This is a chart of Britain’s public debt as a share of GDP – from 1858 until 2002. For American readers I will paste a chart of US public debt for a similar period on my Huff Post blog in a day or two. The same economic lessons apply, even though much of the history is different.
Britain’s debt today – as a proportion of the national cake or GDP – is about 55% and rising. It is expected to hit 70% soon. Study the chart and you will see that it was twice that in 1858 – about 100% of GDP.
After the outbreak of war in 1914 it started rising. The 1929 crisis caused it to rocket upwards, as indeed did the financing of a very destructive war – World War II. In 1945 Britain’s debt stood at 250% of GDP – roughly 5 times what it is today. At that point an extraordinary thing happened (largely as a result of Keynes’ sound advice.)
The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament.
Labour started to invest in a bold and visionary project: – a publicly funded health service free at the point of use – the NHS – in 1946. (The American Congress is today proposing a similarly bold investment in a ‘public option’ for their health service.) Back then, the Labour government carried out a massive slum clearance programme, and built houses. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers.
What happened, you might ask, to the total public debt, as a result of this flouting of the economic orthodoxy – and flagrant extravagance? Well – exactly what Keynes had predicted would happen. The debt fell. Steadily, but unremittingly – as a share of GDP. Look closely at the chart.
This is because government spending kick-started economic activity. (Of course it had done so during the war too – but on destructive, not productive activity. That had helped defeat a profound threat – Nazism – but had not helped much to fix losses and generate income.)
So thanks to government intervention, economic activity revived the comatose and exhausted body that was the post-war UK economy. Soon it began to recover. With recovery, government revenues rose, expenditure on unemployment benefits fell – and hey presto! – government repaid its debts, which fell dramatically as a share of GDP. Soon the spending began to pay for itself.
Apologies for the long quote but thought you might want to really understand her argument.
We\’re in a deep hole as regards debt, the way out is to have more debt to fund more spending because such spending pays for itself. The proof being that this is what happened last time.
Hmm, well, of course everyone is entitled to their own opinions but not to their own facts. So, what actually was the spending stance of the Labour Government immediately post war?
Ah, the IFS:
So how can the path of the deficit best be summarised? The immediate aftermath of the Second World War saw the steady closure over 1946 and 1947 of the huge wartime deficit, producing a few years of surplus as government expenditure was reined in by demobilisation.
Oh. The Labour Government was not in fact fiscally expansionary. They actually ran budget surpluses. Until the Korean War led to deficits again.
So, err, that rather knocks a hole in her argument, doesn\’t it?
In fact, her argument is entirely bollocks.
Oh, and do please note, after this repayment of debts up until 1950 the government didn\’t in fact pay back any of its debts until 69 and 70 (and then again under Lawson). Nope, they really did not pay off any of the debt. It is true that the debt fell as a percentage of GDP, for GDP was growing faster than the debt was, but that really is not the same as \”government repaid its debts\”.
We\’ll mark this one down as a beautiful theory destroyed by ugly facts shall we?