Judging by the Christmas trees and decorations up in cafes, pubs and on high streets, ‘tis already the season to be jolly. The traditional spirit of generosity at this time of year has clearly touched the Conservatives and Labour, with both parties pledging to turn on the spending taps like neither has done in decades with an election win.
Based on announcements made so far, the Tories would borrow an extra £20bn a year to spend on infrastructure while Labour would borrow an additional £55bn a year for the same purpose. Chancellor Sajid Javid has promised more detail about the planned investment in the Conservative manifesto, due to be published two weeks before the 12 December vote. Labour’s manifesto is expected to come out on Thursday.
But there is already some clarity on what the plans would mean for national debt. The Institute for Fiscal Studies has said that under the Conservatives debt as a share of GDP would stay at its current very high level, while under Labour debt would start rising.
Despite years of austerity, Britain’s public debt is close to its historical peak of 84.3 per cent, reached in 2017. Debt jumped in the years following the financial crisis, far surpassing its previous recorded peak of 56.5 per cent in 1976
Living with a heavy debt burden carries a number of risks, but one that receives less attention is the impact on future generations. It works like this:
A government that does not collect enough in taxes and other revenue to fund its day-to-day and investment spending borrows money by selling bonds – gilts in the case of Britain. Gilts are repayable 15 years from the date of issuance on average, during which time the government pays interest to its lenders, or investors holding the bonds. When the time comes to repay a particular set of gilts, the UK tends to source the cash by borrowing again – that is, issuing more gilts. That is known as rolling over the debt.
Therefore, the level of national debt at any point in time depends largely on the amount borrowed by previous generations. Take the latest numbers as an example. The UK borrowed £41.44bn in the 2018-19 fiscal year – this is the difference between government revenue and total spending, better known as the deficit. But outstanding debt in the same year totalled a staggering £1.77 trillion.
That influx of borrowed money benefited earlier generations, although admittedly people alive today also enjoy better infrastructure built over time with the cash. However, it is only the living generations that pay the interest on the debt – and the larger the pile, the higher the interest burden.
The government can borrow more to cover the interest payments but there is always the risk it will instead have to raise taxes on current taxpayers.
There is a school of thought that national debt imposes a burden on future generations. The argument was most recently made last week in an article by Fabrizio Zilibotti, an economics professor at Yale University, Andreas Müller at the University of Essex and Kjetil Storesletten at the University of Oslo. Citing the example of the US which is equally applicable to Britain, they suggest that it is better to postpone adding to the debt pile until it is unavoidable – that is, when an ageing population requires more social spending and when a weak economy needs a shot in the arm.
Some economists, including American Nobel prize winner Paul Krugman, disagree with the idea of debt as a burden on future generations, pointing out that in the US (as in the UK) the bulk of national debt is owed to domestic investors, so the interest is paid by current US taxpayers to current US holders of US government bonds.
“What we are leaving behind is promises that some of our children will pay money to other children,” Krugman wrote in 2011.
Although the same can be said about Britain, the share of foreign holders of UK government debt is significant: according to the latest figures, it stands at almost 28 per cent, around the level recorded over the past 10 years. This means a sizeable chunk of our children’s interest payments will go to people outside the country.
Moreover, high levels of debt create an inequality problem, as Krugman himself acknowledged, because taxpayers – large in number – pay interest to investors, which is a much smaller group. As Jeremy Corbyn would put it, this way the many enrich the few.
There are often good reasons to tolerate a hefty debt load, but the choice is far from straightforward. I may be overly optimistic expecting long-term thinking from politicians, but I hope that whichever party wins the election will consider the welfare of our children and grandchildren before deciding whether to push Britain’s debt higher.