UK debt hits 90 per cent of GDP

(Source: Reuters)

New data has shown the UK's public debt rose to 90 per cent of GDP in 2012, up from 85.5 per cent in 2011. Despite promises by chancellor George Osborne to reduce the public deficit, these figures show that this remains stubbornly high at 6.3 per cent.

Osborne may now be happy that a study he previously championed by Reinhart and Rogoff, which showed a correlation between national debts above 90 per cent of GDP and economic contraction, has been challenged. Nonetheless, a link between high debt and slower growth remains. But as Allister Heath writes, while Reinhart and Rogoff has come under fire, the case to reduce the heavy burden of national debts remain strong:

But even if Reinhart and Rogoff’s original work is no longer useful – we will have to allow the dust to settle on the academic row before being sure – others have come to the same conclusions. Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli’s The Real Effects of Debt, published in September 2011 by the Bank of International Settlements, analyses OECD countries between 1980 and 2010. It also finds that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85 per cent of GDP; for corporate debt it is 90 per cent of GDP and for household debt it is also around 85 per cent. “The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems,” the authors argue.

There is also an extensive literature that shows that elevated levels of public spending (consumption expenditure, not capex) and elevated levels of tax as a share of GDP are bad for growth. The bottom line is clear: don’t listen to those who argue that we can go on borrowing vast amounts at no risk to the economy.

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