How much debt is too much?

Linda J. Dodson

Attitudes to debt have changed over time, in financial markets as well as the political sphere.

In the 1990s, Gordon Brown was keen to establish a reputation for “prudence”; he said the national debt should not rise above 40pc of GDP.

UK debt is past the ‘tipping point’

In the financial crisis, when he emphatically broke that rule, the World Bank said there appeared to be a “tipping point” as nations with public debts above 77pc of GDP typically suffered slower economic growth. That in turn makes it harder to pay down the debts, making for lean years ahead.

A famous, though controversial, paper by Carmen Reinhart and Ken Rogoff that year warned 90pc was a key tipping point.

By 2012 Britain’s national debt was up to three-quarters of GDP, and kept edging up.

In 2015 then-Chancellor George Osborne warned it was key to get this down as a precaution against any future crisis.

“Unless we reduce it, we will not be able to support the economy and the British people in the way we would like to do when the shock comes, because we would not have the room for manoeuvre. Failing to address that is deeply irresponsible,” he told Parliament.

“It is precisely because no one knows when the economy will be hit by the next shock that we should take precautions now.”

His policies to reduce the deficit might not have been universally popular at the time, but that “next shock” arrived with bells on this year. Fitch Ratings estimates the debt could reach 120pc of GDP by the end of 2022.

So should we worry?

Interest rates suggest not, although there is no guarantee that markets have an unlimited demand for Government debt.

The Bank of England has contributed, hoovering up bonds with its quantitative easing programme, depressing rates in the markets.

But the fall in rates in recent years is global, and the Bank reminds people it reacts to market rates as much as it sets them.

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