There are two stories about austerity in the news this morning. First, NSPCC Scotland and Barnardo’s have published new research on the impact of austerity on families, looking at what’s changed since it last studied this issue in 2013. The report finds that poverty remains the core issue, but that there has been a marked increase in families experiencing destitution, with housing insecurity and mental ill-health growing problems, creating more complex service needs.
The other story is the Institute for Fiscal Studies warning that public debt will soon hit a level never seen in peace time, and that huge austerity and/or tax rises will be needed by the middle of the decade. Their new report finds that to keep public finances roughly where they are now – debt at 100 per cent of GDP and borrowing at around £80 billion per year – it would be necessary by 2024-25 for the public purse to be bringing in an additional 2 per cent of national income, around £40 billion.
How is it possible that we can have these two stories side by side, one about the impact of a decade of austerity, which was supposed to be about bringing down public debt, and the other about public debt now being at record highs?
The first reason is that the decade of austerity didn’t achieve its supposed aim of bringing down public debt to GDP. Austerity suppressed household incomes and GDP growth, reducing government revenues. When the Tories came to power public debt was just over 60 per cent of GDP – by 2019 it was just over 80 per cent of GDP. The second reason is the impact of the pandemic, which has added around another 20 per cent on to that total.
But look closely at that additional pandemic debt – it is at dirt cheap rates of interest. As the IFS report points out, the total amount the government pays in interest on its debt has actually fallen since March. It describes these interest rates as “astoundingly low”, but is it really so astounding any more? The rate of interest on government bonds has been consistently trending downwards since 2014, as it is a safe haven for investors to place their money. As the IFS itself admits, in Japan this high public debt and low rate of interest combination has been “typical” for years. Japan’s public debt to GDP is around 240 per cent, more than double the UK’s.
The reason why Japan can simultaneously have a huge public debt and still have rock-bottom rates of interest on that debt (they have even turned ‘negative’ in Japan in recent years, meaning investors pay the government for public borrowing rather than visa-versa) is because the Central Bank of Japan holds more than half of this debt through Quantitative Easing purchases, where new money is created to buy assets including government bonds, which pushes down the rate of interest across the board. Also, 90 per cent of Japanese public debt is held domestically, meaning there are few pressures on the exchange rate from high public debt.
Like other major economies, the UK appears to be following Japan. More than a quarter of public debt is now held by the Bank of England. While the UK has a higher share of overseas owned debt than Japan, it has fallen since 2008 to around 25 per cent.
The UK’s public debt is perfectly manageable, what is not manageable is the worsening social impact of poverty on families due to years of austerity. That’s the news report we should be worried about today – not the big debt numbers.
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