Owen Tudor
Sam Brittan, writing in the Financial Times, draws attention to historical precedents for the current ‘high’ level of public sector debt. And he outlines the case for calming down about whether cuts are necessary. Treasury projections suggests public sector debt will reach 76% of GDP, just under half the level it was in 1956 when Harold Macmillan was Prime Minister. Did the Government then respond by slashing and burning public services? No it did not. Growth reduced the debt. The same is true now. Growth is the best solution to public sector debt. Continuing recession would only make it worse. Sadly, it is out of fashion to learn from the past!
Comment made by Alex on Oct 3rd 2009 at 1:27 am:
Sam Brittan’s article is lazy journalism. The debt to GDP ratio was high in Macmillan’s time in office because of the second world war. GDP was growing fast and debt was high because of government borrowing during the war, not because of high government spending.
More importantly, the ratio of government spending to GDP was much lower, about 30% compared to 50% today. That meant that there was 70% of GDP available to be taxed to pay down borrowing if required, whereas today only 50% of GDP available to be taxed (35% is already taxed and 15% is borrowed).
In earlier times according to Brittan the ration of debt to UK GDP was even higher, but this is misleading because UK government debt was used to finance the whole empire and was serviced out of taxation in the UK and overseas, whereas the GDP figure related to only the UK. Furthermore annual government spending was only 10% of GDP, giving the government more leeway to repay the debt from taxes.
In addition, modern debt numbers do not take into account off balance sheet obligations like the PFI and National Rail, nor the contracted public sector pensions, which are substantially higher than 50 years ago as a proportion of GDP.