319 years of perspective on public debt
04.09.13
Time and again, we see the same pattern in countries that need to save cash quickly. Despite the seeming enormity of Government budgets, the reality is that most public spending commitments are hard to unwind. In practice, then, the options available to governments on a quest for efficiency are few and far between. Relatively big spending departments, such as health, education or sometimes defence are usually in the firing line. Within health departments there are only so many options. Salaries of doctors and nurses are, of course, politically hard to touch – and so is spending on hospitals. So what’s left? Not much is the answer, apart from medicines, devices and other running costs. The route, then, from a macroeconomic discussion of public finance to the medicines bill is shorter than one might think.
And so it has been with keen interest that we have followed the discussion about economic policy in Europe. I have written previously about the academic debate on austerity, which I won’t repeat here in detail. Suffice it to say that the impact of those who have demonstrated the counterproductive nature of some panic-driven austerity policy (public debt in countries who followed the austerity path has gone up rather than down) has become more pronounced.
Out of curiosity, I recently downloaded the IMF’s historical public debt database to try and refresh my own memory of how current levels of debt in Europe compare with those of the past. It proved to be a fascinating exercise that I wish I’d done before now. The UK stood out. As I scrolled backwards in time through the spreadsheet, at first I thought there must be some mistake. But no. It turns out there really are data on public debt in the UK back to 1692!
Chart 1 is the sort of picture we often see on the news – relatively recent history, past decade or so, showing debt shooting up to around 80% of GDP. It certainly looks worrying and helps explain some of the panic about the ‘unprecedented problem’ that needed to be tackled quickly. But widening the lens shows clearly that current debt in the UK is far from unprecedented.
Source: IMF Historical Public Debt Database (accessed August 2013)
Chart 2 gives the full 319 year picture. In many respects this represents the entire history of public debt. Before the Bank of England was created in 1694, wars (at that point, the principle drain on public finances) were simply funded by tax increases. But the scale and intensity of English wars, notably with France, meant that this was not enough. By the Battle of Waterloo in 1815 public debt in the UK was over 250% of GDP. Was this, in itself, a long-term disaster? No! What followed was a dramatic period of economic growth that meant debt consistently declined (as prosperity increased) for over a century – the industrial revolution.
Source: IMF Historical Public Debt Database (accessed August 2013)
It was war, again, coupled with the great depression of the 1930s that led once again to debt spiking to over 250% of GDP in the first half of the 20th century. After World War II, there was, again, rebuilding in Europe and a gradual economic recovery – although even up to the 1970s UK debt was at comparable levels to today’s ‘crisis’.
My aim in posting these data – apart from the admittedly nerdy satisfaction I get from posting a 300 year time series – is not to suggest policymakers should be complacent or unconcerned about public debt. There are, though, two lessons from this history, which I think should help economic policymakers of today get things in perspective. First, don’t panic – we’ve been here before. As high as current levels of public debt are – they are not historically unprecedented. Second, and more importantly, we need to look at how countries have got out very high debt positions in the past and how long it has taken if we are to be realistic about Europe’s mid-term prospects. In short, history tells us there is no quick fix. Recovery has always come from growth – not austerity. So that should be the focus now.
After discovering these data I did some Googling and, of course, I found out that I’m far from the first person to point out the relevance of these numbers. One particular letter to the UK newspaper, The Guardian, in 2010 caught my eye partly because of the timing but also because it was not signed by economists but by a group of academic historians. The authors pointed out that in 2010 debt was
“rather low in comparison to the second half of the 18th century, the first three-quarters of the 19th century, and most of the interwar and post-second world war era in the 20th century”.
But it is their closing paragraph that I think sums things up perfectly:
“Economic growth enabled Britain to escape from crushing debt burdens in the early 19th century and during the 1950s and 1960s. It could do so again, if the public spending cuts that would endanger such knowledge-based growth are ruled out in the short to medium term.”
It is a shame that their advice was not heeded back in 2010. Perhaps the finance ministries of Europe should start employing more historians and fewer economists.
