Economics

2007 - 2022

The Conservative Party and the National Debt

In Rishi Sunak’s pursuit of the leadership of a Conservative Party increasingly committed to the lunatic right fringe of politics, represented by Liz Truss and the ERG, he calculatedly chose the Thatcher shrine of Grantham to make a defining speech on his supposed responsible approach to the management of the economy; which in Conservative thought, always becomes something that is really about the management and level of the national debt.
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Sunak’s problem is that the national debt in recent Conservative history, and in his own hands – does not provide strong ground to defend the frankly catastrophic Conservative record of Britain’s debt management. It is important here to stress that the standard being used to measure Conservative performance on debt in this paper does not require a modern twist, by re-writing monetary theory, or of examining the monetary credentials of Conservative politicians (attractive as that exploration of their insecurity over the subject matter may be, and not least among the bankers in the Party); but is used here solely  according to neoliberal Conservatism’s own self-determined principles on debt management. On these grounds alone, they seal their own fate.
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The problem for Sunak is that the measurement of ‘manageable’ debt in Conservative policy is always the length of a piece of string; that is determined solely by the Conservatives themselves, using strict measurement criteria only where they are in the exclusive self-interest of the Conservative Party alone, but have little to do with the actual level of the national debt; which in Conservative hands could end anywhere, and often does. This is easily proved.
In 2010, when the Conservatives came into power they inherited Britain’s national debt of around £1.0Trn (around 69% of GDP), two years after the financial crash, 2007-8; itself determined by a market and banking system, largely constructed by Thatcherite neoliberalism, but by 2007, wantonly out of control and beyond any responsible regulation. The Cameron-Osborne-Clegg Conservative/LibDem Coalition Government found the level of debt unaffordable and beyond the limits of acceptability. This was essentially classic Conservatism; it was as if the Great Depression had never happened. Austerity was introduced, with the aim of eliminating the deficit by 2015-16, and through deficit elimination, or even through surpluses being achieved, implicitly establishing a debt ceiling little above 2010 levels, with the prospect of a reduction of debt, at least using the GDP measure, if not an absolute fall.
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The Cameron-Osborne Government, however failed spectacularly to meet its targets, and by 2012 had sufficiently harmed the economy on a scale that required them quickly, but quietly to soften the hair-shirt and self-flagellation approach, but without ending the essence of austerity itself. This fudge merely continued to produce deficits, squeezed growth out of the economy, increased the national debt, and led to an unforgivable failure to maintain Britain’s economic and security resilience, for example by seriously damaging Britain’s readiness to contain a future, explicit and reliably forecast health pandemic (including allowing £1Bn of carefully stored PPE for just such an event, to become out-of-date through cost cuts, and unusable when required by Covid; see also the UK Government Cygnus Report, 2017 on Britain’s failure to prepare for the pandemic).
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The British economy stagnated under Conservative direction, and the debt simply grew. Austerity failed to stem the rise in Debt; ironically defeating austerity’s central purpose. By 2015-16 the debt had reached £1.65Trn (+65% on 2010, and now around 85% of GDP); a clear record of principally Conservative (and LibDem) failure not only to achieve their objectives, but to have irresponsibly made the position they claimed was unsustainable, far, far worse following their own prescriptions; according to their own steadfast principles.
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Nothing improved with the Government of Theresa May; the deficit elimination and move into surplus remained elusive; and politically in the age of Brexit, it became of fast diminishing political priority, and the debt in consequence simply increased again, sharply. The major change, however came with the move from political ‘theatre of the absurd’ under May, to the foreseeable lunacy of electing Boris Johnson as PM. The consequences of the disastrous idiocy of Brexit was now playing out in Britain, just as a Covid-19 pandemic was breaking out in China. By September, 2019 the Chancellor, Sajid Javid, declared, on no rational evidence whatsoever (according to the Conservatives’ own cherished so-called principles, which were simply dumped overboard): that Britain had successfully “turned the page on austerity”. The debt had increased, the deficit was not eliminated. We can only suppose, that several pages of key financial text presented to him in preparation for this speech – with all the key figures – had somehow stuck together when he perused them.
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By 2019 Britain’s debt was £1.82Trn (+82% on 2010, +10% on 2016; and was also now 83% of GDP). This was all before we were struck by a pandemic the Conservatives had failed to provide the resilience resource their obligations to Britain’s national security required of them. They were too busy ingratiating Russian Oligarchs, and their money. You may think that by now even Conservatives may begin to realise that the Conservative financial strategy was not going to plan, according to its own standards; that everything had changed for the worse; not so. This is the Conservative Party: what has defined it since Thatcher demolished the ‘Wets’ is revealed by dogmatic political, neoliberal orthodoxy, to the point that their blunders are blandly repackaged as triumphs by a complacent media, run by right-wing journalist hacks, selected and bought by the Government’s press barons, including Oligarchs and dutifully servicing neoliberal Conservatism; hence, no matter what catastrophe has overwhelmed policy or principle, in Conservative wisdom, “nothing has changed”; a state of mind to which the Conservative Party endlessly resorts. After all, according to its own, exclusive, narrow focus on self-interest the Conservative Party interest and the National Interest are the same thing, no matter what, no matter the harm, to no matter how many.
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Rishi Sunak, an uncompromising Brexiteer became Chancellor of the Exchequer in 2020. Beset by the calamity of Brexit (4% reduction in GDP for no discernible economic return whatsoever, and no discernible end to the pain forthcoming: “Freedom!”); and then by a Pandemic that his Government had done nothing to prepare for, in spite of WHO and Public Health warnings, Sunak declared he would do “whatever it takes” (17th March, 2020) to rescue the economy. Indeed, the scale of the crisis was framed by Sunak in powerful and telling terms: “We must act like any wartime government and do whatever it takes to support our economy”. The appeal to ‘wartime’ defines the critical, existential nature of the crisis Britain faced. In wartime you do not stop resourcing the war effort because you are over-running the budget, or even the deficit, or allow yourself to over-focus on debt. It is worth remembering that in spite of over-selling the success of his measures through the usual press channels, and excessive praise by Conservatives of themselves, even then large parts of the country received insufficient help from Sunak’s measures; including the self-employed (long promoted by Conservatives, but true to their colours, deserted when the going is tough); and most of all the disabled and the poorest in society, whom as always slip through the net, which is never designed by Conservatives, for them. Their principle purpose of the poor in the Conservative management of life in Britain, is to pay the full price for the folly of others.
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We certainly had wartime consequences in Government finances from the Sunak Chancellorship; the debt increased to £2.2Trn by 2021 (now 104% of GDP), and is heading toward £2.4-£2.5Trn by 2022-23. Sunak has played a significant role in the Conservative Government’s failure, by adding to an established trend that has more than doubled the national debt, in little more than ten years; so much for the unaffordable problem of 2010; when Osborne, Hammond, Javid and Sunak had all undertaken – in a favourite Conservative metaphor – to fix the roof. Here we all now are, sitting ‘al fresco’, roofless in a thunderstorm. The Conservatives have compounded debt expansion exponentially, while defending a ruinous economic austerity that hollowed out the resilience of the nation, its infrastructure, and even the credibility of Parliament.
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Released from the Johnson Government, and no longer Chancellor, Sunak is now trying both to claim the credit of his Chancellorship, and simultaneously deny any responsibility for it. He does this in a typically slick, duplicitous Conservative way. Sunak has amended his response to the challenge, presented now by Liz Truss; remember, this is all nothing to do with you; you do not count, and almost certainly do not have a vote in the election of your leader. The Conservatives have openly hijacked Parliament, the Constitution, the political conventions, and the airwaves; in order to have a One Party Internal election of the PM (they seem to claim ownership of the office; everyone else is excluded – in Scotland even the number of Scottish voters in this election is officially, a Conservative secret). This PM will be chosen by majority of those who vote in it, from a total constituency of <0.3% of the electorate, with the single electoral condition, membership of the Conservative Party; to elect a PM, with power over 65m people. Even the Russians can rig their national election of a political leader with more superficial plausibility.
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This is no longer an election to Government, but a crude dog-fight over the (dubious) Hayekian Conservative ideology to which the contestants are both heirs. In Grantham 23rd July, Sunak has given an election speech in which he re-asserted his potentially more robust austerity credentials: “Rising inflation is the enemy that makes everyone poorer and puts at risk your homes and your savings. And we have to tell the truth about tax”; and, “… we have to tell the truth about the cost of living and that there is no answer to this problem other than to grip inflation and bring it down”. There is no answer, but for you to take it on the chin.
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The problem for Sunak is, he wishes to stop acting as if it was ‘wartime’ and declare ‘the peace’; so that he can reduce public spending as well as maintain high taxes, in order to claim he is fixing the debt roof. Now, suddenly “is the time”: for austerity. Nevertheless, there is still a war, albeit in Ukraine and it has international economic consequences, not least for the UK. The pandemic has not ended, but remains a serious winter threat, and retains an adverse legacy effect on the health and capacities of the population, compounded by a serious labour availability, demographics problem. Inflation may prove a temporary, imported problem, but again one not directly manageable by the Chancellor, this autumn or perhaps even winter, and the electorate will not easily accept no substantive help through the crisis while a new PM arbitrarily declares the ‘war’ is over and the public must pay for it all, right now; when they can see that their ‘war’ against fear and want quite obviously isn’t over, but is just starting.
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There are a number of interpretative problems of their debt predicament that Conservatives fail to face; ever since Thatcher removed the wise counsel of ‘Wets’ who understood the deeper truths of war, community and sacrifice, like Ian Gilmour (see his book articulating ‘Wet’ Conservatism, ‘Dancing with Dogma’, 1992; Gilmour is frank in criticising the personal failures of the ‘Wets’ to stand up to the needless, foolish brutality of Thatcherism); who were largely ejected from Party and government influence. Johnson finally cleaned out the last remnants even of soft Thatcherites, like the decent Dominic Grieve, who was kicked out of the Party. The far right Conservative Entryists have not only now taken over the Party, but moved the centre to the fringe right: Truss, of all people, we are now supposed to believe in the hysteria, is actually a Bolshevik. The Conservatives have finally left Mother Earth.
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What are the key interpretative problems of the national debt for Conservatives? For as the “most successful political party in the world”, as they smugly tell us over and over again, it is because most of the time, they run the country; for around fifty of the last seventy years: it is, therefore largely the Conservative National Debt. As a matter of plain fact, in 1918, at the end of WWI the national debt was over 180% of GDP (note that absolute debt levels do not represent meaningful comparisons over very long time periods, which itself carries an economic significance politicians typically fail to recognise), and did not fall below around 120% of GDP by WWII in 1939. In 1945, at the end of WWII, the national debt was over 240% of GDP (and critically, but still under-recognised, a relatively high proportion was now held in foreign hands – notably the United States, a function of wartime requirements for necessary material resources). The Debt did not fall below 100% of GDP until around 1960 (and was at least 100% of GDP continuously for around 45 years from early in WWI). This, however was not new. In the great days of the British Empire and commercial, trade, and money power, British national debt was often above 100% of GDP, between the period around the United States revolution in 1776, until the 1870s; over a century.
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The Empire was built on Debt. Thus the periods when Britain became the most advanced commercial, imperial and industrial power in the world, it has had a national debt of at least 100% of GDP, as the rule rather more than the exception. That is the reality of Britain’s economic history, most often, from the mid-20th century run by Conservative Governments. There is nothing here that is not consistent with Conservative debt principles. Explain that away, rationalise it as you will. Conservatism’s debt theory seals its own fate, but more importantly – the fate of everyone else.
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There are interesting anomalies in the national debt history, offering a muddy footnote to the problem. The first is Quantitative Easing (QE), a complex series of bookkeeping transactions that provided an injection of money into an economy facing the collapse of a failed banking system in 2008. Here is the Bank of England in plain speaking mode:  “We [the BofE] buy UK government bonds or corporate bonds from other financial companies and pension funds.
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When we do this, the price of these bonds tend to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down.
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The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses. That helps to boost spending in the economy and keep inflation at target.
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QE also affects the prices of other assets like shares and property.
Here’s an example. Say we buy £1 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £1 million in cash.
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Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return.
In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.” (https://www.bankofengland.co.uk/monetary-policy/quantitative-easing). The Bank, on behalf of the Treasury (which issues the Government bonds – principally ‘Gilt-edged’) buys Government Bonds, from major institutions for cash. It is with pointing out that QE re-stimulated the banks liquidity, and raised asset prices in financial markets; but it did not feed into real economic growth or raised productivity, still less was in a form that even reached the poorer in society. The reason for that is that QE selects very privileged elite institutions with direct relationship with key ‘dealers’; the modern intermediary between the central bank and the financial sector. This rarified system has little direct interaction with the public, still less the non-corporatised public without bank accounts; or those reliant on hard cash for economic activity.
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How much QE is in the current national debt? “We [BofE] began buying bonds through QE in March 2009 as a response to the Global Financial Crisis. Between 2009 and 2021, we bought £895 billion worth of bonds through QE. We used most of that sum (£875 billion) to buy UK government bonds. We used a much smaller part (£20 billion) to buy UK corporate bonds”. Notice that £875m is in Government bonds – the Government’s own issued bonds, bought back by the BofE, for Government. Corporate bonds are therefore not a significant part of the purchase. This total bond purchase represents around 40% of total current UK national debt. This means that the Government effectively owns about 40% of its own debt. It is argued that QE will be ‘unwound’ or sold back to institutions, but currently none has been sold by the Bank of England. QE has fallen slightly because there are no recent purchases, but the fall is due to the natural cycle of debt maturity and cancellation (a continuing process for all Government bonds, more often accompanied by rollover or replacement with new debt, than total elimination). It is not clear how important unwinding will actually be, save as an argument to support the principle of unwinding, in order to keep QE in the ‘debt’ figures. This leaves a real puzzle. For any corporate institution (or individual) confronted with a position in which it is both the debtor and creditor for the same sum, it would cancel out on consolidation. This does not happen to QE, presumably only because of the unresolved ‘unwinding’ issue. This is important because money is debt, and the double-entry is existential. Sustaining the illusion of owing yourself your own money is metaphysically eccentric. Economists seem to have some difficulty understanding the centrality of the accounting in the base nature of money-as-debt; and accountants are rarely keen to explore the monetary theory of economists. Thus we are the hapless prisoners of the academic silos of professional disciplines. Meanwhile the Bank of England and Treasury remain conveniently silent.
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Similarly there are oddities in the recording of national debt interest. Britain has a high proportion of index linked (inflation protected) debt, compared with other major economies. The reasons for this exceptionally high reliance on inflation adjusted Gilts has not been explained. We have thus seen a dramatic increase in the debt interest payments made on inflation-proofed Gilt-edged stock. Here is the ONS explanation for May, 2022: “The recent high levels of debt interest payments are largely a result of higher inflation, as the interest paid on index-linked gilts rises with increases in the Retail Prices Index (RPI).
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In May 2022, central government debt interest was £7.6 billion, of which the RPI uplift on index-linked gilts contributed £5.0 billion over and above the accrued coupon payments and other components of debt interest.”  (https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/may2022#debt).
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The problem here is esoteric. On what basis is the inflation element of the interest cost actually paid? This may seem simple, but non-inflation adjusted debt is paid quarterly on a cash basis. Critical elements of inflation adjusted Gilt-edged only arise on maturity of the bond; perhaps decades later. The timing is critical, because timing is the essence of the distinction between debt as cash, and debt as a deferred financial instrument. This again raises a cash v. accounting treatment problem. It does not seem clear that the inflation-interest when “paid” is actually paid (cash); or is accrued, or even how it is accrued, whether spread to maturity, or on what basis. A detailed transaction, T-account clarification of the accounting; from the ONS, from the Bank of England, or from the Treasury is required, but perhaps is unlikely. None of this is satisfactory.
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The line of attack against the easy answers of Truss for simple minds, also suggests Sunak is reinforcing a battle line with Truss set out earlier in their bitter TV hustings dispute, by establishing that he will delay tax cuts, and perhaps increase uncertainty about the direction of public spending; which looks superficially more responsible but does not fix the cost-of-living crisis that is facing the public. Sunak’s high tax regime counter’s the populist, inflationary and mis-directed Truss tax cut. Nevertheless Sunak speaks as if the problem confronting him was domestic inflation. It isn’t.
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The current UK wage demands are a legitimate function of the multiple crises generated by external, non-domestic pressures; such as the pandemic (still not resolved, and a difficult winter to come), the war in Ukraine, and – a deliberate Conservative blind-spot – the economic disaster of a (still unfinished) Brexit. These, together in a complex soup  have created production problems, supply problems and transport problems on a Global scale, in a world run largely on ‘just in time’ principles that assumed a World Market economic ‘equilibrium’ that only ever existed in the foolish romantic fantasies of neoliberal economists. This is the motor of inflation, over which Sunak has no control. Globalism in the age of the internet has stripped resilience out of the world economy. There is no built-in ‘redundancy’ in the world system. Free market capital has calculatedly stripped out redundancy from the system, as an un-necessary cost of capital, and turned it into profit and rent. The consequence of the events free markets failed to predict (even where there was due warning), is international inflation. All of these pressures are compounded by the obvious inadequacy and incompetence of the Conservative administration of Government in handling each of them in recent years.
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To take a simple example from Brexit alone; since the EU Commission, EU justice and the Single Market provided a large, and highly professional administration of EU functions across a vast array of critical services for members  states, it was quite obvious that by leaving the EU Britain would immediately require a new and higher level of Government resource it had not required in almost fifty years; defining our borders, establishing separate regulations and standards on a large scale, across many departments of government, some quite new, with high levels of expertise not readily available; and require us to build a new and larger administration of government for the UK than was required by Britain when it was able to rely wholly on the enveloping professional resource of the EU, or the elimination of regulations through Custom Union and Single Market. Thus, larger Government, not smaller Government inevitably goes with Brexit, like it or not. It is unavoidable, especially as we live in a Global world, in which Conservatives claim we wish to play a very significant role. In the deep complexity of that modern, rapidly changing, diverse and dynamic global world small government is, effectively, no government, and that globally, leads precisely nowhere.
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The problem is not ‘small’ government, but good government. Since the Conservatives finally sacked Johnson, they will require to learn anew; you can’t have your cake, and eat it.

Comments (5)

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  1. Mark Bevis says:

    The otherwise good analysis fails to account for the increasing cost of energy. Energy is directly related to economy. A debt is a call on future energy, and as total energy available is declining, it is clear those debts will never be paid. All that quantative easing, will never be paid back.
    As EROEI declines (Energy Return on Energy Invested), ie the cost of getting energy out of the ground goes up, economic decline is inevitable. It would not matter which flavour of neo-liberals you had in government, and Starmer is clearly trying to out-Tory the Tories by backing continued economic growth.
    At some point the magic that is called economy will be seen to be a complete illusion, and the reality will bite with a mighty crash. For the 1.5 million or so reliant on food banks, perhaps going up to 14 million from October, that reality is already biting.
    Martin Lewis’s warning to the new PM:
    https://youtu.be/8DgCHblN_x0

    Tim Watkins at Consciousness of Sheep delves into this more in this blog post and many many more:
    https://consciousnessofsheep.co.uk/2022/07/11/a-flaw-seldom-mentioned/

  2. Tom Ultuous says:

    Thanks for that John. The debt before the crash in 2008 was 500 billion. It was 1.1 trillion by the time Labour left office in 2010 but I’m assuming the extra 600 billion was down to bailing the banks out. Since that money was repaid during the reign of “Honest Dave” would that not effectively mean his 10 years of austerity near quadrupled the debt?

  3. SleepingDog says:

    Well, before that there was USAmerican President Reagan’s pivot from national debt as something to be paid back sometime, to something never to be paid back and ever increased, as the USAmerican Empire (which the client British Empire was slaved to) exponentially lived beyond its means, sucking the life out of the world, and corrupting its own politics with ridiculous payoffs. You can see how this worked in the documentary series Big Oil versus The World on BBC:
    https://www.bbc.co.uk/programmes/p0cgql8f
    The contributors put this in ethical terms: it’s evil.

  4. AudreyMacT says:

    Hi John Warren – are you still a fan of lockdowns….the lockdowns which forced 250 million people into extreme poverty while creating 570 new billionaires?

  5. AudreyMacT says:

    Hi John Warren – back in 2021 you were a huge fan of Taiwan’s COVID strategy. Are you still a fan now that they’ve had months of soaring case numbers – peaking at around 90k cases per day early June’22.

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