The myth of record debt
11-18-2008, 04:18 PM
The myth of record debt
When is a record not always a record? When it's twinned with the word "debt". To have a hope of knowing what's happening with the economy, you need to learn the rules of a childish game, says Michael Blastland.
Here's a game that's all the rage with politicians and the media.
Take any number of pounds that's bigger than it was before: the price of a hotel room, the size of the health budget, whatever, but particularly at the moment, government borrowing.
Shout: "It's a record!"
Apportion blame or praise, as desired. The game is fatuous, but don't let that stop you. After all, it doesn't stop them.
Here are some examples. The numbers are all correct.
1. In 17 years of power up to 1997, the Conservatives made net debt repayments in four years, totalling nearly £17bn. Since coming to power in 1997, Labour made net repayments in three years, totalling about £41bn. (A record!)
Praise be to Labour prudence, the Conservatives were rubbish.
2. In 1993, during the last recession, the Conservative government borrowed about £51bn. This year, Labour is expected to borrow about £64bn. (A record!)
All hail Conservative prudence, Labour are rubbish.
3. After World War II, the national debt was about £24bn. In September this year, after repeated Labour and Conservative governments, public sector net debt had reached about £645bn. (A record!)
They are all rubbish.
Getting a taste for it? Try these top tips:
* Don't try to inform or enlighten - just generate as much heat as possible (with extra points at a time of public anxiety)
* Ignore inflation - this makes it impossible to say how any quantity of pounds genuinely compares with another some years apart, but does allow many absurd, baseless comparisons
* Assume that wealth doesn't matter, as if £10,000 owed by someone earning £5,000 a year is as serious a debt as it would be to Roman Abramovich
And it's game on!
Although, there are problems. One is that it treats the public like fools. Another is it soon becomes boring. Both are clear when we play the game with the national debt since the war, which would have allowed us to shout "record!" in the following years:
Records of this type come round almost like the calendar because economies grow, and there's almost always some inflation. We might as well report that the date, 2008, is a record number of recorded years. More than in any other year since records began 2008 years ago. Beating by one the record held only last year, of 2007. And that if the trend continues we will see another record number of years recorded in the year as early as next year.
Stating the obvious
In short, our media and politicians on both sides have been talking a good deal of rubbish.
What's the alternative?
We could look at debt and borrowing in context. This is admittedly less easy to shout about. If we do, cash records can be seen for what they are: often misleading.
"Labour triples spending on the NHS"
"Labour borrowing hits record"
Such boasts and criticisms - and both of these have appeared frequently - tell us little. To many, this will be obvious.
So how do we work out if the numbers are genuinely better or worse than in the past, and by how much?
First, we compare them with the size of the economy in pounds (or what's called "money GDP"). This takes account of the combination of inflation and how well off we are, and is the method used by statistical authorities worldwide.
The first chart plays the game, and shows the government deficit now and in 1993 (the former "record"). If we talk only in pounds - and also chop off the bottom of the graph so it doesn't start at zero - we can make things look terrible.
Here are the same numbers with a little context. This time, they are also compared with the size of the economy.
Now we see rising inflation and economic growth have more than doubled the size of the economy in pounds. But have they also doubled the deficit in pounds? Not even nearly.
If we updated the 1993 deficit to a 2008-sized economy after 15 years of inflation, it would be over £110bn, compared with this year's projected deficit of about £64bn.
So is borrowing already a record, as recent wild headlines have suggested? Evidently not, at least not in any meaningful sense, or certainly not yet, however many zeros there are on the end of the figure (and that is also true in the US).
In 1993 in the UK, borrowing reached 7% of GDP; today it is about half that. Does this mean Labour's borrowing is actually lower in this downturn than Conservative borrowing at the last? No. These are early days - and it will rise.
So we can't compare the peaks in borrowing, but we can compare borrowing at the point that each recession began. We can also say that we don't expect borrowing to be as high in good times as in bad. If we take all this into account, and look at how much each government was borrowing just before the storm hit, we find no meaningful difference.
Adjusted for the economic cycle, Conservative borrowing then was about 2.6% of GDP. Labour borrowing now is about 2.7% of GDP. But the best analysis - from the Institute for Fiscal Studies - suggests that borrowing is beginning to rise more quickly this time.
That's borrowing from month to month. What about the total stock of all debt still outstanding - what was once called the National Debt but is now referred to (and measured differently) as public sector net debt?
Labour did reduce it from the level inherited in 1997, relative to GDP (as did the Tories in 1979) but it soon started to rise again (as it did with the Tories). It's still lower than some other big, rich countries like France, Italy, or Japan, but higher than most countries in the OECD.
Here's another chart. It shows the UK's public sector net debt, as a proportion of GDP, of course.
(Why do we show the debt without the cost of Northern Rock? Because unlike ordinary government debt, Northern Rock is also worth something, an asset that we can probably cash in one day. If we include it, today's line would be at about the level of 1997).
So how do they compare overall? Arguably, Labour's plight is worse because it is starting a recession from a higher net debt position than the start of the recession in the early 1990s. Borrowing also seems to be beginning to rise faster.
But things are not yet remotely as bad as they have been on many previous occasions. Claims the country is in a better debt position than it was in 1997 are true, but less relevant than the comparison with the start of the last recession in the early 90s, by which measure today's debt is higher.
Context takes only a moment. A good and simple start would be to present figures as a percentage of GDP, whether for spending, taxation or borrowing. Of course, there's the small matter of what the government actually does with the money. But when it comes to how much money we're talking about, handle records with care.
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