In all the discussion of ‘stimulus’ packages in the newly Keynesian world of the 2008-09 recession, one highly misleading line of analysis has been given major prominence in the media. This is the argument that the National Debt is going to be increased by an enormous amount and will hugely increase the burden on the average citizen. The argument typically runs along the lines: “The annual government deficit has risen from 2.7% of GDP in 2007 to 11.6% of GDP in 2009 and the Treasury predicts it will hit 13.3% in 2010”. Scary stuff.
But, wait a minute, why are we comparing changes in the National Debt to GDP? This is like working out how well off a family is by comparing its increase in debt after taking out a mortgage with its annual income, without taking into account the value of the house bought - or calculating the value of a company to its shareholders by just comparing its debts to its annual dividend. Would anyone be so stupid? But we’re doing it all the time in relation to the government’s borrowing.
Let’s look at it another way. Figures calculated for the BBC (http://news.bbc.co.uk/1/hi/business/8248645.stm) show that household wealth (including housing wealth and financial wealth) dropped in 2008 from £6,730bn to £5,920bn, a fall of £820bn. The increase in the national debt in 2008 was £60bn and in 2009 is likely to be around £83bn. If these increases in debt, due to the financial stimulus package, do succeed in reinvigorating the economy, promoting house price increases and recovery of the stock market, then they would appear to be a very small price to pay. (And there is the danger that, without such a stimulus package, the UK economy could be stuck in zero or low growth for a long time – see David Blanchflower in the New Statesman (14 September 2009 - http://www.newstatesman.com/economy/2009/09/mpc-bank-recession-king-rates). Certainly, most voters would consider that an attractive package. But that is not what they are being told is happening.
Of course, economists will blanche at such a simple way of picturing what is happening. For them, the real pay-off from the stimulus is the increase in the stock of assets (not simply their financial value) and the increase in annual consumption goods which the stimulus allows. Funnily enough, this hasn’t been talked about much, either, in the media, although there have been widely expressed concerns about job losses. But it’s pretty obvious that the recovery will bring significant gains along these lines – and the debate should be about whether these gains outweigh the disadvantages. (The problems with the economist’s line of argument are well known – the calculation of the value of increases in the stock of assets, and indeed the flow of consumption, is fraught with contentious assumptions and there is still major debate on how to calculate the damage to ¬economy efficiency through the methods used eventually to repay the debt – either cuts in public services or tax increases).
Moreover, all of this analysis leaves out one major element which, in the long run, may be the most important piece in the jigsaw – the value of public sector assets. In large measure, public sector borrowing is undertaken in order to invest in public assets – schools, hospitals, roads, museums, social housing, etc. To worry about the value of debt without considering the value of the assets which it has bought is plain silly. And to allow these assets to deteriorate in value simply in order to avoid an increase in debt would be utterly foolish. Yet, we very rarely hear about the value of these assets ( even though this value now has to be calculated on a regular basis as part of the government’s resource accounting process).
Taken as a whole, these arguments suggest that the National Debt is often a symbol of an active and successful government. Having a high debt is highly desirable, if matched by high public asset levels and if it has seeded fast growth in the economy, and therefore in household wealth. Having a low National Debt is a symbol of government incompetence, if matched by very low public asset levels and if it has constrained the economy, and household wealth, to very low growth levels.
These arguments are not simple and, even more awkwardly, they are hard to encapsulate in one headline or one soundbite. However, they are about the things that are fundamentally important to every voter when deciding how well the country is run. To discuss increases in the National Debt as if they are unambiguously an evil is to engage in one-hand clapping – lots of gesturing, no results.