The rise of government debt around the world remains a source of widespread concern. Will future generations be the ones to foot the bill? Are older generations again recklessly borrowing from the future?

Debt is understandably an emotive subject. At a personal level, few will have been fortunate enough to avoid the debilitating stress of trying to cobble together sufficient funds to meet overdue loan repayments at some stage in their lives. As consumers, we can feasibly borrow a finite amount, normally linked to our income or the assets we hold. At some stage, it has all got to be paid back. For the individual, it is easy to see why debt is often characterised as “borrowing from our future” or facilitating “living beyond our means.” Why shouldn’t these same parameters of profligacy apply at the level of the aggregate national or even global economy?

Many of the world’s most renowned thinkers have weighed in with their thoughts on this debate. From Reinhart and Rogoff’s now infamous piece of scholarship¹ to hedge fund billionaire and philosopher king Ray Dalio’s repeated warnings, the overwhelming consensus seems to be that there is way too much debt. The world has somehow reached and breached a sustainable level of indebtedness, and the process of paying it back suggests years in the economic wilderness (or much worse) for much of the world economy. Implicit in this is the assumption that debt fuels growth, therefore paying it back will have the reverse effect.

There are a couple of important things to remember about debt, thankfully hammered into me by a boss while I was still a professional toddler.² On its own, debt does not actually raise or reduce aggregate financial wealth. At the global level, there can be no net debt. This same former colleague used to wryly observe that since we have not yet managed to syndicate debt intergalactically, the planet Earth cannot yet be considered a net debtor. For every borrower there must therefore be a lender and they will both live on this planet and be alive at the same time. Frequently they are the same entities. In one way or another, companies, governments and consumers will all be both. Untangling, or netting off, the exposures of these entities is much harder than it sounds.

Debt in the UK…

The story of the UK’s national debt over time is interesting in this context. National or government debt was born properly in the wake of the Nine Years’ War in the closing stages of the 17th century. It then exploded over the course of the 18th century, driven primarily by various wars: it grew by over 7,000% between 1700 and the end of the Napoleonic Wars in 1815. We can certainly argue that the invention of national debt is an important part of a much broader financial services revolution that helped lower the cost of capital for businesses, promote trade, and produce all sorts of other positive forces. That, however, is quite different from directly linking the growth in the levels of government debt to the coincident agricultural and industrial revolutions.

Real incomes, living standards and life expectancy in the UK really only started to see dramatic increases in the 4th quarter of the 19th century, decades after modern-day historians date the end of the First Industrial Revolution. However, if this is accurate, this period of unprecedented increases in living standards and life expectancy in the UK began long after public debt levels had peaked and actually coincided with a period of marked deleveraging by the UK government – as the public net debt to GDP ratio fell from well north of 200% in the early 19th century to a low of just 25% in 1914. The direction of the debt pile was essentially irrelevant to either output growth or indeed the welfare of the population.

Is the UK in a ‘death debt spiral’?

Money and all its many derivations are in essence a global confidence trick – a globally recognised (and respected) story that allows us to transact across borders and societies.³ That confidence can disappear fast in the worst crises. Solvency problems can often follow as the financial system suffers cardiac arrest. Apportioning the losses in the aftermath of these shocks tends to sap considerable economic, political and societal energy for years, even decades.⁴

In trying to predict such moments, a focus on levels of debt is more often than not a dangerous red herring.⁵ Those suggesting that the UK’s political context is as dysfunctional as the mid-1970s, with successive hapless governments culminating in a sterling crisis in 1976, are happily exaggerating. For those looking for some colour on this, you could do a lot worse than listen to the collection of podcasts from the Rest Is History team on 1974, the year of four governments.

Rebuilding public finances from the arguably necessary largesse of the pandemic may take time.⁶ On current evidence, investors appear minded to grant this government that time. The repricing of US interest rates has had knock-on effects on global borrowing costs including the UK, as has the war in Iran. However, at the time of writing, there is no sign of disorder or disfunction in markets and indicators of stress appear benign.

It doesn’t take much imagination to see that the years following the GFC may be an inappropriate template to apply to the UK’s next decade or so. The opportunity provided by the technological frontier is just one of the important differences. The long-term path of the debt stock is minutely sensitive to your trend growth assumptions for the UK. If, say, the UK economy managed to use the gathering technological revolution to return to its post war pre-GFC growth rate, the public debt could conceivably vanish as a percentage of GDP in little over half a century (in the unlikely event that policy makers could find no use for further borrowing).

Conclusion

None of this is to say that reckless surges in borrowing, at the country or indeed global level, are never a cause of concern. History tells us that the fixed element of debt can be punishing if circumstances change. It can be used to finance projects that don’t add value. There must be limits to borrowing for individuals, sectors and governments, but the likely reality is that such limits should be loosely defined and may well change over time. A population whose living standards and tangible assets are growing steadily may have greater uses for the flexibility facilitated by debt and use disproportionately more of it.

^{1 Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” NBER Working Paper 15639 (2010).
2 I have Kevin Gardiner to thank for this. This article owes a lot to his excellent book – Making Sense of Markets – which covers these themes in a lot more detail and depth.
3 https://www.imf.org/en/Publications/fandd/issues/2024/12/cafe-economics-humankinds-comparative-advantage-yuval-noah-harari
4 https://www.imf.org/en/Publications/fandd/issues/2024/12/chinas-real-estate-challenge-kenneth-rogoff
5 https://blogs.lse.ac.uk/impactofsocialsciences/2013/04/24/reinhart-rogoff-revisited-why-we-need-open-data-in-economics/
6 https://commonslibrary.parliament.uk/research-briefings/sn06167/}

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References

Source: https://www.brooksmacdonald.com/insights/debt-bomb