Debt, Deficit and Delusion

Amazingly there are still people trying to make political capital out of the financial crash of 2008. Let’s review what really happened.

Banks and insurance companies created esoteric packages of debt and bought them from each other. All of a sudden, it became clear that the packages might not be worth much. They contained loans that had been made rashly and were unlikely ever to be repaid.

The fault that can be laid at the door of governments worldwide is a lack of strong enough regulation of banks. At the time, the Tories were clamouring for less regulation, not more.

Nobody outside the Tory party believes that the UK government bore responsibility for the collapse of Lehmann Brothers, the insolvency of the Royal Bank of Scotland and Northern Rock, or the subsequent collapse of Lloyds, or the global financial crash in general. The government deficit was a result of the hit to the economy caused by the collapse of banks.

The deficit is the difference between what the government spends and what it receives. The debt is the cumulative result of deficits and surpluses over the years. The deficit is now lower than it was in 2010, but is only just reaching the levels prior to 2008.

George Osborne said that he would eliminate the deficit by 2015. He failed. It is very likely that alternative policies would have damaged the economy less and reduced the deficit faster. Then he said he would eliminate the deficit by 2020. Now that goal has been abandoned.

The total government debt is now much higher than it was in 2010, although not nearly as high as it was in the 1950s or the 1820s. Interest does have to be paid on the debt, but since the crash, government has been able to borrow at very low rates of interest. These low interest rates have been less than inflation, meaning that government borrowing has been effectively free. As a consequence of Quantitative Easing, a sizeable part of government debt is held by the Bank of England. At no time in history has the national debt been paid off, rather it has been eaten away by inflation.

Selling off assets to reduce the national debt is usually foolish. Many assets sold by George Osborne were generating revenue for the state, greater than the interest cost on the equivalent debt. So selling them off was pure dogmatism and made the government worse off.

Talk of the UK being close to bankruptcy or being comparable with Greece was pure nonsense. A country that has its own currency (pound sterling) and borrows in its own currency cannot become bankrupt in any circumstances. It simply prints more money if necessary. That may have adverse consequences, but cannot lead to bankruptcy. Greece is not in that situation.

In short, talk of debt and deficit has been muddled and grossly distorted by political prejudice. It’s time we stopped hearing false claims and stopped using the deficit as an excuse for political changes that are motivated purely by dogma. Let’s be positive about what can be done, and look for policies that will make life better and fairer for the people of the UK.

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