Post
by Woodchopper » Fri Feb 09, 2024 11:06 pm
So yes of course, as lpm writes, there's a virtuous circle. Government borrowing is used to invest in infrastructure, education, science and healthcare. And people use all those to grow the economy, and as a result the initial debt becomes irrelevant because the overall wealth of the country has grown. Growth is a great magnet for other ingredients for success. The brightest people in the world want to come and build the careers, companies want to invest and get a piece of the action, and lenders charge low interest.
As we've discussed many times, a great example is the UK's debt after the end of the second World War. In 1945 it had a debt to GDP ratio of 225% and by 1970 it was down to 67%. This happened because of the steady UK economic growth during the long post-war boom of an average of about 3.5% per year. UK GDP doubled between 1955 and 1975, and that made the borrowing irrelevant.
UK growth has slowed down later, on average it was closer to 2.5% during the long boom years of the late 1990s and 2000s, and more like 1.7% in the decade before the pandemic. That's lower but still enough to keep the virtuous cycle motoring along.
Then along comes Brexit.
The problem is that the virtuous cycle (of debt being used to fund investment which creates growth that makes the debt irrelevant) is fragile. It isn't the birthright of the British, and it isn't an inevitable consequence of being a rich country. Japan and Italy both fell of the virtuous cycle and they had dynamic economies in the mid-20th Century. In fact, the virtuous cycle is the preserve of only a few of the most economically dynamic countries. Many countries have tried and failed. Brazil, for example, has millions of very bright people, vast natural resources and a stagnating economy.
If, and this is of course a big if, Brexit turns out to be a collective act of national economic self harm, then Britain may end up with an economy that stagnates. That means that the virtuous cycle is broken. Growth at a long term average of, say, 0.25% probably won't be enough to render government debt irrelevant over a few decades. If debt grows faster than GDP a government is faced with interest payments that take up ever more government expenditure. This can become a vicious cycle. The economy looks less secure so lenders want a higher return. The brightest people go elsewhere, including your own citizens. Companies invest elsewhere. Government debt is a problem when, as with Italy or Greece, more is being spent on interest payments than on investment.
To sum up, if Brexit has f.cked the UK economy, then everyone needs to come to terms with the very different assumptions about the relationship between debt, investment and growth. Being a poorer country with a dysfunctional economy means that borrowing to invest won't deliver growth. This is why the world is full of poor and middle income countries that haven't become rich after decades of trying. Borrowing will just result in more debt as the investment is frittered away by a thousand inefficiencies. If you want to see this happening just spend some time in one of the many stagnating economies.
But to repeat, this is just a scenario, and I'm not saying that it will happen. There's an optimistic scenario in which the UK economy re-adjusts after a few years and growth returns to something like an average of 1.5% - 2% per year. If that happens then the Prime Minister should borrow freely to invest and deliver more growth, and you're all welcome to point at me and call me a pessimist.
