1) How big is it?
We have had a higher debt: GDP ratio for 200 out of the last 250 years – historically, our debt is very small compared to the size of our economy (ie how rich we are). We also have one of the lowest debt: GDP ratios in the western world.
2) Who do we owe it to?
Roughly 80% of British government debt is owed to people in the UK – our pension funds, and the like. As Oxford economist Paul Sagar puts it:
“80% of our government debt is owed to the British people. What is called “national debt” is our own savings, looked at from the other side of the balance sheet.”
If interest rates did go up on government debt, this would just mean our pension funds would get fatter. Essentially, British people have lent money to the British government to make up for the money lost through unemployment. This is good for the government – they need the money to ride out the recession. It is good for pension funds – the government is a safer bet than a company at a time of recession. If interest rates do go through the roof – which the Tories say is the worst thing that could happen to the British economy, we could even tax the money back off ourselves, if we really wanted to.
3) How much interest do we pay for it?
At the moment, we pay about 3.75% interest on our government debt. Given that inflation is running at between 4% and 5%, depending on how you measure it, that is very cheap money. As mentioned above, British government bonds are as safe a bet as you’re likely to find in the middle of the economic storm the world is going through. People are pretty keen to buy bonds from us (ie lend us money). So we can borrow pretty cheaply.
4) When are we due to pay it back?
5) Are we going to have our AAA credit rating downgraded?
Credit rating agency Moody’s have said that they are worried about the UK’s low rate of growth (and high rate of inflation). So, as the cuts hit our economy, it seems it may be possible that our credit rating will drop – ie, because of the cuts.
6) And what if we do lose our AAA rating?
Italy are at AA2 (two rungs below AAA). They paid a rate of 5.06% for €3bn they borrowed in January – just over 1% more than us, still not much more than inflation, and really not the end of the world. And remember, we’d have to be downgraded twice for that to happen. And if it did, most of the money would go to our pension funds.
7) Will cutting jobs & public services reduce our historically small, relatively cheap debt?
The main reasons that we have a deficit (that is, we are spending more than we take in taxes) are that:
a) lots of companies and rich people dodge their tax (and aren’t charged a fair rate in the first place),
b) we have high unemployment, so fewer people are paying tax and more are claiming benefits and,
c) the UK has had historically slow growth for the last 25 years, as we’ve entrusted more and more of our economy to a de-regulated corporate sector interested primarily in asset stripping. In particular, the wages of the people who can’t afford tax dodging accountants have become pretty stagnant (an effect that was hidden for many by the rising ‘price’ of their house). This means lower tax reciepts.
The cuts will do nothing to fix tax dodging (especially as those collecting the taxes are losing their jobs too). They will, however, make unemployment much worse as public sector workers lose their jobs, and spend less, meaning shops lay off more staff – as we are already seeing. They will certainly do nothing at all to re-structure our economy – handing even more of it to the newly liberated corporations who caused the credit crunch in the first place.
In Ireland, they tried to cut their way out of their economic crisis. And they destroyed their economy in the process, and so they ended up needing a massive bail out. Portugal started an attempt to cut their way out of crisis last May. Now they too find themselves in a much deeper mess.
The UK isn’t in crisis at the moment. But it is, perhaps, possible that the government is creating one.
8 ) What will cuts do to household debt?
There is a big difference between government debt and the household debt that people owe individually. While the former had nothing to do with causing the crisis, the latter had lots to do with it. What will the cuts do to household debt?
It is spiralling back out of control. As economist Duncan Weldon puts it: “By 2015 UK households will have amassed over two trillion pounds worth of debt.”