The Real Reason Britain is Broke – A Doom Loop of Debt

A look at why debt is a problem for UK, but also how the current situation could be changed.

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In 2010 the UK had a record peacetime budget deficit the incoming government sought to reduce debt through austerity but over the next 13 years debt to GDP has steadily increased and is forecast to keep Rising with a vague hope that it will fall in four years time due to these deteriorating economic

Circumstances the labor party have cut back on their green investment plans saying we can’t afford it it’s not just central government debt local councils are on the brink of bankruptcy the High Street is in crisis and mortgage ins solven is are rising but is it as bad as these negative headlines and importantly

Is there a way to break out of this Doom Loop of rising debt and falling growth unfortunately the UK’s fiscal situation is somewhat worse than it actually appears for three reasons firstly the forecasts are based on entirely unrealistic assumptions of government spending the government has assumed that tax revenues will rise with

Inflation but government spending or not the head of the OB was scaving stating that debt forecasts had to use government figures which had basically been plugged out of thin air worse than Fiction it’s not something that offers too much reassurance it means that whoever is the next government will need

To implement deep spending cuts to meet these targets and to achieve these kind of cuts would require deeper austerity than in the early 2010s the problem is though that there’s not much fat left to trim education has been hard hit uh leading to crumbling schools and low teaching morale the legal system

Has been underfunded leading to a backlog of cases even the NHS which has seen increases in real spending is struggling to keep up with demand as an aging and sicker population places greater strain on Services one reason for the UK’s poor economic growth is a record number of sick people unable to

Work recently the on revised upwards the number long-term sick in the UK to 2.8 million and this has a large economic cost we’re seeing in lack of uh workers and need for immigration and low growth the second reason to be really concerned about the UK’s debt situation is that in

The past 15 years economic growth has slowed down dramatically this means we’ve seen much slower growth in tax revenues than expected but at the same time there’s been a growing demand for government’s spending on pensions health care and all the economic inactivity if we ignore population growth real GDP per

Capita is basically stagnating now given all the pressures on G finances the easiest thing to cut is public investment because we don’t notice that in the short term and public investment has become much lower than the postar period under conservative plans it will fall to 1.1% of GDP under Labor’s new

Plans it will for to an estimated 1.2% so very little difference between the two main parties the problem though is that the UK has had a long period of low investment private sector investment has fallen behind especially since 2016 and the UK has one of the lowest rates of

Investment in the G7 and oecd and it’s this combination of low private and public investment that’s a key factor behind the UK’s low rates of economic growth and also this lack of investment stores up problems for the future potholes congestion lack of housing waiting lists poor health all damage the long run

Potential of the economy now In fairness it has been a difficult global environment higher energy prices slower productivity growth Europe and China are both struggling but it would be mistake to say there’s no alternative the US economy although far from perfect many of his own problems it

Does show that higher growth is possible since since 2018 the US has clearly outperformed the UK and European economies whilst Germany and the UK pursue a form of austerity the US took something of a gamble with a bold industrial policy incentivizing investment in Green Technology it led to

A surge in private sector investment in manufacturing it’s been quite expensive and has led to a significant us budget deficit but also by creating higher growth it led to higher tax revenues and this is the real reason behind the UK’s long-term Rising debt it’s 15 years of economic growth below its postwar

Average and it’s caused tax revenues to fall behind the demand for government services with low confidence and low investment the economy has become stagnant and whilst we think we can’t afford investment in renewable energy it’s worth bearing in mind the cost of the recent energy price surges was a

Mouthwatering 280 billion and this manifested itself in inflation and the cost of living crisis but affected everybody this is why investment in insulation and renewable energy can have significant long-term benefits so definitely there is a cost of investment but also there’s a cost of non-action to now the government’s fiscal rule is to

Reduce debt to GDP over the long term but the problem is economists have very little faith in these fiscal rules it encourages Creative Accounting and in the UK seems to cause cutting public sector investment which something the UK needs more of not less I would argue

That the real reason for the UK is deteriorating debt situation is a lack of economic growth and there’s a real risk that the UK could start to emulate Italy Italy’s basically stopped growing since 2000 despite frequent efforts to reduce its budget deficit debt to GDP continues to grow continues to inch

Upwards it’s the worst of Both Worlds low growth and Rising debt to GDP so the best policy for any government would be to prioritize kickstarting economic growth ironically trust and Quang had the right idea to try increase growth they just went about it in a way that

Didn’t work now this also brings us to a third problem about the UK’s fiscal situation and that is rising interest rates since the return of inflation bond yields have soared massively increasing the cost of debt interest payment last year the government paid nearly £120 billion on debt interest alone when

Borrowing was cheap the UK didn’t take advantage to invest and that’s something of a missed opportunity and that era unfortunately it’s probably over now the future direction of interest rates is uncertain with inflation forecast a fall but also another complication under quantitative easing the bank of England bought nearly 900 billion pounds of

Bonds which made government borrowing cheaper and easier because basically the bank were creating money to buy government debt but now all this is going into reverse they are selling the bonds they own they’ve already sold 150 billion but there still another 700 billion to go and this quantitative

Tightening will push up interest rates and make it harder for any government to borrow in the future and no one really knows the full impact of unwinding 700 billion pound of quantitative easing and even whether the bank will be able to do it but it would definitely make it

Harder for any future government because it will relatively push up bond yields now does this rise in interest rates and the market reaction to the mini budget of 2022 mean we should just give up and focus only on reducing debt I think that would be mistake for three reasons

Firstly although the UK debt situation is deteriorating it has been believe it or not much worse in the past in the postwar period the UK had debt over 200% of GDP but we still invested in the NHS education building houses now the reason such a high level of debt was not a

Problem is because well partly we had a big loan from America but secondly and perhaps most importantly in the postwar period economic growth was averaging to half% a year and this is the real method to reduce debt to GDP not austerity which reduces demand and investment but consistent economic growth of course

Easier said than done and it is worth bearing in mind that economic growth can come from many sources it could be private investment new technology a new burst of productivity it doesn’t have to come from a government green energy deal but at the moment hoping that something

Will turn up to change the UK’s fortunes feel was a bit too much like wishful thinking bold government investment can stimulate private Enterprise too at the moment the private sector is lacking in confidence perhaps because of frequent policy u-turns costly changes in trade rules and the general sense of malays

And weak wage growth now arbitrary debt rules are really not helping they’re too easy to fudge but also a fail to distinguish between borrowing which can really help long-term economic growth and something that need now this doesn’t mean the UK can magically improve all its Public Services through borrowing if

We want to tackle the long array of waiting lists through higher spending we will need to push up taxes if we want to have the low taxes if we want to cut taxes we’ll have to go private or put up with very long waiting lists but if the

Economy is stuck in the do drums then there is some Logic for a kind of fiscal intervention to help Kickstart the economy but the goal will be to achieve something called escape velocity this means escaping the cycle of high debt low growth low investment and low confidence when the economy escapes this

Doom Loop of low growth and austerity then the government starts to have a much better tradeoff and it can much more easily concentrate on reducing debt now I Googled escape velocity and realized I wrote about this in 2013 10 years ago and unfortunately was still haven’t achieved it 10 years later do we

Want to wait another 10 years now to achieve escape velocity you do need some degree of boldness and not be hemmed in by artificial debt targets now things might seem Grim at a moment but it could change for the better let’s hope that they do now another reason for broken

Living standards is a very real housing crisis how did we end up with this situation of house prices and rent being so unaffordable and what if anything can we do about it this video goes into more detail so do check it out thanks