On the Nature of Debt

The government's plan to financially support households and businesses in the face of rocketing fuel bills, which remains vague on the details and may end up costing more than the suggested figure of £150 billion, has brought the question of government debt back to the fore. But instead of warnings about sustainability or the impending arrival of the bond vigilantes the discourse has been marked by an easy acceptance of the idea that the state should borrow not just to subsidise consumers but to fund tax cuts as well, and that both can have a positive impact on debt levels over the medium-term. The former is expected to reduce inflation and therefore the interest that the government must pay on existing debt - a dubious assumption that the Tories have lifted wholesale from Labour's equally vague proposals - while the latter is expected to boost GDP at a time of geopolitical uncertainty with the IMF and World Bank forecasting a global decline in growth from 6% to 3%. Clearly there is some blind faith at work here, but there is also a lot of political economy. What the media have so far failed to do is uncover that in any meaningful way, and it's not because they've been distracted by the funeral.

Recent examples of the media promoting crazy nonsense in the interests of supposed balance (Brexit, climate scepticism etc) should not blind us to the fact that it mostly operates by taking sides, rather than pretending there are two of equal weight. The debt-to-GDP ratio is a good example of this, which can be seen in the persistent treatment of debt-sceptical theories such as MMT as unorthodox or even downright nonsense, and in the gullibility displayed over Ken Rogoff and Carmen Reinhart's infamous 2010 claim about sustainability levels, which turned out to be based on a mix of political economy prejudice and spreadsheet errors. Instead it was taken as read that rising debt is bad, despite domestic economic growth having been reliant on it for decades. The household metaphor was a particularly bizarre example of this, as if people didn't have mortgages or credit cards and still managed their finances by arranging piles of coins on their kitchen table. 

It was also strange that the variability of the cost of debt, both in terms of interest rates and collateral, was so little remarked upon despite this being obvious to the average householder and despite it being central to the sub-prime explosion. It is always easier and cheaper for the rich to incur debt, and socially more acceptable to do so. This isn't because they are less likely to default. As John Paul Getty famously observed, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." The simple truth is that the ability to borrow money is a privilege. Originally, this was limited to royalty and the aristocracy (the Queen Mother owed £7 million when she died in 2002, despite having assets worth vastly more) but soon spread to the bourgeoisie with the development of  commercial banking and eventually to the rest of us with its "democratisation" in the twentieth century. If the top end of the debt market is still about privilege (platinum credit cards), the bottom end is very much about discipline (loan-sharking).

Increased government debt will now be presented as acceptable because the issue is not the debt itself but what the money is spent on - i.e. who benefits. When the focus is public services, then debt is bad. When the focus is tax cuts that disproportionately favour the better-off, then debt is efficacious. The theoretical underpinning of this has nothing to do with sustainbility levels or the powers of a monetary sovereign. It is rather the belief that the state spends wastefully while the private sector spends wisely. Keynes's major contribution to the debate was the observation that there really isn't any such thing as wasteful spending at a macroeconomic level, just wasted resources (the banknotes in bottles story), while Hayek's chief contribution was the idea that private actors price goods and services more accurately than planners, so pounds spent in the private sector have in aggregate a greater return than pounds spent in the public sector. These theories aren't in conflict, but they clearly reflect very different views on the role of the state: the buyer of last resort versus the enforcer of contracts.

Kwasi Kwarteng, the new Chancellor of the Exchequer, has reassured markets that despite the government's commitment to short-term fiscal loosening, it will "never let debt spiral unsustainably". The key word there is "spiral", which is usually associated with the unreasonable demands of labour. In other words, Kwarteng is promising that there will be a tight rein on public spending. This should be read in tandem with the government's refusal to impose a windfall tax on energy providers' super-profits. Together they point to who is going to pay for that extra debt and the mechanism by which it will be effected, namely the lower income brackets and further public service cuts. Liz Truss's determination to reverse the National Insurance rises introduced by Rishi Sunak, which will significantly benefit the well-off more than the poor, is not simply about sucking up to Conservative voters but about reducing benefits. Even though NI isn't hypothecated, it is associated with welfare in the public mind, so this decision carries a symbolic weight.

Critics, like James Meadway, who suggest we're witnessing the birth of "Tory MMT" are ignoring the distributional intent by focusing on what appears to be a volte-face over the acceptability of debt. But while the Conservative Party has a long history of flip-flopping on the mechanics of economic management, from the gold standard to the ERM, it has never wavered in its representation of class interests. The underlying issue is always about who benefits from debt and, in turn, who will pay for it. The significance of MMT to the present moment is that the theory is a rejection of the neoliberal idea of globalism in which the international financial markets discipline the nation state. The government's relaxed approach to increased debt, like the hints that the Bank of England's monetary independence may be constrained, are only possible because we are currently in an environment in which that global discipline is largely in abeyance due to the combined impact of the Covid-19 pandemic and the ramifications of the war in Ukraine. 

However, it's worth remembering that rising debt is also the inevitable consequence of the turn against austerity. According to the New York Times, surveying the European scene, "spending billions and ditching the old orthodoxy may be the only way to keep voters on board with Europe’s strong support of Ukraine against Russia." But government debt was rising for some years before the Russian invasion as it became clear that the fiscal orthodoxy was strangling growth and that millions faced declining living standards even before the price of fuel went up. A better observation in the same article, quoting a Dutch economist, is that "For the last ten years and more, we’ve been told that workers and pensioners and the young all have to make sacrifices and we need to live within our means. We’ve seen degrading infrastructure, our health system deteriorated. It was all for nought. The dogma has been clearly exposed as a narrow political ideology, devoid of macroeconomic thinking, weaponized for narrow political ends."

The current environment is likely to persist until 2024 at least, which means the next general election will probably be a watershed, in the way that 2010 was but 2017 and 2019 were not. According to Simon Wren-Lewis, "Truss believed that, with two and a half years before the next election, playing the deficit responsibility card would reap few political dividends and might prevent the government from doing more popular things, like cutting taxes. Deficit obsession was never a fundamental part of neoliberalism, but just a useful tactic at certain times to achieve a smaller state." I think this underplays the role of defict discipline in neoliberalism. As Ludwig von Mises put it in 1944, looking forward to a postwar order that would limit sovereign rights, "Measures which affect debts, the money systems, taxations, and other important matters have to be administered by international tribunals, and without an international police force such a plan could not be carried out. Force must be used to make debtors pay". That pretty much describes the Troika's approach to Greece in 2007.

It's worth noting, with the 2024 election in mind, that there isn't a significant political divide on this. New Labour's famous "prudence" was premised on the idea that rising tax receipts due to bouyant GDP growth would fund improved public services, but the argument that the latter could boost the former was rarely made: the causal relationship was always one way. While Labour may be advocating a windfall tax - as ever, a relatively timid one despite widespread public support - it isn't proposing to redefine the role of the state, hence the continuing aversion to nationalisation. It would no doubt seek to increase spending on the NHS and other "acceptable" elements of public expenditure, but it won't noticeably shift the ratio of private and public in the GDP mix, and that inevitably means that the less acceptable elements of welfare spending, such as benefits, will continue to be squeezed. The rehabilitation of debt as a tool of macroeconomic management may signal a renewed focus on the "dependency culture" that lost its spot in the political limelight of recent years to "wokeness".