The Deficit, the National Debt and VE Day
Friday, 8th May, is VE Day. 70 years since the end of the war in Europe. On Bank Holiday Monday there was a programme on the TV about VE day, which I don’t remember, mainly because it happened 8 years before I was born. But the programme was not just about celebrities memories of the day. It was also about the immediate post-war years. I was able to confirm what I had always thought, which is that I would have had a ration book. I was born in July 1953, and meat rationing did not end until 1954.
But this programme also emphasised the amount of regeneration and rebuilding which had to be done. Close to where I am writing this, Southampton suffered serious bomb damage during the war, let alone London and – perhaps the greatest victim of all – Coventry. Any number of cities were devastated. The work needing to be done had to be paid for.
The Programme also mentioned that in the fifties we had full employment. It has to be said, though, that full employment would be a different animal then to what it is now, because fewer women – particularly married women – would have been at work, women did not go back to work after starting a family.. There would not have been so many immigrants to cater for, but at the same time the programme mentioned that, in order to bring more desperately needed labour in to the country, the UK granted British citizenship to any citizen of a Commonwealth country who wanted to come here to work. This is what gave rise to the famous “Windrush”, the boat bringing the first wave of West Indians to these shores.
The Deficit and the National Debt
One of the major issues around in many people’s mind at the moment as we stumble towards Election Day is the management of the economy. Late last year we had a discussion in the IBEX board about the level of misunderstanding that exists – and which seems to have been promoted – about such matters, but particularly around the question of the Deficit and the National Debt. These two matters often seem to be conflated by our politicians, often deliberately. The two are very definitely not the same thing.
What is the Deficit? I am not an economist, but this is, straightforwardly, the difference between the amount of money the Government spends on things like Education, the Health Service, Defence, Welfare and all the rest, and the income the government has from taxes or whatever.
So what is the National Debt. This is quite simply the amount of money the Government owes because of what it has borrowed in previous times. This is financed in a number of ways, such as Government bonds, borrowing from the banks or selling off the “Family Silver”, as it has been termed in the past. The National Debt was particularly high after the war, precisely because of all the work and rebuilding which had to be done, but while people were in work – full employment – they were paying taxes, so the work and the debt could be afforded.
So whereas our major parties seem to be somewhat paranoid about the National Debt, it is a concept which has been around for a very long time, and there is a perfectly valid school of thought which would deem it a perfectly acceptable – even expected – way of running things. When times are difficult, Government’s borrow so as to be able to carry on with a relative level of civilization. The Financial Crisis of 2008, though, did not lead to any significant increase in the National Debt, there are no graphs which would show it going through the roof, as there would have been after VE Day.
What’s that got to do with VE Day
But the rebuilding had to be paid for. Levels of the National Debt increased dramatically in the post-war years, but were coped with and, since things began to level off, the level of National debt has remained relatively stable. The Financial Crisis, to risk being repetitive, around 2008 did not lead to a sharp increase in the level of national Debt, as I understand it.
Cutting the “deficit” to zero would stop the clock, would call a halt to any increase in the National Debt, but would leave us with £1.4 to £1.5 trillion (million millions) of National Debt. The ongoing interest on this would cost the country, say, £45 billion a year, before we spend on anything else! To the Layman, that sounds a frightening amount of money. In terms of national economics, it is far less so.
If governments are lucky and an economy grows under their watch, their income in tax receipts goes up and their outgo on benefits goes down, so the deficit decreases. They could also raise taxes or cut spending to reduce the deficit. But either of these risks slowing economic growth so may be cutting off their nose to spite their face. So yes, cutting spending can have a detrimental effect.
In some ways, once we have got the National Debt steadied, the Government of the day might as well leave it there and bite the bullet of paying the interest (while rates are quite low, of course). The daily Election arguments about “cutting the deficit” are about cutting the rate of increase in the National Debt, NOT cutting the Debt itself. To achieve that needs a Budget surplus. To spend a Budget surplus paying a tiny amount off the National Debt would seem to be a sterile exercise – and thus not easy to sell to the electorate.
Although passing on a steadied National Debt to our children is not the best gift we could give them, to hand on an economy that is at least not racking up a higher and higher National Debt is something like sellable. But we do risk being misled about the scale and the nature of the “problem” from all sides, perhaps.
Contact David Wrighton, Team Leader, E-mail: firstname.lastname@example.org