We can't keeping ducking the debt issue

The resignation of French prime minister Michel Barnier after only three months in office exposes a truth about the western world’s attitude to its high debt problem. We know we need to shift this weight, but the sacrifices required mean it’s preferable to park the problem for another day or wait for better economic times to make it go away. 

Some people are nonchalant about high and rising levels of national debt, to the point of arguing that the case for reducing borrowing is flawed and nonsensical and, furthermore, that the UK could safely borrow many more billions. But most support the view that a debt-to-GDP ratio of 100 per cent-plus is undesirable, potentially reckless, and that it is so because it is expensive to service (UK debt interest currently accounts for about 7.3 per cent of government spending), carries risks to financial stability and limits our options in the event of a new crisis. Much better for governments to balance the budget, relying only on revenues to cover day-to-day spending. For this financial year, the Office for Budget Responsibility is expecting a deficit of £127.5bn and for debt to reach 98.4 per cent of GDP (£2.8tn in cash terms). According to IMF forecasts, the UK’s debt ratio will be five percentage points above the G7 average in 2029.

While a ratio of around 60 per cent is considered ideal, the natural inclination of governments is to let the problem drift rather than spend their time in office taking the debt bull by the horns. To do the latter would risk provoking public anger at worsening public services, a higher retirement age and rising tax rates. It is always easier for politicians to give in and agree to less painful courses of action. 

But because eye-watering interest bills force governments to make difficult decisions about their pet projects, or to ditch investments that could aid productivity growth, and because bond markets are sensitive to borrowing levels, lip service must be paid. So fiscal rules are rolled out, usually with a good degree of flexibility, and promises are made that cost savings will be delivered and waste ended. Chancellor Rachel Reeves has launched a drive to reduce departmental spending by 5 per cent to help cut unnecessary public spending, although the government is at the same time agreeing steep public sector pay rises and the expansion of that workforce. 

In the US, where the debt-to-GDP ratio is 122 per cent, president-elect Donald Trump has appointed Elon Musk and Vivek Ramaswamy to find ways of drastically cutting federal government spending and headcount, although it is not clear that his plan to hack one-third off government spending could ever be implemented.

France’s debt ratio is approaching 112 per cent, but outgoing prime minister Barnier’s well-intentioned attempts to reduce the country’s budget deficit by a single percentage point from 6 to 5 per cent ended with his toppling. The cost of his austerity plan – €60bn of tax hikes and cuts to spending – was too much. France will survive this crisis, and the debt issue can be kicked down the road again, although as Holger Schmieding at Berenberg notes: “The reluctance to return to a sustainable fiscal policy now means the correction will have to be even starker at some time in the future.”

That’s the reason the country's economic affairs committee has been urging the government to get debt on a downward path and to build a much larger fiscal buffer to weather future economic shocks. Its September report concludes that difficult decisions “can no longer be avoided”. That may be true, but it seems a slow and steady battle is the best we can hope for.