zico wrote:Sky are covering the news that debt exceeds 100% of GDP for the first time, but I was really surprised to see this historic graph, showing debt was around 40% of GDP under Labour before the financial crash, unsurprisingly rising steeply after the crash, but then the surprising bit (to me, at least!) was that despite what we've been told was "10 years of austerity" the ratio continued to rise steadily to around 80% by 2018.
Seems to me there are at least 5 plausible possible interpretations of the trend from 2010-2018.
a) Too much spending - so there wasn't enough austerity, and public services needed to be cut massively more to get back down to 40% (though 80% to 40% would be a big stretch).
b) Austerity was a huge mistake, and maintaining public spending would have enabled the economy to grow more quickly, and the ratio would have gone back down to 40%. (Similar approach to Trump's tax cuts and consequent deficit increases were hailed as being good for the economy).
c) Not enough revenue collection - taxes weren't increased to anything like the amount they should have been.
d) 40% ratio is too low for the UK, and the economy is best served by 80% levels.
e) Financial crash meant the ratio needed to increase from 40% to 80% to function properly, but it's just a temporary 10-year blip, and without coronavirus, the ratio would have reverted to 40%.
In a larger sense, the question seems to be "in a crisis, what should the government do, and who should pay for it?" (Someone always pays for it, the question is "who"? Presumably similar principles should apply to the pandemic as the financial crash.
What do you think?
The problem is that Austerity is a political term with very little economic meaning. It's used to imply "Cuts" when they're aren't any. So the fact that people get confused is a feature, not a bug.
Austerity is simply where Govt Spending increases by less than overall GDP growth. It's not an absolute decrease in Spending, it's a relative decrease.
All else being equal, Austerity should act to lower the Deficit as Revenue collection should naturally increase in line with GDP.
All else being equal, a lower Deficit should result in a slower increase in the Debt required to fund it.
So, taken altogether, it is perfectly natural that in a time of Austerity the overall Debt is increasing. Just by less than it otherwise might have.
Of course, in the real world, all else is never equal.
We are also in the QE era. Government issues debt that is bought by the central bank in order to increase the money supply without inflation, to reduce interest rates, and to force investors into more high risk instruments. This is supposed to increase economic growth. It's also a lot of debt that isn't really debt.
And with reduced interest rates it is also a good time to borrow. IIRC the UK had -ve rates on the last tranche of 10 Year gilts they issued. If not then very close to.
Low inflation also makes an impact on your chart, as it is inflation adjusted. With high inflation, it's easy to run a larger deficit and still see the overall debt reduce in real terms.