Understanding the issue of National Debt

In 1919, Stanley Baldwin asked tax payers to help pay off the national debt, which had skyrocketed during the WW1 (debt-to-GDP was 165% at the time).

So a fund was created with an anonymous £500,000 donation to pay off the national debt.

It is now worth £400 million.

But the fund has never grown above 0.066% of the national debt, meaning it has been kept in limbo this entire time.

Now, the Attorney General Jeremy Wright QC is applying to release the fund and use it to pay off the debt.

“Almost 90 years ago an anonymous donor bequeathed money to the nation and yet we have not been able to put it to good use. We have been working with the Treasury, Trustees and the Charity Commission to find a solution consistent with the donor’s original objectives of extinguishing the national debt.”

This is good news. Sure, the fund is only a drop in the ocean, but anything that reduces the colossal debt we’ve amassed is surely to be welcomed.

But the reason I mention the fund here today is because I think it gives a useful indicator into how some people view our national debt.

The Guardian’s headline on the story ran as follows: “Attorney general defies call to give £400m windfall to UK charities”.

They are expressly not happy that the trust might be used for its original purpose – the one intended by the generous donor.

They are in support of Labour Shadow Minister Steve Reed, who gives a clear insight into where his thinking is on the matter:

“This £475m would be a tidal wave of support for small charities, but it’s a drop in the ocean compared to the national debt. In fact, the national debt is rising so fast that by the end of the same day this payment is made towards it, the debt will have risen by nearly the same amount.”

Just think about what he’s saying here.

Because the debt is rising so fast, he sees no reason to pay a bit of it off.

Forget the fact that his point is meaningless (it will still reduce the debt by 400 million pounds for Heavens’ sake!), I find it unsettling that this is how an elected politician views the country’s finances.

That Reed thinks money intended to pay off our debt – donated at a time of national trauma – can be compared to giving the money to charity is alarming, no?

It’s as if the debt is merely a minor irritant for some people, an esoteric subject for a handful of miserable accountants to fret over, while everyone else gets on with what’s really important…

Well, it isn’t.

And anyone who suggest otherwise is unfit to hold public office, to my mind.

It is not my intention to make a party-political point, here.

I’m not sure the Tories are much cop themselves on this issue. Theresa May’s idea for a cap on energy bills was an astonishing idea for a Tory Prime Minister – one we haven’t heard from a Tory leader since the disaster of the 1970s, if I’m not mistaken.

But I do want to make an economic point.

Since 2008, the UK national debt has skyrocketed.

Despite the economy returning to growth in the wake of the global financial crisis, the debt has only got bigger – trebling since 2007.

Britain’s debt has exploded by over £1 trillion in less than a decade

According to Trading Economics, the UK’s debt-to-GDP ratio has increased from 76% of GDP in 2010 to over 89% today. That leaves us at the edge of an economic cliff.

In 2010, Harvard economics professor Kenneth Rogoff looked into how debt levels affect an economy’s ability to grow and get itself out of trouble.

He looked at 200 years of data for 44 countries. Here’s the critical finding [emphasis mine]:

So countries with a debt to GDP burden of over 90% find it significantly harder to grow, as paying off the interest on existing debt becomes such a hindrance it constrains growth.

You can see this with Italy and Greece – suffering with national debts of 131.80% and 178.60% respectively.

Britain is perilously close to the 90% threshold. A bad quarter would push us well over that mark, I expect.

As I said before, this is the highest peacetime debt we’ve ever had. We’ve been living beyond our means for decades.

And yet the idea we could start chipping away at the debt by putting £400 million towards its original purpose is dismissed by a Member of Parliament.

I’d be interested to hear Steve Reed’s view on what happens to the debt when the next recession strikes… and what he’ll tell his constituents when they ask him how he proposes reducing it…

Then again, it’ll be too late by then.

You’ll either be prepared for what’s to come… or you won’t be.

Here’s what you need to do.

Nick O’Connor

Publisher, Southbank Investment Research