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UK GDP - what's going on?

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zico
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UK GDP - what's going on?

#319774

Postby zico » June 19th, 2020, 2:05 pm

Sky are covering the news that debt exceeds 100% of GDP for the first time, but I was really surprised to see this historic graph, showing debt was around 40% of GDP under Labour before the financial crash, unsurprisingly rising steeply after the crash, but then the surprising bit (to me, at least!) was that despite what we've been told was "10 years of austerity" the ratio continued to rise steadily to around 80% by 2018.

Seems to me there are at least 5 plausible possible interpretations of the trend from 2010-2018.

a) Too much spending - so there wasn't enough austerity, and public services needed to be cut massively more to get back down to 40% (though 80% to 40% would be a big stretch).
b) Austerity was a huge mistake, and maintaining public spending would have enabled the economy to grow more quickly, and the ratio would have gone back down to 40%. (Similar approach to Trump's tax cuts and consequent deficit increases were hailed as being good for the economy).
c) Not enough revenue collection - taxes weren't increased to anything like the amount they should have been.
d) 40% ratio is too low for the UK, and the economy is best served by 80% levels.
e) Financial crash meant the ratio needed to increase from 40% to 80% to function properly, but it's just a temporary 10-year blip, and without coronavirus, the ratio would have reverted to 40%.

In a larger sense, the question seems to be "in a crisis, what should the government do, and who should pay for it?" (Someone always pays for it, the question is "who"? Presumably similar principles should apply to the pandemic as the financial crash.
What do you think?

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Re: UK GDP - what's going on?

#319777

Postby Alaric » June 19th, 2020, 2:11 pm

zico wrote:c) Not enough revenue collection - taxes weren't increased to anything like the amount they should have been.


Increases to the tax threshold were beneficial to those on low wages, but also beneficial to those who were capital rich but income poor, such as those able to retire early.

zico
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Re: UK GDP - what's going on?

#319790

Postby zico » June 19th, 2020, 2:50 pm

I'd always assumed our 30%-40% ratio was "about right" but it seems there are massive difference between countries - even ones which you might think are "similar" countries. But apparently not.

From the link below (a bit outdated because it's before the pandemic, but still interesting).
Japan 238%
Greece 177%
USA 107%
Euro Area 84%
Netherlands 48%
Switzerland 41%
Chile 28%
Bulgaria 21%
New Zealand 19%
Cuba(!) 18%

https://tradingeconomics.com/country-li ... debt-to-gd

Read an interesting weekend article about MMT ("Magic Money Tree" theory or "Modern Monetary Theory" as its proponents prefer). The basic idea appears to be that hyperinflation can be avoided at much lower levels than prevailing economic theory, so the unemployment/inflation tradeoff is eased - so not rewriting the rules, just relaxing them.

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Re: UK GDP - what's going on?

#319808

Postby dspp » June 19th, 2020, 4:09 pm

zico wrote:I'd always assumed our 30%-40% ratio was "about right" but it seems there are massive difference between countries - even ones which you might think are "similar" countries. But apparently not.

From the link below (a bit outdated because it's before the pandemic, but still interesting).
Japan 238%
Greece 177%
USA 107%
Euro Area 84%
Netherlands 48%
Switzerland 41%
Chile 28%
Bulgaria 21%
New Zealand 19%
Cuba(!) 18%

https://tradingeconomics.com/country-li ... debt-to-gd

Read an interesting weekend article about MMT ("Magic Money Tree" theory or "Modern Monetary Theory" as its proponents prefer). The basic idea appears to be that hyperinflation can be avoided at much lower levels than prevailing economic theory, so the unemployment/inflation tradeoff is eased - so not rewriting the rules, just relaxing them.


Zico,

You really really ought to read Piketty (Capital etc) . He gives huge amounts of long run debt/GDP figures for many nations and he explains very clearly why these are crucial to an understanding of what is going on over the last several hundred years and the next 50-100 or so. Here are some links, including the figures https://web.archive.org/web/20140508185 ... apital21c2 but from the stuff you write about I can see you would find a copy of the book itself most rewarding to read.

Austerity wasn't austerity at all, as you have by now sussed out. But when coming off heroin, I understand that even overdosing on alcohol is nowhere near as good. But there are other things going on as well. The real questions are which generations get to spend it, and which chunk of society gets it.

Regards, dspp

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Re: UK GDP - what's going on?

#319811

Postby fca2019 » June 19th, 2020, 4:22 pm

Yes Labour banging on about "Tory austerity" is a load of ... nonsense. As the graphs shows spending was out of control before Covid.

My take is that the govt will continue to use "financial repression" rather than tax increases (unpopular with Tory voters) or spending cuts (unpopular with the voters). Financial repression is measures to keep the interest rates close to zero, thereby keeping the debt interest repayments under control.

However the obvious victims will be savers, hence, why we need to continue to invest in the markets instead of savings accounts which as we all know pay 1% if you're lucky. Cheers

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Re: UK GDP - what's going on?

#319818

Postby dspp » June 19th, 2020, 4:31 pm

fca2019 wrote:Yes Labour banging on about "Tory austerity" is a load of ... nonsense. As the graphs shows spending was out of control before Covid.

My take is that the govt will continue to use "financial repression" rather than tax increases (unpopular with Tory voters) or spending cuts (unpopular with the voters). Financial repression is measures to keep the interest rates close to zero, thereby keeping the debt interest repayments under control.

However the obvious victims will be savers, hence, why we need to continue to invest in the markets instead of savings accounts which as we all know pay 1% if you're lucky. Cheers


Financial repression is what was used after WW2 to achieve this outcome. It needed capital controls etc to do it (i.e. you could not take money out the country at all). In the modern world different means may get the same ends as a way of repressing the bulk of the population. If you have a jet and an offshore trust fund ... like the Cons are paid to protect .... then you needn't worry.

Taxation in a digital globalised world is all about control of power.

dspp

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Re: UK GDP - what's going on?

#319822

Postby johnhemming » June 19th, 2020, 4:41 pm

zico wrote:Seems to me there are at least 5 plausible possible interpretations of the trend from 2010-2018.

There was always a misunderstanding as to what austerity meant. The idea was to reduce the deficit by keeping public spending roughly constant in real terms whilst the economy grew to reduce the deficit.

In some areas of the public sector spending was held back quite a bit, but in other areas such as health and education spending grew in real terms.

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Re: UK GDP - what's going on?

#319824

Postby Lootman » June 19th, 2020, 4:51 pm

zico wrote:40% ratio is too low for the UK, and the economy is best served by 80% levels.

That one gets my vote. If interest rates are now half what they were when it was at 40%, the cost of servicing that debt hasn't changed.

In fact interest rates may well be a quarter of what they were 15 years ago, in which case a 160% debt-to-GDP ratio would be entirely serviceable.

And bear in mind the debt is never paid off. When bonds mature the old bondholders are paid off using the proceeds of newly issued bonds. So all that matters is the annual interest cost.

I hope the Treasury is taking the opportunity to issue more longer-dated gilts to fund this expansion of debt. There is probably a market for durations out to 40, 50 and maybe even 100 years, locking in these rates.

Inflation will do the rest.

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Re: UK GDP - what's going on?

#319832

Postby ursaminortaur » June 19th, 2020, 5:08 pm

zico wrote:Sky are covering the news that debt exceeds 100% of GDP for the first time, but I was really surprised to see this historic graph, showing debt was around 40% of GDP under Labour before the financial crash, unsurprisingly rising steeply after the crash, but then the surprising bit (to me, at least!) was that despite what we've been told was "10 years of austerity" the ratio continued to rise steadily to around 80% by 2018.


The debt/GDP ratio is above 100% for the first time since 1961 not the first time ever. In the immediate aftermath of WW2 the debt/GDP ratio was around 240% and was gradually lowered down to less than 100% by a combination of governments running surpluses and more importantly growth in GDP. Since 1970 governments have pretty much consistently had deficits with the only exceptions being a few years under chancellors John Major and Gordon Brown - though in both cases after the few surplus years both governments then reverted to having deficits which quickly wiped out any paying down of the national debt in the years of surpluses. Instead the debt/GDP ratio was brought down and kept down purely by GDP growth from 1970 until the financial crisis.

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Re: UK GDP - what's going on?

#319850

Postby dealtn » June 19th, 2020, 5:51 pm

Lootman wrote:
zico wrote:40% ratio is too low for the UK, and the economy is best served by 80% levels.

That one gets my vote. If interest rates are now half what they were when it was at 40%, the cost of servicing that debt hasn't changed.

In fact interest rates may well be a quarter of what they were 15 years ago, in which case a 160% debt-to-GDP ratio would be entirely serviceable.

And bear in mind the debt is never paid off. When bonds mature the old bondholders are paid off using the proceeds of newly issued bonds. So all that matters is the annual interest cost.

I hope the Treasury is taking the opportunity to issue more longer-dated gilts to fund this expansion of debt. There is probably a market for durations out to 40, 50 and maybe even 100 years, locking in these rates.

Inflation will do the rest.


Sounds like you are expecting at least some inflation. In which case what do you think might happen to interest rates? If you think interest rates might rise, how do you propose that 80%, or even 160% debt-to-GDP ratio is reduced such that the affordability metric you appear to be advocating is restored?

It is very easy for that debt-to-GDP ratio to go in one direction, but multiple times harder to go the other way I would think.

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Re: UK GDP - what's going on?

#319851

Postby Lootman » June 19th, 2020, 5:58 pm

dealtn wrote:
Lootman wrote:
zico wrote:40% ratio is too low for the UK, and the economy is best served by 80% levels.

That one gets my vote. If interest rates are now half what they were when it was at 40%, the cost of servicing that debt hasn't changed.

In fact interest rates may well be a quarter of what they were 15 years ago, in which case a 160% debt-to-GDP ratio would be entirely serviceable.

And bear in mind the debt is never paid off. When bonds mature the old bondholders are paid off using the proceeds of newly issued bonds. So all that matters is the annual interest cost.

I hope the Treasury is taking the opportunity to issue more longer-dated gilts to fund this expansion of debt. There is probably a market for durations out to 40, 50 and maybe even 100 years, locking in these rates.

Inflation will do the rest.

Sounds like you are expecting at least some inflation. In which case what do you think might happen to interest rates? If you think interest rates might rise, how do you propose that 80%, or even 160% debt-to-GDP ratio is reduced such that the affordability metric you appear to be advocating is restored?

It is very easy for that debt-to-GDP ratio to go in one direction, but multiple times harder to go the other way I would think.

Yes, that was why I expressed the opinion that the government should be issuing very long-dated gilts as much as possible. Then if inflation returns there will be a lag between that and the interest burden of the debt rising.

Inflation would of course be effective at reducing the real value of the debt as well. So I expect the government to be sanguine about at least a modest return of inflation. Otherwise, yes, very hard to get back to 40% without real pain (much higher taxes and/or drastic spending cuts).

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Re: UK GDP - what's going on?

#319877

Postby GoSeigen » June 19th, 2020, 8:17 pm

zico wrote:d) 40% ratio is too low for the UK, and the economy is best served by 80% levels.


The above is probably closest, if not attempting to generalise for all time.

in reality the whole narrative ten years ago (and more) about debt being too high, labour borrowing too much, government too big was a crock. I said back then that even if the Tories came to power and tried to implement austerity they would be forced by the difficult predicament of the private sector to borrow more; that government borrowing was actually at all-time lows, not highs; that rather than shorting gilts as everyone wanted to do the correct trade was to buy them; that inflation was unlikely to be a problem but would be subdued for a decade or more.

I think the current situation was pretty predictable if only one had the imagination to ignore the conventional "wisdom".


GS

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Re: UK GDP - what's going on?

#319879

Postby johnhemming » June 19th, 2020, 8:20 pm

The arguments were about the deficit not the debt because it is the deficit that is difficult to handle.

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Re: UK GDP - what's going on?

#319886

Postby tjh290633 » June 19th, 2020, 8:40 pm

zico wrote:Sky are covering the news that debt exceeds 100% of GDP for the first time, but I was really surprised to see this historic graph, showing debt was around 40% of GDP under Labour before the financial crash, unsurprisingly rising steeply after the crash, but then the surprising bit (to me, at least!) was that despite what we've been told was "10 years of austerity" the ratio continued to rise steadily to around 80% by 2018.

Seems to me there are at least 5 plausible possible interpretations of the trend from 2010-2018.

There is only one explanation. Under Gordon Brown the deficit became very large, which led to corrective action by the Coalition Government. Being kind souls, they did not make the required change to eliminate the deficit in one fell swoop, but reduced it gradually. As long as you have a deficit, the National Debt will continue to rise and can only fall when there is a surplus.

It is simple mathematics, yet confusion between deficit and debt seems to affect the whole of the media and the many commentators.

TJH

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Re: UK GDP - what's going on?

#319888

Postby johnhemming » June 19th, 2020, 8:50 pm

tjh290633 wrote:Being kind souls

It is not just an issue as to being "kind", but also that if you create an economic dislocation through massive tax increases or spending cuts that that has an effect on the economy as a whole which makes it better in the long term to approach things in a gradual manner.

The national finances are normally planned like steering an oil tanker (although on multi-annual timescales). The oil tanker may now have hit an undersea mountain (rather than an iceberg), but public finances do need multi-annual planning.

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Re: UK GDP - what's going on?

#319942

Postby JamesMuenchen » June 20th, 2020, 9:25 am

zico wrote:Sky are covering the news that debt exceeds 100% of GDP for the first time, but I was really surprised to see this historic graph, showing debt was around 40% of GDP under Labour before the financial crash, unsurprisingly rising steeply after the crash, but then the surprising bit (to me, at least!) was that despite what we've been told was "10 years of austerity" the ratio continued to rise steadily to around 80% by 2018.

Seems to me there are at least 5 plausible possible interpretations of the trend from 2010-2018.

a) Too much spending - so there wasn't enough austerity, and public services needed to be cut massively more to get back down to 40% (though 80% to 40% would be a big stretch).
b) Austerity was a huge mistake, and maintaining public spending would have enabled the economy to grow more quickly, and the ratio would have gone back down to 40%. (Similar approach to Trump's tax cuts and consequent deficit increases were hailed as being good for the economy).
c) Not enough revenue collection - taxes weren't increased to anything like the amount they should have been.
d) 40% ratio is too low for the UK, and the economy is best served by 80% levels.
e) Financial crash meant the ratio needed to increase from 40% to 80% to function properly, but it's just a temporary 10-year blip, and without coronavirus, the ratio would have reverted to 40%.

In a larger sense, the question seems to be "in a crisis, what should the government do, and who should pay for it?" (Someone always pays for it, the question is "who"? Presumably similar principles should apply to the pandemic as the financial crash.
What do you think?

The problem is that Austerity is a political term with very little economic meaning. It's used to imply "Cuts" when they're aren't any. So the fact that people get confused is a feature, not a bug.

Austerity is simply where Govt Spending increases by less than overall GDP growth. It's not an absolute decrease in Spending, it's a relative decrease.

All else being equal, Austerity should act to lower the Deficit as Revenue collection should naturally increase in line with GDP.

All else being equal, a lower Deficit should result in a slower increase in the Debt required to fund it.

So, taken altogether, it is perfectly natural that in a time of Austerity the overall Debt is increasing. Just by less than it otherwise might have.

Of course, in the real world, all else is never equal.

We are also in the QE era. Government issues debt that is bought by the central bank in order to increase the money supply without inflation, to reduce interest rates, and to force investors into more high risk instruments. This is supposed to increase economic growth. It's also a lot of debt that isn't really debt.

And with reduced interest rates it is also a good time to borrow. IIRC the UK had -ve rates on the last tranche of 10 Year gilts they issued. If not then very close to.

Low inflation also makes an impact on your chart, as it is inflation adjusted. With high inflation, it's easy to run a larger deficit and still see the overall debt reduce in real terms.

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Re: UK GDP - what's going on?

#319988

Postby dealtn » June 20th, 2020, 11:44 am

JamesMuenchen wrote:
The problem is that Austerity is a political term with very little economic meaning. It's used to imply "Cuts" when they're aren't any. So the fact that people get confused is a feature, not a bug.

Austerity is simply where Govt Spending increases by less than overall GDP growth. It's not an absolute decrease in Spending, it's a relative decrease.

All else being equal, Austerity should act to lower the Deficit as Revenue collection should naturally increase in line with GDP.

All else being equal, a lower Deficit should result in a slower increase in the Debt required to fund it.

So, taken altogether, it is perfectly natural that in a time of Austerity the overall Debt is increasing. Just by less than it otherwise might have.



Well I think we can agree that Austerity is a political term, but on your definition much of the post-WW2 period would have been a period of "Austerity" and I really don't think that term was used in that way, nor would most people characterise those periods as such.

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Re: UK GDP - what's going on?

#320013

Postby 1nvest » June 20th, 2020, 1:04 pm

But where the BoE printed enough money to buy up most older higher yielding (cost to treasury) Gilts/debt, whilst the Treasury issued new Gilts, paying lower yields. Of the order £500Bn of prior 5% Gilts were bought by the BoE, whilst the Treasury issued £1Tn of new gilts paying 2.5% type motion. As the BoE returns all interest it receives on the gilts it holds back to the treasury, then they cost near nothing for the Treasury to service.

With the BoE holding around a third of the 100% of GDP debt, that's comparable to a actual 66% of actual debt/GDP level. And where whilst the debt has doubled, so the cost to service that debt has halved, so little different to a 33% debt/GDP type figure in other times when yields were higher.

The primary risk is when it comes to roll gilts as they mature, which is phased out to over 60+ years such that the risk is time diversified. But where perhaps the tendency might be more towards repaying rather than rolling (selling a new series of gilts to cover the cost of paying back a maturing gilt series).

It's much the same in the US. Where much of the holders of the debt are 'internal' (Fed and other agencies).

Fundamentally its a EU induced distortion. The EU attempted to export its problems by devaluation. Massive pre financial crisis big bets by Germany turned sour. So they transferred those debts over to the ECB. The ECB in turn printed 2 trillion, which all else being equal would devalue each Euro in circulation (a form of micro-taxation across the entire Eurozone). Rather than the US, UK, others seeing the EU export its problems onto them, they all similarly devalued in lockstep, which places the ball/ownership of the problem squarely back into the EU's own court. The EU have continued printing, first to buy up government bonds, then junk bonds, now even stocks. Taken to the extreme they could continue printing to buy up all houses ..etc. in a great nationalisation. Before then however more likely there'd be a flight from the Euro, which more often tends to occur very quickly, resulting in hyperinflation.

UK debt is fine. Not good that the US have relaxed legal-counterfeiting (money printing) to now also include being able to buy up to 70% of each/any bond series (potential $8Tn value), but a necessity. As more money is printed to buy up bonds, pushing prices higher/yields lower, so pension funds etc, will tend to rebalance out of bonds into stocks - pushing stock prices higher. Simple to do, the difficult part is relaxing/reversing back out of that. Looks to me that 0% is the new norm, and instead of using the raising/lowering interest rates pedal as the means to stem/aid the economy, central banks will instead be using forms of scaling up/down QE as the main pedal.

The first to start dumping Euro's will tend to come out well. If left until others have started that run then so the cost/loss will be deeper. Often only takes a small event to trip over to the likes of a bank or currency run/flight. Interesting times.

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Re: UK GDP - what's going on?

#320016

Postby 1nvest » June 20th, 2020, 1:12 pm

ursaminortaur wrote:Image

Interesting chart. Thanks.

Looking at the 1950 peak, I believe interest rates back then were around 0.5%. Looking at the lows and that coincided with periods of higher interest rates.

Would be interesting to see the progression for a cost to service debt, debt level x interest rate being paid. But even though that might be a smoother line, would also be nice to see how much was actual external debt, rather than for instance as of present when the BoE holds around a third of the Treasury's Gilts (debt) and returns all interest paid on those gilts back to the treasury.

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Re: UK GDP - what's going on?

#320018

Postby Alaric » June 20th, 2020, 1:26 pm

1nvest wrote:Looking at the 1950 peak, I believe interest rates back then were around 0.5%. Looking at the lows and that coincided with periods of higher interest rates.


Money rates of return were never that low, real rates possibly. For example he War Loan 3.5% stock due to mature 1952 or later was regarded as a Short Gilt in the late 1940s. The Korean War pushed inflation higher and with it money yields.

It was a difference between the financial aftermath of WW1 and WW2 that following WW1. the government hadn't been able to allow inflation to reduce the cost of WW1 borrowings. This left the Government perpetually short of money, both for domestic social purposes such as to relieve unemployment and for foreign policy such as rearmament as deterrence.


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