies!

I wasn't able to get back to it before now.

I don't live in the UK and have found out the debt to GDP ratio. Ok, it is not great here either. Unfortunately the Gov's measures are much more tied to cutting spending than anything to do with increasing employment and productivity.

Agreed on the point of not educating everyone to a high degree. Where I live, there is a lot of pride in the percentage of highly educated population, however, then there are issues with no one wanting to do menial jobs, as they feel they are entitled to 'more' with their master's and PhDs. Immigration then becomes a battleground where some public sector jobs (poorly paid and poorly regarded but critical for society - kindergarten, public transport workers, etc.) are empty but no one with a higher degree wants to do it, or wants to live on the corresponding income. The solution the Govt then comes up with is to cut costs, salaries, benefits, etc. which I can't see is ideal. I would prefer they pay higher salaries for those critical jobs so that higher educated see them more as a viable career option.

But, then, yes, it comes to politics in a lot of ways.

In terms of what happens when the books are balanced....which seems unlikely, so let's go with debt reduced....there is the risk then of everything being so run down, the workforce off sick or on the poverty line and public buildings being in a bad state. I guess also general housing stock also gets run down (I would like to do some home renovations this year, but not while I am not able to find decent paying work and my husband is not getting any pay rises) so that it does not rise in value (market has been stagnant for years with no price increases at all) and then we don't spend any money as can't afford to...so we don't help to stimulate the economy.

Ok, now I am as depressed as the economy 😫

E this video about Singapore is quite interesting (I don't know why the link just says 'E'). Every so often a UK MP pops up saying we (well, I guess they mean London) should become a "Singapore on Thames".

It does seem to require a single party state, ams living in an apartment, though.

Interesting thread, thank you everyone 😊 I am interested in economics and politic and do try, but struggle to keep my head wrapped around the "big" stuff!