Like a stuck record we keep saying that government debt is too high and that this will come back to bite us at some point. Spiralling inflation in the UK is making the cost of servicing UK government debt much more expensive but it does at least inflate away its real value over time. Governments wring their hands about inflation but it is the quickest way to get rid of their debt.
We like to challenge our thinking all the time and so we thought that we would look at whether UK government debt really is too high. Firstly it is big, £2.5 trillion of big. A trillion is a very big number.
If you go back 1 million seconds it was 17th August, I was on holiday and it was just 12 days ago.
If you go back 1 billion seconds it was 1991, I was building ModRoc models of Gulf War bunkers and it was 32 years ago.
If you go back 1 trillion seconds it was, well it was 32,000 years ago, I would be feeling cold and very lonely.
Of course numbers are relative and our GDP is now in the trillions and so what matters firstly is the ratio of our government debt to GDP.
Source : 7iM/Deutsche Bank
At 100% of GDP, debt is not so bad compared to the past and is broadly in line with other developed economies as you can see from this excellent animation from Visual Capitalist.
What matters secondly, is how we are going to repay this debt. The answer is almost always: grow the economy. We have blogged in the past about how this might not be sustainable given the existing burdens on the planet. It is also becoming increasingly unclear how growth can be achieved. In the past it has come through population growth, but all Western economies now have birth rates below the replacement rate and a generally negative view on immigration.
This has potentially very serious economic implications that we haven’t even begun to address. The most extreme examples of this are the most useful to try to understand what might happen to our own economy in the future. Some Asian countries (for very different reasons) are facing huge levels of de-population in the next few decades. As you can see from the chart below, South Korea is predicted to have half of its 2000 population by 2100. Can you imagine the economy we would have if we had the current levels of debt but only half the population to pay it off?
Population growth, it should be remembered, has been extreme over the last few decades, but the point is that the world economy has grown to match it. This has brought about huge environmental degradation, with some species being wiped out entirely and ever more extreme weather events. A shrinking population may help the planet, but it is going to leave us with the mother of all money hangovers from the partying of the last 100 years.
So why aren’t people panicking? Well the simple answer is that everyone is banking on continued growth in GDP through productivity improvements. The UK lags on this measure quite substantially and so it may be that we need to take on a bit more debt in the short-term to invest in productivity improvements. The US is already spending huge amounts in this area and investing heavily into the centre of the country to turn those states from ‘rust-belt’ to ‘chip-belt’. Essentially betting that technology will save us. Europe is doing the same but at a slower pace and this emphasis on the next phase of our economic development is partly driving the current high share prices for Tech firms.
There is a bigger problem with this population shift, which is the ageing of our global population but that is a subject for another blog. In the meantime keep a close eye on what governments say they want to do; control immigration, reduce tax, reduce inflation and what actually happens in practice.