Should we be worried about another £30bln of National Debt?

The National Debt is approximately £1,560bln.  The IFS estimates that it would increase by £90bln more under a Labour Government than under a Tory government.  That is nearly 6% over a 5 year period but it is hardly "rocketing", as The Times describes it.  Indeed with inflation running at say 2% National Debt will still fall in real terms.  

Although a lot has been made recently of the current level of National Debt, it is in fact quite low relative to GDP, compared with historic levels (see chart 1 below), though particularly high levels arose out of financing various wars, including the Napoleonic wars, World War I and World War II. The IFS provides data series for Government budgets, National Debt and GDP and, in the 66 years since 1948 (first year when GDP measured on a consistent basis) the UK Government ran a budget deficit in all but 9 years. Despite this, National Debt fell as a percentage of GDP  in every year until 1967 and in 15 of the 47 years since then.  

 

Chart 1: data "UK GDP" by Chris55 - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:UK_GDP.png#/media/File:UK_GDP.png

Of course interest rates are particularly low at present (chart 2, below), but if they were to increase then the burden on the public purse would increase significantly.  Governments would then have to consider reducing spend in order to pay the interest which would be disastrous if that spend became a more substantial part of overall economic activity.  

 
Chart 2:  Chris55 ibidem. http://commons.wikimedia.org/wiki/File:UK_National_Debt_interest.png#/media/File:UK_National_Debt_interest.png.

Playing down the size of the national debt is not an excuse for using debt to finance revenue expenditure on a routine basis, or indeed to consistently run budget deficits even to pay for capital expenditure.  Governments are not corporate entities where assets can be used as collateral for debt (there is unlikely to be a secondary market for motorways or military installations that is consistent with an acceptable public policy).  But providing they are responsible and reliable, they seem to be able to borrow more easily and more cheaply than the average family (or business).  

So if it does not become unsustainable, governments should be able to borrow and indeed run a budget deficit for periods of time.  What they should not do is carry debt that the nation cannot afford. This means keeping the ratio to GDP at a reasonable level and ensuring that there is head room to allow for an increase in interest rates, as is inevitable at some point in the future.  Gordon Brown’s adage of “balancing the books over the cycle”, which he consummately failed to do, is worth reconsidering, thus allowing for expansive spending during the bottom of the cycle, and surpluses at the peak. Whether Governments, of any hue, can be persuaded to constrain themselves in this way in reality, is another matter.
 
In conclusion, the arguments that the major parties are having over £30bln increase in National Debt seem to be fairly inconsequential in the bigger scheme of things (how much more so the £6bln that featured in the 2010 election).   What is much more important to the electorate is what they are going to do with the money they have at their disposal.  We hear a lot about what they are going to spend, but they seem less keen to elaborate upon where that money is going to come from.