How Much Debt is Too Much Debt? That is the question millions of us will ask ourselves tomorrow morning when faced with headlines proclaiming that the pandemic spending is raising the UK's national debt – accumulated credit over the centuries – above £ 2 trillion -Mark shot.
Let me put it. £ 2,000,000,000,000.
It's a really terrible sum.
What it means is that each of Britain's 25 million households now has a public debt burden of £ 80,000 hanging over them like a volcanic black cloud, which may take decades if not generations to resolve.
Another £ 36.1 billion was borrowed in September – the third highest month on record and compared to just £ 7 billion a year ago – when tax revenues plummeted and the Treasury released bailouts
With Covid infection rates soaring, forcing large areas to increasingly restrictive lockdowns, local authorities, schools, unions and some senior politicians – including former Labor Secretary Gordon Brown – are calling for the vacation program to be extended beyond the end of this month on top of other wasteful spending to deal with the economic consequences of this new phase of the pandemic.
Their concerns are understandable, but they should be honest about the implications. The burden of repaying the extraordinary loans is borne most of all by our youngest citizens, who have already suffered a devastating blow.
Their education has been severely disrupted and their employment opportunities diminished as companies try to cut costs. Even temporary jobs – weekend or evening work in bars, cafes and restaurants that many relied on as students or before they found that first job – are being denied them by the collapse of the hospitality industry.
The growing fear is that young Britons – like their counterparts in Greece, Italy and Spain, whose lives were ruined by the 2010 euro crisis – will become the troubled lost generation in Britain.
As generous as the help for trainees and the kickstart program in Chancellor Rishi Sunak's employment plan may be, it will not be enough to prevent permanent scars.
The sheer size of the UK's mountain of credit and debt is detailed by the Bureau of National Statistics for September. In that one month alone, the UK increased its national debt by £ 36.1 billion. New invoices for GBP 172.4 billion were issued between April and August. This far exceeds the £ 150 billion borrowing during the 2008-09 financial crisis.
And the latest data does not take into account the plans contained in the Chancellor's winter economic plan. This does not include additional £ 24.3 billion related expenses related to Covid-19 such as vaccines, medical services and test and trace, and additional funding for local authorities.
In addition, Sunak extended the VAT cut to the hospitality sector and introduced a new job retention system that pays two-thirds of earnings for part-time work.
And today the Chancellor will present plans to provide additional help to companies in stages two and three.
When the reckoning hits, the UK's borrowing is likely to cost a staggering £ 372 billion for this year alone.
It is frightening to reflect that, even after ten years of severe cuts and austerity under George Osborne and the coalition government, the budget was never truly balanced. National debt was still almost 80 percent of total production (gross domestic product, or GDP).
New projections by the International Monetary Fund (IMF) show that the UK's debt, which currently equates to total annual production of the entire economy, will exceed 100 percent at some point this year and reach 117 percent of GDP by 2025.
We're not the worst offenders, and we're better off than France, Spain, Italy, Japan, and even the world's leading economy, America. Those of us of a certain age will remember the shocking moment in 1981, shortly after Ronald Reagan became president, when US debt exceeded $ 1 trillion.
Reagan, and later Bill Clinton, embarked on a crusade to balance the budget and reduce the country's debt burden.
As generous as the help for trainees and the kickstart program in Chancellor Rishi Sunak's work plan may be, it will not be enough to prevent permanent scars
However, the latest IMF data shows that America's debt as a percentage of GDP is even higher than that of the UK, at over 100 percent.
The difference is that the US dollar is the main reserve currency in the world. As a result, most nations, including those with large trade surpluses like China and Japan, hold large stocks of the greenback. This gives the US the extreme privilege of borrowing more and more as it allows the presses to keep running.
The pound sterling is not a reserve currency, but that does not mean that we do not have an advantage over most other advanced countries.
Britain has never in its history – even in the darkest days of World War II when borrowing spiked to 25 percent of production (up from an estimated 16 percent this year) – has turned down its loans. (Gordon Brown paid back the last part of the War Loan, the perpetual debt created in 2006 to fund the war against the Nazis.)
Because of this excellent record, the UK has a healthy global credit rating and can borrow at historically low interest rates.
Governments finance their operations by issuing bonds known in the UK as gold-rimmed stocks.
The perceived security of a UK government guarantee means there is no shortage of buyers even as this pandemic rages and we near Brexit.
The most enthusiastic customers are the banks, insurers and pension funds, who have to hold gold-rimmed stocks as a safety net against bad times.
The Bank of England is also a big buyer of UK bonds. A £ 300 billion program has been in place since Covid got a foothold here. More purchases of up to £ 100 billion are widely expected to be announced next month.
By buying bonds for cash, the bank's tacit governor Andrew Bailey can also keep the banking system lubricated to save so many companies thrown into the abyss by the pandemic from tipping over.
Britain is also fortunate to have friends, including Gulf states and Norway's state oil and pension funds, who still view gilts as a safe place to invest their money.
However, what worries me about current borrowing is how much money has been wasted.
Earlier this month we learned that up to £ 24 billion of the £ 38 billion government guaranteed bounce-back loans to the smallest businesses may never be repaid due to errors and fraud as the system is allegedly infiltrated by gangsters.
According to the National Audit Office, the vacation program may have protected jobs, but it has also been abused, with a risk of up to £ 3.9 billion.
The government had little choice but to help the economy through this crisis, convinced that growth would eventually be restored and many jobs saved. But there is no great forest of money trees for the Chancellor to tremble further.
Governments have a sacred duty to spend taxpayers' money wisely. As the American Senator Everett Dirksen famously noted: "Spend a billion here and a billion there, and soon you will soon be talking about real money!"
As important as it is to provide businesses with cash and jobs, the bills have to be paid after all.
This is a sobering thought for all of us as calls to keep spending cones open continue to grow.
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