You can’t dodge austerity

There's still a significant number of people who think Britain can spend its way out of debt. But that, as Merryn Somerset Webb explains, is utter nonsense.

The world of economics got itself very wound up this week. Why? Because a group of enthusiastic economists spent many hours trawling the work of some other economists and found they had made a mistake with a spreadsheet formula. Petty rows over statistics are not uncommon in economics. But this one was more important than most.

That's because the mistake was discovered in a paper by US economists Carmen Reinhart and Kenneth Rogoff that explored the relationship between a country's growth and national debt. It concluded that nations with public debt at 90% or more of GDP are destined to see low economic growth at best. The paper was often cited as one of the main justifications for the attempts across the UK and Europe to cut state spending.

The mistake (which doesn't actually make that much difference to the theory) has given new impetus to the anti-austerity gang in the UK a mixture of politicians, economists and union leaders who genuinely believe you can spend your way out of debt. And that if you do so, austerity will never be needed.

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This is nonsense. Robert Colville, writing for The Daily Telegraph, lays out the basic numbers. It costs the UK £43bn a year to service its debts (even with historically low interest rates). We have those debts (the interest on which eats up money we might like to spend on other things) for the simple reason that there is "a ceiling on the level of tax receipts that the government manages to take in". It is about 35% of GDP.

Spending averages out at more like 42% (it's more at the present time). So we have to borrow 7% of GDP a year loading bill upon bill. There is, says Colville, "no universe in which this is sustainable". You can delay austerity. You can hope that the longer you leave it, the less painful it will be. But it has to be done in the end.

But what do we do instead? We keep giving benefits to wealthy pensioners. We ringfence the areas where real spending takes place (schools and hospitals). We pour money into propping up house prices (to the cost of our renting young). We cross our fingers that we can rely on mild inflation to erode our debts (without said inflation getting out of control).

We use 652 different types of surgical gloves in the NHS (which the National Audit Office estimates wastes £500m a year). We keep sending money to the EU despite it sending us back little of apparent benefit.

And we put up with ministers such as the one who said to The Times this week that "this is not the time to have a lively debate about the remodelling of the state". I would have thought now is exactly the time for that debate. And to get on with remodelling the state before it really is too late.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.