the debt crisis as just another story – or why are we

prey to a single narrative?

BELIEVING IS SEEING
CURRENT DEBT – GDP
RATIO

....about 63%
(we owe about two-thirds of what we are
worth – like having a mortgage)
...and what does the Maastricht
Treaty allow?

(i.e. What did Margaret Thatcher sign up

to?)

......a debt limit of ............. 60%

.....but how does that stand
historically....?
Britain's Debt /
National Income
Ratio, 1691-1990
Year Percentage Year
Percentage
1688/91 6 1901 43
1759 137 1911 39
1801 197 1921 179
1811 202 1931 207
1821 288 1938 171
1831 231 1941 154
1841 175 1945 261)
1851 150 1950 240) look!
1861 123 1960 133)
1871 86 1970 82
1881 73 1980 52
1891 53 1990 35

Source: Mitchell (1990). 1980 and 1990:

....or look at it another way

Our current debt is at an historically

low level
“....but cheap American money in the
post-war period,” you say? …Government
has cheap money now – interest rates are
low and Government owns banks

“but that was long-term debt,” you say.

…So is ours today – 13-14 years.

“....but that post-war period, too, was a

time of great austerity,” you say? …But
we were building a welfare state then,
free universal education, expanding the
university sector– right now we are
dismantling the welfare state and
 ....and another way to see
debt...looks pretty random,
doesn’t it?

Source: CIA World Factbook

(Notice: Canada went through extreme austerity
measures only recently and has a higher debt than
the UK!)
 Built-in (structural) imbalance of Government’s incomings and
outgoings – e.g. Public sector costs + servicing the debt
against tax receipts, proceeds from growth and exports.
 So – are Public Sector costs too high – or GDP/growth/tax
receipts too low? You can work on both sides of the equation.
 CG says 80% cuts (one side) and 20% tax receipts (other side).
Why? Why not 50/50...20/80...0/100? It’s political.
 But what does ‘structural’ mean?! Look at recent history.
There’s a dynamic relationship between deficit and borrowing
– they balance each other out.
Conservative Government

We borrowed our way out of debt under Thatcher!!

 GDP = Consumer spending + Business Investment + Government
Spending + International Trade income
 It’s an estimate, based on surveys of < 2% of UK businesses. So
it’s a guide a rough indicator – not a fact?
 And GDP is multiplied by the Velocity of money -

(how many times a £ is spent in 1 year). Increase V and you

increase GDP. But banks have RESTRICTED the flow of money –
so artificially dampening GDP.
 This is investment – we have bought
shares in banks. Why count it as debt?
 In the long term how much will we
recoup from these investments?

more importantly….
 If we can invest in banks and make
public sector pay – why can’t we
invest in public sector and make
banks pay?
 UK net debt is £903 bn
 Excluding Financial
sector intervention, debt
is £771 bn
 Or 54% of GDP!
Source: Office National Statistics (updated June 18,
2010)
Increasing or reducing the supply of money into the economy
through household and business lending – i.e. Manipulating
the Velocity of money

EXAMPLE: housing equity renewal increased from £4bn in

2001 to peak at almost £18bn in 2004, an annual injection of
between £10-14bn into the system during the 2000s. Since
2008, as a result of the credit crunch, banks have pulled £8bn
per year out of the system and slowed down the circulation of
money by making loans expensive (i.e. To raise the price of
money – their main commodity)
 So – is public sector cost too high?
 Or GDP too low?

 Or growth too low?

 Or tax receipts too low?

 What kind of society do we want when the economy
is performing to capacity? If we are cutting the
‘structural’ elements of debt that means we don’t
plan to bring them back. What do we want:
 Free health care?
 Winter fuel allowance?

 Good schools?

 Historically low taxes on the wealthy?

 A well run railway?

 Child benefit?
 Financial services share of UK GDP rose
from 5.7% in 1995 to 7.6% in 2007

 The manufacturing sector share of UK

GDP has fallen by over a third from
20.3% in 1997 to 12.6% in 2007
Source: International Financial Services, London Report
2008
 Private sector debt is about 4-5 times larger than
public debt and that is sustainable
 Anyway, it’s not debt that matters – but our capacity
to pay it (like a mortgage). And our capacity is historically
high, because:
 Increased wealth and income inequality (see the Gini co-efficient)
 UK’s long-term debt repayments (14 years)

 Government access to cheap money (we own two banks!) –

Doesn’t that make the value of debt

historically low?
The Gini Coefficient – the
most disgraceful curve of all
Low = lower wealth disparities; High = greater inequality

Public sector compensates for wealth inequalities – so why are we not

EXPANDING the public sector???
 Notice that the Gini Coefficient has been
rising (more wealth concentrated on the
wealthy) while higher rate taxes have been
reduced (the wealthy taxed less). So the
money to pay for public sector has shrunk.
Where can it come from?

..........not from growth...the financial

sector has suppressed that! LOOK!
 Growth rates
The financial sector and banks in recent years also
suppressed growth– compared to 6-10% growth of
‘tiger economies’
 Public utilities privatised - prisons, more and
more schools, many health services, council
services etc
 Around 20% public current expenditure
outsourced to private sector (£124bn) with
more to come as ‘commissioning’ steps up;
 Around 20% public sector employment
transfer to private sector over recent 2
decades
YES…..…BUT……..

 Not between the public and private

sectors

 Between the financial and

manufacturing sectors
 The UK is not broke – “there’s no money left!” is economically
illiterate. We have the 6th highest GDP in the world
 What about our assets in bank holdings?
 Why pay off 100% of our deficit in 5 years, when our debt is
historically low and we have 14 years to repay our borrowing?
 But national debt is never paid off – its part of the dynamic of a
healthy economy. YOU may pay off your mortgage – but the next
owners bring another one – your house ALWAYS has debt
 Why not explore options to meet debt payments and reduce the
deficit? i.e. pay more when we have growth, reschedule loans in
10 years, increase wealth taxes, public enterprise.
 National debt? NO

 Current account deficit? Depends on

your values - it’s political

 Economic governance? YES

 Democracy and public debate? YES

...so...why are we prey to
single narratives?

"Thinking's a dizzy business, a

matter of catching as many of
those foggy glimpses as you can
and fitting them together the best
you can. That's why people hang
on so tight to their beliefs and
opinions; because, compared to
the haphazard way in which they
are arrived at, even the goofiest
opinion seems wonderfully clear,
sane, and self-evident.”

Dashiel Hammett