Azeem Ibrahim is a Research Scholar at the Kennedy School of Government
at Harvard University, Member of the Board of Directors at the
Institute of Social Policy Understanding and Chairman and CEO of
Ibrahim Associates.
The National Debt is a confusing issue. Unlike schools and hospitals, you can’t see it, so you can’t see when it gets worse. Unlike crime, it doesn’t threaten your physical safety, so you can’t feel that something urgently needs to be done. Unlike climate change, there are no scientists to back up the claims for how urgently we need to deal with it. Unlike abortion or euthanasia, nobody has a best friend or relative who has suffered deep emotional scars from having had an experience related to it. And unlike bombings or natural disasters, it never gets concentrated coverage, so it never suddenly seems urgent. Rather, it is terribly urgent, but only a little bit more urgent each news-cycle.
All of this makes the issue of the national debt hard to understand. But that’s only half of it. Once you have learned about just how high the mountain of money which we are asking future generations to pay in our name actually is, you still face disagreement on how big a problem that is. Some economists argue that even though the national debt looks eye-wateringly big, we don’t need to worry about it. Others argue that the national debt is a really big problem right now. That kind of argument never happens with crime figures.
Let me tell you straight: the national debt is a really big problem right now. It has its claws round the neck of the British economy, and they are tightening. The reasons why do not make the news enough.
Each year, like any person, household, or company, the government has income and outgoings. The income, of course, is what you pay it in tax, the outgoings are what it spends. The difference between the government and people, households, and companies, is that they know that their outgoings can only exceed their income up to a point. After that, companies know they will go bust, families know they will have their homes repossessed, and people know they will get a negative credit rating or start having their stuff taken away by the bailiffs.
Not so for the government. When the government spends more than it brings in – as it has been doing, it makes up the shortfall by selling bonds to investors. This is, in effect, a promise to pay the investors back in the future, with interest. And recently, the little office in London which sells Britain’s debt has been working overtime. It sold more bonds in this financial year than it has in each of its first seven years combined.
If you are angry about the government wasting money, this is about the purest form of waste that you can get. It means that over the future years and decades, you, me, and our children’s taxes will not be spent on paying those investors interest. Would you be shocked if you learned that every year, each household spends £100 of their tax on interest payments? How about £500? Because the true figure is a whopping £1,206, according to debt website www.debtbombshell.com.
That is not money which is going towards paying off the national debt. It is money going only towards paying off the interest on the national debt. In other words, it is a pure transfer from the hard-earning taxpayer to the investors in UK government bonds, wherever they are in the world. On average, the British taxpayer goes on paying this interest for fifteen years for each bond.
That means that the government will be spending more of your tax money on interest payments to buyers of UK government bonds next fiscal year than it will be spending on the entire defence of the United Kingdom. That is almost double the amount it spends on the whole of Scotland, and more than double the amount it spends on the entire law and order budget. This is ridiculous.
But it gets worse. In that fiscal year, debt interest payments are likely to be about £45 billion (according to the Institute for Fiscal Studies). But the national debt is not declining. It is not even standing still. It is getting much, much worse. By fiscal year 2014-15, that £45 billion we are giving to investors in interest is expected to almost double to an eye-watering £71 billion. That is more than the entire education budget.
But forget, for a moment, the appalling wastefulness of it all. Forget, for a second, the offensiveness of money earned by hours of hard work from workers and businesses up and down the country being transferred by the government to international investors. The fact is, this whole system is also ruinous for Britain’s credit rating.
As the debt gets worse, the interest payments flow ever faster out of our economy, and the tax money carries on gushing out on massive public spending, those who have kept us afloat by buying government bonds are likely to feel less confident that the government will continue to be capable of keeping its finances under control. And if that leads to a drop in Britain’s credit rating, a debt crisis that is currently burning slowly will turn overnight into a fully-blown financial catastrophe.