David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

17 .6 The national debt and the deficit
Qj T_ h _e_na_ ti _on_a_ld_e_bt_a_nd_t_ h _e_de_ fi _cit -
Occasionally, the UK government had a budget surplus. Historically, this is rare.
Most governments have budget deficits. The flow of deficits is what adds to the
stock of debt.
The government's debts are
called the national debt.
The UK government had large deficits in the 1970s. The nominal value of its debt soared. Yet inflation
was also raising nominal income and nominal tax revenue. Moreover, real growth was also taking
place. For both reasons, rising levels of nominal government debt have often taken place without the
debt being out of control. When nominal debt rises more slowly than nominal output, the ratio of debt
to GDP is falling and the government can meet its debt interest commitments without having to
raise tax rates. What must happen to tax rates is a good indicator of how much the debt burden is
hurting.
Table 17.3 shows how the UK's debt/GDP ratio has evolved over the last 35 years. Despite a steadily rising
level of debt, the ratio fell steadily to a mere 15 per cent in 1989. Thereafter, the debt/GDP ratio rose
steadily until 2007, but still remained at levels that were modest by international standards.
This gradually evolving picture came to an abrupt end with the crash of 2008/09 and the dramatic fiscal
expansion needed to prop up the banks and provide additional injections to aggregate demand. This raises
an obvious question: given increasing confidence that GDP growth had been restored by the start of2010,
why not withdraw the fiscal stimulus more quickly in order to shrink the size of the budget deficit and
prevent government debt spiralling to the extent predicted by the IMF?
First, to the extent that the national debt is owed to UK citizens, it is a debt we owe ourselves as a nation.
Paying interest entails redistributing income within the UK, from taxpayers to debt-holders, but is a drain
on national income only to the extent the UK has previously borrowed abroad and must now pay interest
to foreigners.
Second, to the extent that the debt has financed investment in physical or human capital, this will raise
future output and tax revenue, and help pay off the debt. Prudent businesses sometimes borrow to finance
profitable investment. A prudent government may do the same. More investment in rail infrastructure
would probably have been good for the UK, even if financed by greater debt.
Third, specifically in relation to the recent surge in debt, some of which has been financed by foreigners, it
is vital that financial markets believe that the UK government has a credible plan to reduce the debt before
any financial panic about whether or not the government can meet future interest repayments. In an ideal
world, this would entail raising tax rates a little and taking a long time to reduce debt/GDP levels. Doing
this too quickly would entail drastic cuts in public spending or punitive rates of tax in the short run.
Complete financial collapse in 2009 would have scarred the economy for decades - just like the Great
Depression of the 1930s. Future generations will benefit from the actions that averted such a collapse, and
it is entirely reasonable they should pay a little in order that the current generation does not bear the
burden alone.
Table 17.3
UK government net debt, 1973-2014 (0/o of GDP)
1973 1979 1989 1999
60 48 15 39
2007 2014
44 92
Sources: OECD, Economic Outlook; IMF, World Economic Outlook, 2009.
411