Sunday, April 26, 2009

Repaying The National Debt. Not.

These days you don't even get a nice certificate to keep

A question we've been hearing a lot over the last few days is HTF is HMG ever going to repay all this debt it's taking on?

The short answer is that it's not going to.

Consider the history of HMG debt.

On today's definitions, we've only got fully consistent stats going back to 1974-75. And this is how they look, including the latest hairy Budget projections up to 2013-14:

As we can see, it's basically four decades of increase.

The only exceptions were two short periods in the late 80s and late 90s. Between 1986-87 and 1990-91, we managed to repay £16.5bn, constituting about 10% of the National Debt. And between 1997-98 and 2000-01, we repaid £40.9bn, around 12%.

But both of those periods saw exceptionally strong economic growth combined with falling interest rates. Moreover, in the overall scheme of things, neither actually made much of a dent in what we owed.

So HMG's record of debt repayment in the recent past is pretty weak.

But to get a fix on today's problem we really need to look back further - to the period after WW2 when we were struggling with the massive debts we'd accumulated in two world wars.

By 1946, our national debt was an humongous 250% of GDP - even worse than the 100% we're facing now. Yet, although it took us three decades, by 1974 we'd got it down to a manageable 50% of GDP. So how did we do that?

For this period we have to use the traditional definition of the National Debt, which comprised the liabilities of the National Loans Fund (don't ask, but there's not a show-stopping difference from today's definitions, and if you're really interested, read this). Here's how it looks for the three decades from 1945 to 1974:

Well, what do you know? Although over these three decades we reduced our debt burden from 250% of income to 50%, we actually made no net repayment at all. In fact, we doubled our outstanding debt.

The trick?

Oh, you guessed.

Over those three decades, money GDP increased nearly sevenfold, so as a percentage of GDP, debt fell sharply.

But here's the scary bit - of that sevenfold increase in money GDP, the vast bulk comprised inflation. In fact, over the period as a whole, inflation eroded the real value of government debt by nearly three-quarters.

Or as we creditors say, HMG defaulted on three-quarters of what it owed to the poor schmucks who'd been stupid enough to lend.

In ten years time, please don't say you weren't warned.

PS Oh, go on then. Just for fun, here's HMT's long series for the National Debt (old definition) as a percentage of GDP (1858 - 2004):

As we've said before, debtwise, those World Wars were a serious mistake. Although perhaps not so much of a mistake as Gordon B.

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