‘I think we have a moral duty to the next generation, to our children and our grandchildren, to wipe the slate clean for them. We set out a plan, it lasts for about six or seven years, to wipe the slate clean. To rid people of that sort of dead weight of debt that has been built up over time… We owe it to the youngsters of today to lift that dead weight of debt off their shoulders.’
Of all the justifications for austerity, the one which says we owe it to our grandchildren to deal with the debt is probably the most emotive. The national debt currently stands at £1 trillion and despite what Nick Clegg says (in the quote above he confuses the debt and the deficit), it’s set to rise year on year. Right wing commentators (such as Fraser Nelson) love to remind us this is £20,000 per person which will need to be paid off through higher taxation in the future. Now it’s true £1 trillion is certainly a lot of money, but is it true that our grandkids will suffer if we don’t deal with this now?
I would argue that the exact opposite is true. What we leave to our grandkids should be measured in real things. Will there be enough housing? Will our roads and railways be adequate? Are our schools good enough? Have we invested enough in the decarbonisation of our economy? In looking to cut now, I believe the Government are on the way to ensuring the answer to all these questions is no. That will be the real legacy we leave to our grandkids. By failing to invest for the future today we will bequeath a less prosperous economy, and a huge debt pile because at the moment austerity is failing to reduce the deficit.
But is this huge debt pile a problem? If it’s been built up investing for the future, it will be less of a problem than if it’s been built up by paying people not to work, but in both cases though, it’s a distributional issue rather than a funding issue. Every £ of government debt is an asset to someone else. The question is who holds these assets? If it is mainly those at the very top, that may be a bad thing. If it’s going mainly to support the retirement income of pensioners, maybe that’s not as bad. We could rectify this distributional issue through the tax system.
So who holds the national debt at the moment?
This data come from the Treasury and is up to date as of Sept 2012. You can see that following QE, the Bank of England now holds over a quarter of government debt. Any interest the government pays to the Bank of England must be returned to the Treasury as profit. So this portion of the debt is no burden on anyone. More QE is likely, so this proportion could rise.
About a quarter is held by the insurance sector. This includes pensions. Most pension funds hold government bonds as part of their porfolios as a way of generating low risk returns, and debt interest payments go towards pensioners income.
The other sector with large holdings of UK debt is the foreign sector. This includes foreign governments and corporations. Just over 30% of UK debt is owed to foreigners. A lot of people may be surprised it’s not higher and are worried about what might happen if foreigners stop buying our debt. The UK is seen as a safe haven at the moment due to the turmoil in the Eurozone, but if there did come a time when the rest of the world stopped buying our debt, this would not mean the government would cease to be able to fund its spending.
It’s possible to view government debt issuance not as a source of funding, but instead as a way of controlling interest rates. The government could actually turn that 25% of debt held by the Bank of England onto 100% and stop issuing debt externally altogether. Some Modern Monetary Theorists such as Bill Mitchell view government debt as “corporate welfare” and think the practice should be stopped altogether.
In summary then, it’s right to think about the longer term and worry about what life will be like for future generations, but in promoting austerity as a way of reducing the debt burden for our grandchildren, what we are actually doing is ensuring they will be less wealthy than if we invested now in infrastructure, education and decarbonisation. I don’t think they will thank us for that, so we need to invest for the future now to ensure they will be better off than we are today. In Mr Clegg’s words, “we owe it to our youngsters”.