Thursday, 7 October 2010

UK Debt - The Facts

Some interesting data on the UK's Debt, which the Tories tell us is so bad that – THERE IS NO ALTERNATIVE but to slash Public Services – is to be found here at UK Public Spending. It shows that, in fact there is nothing exceptional about the current level of Net Debt. For nearly 200 years between 1700 and 1900 it was at levels many, many times higher than today as a percentage of GDP, as it was again for nearly 50 years from before WWI, and until the early 1950's – a period during which Governments were, of course, mostly Liberal and Tory or a Coalition of the two!

But, at £772 Billion, the total UK PUBLIC debt, is actually smaller than UK Private debt, as can be seen here. In fact, at £1.4 trillion, Private debt is almost exactly double the Public Sector debt. So what are the Liberal-Tories proposing to do about that? They are keen to tell us that the country is paying more in interest payments than it spends on various Public Services, but they never mention that the average family spends more in interest payments to rip-off banks and credit card companies, and to repay mortgages than they spend on food, or on clothes for their kids etc.

Yet, although, the Government is keen to tell us that they have to rip up Public Services to repay its debts, far from advising citizens to slash their own spending, to rip up their credit cards, to sell their houses to be able to pay off the mortgage and so on, we have Charlie Bean from the Bank of England coming on TV, and telling us all to go out and spend whatever saving we might have!

As with much of the rest of the policies of the Liberal-Tories its all just a part of the Big Con.


Phil said...

Great post, Boffy. I hope you don't mind me nicking one of the graphs for a quick blog on this subject.

Btw, next co-op party meeting's on Nov 11th. I'll send you the details when I have them.

Boffy said...


That's fine. I would add that in a discussion over at The Commune, where I referenced this data, Bill Jefferies, from Permanent Revolution, makes the additional point that part of this debt is for the Bank-Bailouts, which are producing revenue for the Government, and will probably result in a Capital Gain when the shares are sold. Take that out, and the actual Debt to GDP figure is more like 54%.

He also makes the point I have been arguing for the last year or so that the debt in any case will be reduced because of inflation. Paul Mason's Newsnight report last night was illuminating. He confirms another point I've been making. The Federal State has initiated a huge fiscal stimulus, which supports the interest of Big Capital - there was also an interesting discussion at the weekend about this on BBC news with Joe Stiglitz and others. But, the stimulus is not as effective as it should be. Why? As he showed in Indiana the State is governed by Republicans. They have been holding up use of the stimulus for quite obvious narrow political reasons. In Gary, which is controlled by the democrats, and is a predominantly black and run down City, they have insisted that before funds are realeased the City has to make Cuts, and cut taxes!

Large numbers of ideologists of Big Capital are making the point that the Cuts are detrimental. Big Capitalists like Soros are saying the same thing. The parties more closely connected with the interests of Big Capital - are tending to heed that warning. The exceptions are Greece, Portugal and Spain, where as Stiglitz says they have been left with no alternative, but as I've previously pointed out, though that is true individually, there is an alternative EU solution - it is right-wing populism, responding to its base, and vote grabbing such as the Tories in the UK, and Republicans in the US who are needlessly pushing for these policies.

The LeftBanker said...

he Myths about UK Government Debt and the £1.1 trillion Crisis We Face

UK debt rose dramatically at two times under modern capitalism – to fund the world wars and the rebuilding of the economy after the war. The debt built up during the Second World War and in its aftermath was finally paid off 60 years later with most of it repaid by the 70s as the UK and world economy experienced a period of unparalleled expansion. Most of the loans were to the US government at 2% per year – we are on average now paying 5% on our current loan book (£950bn) and 33% (£305bn) of our loans have to be repaid/renewed over the next five years. Our current economy has had the second deepest recession of modern capitalism and only a third of pre-recession output has been recovered that was lost and we are heading for a long period of a stagnant/declining economy. The government estimate that even with the cuts the debt will grow by £540 bn over the next 5 years. This is based on growth estimates by government above the city estimates. The city estimates will prove too optimistic themselves so the debt will be larger and there will be fewer revenues to pay the interest on the debt. This interest – again conservative – will be £250 bn over the next five years. This means that we will have to find conservatively £1.1 trillion over the next five years! 33% of our debt is held by foreign governments contrary to what some in the labour movement have been saying.

On the debt incurred after the first war and during it – this was borrowed from the US. It declined in the early 1930s because we and other governments defaulted on it when the US government, after the Wall ST crash, asked for it back early. This played a major part in freezing up world credit that led to the great depression. Sounds familiar?

Finally on the high level of private debt, this is what is at the centre of the debt/deficit/cuts. It is the losses over the last three years – estimated globally to be running at $2.3 trillion –that banks have made on private loans that led to the bail outs and the recession. It was paying for these bailouts and the shortfall in revenues as welfare expenditure increased during the recession that is at the root of our ballooning debt and deficit. Having high private debt goes hand in hand with having high and increasing levels of public debt spread right across society and countries.

The government is going to cut £83bn over five years which is 9% of the £1.1 trillion we have to find over the next five years. This is based on optimistic estimates about the economy. The government and city economists have got this wrong consistently over the last three years.

We were almost alone in January to March 2009 in calling the recession/near depression and the near collapse of the financial system and the bankruptcy and near bankruptcy of several banks and the collapse of the housing market. The LeftBanker is currently ranked 4th by Bloomberg amongst 1000 global analysts for the accuracy of economic forecasts.

Be wary of those who say the debt is not a problem and that has been bigger in the past. There is a very good reason for that as we have spelled out above. It is likely with the cuts and reduced growth they bring on will mean at some time we will have go to the IMF. Their cuts as a condition for loans will be much tougher.

We have to show that we are facing a crisis – which the coalition is walking blindly into it. But we have to build an alternative solution that does not mean we pay for a crisis made by the bankers, governments and the wealthy.

And then there's the £1 trillion public pension deficit!

Boffy said...


Thanks for your comments. No one doubts that in the 20th Century large debts were run up as a result of the two wars. The fact, that they were owed to the US is not significant. Keynes was sent by Attlee to negotiate with them, and the US used its position to get the UK to concede its remaining Sterling role, and to get rid of its protected Colonial Markets.

The point is that despite those huge debts, much bigger than today, and with far less favourable conditions for growth in the 50's given the devastation of UK productive potential, and despite the fact that the UK wasted even more money on developing nuclear weapons and engaging in the Korean War, the UK still managed significant growth in the 50's, and created the NHS, and paid out over inflated sums in compensation to the owners of nationalised industries.

A look at the longer historical chart going back to 1700, shows that those levels of debt to GDP have not at all been uncommon, and do not appear to have caused a problem in the past. As Bill Jefreis has pointed out elsewhere, and as I have myself been arguing, a dose of inflation for the next few years would almost certainly shrink the debt without any cuts at all. Traders are now talking about the US being unable to repay its debt, and that - because it won't default, it will have to do the next best thing, and inflate the debt away.

Bill has also pointed out that if you deduct the Bank Bail-outs the actual Public debt is considerably smaller, and when the Bank shares are sold their is likely to be a Capital Gain, let alone the revenues currently being earned.

I don't understand your comments in regard of private debt. As I understand this it is not the debt of banks, but the debt of individuals i.e. Credit Card debt, mortgage debt and so on, and therefore, nothing to do with the bail-outs.

Boffy said...


You say,

"January to March 2009 in calling the recession/near depression and the near collapse of the financial system and the bankruptcy and near bankruptcy of several banks and the collapse of the housing market."

Really? I had forecast the Financial meltdown in pretty accurate bdetail in August 2008, a couple of weeks before it materialised. Given that Lehman's collapsed, and other major US Banks were effectively nationalised within the following weeks of the Autumn of 2008, provoking massive intervention by Central Banks, and given that all western economies had already gone into recession by the first quarter of 2009, and commentators on Bloomberg and other business channels were asking questions like "Is this the end of Capitalism?" even by the end of 2008, what was so prescient about forecasting in March 2009 what had already occurred????

The LeftBanker said...

The situation after the Second World War was much more favourable for growth. The economy was being rebuilt for scratch and we had revolution in technology. Global capitalism had a golden age of expansion with a rising rate of profit. This enabled the debt to be gradually paid off over a period of thirty years. This is very different to the situation we have now – the second deepest recession of modern capitalism with only a third of lost output recovered (some of this recovery through public spending) and a further decline/stagnation on the horizon. Over the next five years we will struggle to make the £250 billion in interest rate payments and find £540 of new loans and renew £305bn of existing loans.
Looking at the periods prior to the start of the 20th century is irrelevant. The economy was much smaller and consequently so was the debt. We were also, the major capitalist economy and one of the few issuers of government bonds making it much easier to raise loans.
The government have about £85bn in holdings in banks but given that the fragile recovery in bank shares and there recent underperformance it will be very difficult to sell these shares. I think it would take about ten years for the banks to be deleveraged and be in a position to look attractive again to investors.
It is wishful thinking to hope for inflation to wipe out the debt. Although demand for food and commodities from the developing countries is creating some inflation the real danger is a Japanese deflation through low demand and cuts in real wages.
Finally private debt is at the root of the crisis. The global banking system has lost $2.3 trillion because of bad loans on housing, credit cards etc. Most of the debt is still out there which means further write downs are likely by the banks meaning more bailouts and bigger deficits and more cuts.
A last thought we also have a £1 trillion deficit on public pensions which is exponentially adding to the deficit - £4bn this year, £15bn by 2015!

On the forecasts I meant January to March 2008 not 2009.

The LeftBanker said...

See my analysis written in January 2008:

Boffy said...

Thanks for the clarification on dates. I do not, however, accept the argument or analysis you put forward. Firstly, I find it impossible to see how the situation for the UK was better in 1945 than it is today, on any basis. A fundamental requirement for economic growth is Capital Stock. In 1945, the UK Capital Stock had been decimated. Not only was that stock badly out of date due to lack of investment during the Depression of the 1920's and 30's, but it large parts of it had simply been scrapped. That is before we consider the Capital Stock destroyed by the War itself. Secondly, there was a Balance of Trade constraint that led to the continuation of rationing into the 1950's, which itself held back the growth of consumption.

None of that has been the case since the start of this Long Wave Boom in 1999. Indeed, part of the problem has been not destruction of the Capital Stock, but part of that Capital Stock remaining tied up in low profit areas rather than being re-allocated to higher profit areas. You mention the role of technology, but the technology of the 1950's was still based on valves, and only just beginning to use transistors. The technology of today is literally a thousand times more powerful than that as a result of the development of the microprocessor. In addition, the other base technologies built around the chip have provided a plethora of potentialities not only for new productive methods based around mobile technology and the net, but for whole new industries and product ranges.

In actual fact, the evidence is that as early as the 1960's the rate of profit was falling, as is normal in that stage of the long Wave Boom, as Glyn and Sutcliffe have demonstrated. There certainly was a Global Boom in the post-war period, but it was not Britain that mostly gained from that it was the US, Germany and Japan.

You are quite right to say that the recession was the second deepest, but it was also very short. The depression of the 1930's lasted for 40 months, this recession lasted for only around 12 months. As a result the total reduction in output was significantly less. From memory, around 25% loss compared to just 7% loss. The fact, that only a third of has so far been recovered has to be placed in that context. Moreover, you have a very restricted basis of analysis. On the one hand you talk about a Global expansion after WWII, but only talk about the limitations of the UK economy in the present. In fact, on a global basis not only has the lost output been recovered, but well surpassed as China grows at more than 10%, and other major economies grow at inordinate levels. In fact, that growth and the potential for the UK to benefit from it is another difference with post WWII.

For this last reason I think your forecast of a long period of stagnation is hopelessly pessimistic. In fact, all the evidence is that the economy was growing rapidly in the earlier part of the year, witnessed by the 170,000 new private sector jobs created in just 3 months. Given the growth in the global economy, the strength of Germany as a hub within Europe etc. there was every likelihood of that growth being extended prior to the decisions of the Tories, and other right-wing populists to push for austerity measures. The consequence of those measures will now be – as I am writing in a new blog – that there will be a new sharp recession, which will be accompanied by a thoroughgoing restructuring of Capital in the West. At worst that might cause a crisis lasting as long as the 40 months of the Depression, but I doubt it, but the consequence will be that the restructuring of western Capital that was needed, and which could have been carried through over a long period will now occur much more quickly and brutally, and will lay the basis for even more rapid growth, higher rates of profit, and Capital Accumulation.


Boffy said...

The US is already inflating its debt away via massive money printing with QEII and QEIII already lined up. As Marx pointed out inflation is a result of the increase of money tokens, not as the Keynesians argue cost-push or demand-pull. The massive money printing in the UK, and that to come has already led to inflation remaining higher for longer than the BoE has been forecasting for the last year. You are right that there are increased costs from imported goods, and that money printing will monetise those costs, which will be added to buy the falling £, and the VAT rises etc. to come. The £2.3 trillion is not a loss for the UK, but the Global Economy. Most of that has already been written down, hence the bank bail-outs. You may well be right that there is a lot still out there, but the reality is that we do not know how much of this will be netted off within the system, nor indeed, how much of it is based on assets that DO have value. Either way, the figure for the UK is much smaller than £2.3 trillion, whereas the actual private debt I referred to is real.

On pensions I've already written on what I think about that. On forecasting the crisis. In fact, in January-March 2008 there were many people forecasting a crisis, some as I wrote at the time already talking as though a recession had begun. That is not new, as again I've written the Left and Right have never been short of people with a catastrophist model. But, as I and others like Bill Jeffries wrote at the time, they were wrong. The onset of the Credit Crunch in August 2007, provoked a significant response after Northern Rock, and the sharp rises in Libor and Euribor. The Crunch had little impact on economic activity in the real economy into 2008, as the figures for economic growth up to the third quarter demonstrate. Could the Financial meltdown have been avoided? Difficult to say, but had Lehman's not been allowed to collapse the amount of intervention might have been less. It is also clear that this was a Financial Crisis not an economic crisis. The economic crisis was the result of panic, and a seizure of economic activity it caused. It did highlight the fundamental problem that the necessary restructuring of western Capital had not occurred, and that is now that is being addressed.

The LeftBanker said...

Thanks for publishing my reply and your repost. I’ll take up some of your points and then leave it at your reply.
You can have over accumulation of capital with declining growth rates and declines in the rate of profit. These all appeared at a the start of the 70s and again in the UK in the mid of the millennium. Excess capital flowed East were higher rates of profit were available and into speculative finance capital.
While the UK did not perform as well as other economies after the war but it had an unprecedented period of expansion without a major recession until 1973. It was based on a building from a low base and the introduction of the new technology primarily electronics. The transistor is probably the major technological breakthrough of the last 100 years. These rates of growth were much higher than in the new “long wave” of the 90s/2000s as the table below shows. The decline in the rate of profit data I have seen from Mandel shows it not start falling until the late 60s.
The recession we have just been through lasted 18 months not 12 as you state. The recovery we have seen is weak compared to the recoveries from the 70s and 80s recession when nearly 75% of lost GDP was recovered in the same time that we have recovered in this recession 33%. The recovery this time is more akin to the one seen in the early 1930s when it double dipped into a depression.
Global production in the developed countries has only reached 90% of pre-recession levels. The overall recovery is down to China. But this has been an import led recovery by China as they pumped $700 bn into their infrastructure and $1.5 trillion into their banking system which created a housing and stock market bubble. This drew in imports of commodities and machinery seeing economies like Germany and Australia benefit.
This spending is over and there is insufficient domestic consumer demand in China and other emerging economies to keep their or other economies afloat.
The UK recovery in the second quarter was largely because of delayed construction projects in late 2009 and early 2010 because of the severe winter and increased public spending. The growth in jobs in the UK has been in part-time jobs this has come to an end with two monthly rises in jobs seekers allowance.
Let’s be clear I am against the cuts but they are a drop in the ocean compared to scale of the fiscal crisis. Capitalism will have to impose more cuts on us as we drive into the storm of this £1.1 trillion crisis unless we come with alternatives while at the same time warning all of the impending storm.
UK GDP Growth Rates By Decade
40s/50s 60s 70s 80s 90s 2000s
2.5% 3.1% 2.4% 2.5% 2.2% 1.7%

Boffy said...

1. I've never said you can't have over accumulation with declining growth and profit rates. I'd have thought that the two go together. I've also said many times that in the 80's Capital went East, and into assets.

2. UK growth was sub par after WWII, but along with the rest of the global economy benefited from the Long Wave Boom. The main reason that there were no long or serious recessions, was as Mandel sets out, because all ACC's used Keynesian intervention to cut them short. It was part of the Social-Democratic consensus, or in the UK “Buttskillism”.

3. The transistor like all base technologies was important in relation to the Long Wave Boom it was associated with. What is different about the microprocessor is that in forming the engine of so many smart machines it has had so significant an effect not just in restructuring Capital – without distributed computing, distributed production would have been very difficult, as would the tying together of suppliers for Just In Time – but, it has also acted as an adjunct to human brain power. Without it the advances in other sciences such as in bio-technology – the decoding of the genome for instance – would have been impossible. The microprocessor now means that the very process of scientific discovery, and technological development are restructured and revolutionised. No other base technology in history has come close to that.

4. As I have said I do not date the new Long Wave from the early 90's as do, for example, Permanent Revolution, but from 1999. I have also written that I agree that the measures used during the 1974-99 downturn, of increasing liquidity and debt, have acted as a drag on the vibrancy of the growth in the UK and US, as well as the fact that the necessary Capital restructuring had not been carried through. I don't think you can take the growth figures for the last decade as a guide. If as I now think likely, a brutal restructuring occurs, I think the growth rates for the last part of the Boom will blow away the growth rates for the 50,s and 60's.

5. Whether recovery of lost output was faster in the 70's and 80's I'd have to check, but the fact is that the 70's and 80's were characterised by prolonged stagnation, and repeated crises. In fact, this was why Capital had to abandon Keynesianism, defeat workers and then move to Monetary stimulus. I don't know what you mean about the early 1930's. The Depression began in 1930, and continued for 40 months, hitting its low point in 1933.


Boffy said...

1. No its not just down to China. US growth has been as high as 5% in a single quarter. Many other Asian economies – which on any meaningful basis now have to be called “developed” - have had even higher growth rates than China. Brazil and other Latin economies have been growing strongly too.

2. To say the spending in China is over, and that they do not have sufficient domestic demand to keep the economy afloat is I think completely unfounded. China has huge reserves that it can use. As the recent strikes, and support for them from the State demonstrates, it is moving towards a larger domestic market, based on higher wages, and higher value production as many other Asian economies have done. Already 30% of Chinese output goes to the home market, and as it begins to develop Western China the potential for exapanding that is vast. Much of the rest of its output goes to other Asian economies including Japan. Although, Asia will undoubtedly be affected by any serious slow down in the West this intra-regional trade is increasingly important, and given the dynamism of these economies and their overall strong growth rates, provides the basis for them being shielded from some of the effects of such a downturn.

3. The recession in the US and Europe lasted only 12 months. In a global economy I think its pretty meaningless to separate out the growth figures for the UK in determining the duration of the recession. Even at 18 months, that is no worse than average for the length of recessions.

4. The data shows that the second quarter growth figures for the UK could not be put down solely to Construction. At best it accounted for about a third of the growth. But, by the same token construction depressed the First Quarter figures. A lot of the growth was due to restocking after inventories were run down in 2009, as the panic brought economic activity to a halt. It was inevitable that after that was completed there would be a tail-off, which is why I argued a year ago that it would be lunacy at that stage to remove the stimulus.