There’s an interesting post by Éoin Clarke on debt interest doing the rounds. It
originally appeared on his blog, but was soon commandeered by LabourList — and little wonder why. Dr Clarke’s point is a perceptive and striking one. Debt interest, he says, is lower now
than it was under John Major. The implication is that when George Osborne rattles on about the money blown on just “servicing our debt,” we should take it with an almighty heap of salt.
It’s not, perhaps, as bad as all that.
Or, rather, that’s one way of looking at it. There are other ways, which I would list thus:
1) Going beyond 2011. Dr Clarke’s post centres around two graphs: one which shows debt interest levels as a percentage of overall government spending, and one which shows them as a
percentage of GDP. He’s referring to these two ratios when he says that debt interest payments are lower now than they were when New Labour took over. As he puts it, “debt interest was 30 per
cent higher as a portion of total government spending in 1998 than it is today.”
But, with debt, “today” is often not the problem. Tomorrow is. Brown’s deficit plan jacked up debt (and debt interest) over a 20-year period, according to the IFS. If we extend both of Dr Clarke’s graphs forward as far as we can, to 2015-16, then a grim trajectory is revealed: they both go up, more or less, to 1997-98 levels, even on today’s rock-bottom interest rates. Here’s the debt interest/spending one first:
And the debt interest/GDP one:
2) Real terms not ratios. But why should we use these two ratios in the first place? As Dr Clarke admits, if we look at the “raw” numbers — aka, real terms figures
— our debt interest levels have already risen beyond the levels inherited by Labour. And they’re still going up, up, up:
When it comes to the national debt itself, many economists believe it is better expressed as a percentage of GDP — as this also captures a country’s capacity to pay off that debt. Perhaps the
same might be said of debt interest. But, to my mind, this rather conceals the main concern about debt interest. It is a sum of money that has to be raised through taxes, or by further borrowing
— but which cannot be spent on public services. As we showed a couple of weeks ago, the actual cash level of our debt
interest payments will soon exceed the entire education budget. What would you rather it went towards?
If we express debt interest payments as a percentage of GDP, or of overall spending, then they will appear to go down as either GDP or spending rises. But that wouldn’t change the underlying fact:
that every hour, of every day, we’re haemorrhaging enough money to build a new primary school. And it’s getting worse.
3) Off the balance sheet. Let’s not forget that Major actually declared all his debt. Brown used PFI deals to create a world of off-balance-sheet financing, Enron style. And
we’ll be paying it off for decades to come — with interest wrapped, contractually, into the payments. As Fraser and I said in a magazine piece a couple of years ago, some £2.2 billion had been
committed to PFI when Labour took over from the Tories. According a recent analysis by the Centre for Policy Studies, it’s more like £169 billion après-Brown.
Point is, there are lies, damned lies, statistics and other ways of accounting for debt. Dr Clarke makes the case for saying that things aren’t that bad. Here at Coffee House, we’d cut the cake a different way — and leave CoffeeHousers to make up their own minds.
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