Remembrancing the national debt

My husband teased me for saying The National Debt: A Short History by Martin Slater was a rattling good read, but it is. Published in late May, it puts the ‘austerity’ debate in illuminating context.

This is the UK’s national debt we’re talking about, and the book starts in the Middle Ages and ends at the financial crisis. For government debt is about high politics, from the needs of feudal monarchs to fund armies increasingly consisting of mercenaries to the long battles – in the Civil War, literal battles – over the respective powers of monarch and Parliament, to the effective private sector default in 2008 that led to banks being bailed out with the government borrowing to purchase bank equity of uncertain future value.

The history is delivered with a light touch and nice anecdotes. For instance, income tax was so hated than both times it was scrapped after its early, temporary introduction – all the records were destroyed, by immersion in water in 1802 and by burning in 1815. It turned out, however, that there was an official called the Remembrancer whose job was to keep a copy of all government financial records. This post was so obscure, that nobody had noticed and the copies were found many years later. (Created in 1154, the post still exists. What a great job title.)

There are boxes on famous economists’ views of the National Debt – including Karl Marx, who like all the others frowned on public indebtedness. He noted that most institutions in Britain were ‘Royal’ but the debt was ‘National’: another way working people had to support, through taxes to pay the interest, the rentier classes.

I learned that the founding President of the Royal Economic Society (no, not ‘National’) was an economist I’ve never heard of: George, Viscount Goschen, whom Slater describes as “perhaps one of the most economically literate Chancellors of the Exchequer to hold office before the late 20th century.” He wrote text books, encouraged the expansion of the universities, and was also President of the Royal Statistical Society.

The book ends with a (painlessly) theoretical section setting out a very clear explanation of debt sustainability. It does involve two equations, but even the most algebra-averse reader will be able to cope. The history behind the upward-ratchet of the net debt to GDP ratio makes it all too apparent that usually governments treat their purchases of assets (such as bridges or nationalised corporations) as capital expenditure but their sales of assets as current revenue, available to be spent on political priorities. For sustainablility, the government’s primary surplus of tax revenue less current spending, relative to the size of the economy, needs to be at least as big as the debt to GDP ratio, multiplied by the gap between the interest rate and growth rate (remember Piketty‘s famous r>g inequality). A higher growth rate is always the deus ex machina hoped for by governments struggling with high debt and interest payments. Currently, the UK’s national debt would start to decline (relative to GDP) with a modest 0.9% of GDP primary surplus, but that is quite a turnaround from the present deficit.

As Slater says, however, it is not straightforward to decide what the optimal level of the debt ratio would be; there is probably no better option than waiting for growth to do the job. The book concludes with a plea for a more comprehensive accounting for the government’s finances; the experimental whole of government accounts go a long way toward including other obligations that will fall on future taxpayers. Even these do not include non-legally binding future payments – such as state pensions or the NHS – while future PFI obligations are included as notes but are not in the figures. The politics of national debt are not going to get any easier.