We don’t owe it to ourselves

“We owe it to ourselves” sits high on the list of irresponsible statements about public debt, next to “In the long run we are all dead.”

The first is by one of today’s most popular economists, Paul Krugman; the second, by his inspiration, John Maynard Keynes. Both imply that, since the debt will never have to be repaid, we shouldn’t worry about it.

If only that were true. Our public debt already stands at £1.9 trillion. Granted, this still isn’t a patch on the US debt that’s about 10 times as high, but if today’s news is any indication we’ll close the gap fast.

The Exchequer borrowed £62 billion in April, six times more than in April, 2019. And, since Boris Johnson has already promised there will be no return to ‘austerity’, which he flippantly calls “the A-word”, this is only a point of departure – for the sky.

But in rides Krugman on his white steed, saving the day: “Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer).”

We ought to follow Descartes’s advice and agree on the meaning of the words we use. Such as ‘we’, ‘ourselves’ and ‘directly’.

Krugman’s ‘we’ is the global economy as a unit, and one has to congratulate him on possessing such panoramic vision. Indeed, if one looks down on the world’s economies from the vertiginous height of his intellect, they may all seem to be one homogeneous blob.

However, descending to the more familiar level of mortal humans, one realises that the international economy is largely a patchwork of national constituents. Hence, while a bird’s eye view will suggest that money borrowed by Britain from, say, China stays in the same global pocket, a closer look will show that Britain is the debtor and China is the creditor.

Perhaps some 20 per cent of our national debt is owed to the Bank of England and, though that’s still not exactly owing it to ourselves, that creditor is unlikely to tell us he knows where we live and threaten to have our legs broken.

The rest of it is owed to foreign governments and the money markets. Quite apart from leaving Britain exposed to political and economic blackmail, this debt has one annoying aspect familiar to all mortgage holders: it incurs interest.

Because we are living in a period of uncharacteristically low inflation, our debt servicing isn’t as expensive as it could be. Still, Britain pays the better part of £50 billion a year in interest charges, higher than our defence spend.

Another suspect word in Krugman’s epigram is ‘directly’. It’s true that borrowing doesn’t make the economy poorer directly, straight away. By the same token, a pleasure-seeker who borrows £10,000 to pay for a junket to Thailand suffers no instant pain.

The problem will start when the debt has to be repaid, and a state has similar, though not identical, problems. Yes, unlike our hedonist, the state stands a better chance of deferring repayments.

It can continue to issue IOU bonds, derivative bonds and bonds on the derivatives for a long time. But not indefinitely. At some point, its credit rating will drop, making further borrowing suicidal. The only way for the public to repay such debts will be to accept much higher taxes and much lower consumption.

To continue the parallel between our hedonist and the state, the former will have to repay his debt within a few years, while the latter may be able to pass it on to the subsequent generations. But it’s naïve to deny that at some point the balloon will go up, with bankruptcy beckoning.

Every Briton’s share in the present debt is about £30,000. In the next generation, that’s likely to triple if not quadruple. And I haven’t yet begun to list the blows huge public debts deliver to the public.

Promiscuous borrowing is inherently inflationary, at least over that long term that Keynes dismissed as irrelevant.

Inflation is low now, but chances are it won’t stay that way, especially with the government injecting more and more new cash into the economy. Just a generation ago, our inflation rate was higher than today by an order of magnitude. This may well return, and the cost of servicing our gargantuan debt will become unsupportable.

Even that isn’t all. For the billions borrowed by the state are the billions unavailable to free enterprise. Economists describe this situation as public borrowing ‘crowding out’ the private kind.

One doesn’t have to be a libertarian to observe that free enterprise generally uses investment more productively than the state. The state will spend most of the borrowed capital to finance grossly inefficient public services and infrastructure projects.

While zero-sum economics is spurious, money markets are indeed zero sum in that, the more finance goes to the state, the less is left for the private sector, the only one that can eventually get the economy back on track.

The chancellor likes to compare the current situation with the Second World War. He forgets to mention that Britain only finished repaying those war debts in 2006 and had to endure several decades of economic misery – thanks to exactly the kind of policies this government seems to favour.