Hold on to your hats!
The meteoric rise of the asset no government wants...DEBT.
A loan may be considered both an asset and a liability (debt). When you initially take out a loan and it is received by you in cash, it becomes an asset, but it simultaneously becomes a debt on your balance sheet because you must pay it back.
Same for governments, or is it?
A license to print money....
If government borrowing were a competitive sport, the UK would be a top contender.
We’ve hit the £2.8 trillion mark in debt, equivalent to 100% of our GDP. That’s up from a mere 36% twenty years ago - a humble beginning compared to today’s Olympic-level debt marathon. It’s easy to blame the usual suspects - the 2008 financial crisis, the pandemic, the energy crisis—but that doesn’t make the figure any less alarming.
The last time we were in this territory was in the early 1960s, when we were still paying off the bills from World War II. One can almost hear the echoes of wartime rationing as we take stock of today’s debt pile.
But let’s not sugarcoat it: that 100% debt-to-GDP figure is an underestimate. If you add public sector pensions, the total rockets to 150%. Toss in welfare and healthcare costs, and we’re suddenly deep in 200% territory. And yet, when was the last time you heard a politician seriously worry about it?
Meanwhile, the Office for Budget Responsibility (OBR) forecasts that public debt could reach a staggering 274% of GDP by 2074. Aging populations and rising healthcare costs are the villains in this story, driving up government spending. It's like planning a party 50 years in advance, but instead of ordering balloons, you're stockpiling debt.
If you're thinking, "Well, it can't be that bad," take a glance across the pond. The US - always the overachiever - is set to borrow 7% of its GDP this year alone.
That’s $2 trillion, and it's happening outside of wartime or a recession. U.S. public debt, now close to 100% of GDP, could climb to 166% by 2054, according to the Congressional Budget Office (CBO).
For context, that’s the fiscal equivalent of running a marathon with your shoelaces tied together.
The University of Pennsylvania (UPenn) has done the ‘math’(s), and the outlook isn’t sunny. They predict the US has 20 years to turn things around. After that, financial markets might simply throw in the towel, forcing the US to choose between default or an "implicit" default—a charming euphemism for inflation so high that it wipes out the real value of debt.
Now, if you’re looking for an easy way out, the magic bullet is growth. The current Labour government needs to take note!!
Faster economic growth means more tax revenue, less welfare spending, and less borrowing. But if it were that easy, we wouldn't have this problem in the first place.
Every government, from the UK to the US, dreams of higher growth, yet few manage to pull it off. It's a bit like aspiring to be a world-class sprinter while steadfastly avoiding the gym.
And let’s face it: fiscal prudence is about as fashionable as bell-bottoms in today’s political climate. Politicians don’t seem to be losing sleep over the debt levels. Low interest rates and the insatiable appetite of financial markets for government bonds have numbed the political class into a false sense of security. It’s no surprise that debt isn’t a hot issue in the current US election campaign.
Debt reduction was all the rage in the early 1990s, but apparently, we've all gotten a bit more laid-back about fiscal discipline.
It wasn’t always this way. In the 1992 US election, public debt was a major talking point. After winning, the “cigar smoker” Bill Clinton famously raised taxes and cut spending, eventually turning a deficit into a surplus. Public debt in the US dropped from 47% of GDP in 1993 to 31% by 2001, thanks to robust growth and a post-Cold War dip in defence spending. Similarly, the UK, post-World War II, saw its debt peak at 252% of GDP in 1946. But strong growth and artificially low real interest rates helped Britain pay it down - though there was also a fair bit of “financial repression” (think capital controls and forcing banks to hold public debt).
So, what’s the story?
Getting politicians to pull their thumbs out of their backside is like asking someone to fix a clogged solid gold toilet with a velvet-lined teaspoon - slow, messy, and you’ll probably end up with a bigger problem than you started with.
Getting debt under control requires long-term planning, something politicians say they’ll do but never quite manage - like a kid promising to clean their room, only to shove everything under the bed and hope no one notices.
The UK’s decision back in 1995 to raise the state pension age from 60 for women and 65 for men to 67 by 2027 were announced a full 15 years in advance, giving people plenty of time to adjust. That kind of foresight, whilst great (if you can call it that??!) sadly, seems in short supply today.
Where does this leave us?
Western countries, from the UK to the US, are drowning in public debt like someone who maxed out their credit cards, and then decided to book a holiday. Growth? Barely a pulse. And the cost of paying off that debt is rising faster than a plumber’s weekend call-out fee. Throw in aging populations and welfare bills ballooning like no one’s heard of inflation, and the fiscal road ahead looks less like a highway and more like a pothole-filled obstacle course. Even the IMF and the Fed are waving their hands in panic - Jay Powell’s over there telling US debt is on an “unsustainable path,” which is basically code for “good luck with that.” But if history has taught us anything, it’s that governments don’t start caring about debt until the wolves are not just at the door, but sitting at the dining table, drooling.
So, if you’re waiting for bold action, don’t hold your breath - just hold onto your wallets. It’s going to be a wild, expensive ride.
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