The Organisation for Economic Co-operation and Development (OECD) has said that the current government’s austerity programme will not be enough.
An additional and “sustained period of fiscal tightening” will be needed.
They predict that under current government plans, the national debt is to rise to 76% of GDP by the end of the parliament. They suggest that for the sake of “prudence” (remember her?) developed countries should reduce their debt to 50% of GDP.
In order to get down to that 50% level, Britain will need further tightening of 8% of GDP. The OECD says that should be done by spending cuts rather than tax increases, since tax increases lower economic growth and make the problem worse.
I certainly don’t disagree with any of that. But it doesn’t really go nearly far enough.
First, what about that 50% figure they want to aim for? Even that figure is a lot higher than the 40% that was Gordon Brown’s “golden rule” while he was Chancellor during the good times.
We ought to ask more fundamental questions. Why is there an orthodoxy that the government must have a permanent debt? Clearly, once you have a debt, it is enormously hard to get rid of it. But don’t forget that any debt at all carries interest payments.
Britain’s national income is very roughly £1.5 trillion. A national debt of 50% of our income would therefore be around £750 billion. At 3%, the interest payments on that debt would come to £22.5 billion. For comparison, that is about half what we spend on schools.
In order to keep the national debt at that figure, with an economy growing at a long term average of 2%, that would leave room for a deficit each year of £14 billion. So the government would be borrowing £14 billion to pay interest on existing debt, and taking a further £7.5 billion from taxpayers to cover the rest of the interest.
Consider what those interest payments represent. They are a transfer of wealth from taxpayers to people who hold government bonds.
In order for the new borrowing to be just enough to pay the interest on the existing borrowing, without making taxpayers pay for it, the debt would need to be cut much further.
To do that is not particularly hard of course. The government only ever looks at the debt side of its balance sheet, and ignores the asset side. We could get the national debt down easily by selling State assets, including the stakes in the nationalised banks.
Getting the deficit (the annual extra borrowing) down is hard, because it means tackling vested interests in the State sector. The current government is borrowing well over £100 billion this year. But getting the debt down to 50% of GDP is not enough, and the government needs to be a lot more ambitious on that front. Asset sales are the place to start.