Wednesday, 28 March 2012
This year we cross the threshold to a new digital-analogue age of moribund growth and colossal debt accumulation
According to Her Majesty's Treasury, this fiscal year – 2012-13 – the UK public debt stock will reach 90 percent of GDP. Historically, that number has proved to be a threshold delineating the point when excessive public indebtedness begins to affect growth.
Two prominent US economists – Carmen Reinhart and Ken Rogoff - recently produced a study called “Growth in a Time of Debt”. They found that moderate levels of debt had little effect on economic growth. However, once a country accumulates public debt of 90 percent of GDP or more, then the growth rate falls by about one percent a year. The Reinhart and Rogoff result is robust. They looked at 44 countries over 200 years spanning a wide range of political and historical arrangements.
The message for the UK from this study is bleak. Since debt levels are notoriously difficult to reduce, we are looking at a decade or so of debt-induced substandard growth. With compounding, this loss of GDP growth will have a powerful dampening effect on living standards. In fact, we are already there. The UK economy hasn’t grown in four years. In real terms, UK GDP is 4 percent lower today than it was in 2007.
Reinhart and Rogoff produced another interesting result. It is comparatively rare for a country to exceed debt ratio of more than 120 percent. Once a country gets to that sorry point, financial markets abandon ship and a sudden and disorderly fiscal adjustment begins. This is pretty much the story in the Eurozone periphery.
The UK has another 30 pips of GDP to go before we reach the point of no return. Nevertheless, we are accumulating debt at a shocking rate. We've added 30 percentage points of GDP in the last four years. Either something changes, or we will hit the dead zone by the middle of this decade.
Since the budget statement I've looked forlornly for some sense of urgency about our growing debt levels. Perhaps unfairly, I looked to the Labour Party to see if their latest policy priorities included anything on debt.
The news section of their website focused on three key issues; they attacked the Coalition’s “Charter for Coroner Services”; they claimed that Government had failed to provide potential investors with clarity on funding for carbon capture, and finally they claimed that Michael Gove was promoting an “analogue curriculum in a digital age”.
This political disconnect from reality is really starting to bother me. Within Westminster, there is no sense of impending doom; our politicians have only the vaguest comprehension that something is going seriously wrong. They are caught up in trivialities, while the policy debate is driven by inane sound-bites based on vacuous phrases like the digital age.
The real dilemma is that we are not living in a digital or analogue age. We are living in a time of colossal debt accumulation and moribund growth and no one in Westminster seems to care.