‘If something cannot go on forever, it will stop.’ This is what Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon and Gerald Ford, once wrote. It’s accurate when we think about public debt. The question is not whether it can continue forever, but when and how it ends. Some are already warning that the alarm is on and that we are heading for an IMF bailout. The mainstream argument against debt focuses on its economic risks, but there is another aspect to it: public debt is a danger to democracy itself.
The UK now has the highest level of debt since the early 1960s. According to the ONS, government borrowing since April has hit £60 billion. Public sector net debt (excluding public sector banks) is provisionally estimated at 96.1% of GDP, and according to the Taxpayers’ Alliance, the new Government has already increased debt by almost £200bn since coming to office. Looking at the trend, two major shocks stand out. The 2008 financial crisis pushed public debt from 35% of GDP in 2007–08 to 70% in 2010–11. The upward trend has not stopped since, but the most eye-catching rise came with the Covid shock, which increased public sector net debt from 85% of GDP in 2019–20 to 96% the following year. The last time the UK economy had three continuous years of debt above 90% of GDP was when Harold Macmillan was the prime minister. The new reality we are living with is high debt, but unlike the 1960s, there seems to be no will to cure it.
Balanced budgets and paying back debt are no longer popular. There are reasons for that. On one side are the intellectuals, in Hayek’s words, the ‘second-hand dealers of ideas’: economists who treat government as a magic money tree, such as Stephanie Kelton in ‘The Deficit Myth’ or Barry Eichengreen and his co-authors in ‘In Defense of Public Debt’. They argue that the ability of governments to issue debt has played a critical role in addressing emergencies and financing good things like healthcare and education. On the other side, the idea of a balanced budget has become a curse word, associated with austerity and somehow blamed for all of the world’s problems. The intellectuals on the Left have made balanced budgets and debt repayment sound like sins. But the real danger lies in delaying the hard decisions, which only leads us to a situation where austerity is no longer a choice but a necessity. At that point policymakers will not have the luxury of weighing which path harms people less, they will be forced into immediate measures that hurt people more.
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