An early, formative career experience of mine was an internship in the City of London, where I sat a few metres away from the office of Gavyn Davies, then (and now) a very prominent economist. He was instrumental behind the scenes, in spurring some of the early policies of the New Labour government of the 1990’s, such as the radical move to give the Bank of England its independence.
At the time, one of the great tasks of City economists was the parsing of the Budget. Budgets were great set pieces affairs, dramatized by Chancellors like Ken Clarke sipping whiskey as he delivered the Budget. Trolleys of sandwiches (and a few whiskies) would be delivered to economist’s desks as they made sense of the Budget and then transmitted their views to gilt, currency and equity investors. The Budget was a frontpage story for nearly all newspapers.
Today, the Budget is a whimpery affair. The speed of telecoms, pre-releases and the spinning and whispering of press secretaries mean that the interesting detail reaches markets and the press well before the Chancellor stands up. In addition, bond markets today are more sensitive to inflation figures and the manipulation of central banks, so they are less sensitive to fiscal tweaking.
As Jeremy Hunt delivered his Budget, there were effectively two ‘elephants’ in the room.
The first is that this year is an election year (possibly May but more likely November), and the second is that the sense checking by the Office for Budget Responsibility that accompanied the delivery of the Budget, made it very clear that the scope for fiscal manoeuvre (the Chancellor is constrained by a fiscal framework) is very limited. In particular (depending on how we measure it), government debt to GDP is close to 100%, a historically high level and one that should set alarm bells ringing.
The very limited set of options open to Jeremy Hunt was a perfect illustration of how, when government debt hits record levels, policy choices are severely curbed.
A report by the respected Institute for Fiscal Studies the day after the Budget made this very clear, even a recent BBC 4 radio interview with Hunt’s junior minister Laura Trott laid bare the fact that few senior politicians have a grasp on the UK’s indebtedness problem.
What is happening in the UK, Europe and in the US, is that debt is smothering politics in the sense that the financial burden that high levels of debt produce (in the context of high interest rates), reduces the policy options that governments have.
To an extent, reflecting the euro-zone crisis, governments are now the wards of bond markets (and their own fiscal rules). To stick with the example of the UK, though it is much the same for neighbouring countries like France, Jeremy Hunt brandished GBP 10bn worth of tax cuts, but he will spend eleven times that on debt interest payments.
I do not think enough attention is given to the ‘debt smothering politics’ thesis, but we can start to think of its implications.
Against a backdrop of elections throughout 2024 and a broader ‘democratic recession’, the idea of debt dominating fiscal policy may cause further disenchantment with politics. It might also drive politicians to focus much more on identity politics and polemic issues like immigration (as is the case in France and Italy) and to become speculative and populist on economic policy (expect talk of ‘taking chainsaws to debt loads’).
A less pessimistic view is that much reduced fiscal space means that there are fewer means to ‘buy off’ voters (Jeremy Hunt’s budget was a case in point) and that as result political leaders are induced to reform public services and possibly, public life, along the lines of the playbook introduced by the ‘Troika’ to Greece and Ireland in the aftermath of the euro-zone crisis.
In turn the debate may turn to economic growth and what the UK for example, might learn from neighbouring countries like Ireland, or even how economic and financial reform in the aftermath of the Napoleonic Wars (debt was extremely high) permitted the English economy to outperform the French one.
Before we arrive at that rosy scenario, I suspect that the first port of call for debt-burdened politicians will be central banks. Notably the Bank of Japan has swallowed over half of the national debt market, which has reduced the short-term consequences of indebtedness, but increases the risk of an ultimate, existential crisis.
In an indebted world there will be greater pressure on central banks to compromise themselves and act in ways (i.e. control the level of bond yields) that reduce the political consequences of indebtedness. In this respect the US could prove interesting if Donald Trump becomes president.
He doesn’t like taxes, and is unlikely to want to raise them, but cutting them may lead to a rise in bond yields. As result, one of his first moves may be to replace Jerome Powell with a more overtly political Fed chair (markets may not like this either). If that doesn’t work, he might start to threaten to chainsaw the national debt. America might then have the crisis Trump deserves.
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