This article is taken from the July 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Have the Tory politicians in charge of our public finances since 2010 been financial magicians? As will soon be explained, in their years in office the state has borrowed more — relative to national output — than in any previous period of similar length in British peacetime history. Yet somehow the debt position remains respectable by international standards. How have they accomplished this feat? 

Consider the following numbers, which are sourced from the International Monetary Fund’s magnificent database and show “general government net lending/borrowing (i.e., the budget deficit) as a percentage of gross domestic product” for the years of Conservative rule. (The IMF prepares these numbers for 196 of its member countries!)

Simple arithmetic gives the sum of these numbers as 86.2 per cent. So — if GDP had been unchanged in nominal terms — the ratio of net national debt to GDP would have increased by almost 90 per cent. If wartime is excluded, a slide into debt on this scale has never before been recorded. 

Yet the same source of information shows that, in fact, net national debt has risen relative to GDP from just under 70 per cent in 2010 to only 93 per cent in 2024. Plainly, a rise in the debt/GDP ratio of 23 per cent is much less than one of 86.2 per cent. 

Readers may be concerned about a public debt approaching the level of national income, and they are right to be concerned. But — relative to our past and other countries today — the UK is in a decent enough position. 

At the end of the Napoleonic War and the Second World War, the debt was more than twice national income. Indeed, between the First World War and the 1960s the debt was almost constantly above 150 per cent of national income. Further, today the UK is in an ostensibly satisfactory situation compared with the United States of America, Japan, France and Italy, where — in every case — the net national debt exceeds national income. 

The obvious question is, “How has it been possible for the sum of deficits under Conservative rule to have totalled 86.2 per cent of GDP, and yet for the ratio of debt to GDP to have gone up by below 25 per cent of GDP?” What sorcery has been at work? 

The answer is in one sense banal. Obviously, our GDP has risen by a large amount since 2010. But this may come as a surprise, in that the current government has been notorious for the miserable rate of productivity growth and associated stagnation of living standards. If the last 14 years have been characterised by economic stagnation, the anomaly of vast deficits and a manageable increase in debt remains. 

The key to resolving the puzzle has of course been inflation. According to the inflation target in place since 2003, the consumer price index should increase by about 2 per cent a year. Over 14 years that compounds to an increase of just under 32 per cent. But in practice the rise in the price level has been well above that. 

According to the IMF, in the 14 years to 2024 the rise in the GDP deflator — a somewhat more general measure of prices than consumer prices alone — will have been over 40 per cent when the final data are assembled. If that had not occurred, the ratio of debt to GDP would now be not 93 per cent, but 130 per cent. 

A figure that size would be uncomfortable, although far from unprecedented. In other words, under the Tories the British government has relied on the persistence of inflation to reconcile its deficit habit with a seemingly manageable debt position. 

The trouble with this is that investors in its debt did not — in the early years of the administration — expect to be cheated by inflation to the extent that has occurred. 

Under the Conservatives, the holders of the debt have lost — in terms of today’s money — a number somthing like 30 per cent of national output because they have owned gilt-edged securities instead of other more successful assets which kept pace with the price level. What sort of yield should investors require to keep them interested in UK government bonds? 

As the next government (whether Conservative or Labour) will discover, if they were to demand protection against future inflation by insisting on yields of, say, 6 or 7 per cent, the deficit habit would be unsustainable. That government will have to maintain good relations with the bond markets if it is to be economically viable. 

A soaring debt interest bill would wreck any government, whether Conservative or Labour. The period of so-called NICE-ness (non-inflationary, consistently expansionary) between 1992 and 2007 was associated with a commitment by both major parties to the avoidance of budget deficits. 

A balanced budget is a simple and better objective than saying that, after five years in office, public debt will be on a downward trajectory relative to GDP.