The graph on the right is extremely interesting in showing the historical level of government debt in the Twentieth Century.
From figures published in May 2010, UK public sector net debt was £903.0 billion. (or 62.2% of National GDP) – Source: Office National Statistics. Excluding Financial sector intervention, public sector debt is £771 billion or (54% per cent of GDP)
That is, the current level of UK government debt is roughly at the same level as it was in 1997 at the end of the John Major government, and is much, much lower than in the period of the long post-war economic boom.
Now there is no doubt that debt has a negative effect on the balance of state finances, as the cost of paying interest on the government’s debt is very high.
In 2008 Debt interest payments were around £31 billion a year (est 2.5% of GDP). In 2009, about £35 billion (similar to defence budget). Public sector debt interest payments are around the 4th highest category of government spending after social security, health and education.
It is the scale of the debt, and the consequential impact of government spending, which is being used as an excuse by the Con-Dem government for their proposed cuts. Those of us who question the need for cuts are described as “deficit deniers”.
However, as the BBC business reporter, Richard Anderson, points out, UK government debt is no worse that other countries:
“It is hard to single out the UK,” says Gilles Moec, senior European economist at Deutsche Bank. “In 2011, the UK and the eurozone are projected to have exactly the same debt to GDP ratio.”
In fact, according to the IMF, the UK’s debt levels as a percentage of its economic output will be 98.3% in 2014, lower than the US (108.2%), Italy (128.5%) and Japan (245.6%), and only fractionally higher than France (96.3%).
According to Anderson, repeating conventional thinking: “repaying these high levels of debt will force countries to cut spending and raise taxes, with potentially serious implications for their inhabitants. “
However, if we look at the level of debt compared to GDP during the Labour government on 1945 to 1951, we see that it stood at a staggering 250%, vastly higher than today.
Yet this period saw an unprecedented expansion of state spending. Comparing 1936 to 1947, social expenditure by the state increased 46% (normalised to 1936 prices), but by 1949 the National Insurance Act and National Health Service Act came into force, and the 1944 Education Act was causing further expansion of schools.
By the financial year 1949 to 1950, social spending had risen in England and Wales from £7.4 in 1936 to £15.5 per head (normalised to 1936 prices), a total net increase of UK government expenditure on the social wage of 132%.
As I have written before:
Regarding welfare, the enduring legacy of the 1945 government, it is sometimes implied that Labour merely implemented the reforms of the Beveridge report, a liberal set of proposals from 1942 calling for comprehensive social security “from the cradle to the grave”; but actually Labour went beyond Beveridge in many important aspects: firstly it gave greater emphasis to the immediate social ownership and expansion of the health service, and to a dramatic commitment towards building housing. But even more significantly, Beveridge had made his proposals conditional on very optimistic projections of full employment and a healthy economy. But Labour didn’t wait for these conditions to be met: one of the very first decisions taken when Labour took office in July 1945 was to introduce welfare reform, and to structure the 1946 budget around Beveridge, regardless of the economic conditions.
The British economy in this period was sustained by a very large post-war loan from the USA, negotiated by John Maynard Keynes at relatively harsh commercial rates of 2%, to be repaid in fifty instalments starting in 1951; but most significantly Britain would have to open both the domestic economy and the Empire to American free trade, and make Sterling a fully convertible currency within 12 months. The British had asked for US$ 5 bn, they were loaned $3.75 bn (£1.13 bn) .
In 15th July 1947, Sterling became a fully convertible currency, and there was a disastrous collapse of Sterling, so that within days, the American loan expected to last until 1951 was down to just $400 million, and due to run out within weeks. Only firm action by the Labour government, defying the terms of the American loan and withdrawing Sterling from convertability prevented complete economic collapse.
The Marshall Aid Plan subsequently transferred $3.3 bn (about £1 bn) to the UK between 1948 and 1951. I have discussed the Marshal Aid package before here; for our present purposes we need to understand that the Aid package was not used by the Labour government for debt reduction, but instead for boosting the productive economy.
Instead of reducing the national debt, the government put the money to work. Nationalisation focused on industries that were old and were failing under private ownership, and also key concerns like the Bank of England, and Cable and Wireless, that were strategic for planned economic growth. The Coal industry and steel industry were dramatically rationalised and modernised under public ownership, and this included improvements of working conditions, safety, reduction in working hours to a five day week, and better pay.
The new nationalised industries deliberately operated a policy of pricing below market levels, both to benefit private sector profitability, and also as a direct subsidy to working class living standards, as a trade off for the pay freeze negotiated with the TUC in 1948. Railway fares were subsidised, house coal for domestic use was sold at between 10 and 30 shillings per ton less than world market prices; gas and electricity prices were frozen, and were lower than 1938 levels. Socially progressive subsidies also operated in the private sector, with food and other necessities being sold at prices far below market levels.
The government also effectively used the Distribution of Industry Act of 1945 to promote employment. A staggering four million men and women were demobilised from the armed forces by the end of 1946, yet the Board of Trade, first under Cripps, and later under Harold Wilson made aggressive use of Industrial development Certificates to force modern, new industry into area of unemployment, like the North East, south Wales and Central Scotland, and then provide these new industries with remission of rents, zero rates, and interest free loans.
The North East of England had unemployment of 38% in 1932, by 1948 this stood at 2%; over the same period Scotland saw unemployment fall from 35% to 4.5%, and Wales saw unemployment fall from 41% to 5.5%. The UK national average unemployment by 1951 was just 1.8%. Although there was only limited forward planning, government direction effectively produced full employment, and intervention against the market’s bias towards the South East of England spread the benefits across the UK. In Scotland alone 536 new factories were built between 1945 and 1951, providing direct employment for 150000 workers.
Although the Marshal Plan did not solve the structural imbalance of trade between the USA and Europe, it prevented a disastrous global economic collapse during 1948/1949, and provided a foundation of stability that was built upon by the huge spending on rearmament associated with the Korean war, and the scaling up of US military presence in Europe which reduced the dollar gap to manageable levels.
Current government spending on servicing the debt in 2010 is much lower than the equivalent costs during the 1940s and 1950s. However at that time, the Labour Party had the confidence to rely upon economic growth to solve the problem over the longer term, and they had the boldness to embrace their social reform agenda regardless of the economic risks.
We are not in the same place as we were then, but the contrast is sufficient to show that dramatic cuts in government expenditure are not the only response, and are not even a rational response to high debt, and a government deficit.
Of course the current deficit is not only caused by servicing the debt, there is also a vicious cycle of economic deflation caused by the recession itself, with falling income tax, stamp duty and VAT receipts reflecting the economic slow down. But we could be even more confident that these would be reversed by boosting productive investment in the economy, and stimulating growth.
The current arguments for cuts are merely a pretext by the Tories, and their craven Liberal allies, it has nothing to do with solving economic problems, and is realy class war, seeking to shift the proportion of national wealth that goes to ordinary, hard-working women and men, and their families.