Demystifying Government Debt - What Should Labour Do About It?

In the final part of the Young Fabians Economy and Finance Network’s Coronavirus Economics series, Jonathan Quin looks at the impact of Government debt on potential policies of the next Labour Government.

It is perhaps the most well-known fact about the domestic economy - our government is in a large amount of debt. It is also the case that the Covid pandemic has led to the accumulation of even more debt (the total level reached £2,382.8 billion in 2021). This is roughly the entire value of the UK’s economic output within any given year.  

While the facts may be something we are all aware of, how a Labour government should respond to government debt is a controversial topic. For many, the idea of debt in any context seems profoundly negative, and something to avoid. My uncle recently mentioned to me how ‘every single one of us owes £30,000’ as if we could be held personally liable for government repayments. The good news is that government debt is not like personal debt. There’s no possibility of bailiffs arriving to take your belongings in order to pay it back. You’ll also never lose your home or have your credit rating affected by what the government chooses to do. Most mainstream economists will also tell you that the current UK debt level is sustainable, that the UK is nowhere near default, and that there is room for further borrowing to get through short-term crises.  Therefore, while catastrophising about government debt is reasonably understandable, fortunately it isn’t necessary. 

This is not to suggest that a Labour government should simply ignore the debt burden. I would argue that those who take this view are no better than those who actively worry about government debt. Recent proponents of ‘Modern Monetary Theory’ or MMT have put forward the view that government borrowing is practically unlimited because the government can take control of the money supply. They argue that default can always be avoided as more money can simply be ‘created’ when needed to pay back government debt or even directly fund public spending. Unfortunately, there isn’t anything modern about this aspect of MMT. Governments throughout history have been known to devalue their currencies from days of antiquity, when government-led coin clipping was an ongoing issue. The ultimate result of creating new deposits of currency is to simply devalue the deposits of everyone but the government. This occurs through inflation, which act as a hidden tax on savings and those on fixed incomes (those claiming welfare and pensions). The distributional impact of taxing through inflation is not progressive either. Although those with savings clearly lose out, the very wealthiest in society are able to invest in diversified and risky assets, which are not accessible to most savers. This includes investment in property, gold and stocks and shares. These assets often increase in value in line with inflation (or exceed inflation), meaning the wealthiest are not hit by rising prices. Instead, those who distrust financial institutions, for example those who store their money in cash, are those who suffer the most. Those without any assets at all, or those in debt, can also suffer if interest rates increase to tackle rising prices. This is what we have observed in the UK with the current levels of high inflation. Therefore, attempting to ‘monetise’ government debt is equivalent to a tax with the biggest burden on the working and middle classes.

As a result, Labour must take a firm but evidenced view on rising government debt. Any borrowing should only be used to fund spending that will help fuel economic growth or deal with urgent crises. The most expensive possible projects like nationalisation, if at all attempted, should occur in stages and use tax revenue. Finally, Labour should commit to government debt remaining the same proportion of GDP at the start and at the end of the next parliament. Such a promise in our manifesto would maintain flexibility and mean that borrowing can increase, while also preserving progressive and sound fiscal policy.

Jonathan Quin is a graduate in PPE, a CLP Vice Chair and a member of Labour’s National Policy Forum. He tweets at @_JonathanQuin.

Do you like this post?