1 00:00:02,440 --> 00:00:10,240 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol and 2 00:00:10,360 --> 00:00:12,880 Speaker 1: this is Here's Why, where we take one news story 3 00:00:12,920 --> 00:00:14,880 Speaker 1: and explain it in just a few minutes with our 4 00:00:14,920 --> 00:00:21,200 Speaker 1: experts here at Bloomberg. And when you hear politicians talking 5 00:00:21,239 --> 00:00:24,639 Speaker 1: about government debt, it usually means taxpayers aren't going to 6 00:00:24,800 --> 00:00:28,400 Speaker 1: like what comes next. The whole world now realizes that 7 00:00:28,520 --> 00:00:32,320 Speaker 1: the huge overhang of debt means that the recovery will 8 00:00:32,360 --> 00:00:34,920 Speaker 1: take longer and be harder than have been hoped. 9 00:00:35,040 --> 00:00:37,879 Speaker 2: There's no free lunch in this world, and eliminating the 10 00:00:37,960 --> 00:00:41,559 Speaker 2: national debt, while it may sound attractive, has its costs 11 00:00:41,600 --> 00:00:44,479 Speaker 2: as well, And so the fundamental problem is not the debt. 12 00:00:44,680 --> 00:00:49,440 Speaker 2: The fundamental problem is that we are not managing to 13 00:00:49,920 --> 00:00:52,800 Speaker 2: pay our way. The real sword of Domocles is our 14 00:00:52,840 --> 00:00:58,160 Speaker 2: colossal financial debt and twenty eight billion euros, and if 15 00:00:58,160 --> 00:01:00,639 Speaker 2: we were not careful, it will put our country on 16 00:01:00,680 --> 00:01:01,520 Speaker 2: the edge of a question. 17 00:01:02,720 --> 00:01:06,640 Speaker 3: The interest on the debt, for example, is estimated at 18 00:01:06,680 --> 00:01:10,520 Speaker 3: around fifty billion euros a year. That is more than 19 00:01:10,600 --> 00:01:14,880 Speaker 3: the entire French budget for education. 20 00:01:15,280 --> 00:01:17,639 Speaker 1: Debt levels for the world's biggest economies have been creeping 21 00:01:17,720 --> 00:01:20,240 Speaker 1: up for years, but they jobbed sharply during the COVID 22 00:01:20,319 --> 00:01:25,000 Speaker 1: nineteen pandemic. Is economy shrank and public spending ballooned, but 23 00:01:25,080 --> 00:01:28,520 Speaker 1: the return to normality hasn't fixed that. In fact, stimulus 24 00:01:28,520 --> 00:01:31,839 Speaker 1: policies like the US Inflation Reduction Act have involved even 25 00:01:31,880 --> 00:01:35,440 Speaker 1: more government spending. While the UK's mini budget crisis under 26 00:01:35,480 --> 00:01:38,679 Speaker 1: Liz Trust offered a cautionary tale to governments, the UK 27 00:01:38,800 --> 00:01:42,080 Speaker 1: recently saw its debt to GDP ratio surpass one hundred 28 00:01:42,080 --> 00:01:46,839 Speaker 1: percent too. So here's why governments just keep piling up debt. 29 00:01:51,280 --> 00:01:53,960 Speaker 1: Bloomberg's head of Economics and Government, Stephanie Flanders, is with 30 00:01:54,080 --> 00:01:56,720 Speaker 1: us now for more. Stephanie, you are the perfect person 31 00:01:56,720 --> 00:01:58,680 Speaker 1: to talk about this because you follow about the politics 32 00:01:58,920 --> 00:02:02,240 Speaker 1: and the economics US. Is it a problem first of all, 33 00:02:02,280 --> 00:02:04,720 Speaker 1: that governments have taken on a lot more debt in 34 00:02:04,800 --> 00:02:05,720 Speaker 1: recent years. 35 00:02:05,520 --> 00:02:07,320 Speaker 3: If you take the sort of longer view, going back 36 00:02:07,320 --> 00:02:09,280 Speaker 3: to the global financial crisis, I mean, we have had 37 00:02:09,360 --> 00:02:13,560 Speaker 3: a lot of exceptional crises, and taking on debt to 38 00:02:13,600 --> 00:02:16,600 Speaker 3: confront those kind of situations obviously much better than not 39 00:02:16,639 --> 00:02:18,640 Speaker 3: doing anything. I mean, we saw in the nineteen thirties 40 00:02:19,040 --> 00:02:22,079 Speaker 3: when governments tried to balance the budgets, when you had 41 00:02:22,120 --> 00:02:24,280 Speaker 3: collapsing demand and you ended up with a depression and 42 00:02:24,280 --> 00:02:27,280 Speaker 3: a downward spiral. So you know the fact that governments 43 00:02:27,320 --> 00:02:31,320 Speaker 3: stepped in and spent in extraordinary amounts to sort out 44 00:02:31,360 --> 00:02:34,040 Speaker 3: the banks or to respond to COVID. That's not bad 45 00:02:34,080 --> 00:02:36,200 Speaker 3: in itself. I think the worry comes from what that 46 00:02:36,280 --> 00:02:39,680 Speaker 3: money was spent on. Long term, the slower growth that 47 00:02:39,720 --> 00:02:41,320 Speaker 3: we've had, we sort of didn't get a very good 48 00:02:41,360 --> 00:02:44,600 Speaker 3: bang for our buck, and the fact that even as 49 00:02:44,600 --> 00:02:47,480 Speaker 3: the economy has got a little bit stronger, as you mentioned, 50 00:02:47,520 --> 00:02:50,200 Speaker 3: governments have continued to borrow, continued to spend. So all 51 00:02:50,280 --> 00:02:52,440 Speaker 3: of that makes it much harder to climb out from 52 00:02:52,520 --> 00:02:55,560 Speaker 3: under that debt, especially when you now have rising interest rates, 53 00:02:55,600 --> 00:02:58,639 Speaker 3: which you didn't have when those crises were actually happening. 54 00:02:58,720 --> 00:03:01,080 Speaker 1: And interest rates are really interting piece of this puzzle 55 00:03:01,120 --> 00:03:03,359 Speaker 1: because although this starts to come down in many parts 56 00:03:03,360 --> 00:03:04,960 Speaker 1: of the world, they're still much higher than they were 57 00:03:04,960 --> 00:03:07,520 Speaker 1: in twenty twenty two. So how does that factor into 58 00:03:07,560 --> 00:03:09,399 Speaker 1: how much we have to worry about the debt. 59 00:03:09,480 --> 00:03:12,040 Speaker 3: It's always dangerous getting into comparison with households because governments 60 00:03:12,040 --> 00:03:13,760 Speaker 3: are really different from households. But there is that if 61 00:03:13,800 --> 00:03:16,440 Speaker 3: you think about how you pay back alone. The two 62 00:03:16,480 --> 00:03:18,480 Speaker 3: things that will most affect your ability to pay back 63 00:03:18,520 --> 00:03:21,560 Speaker 3: that loan is how high the interest rate is, so 64 00:03:21,600 --> 00:03:23,680 Speaker 3: a lower interest rate you can service a higher debt. 65 00:03:24,240 --> 00:03:26,800 Speaker 3: The other is your income. If your income is growing 66 00:03:26,880 --> 00:03:29,600 Speaker 3: quite fast, that also makes it easier to make those 67 00:03:29,639 --> 00:03:32,359 Speaker 3: interest payments. So the same applies to governments. The faster 68 00:03:32,480 --> 00:03:35,640 Speaker 3: they grow or faster that the economy grows, the more 69 00:03:35,640 --> 00:03:37,720 Speaker 3: money they have coming into tax revenues, that easier it 70 00:03:37,760 --> 00:03:39,960 Speaker 3: is to pay back the debt. And if you're growing 71 00:03:40,040 --> 00:03:42,880 Speaker 3: faster than that total stock of debt, you can actually 72 00:03:42,920 --> 00:03:45,720 Speaker 3: shrink the debt relative to the economy without having to 73 00:03:45,760 --> 00:03:48,200 Speaker 3: do anything horrible. And that used to happen in the 74 00:03:48,240 --> 00:03:50,640 Speaker 3: old days. But in the past sort of fifteen years, 75 00:03:50,760 --> 00:03:53,200 Speaker 3: most economies, certainly the UK but a lot of advanced 76 00:03:53,240 --> 00:03:55,960 Speaker 3: economies they've been growing a bit slower, but it didn't 77 00:03:56,000 --> 00:03:59,920 Speaker 3: matter so much because interest rates were extremely low, indeed falling, 78 00:04:00,080 --> 00:04:01,920 Speaker 3: so you could service more and more debt. In fact, 79 00:04:01,960 --> 00:04:04,520 Speaker 3: the extraordinary thing was, even in a quite slow growth environment, 80 00:04:04,880 --> 00:04:07,600 Speaker 3: advanced economies managed to more or less double their debt, 81 00:04:07,840 --> 00:04:11,200 Speaker 3: but their actual interest payments every year went down, so 82 00:04:11,240 --> 00:04:13,600 Speaker 3: you can see why they didn't feel much pressure to 83 00:04:13,760 --> 00:04:15,720 Speaker 3: get a handle on that debt. I think that the 84 00:04:15,760 --> 00:04:18,640 Speaker 3: problem now is that you've had a sharp increase in interest 85 00:04:18,680 --> 00:04:21,600 Speaker 3: rates and that is feeding through into higher debt interest 86 00:04:21,640 --> 00:04:23,520 Speaker 3: In the US. For example, you're now got the US 87 00:04:23,560 --> 00:04:28,640 Speaker 3: is spending three percent of GDP on debt interest, which 88 00:04:28,680 --> 00:04:30,360 Speaker 3: is much more than a few years ago. It's actually 89 00:04:30,360 --> 00:04:32,560 Speaker 3: more than the defense budget. It's not just that it's 90 00:04:32,600 --> 00:04:34,200 Speaker 3: a lot of money, it's money that you really want 91 00:04:34,200 --> 00:04:35,240 Speaker 3: to spend on other things. 92 00:04:35,400 --> 00:04:37,440 Speaker 1: And then there's the attitude of spending as well, which 93 00:04:37,640 --> 00:04:40,920 Speaker 1: feels like went through quite a big shift, particularly after 94 00:04:40,960 --> 00:04:44,400 Speaker 1: the pandemic. Everyone understood why governments were spending more during 95 00:04:44,480 --> 00:04:46,719 Speaker 1: the pandemic, but then afterwards we had policies like the 96 00:04:46,720 --> 00:04:49,080 Speaker 1: Inflation Reduction Act, which was more on top of that. 97 00:04:49,400 --> 00:04:52,320 Speaker 3: Yeah, I think it's it's that sort of taboo that's broken, right. 98 00:04:52,360 --> 00:04:54,880 Speaker 3: We were always told, well, it's just if you're absolutely 99 00:04:54,880 --> 00:04:56,520 Speaker 3: in the teeth of a crisis, you could borrow, but 100 00:04:56,560 --> 00:04:58,599 Speaker 3: then you have to quickly get back to balancing the books. 101 00:04:58,600 --> 00:05:02,240 Speaker 3: And that was obviously that was the rhetoric around austerityk 102 00:05:02,320 --> 00:05:04,919 Speaker 3: or Some people disagreed with George Osborne's assessment back in 103 00:05:04,960 --> 00:05:07,520 Speaker 3: twenty ten, but there a feeling that you couldn't just 104 00:05:07,560 --> 00:05:10,080 Speaker 3: borrow forever. There was no magic money tree. And then 105 00:05:10,120 --> 00:05:12,200 Speaker 3: I think the slight problem with the pandemic was that 106 00:05:12,240 --> 00:05:14,760 Speaker 3: the numbers were so large it suddenly had the government 107 00:05:14,880 --> 00:05:18,320 Speaker 3: paying a huge chunk of the nation's wage bill, in effect, 108 00:05:18,400 --> 00:05:21,080 Speaker 3: while we were all in lockdown, and the world didn't 109 00:05:21,120 --> 00:05:24,960 Speaker 3: stop moving on its axis, and the government continued to 110 00:05:24,960 --> 00:05:27,040 Speaker 3: be able to pay for itself, and the US has 111 00:05:27,080 --> 00:05:30,839 Speaker 3: grown its borrowing, has increased in more and more stimulus packages, 112 00:05:31,080 --> 00:05:34,320 Speaker 3: and nothing so far has broken in a sense. So 113 00:05:34,440 --> 00:05:37,600 Speaker 3: you can see politicians but also voters saying, oh, hang on, 114 00:05:37,680 --> 00:05:39,720 Speaker 3: so if you can spend money on that, why not 115 00:05:39,760 --> 00:05:42,640 Speaker 3: spend money on an equally important crisis, they would argue, 116 00:05:42,680 --> 00:05:45,960 Speaker 3: maybe even worse the climate crisis and on these other things. 117 00:05:46,040 --> 00:05:48,480 Speaker 3: That basic taboo has just lifted, And I think that 118 00:05:48,480 --> 00:05:51,080 Speaker 3: makes it much harder for politicians to say, no, no, 119 00:05:51,120 --> 00:05:52,599 Speaker 3: we've really got to tighten our belts. 120 00:05:52,640 --> 00:05:55,839 Speaker 1: But is there a risk that something breaks, essentially and 121 00:05:55,880 --> 00:05:58,160 Speaker 1: that we end up in a situation where we have 122 00:05:58,240 --> 00:06:00,719 Speaker 1: to either go back to austerity or something much more 123 00:06:00,800 --> 00:06:01,799 Speaker 1: dramatic have to happen. 124 00:06:02,000 --> 00:06:05,039 Speaker 3: I think we're already running a risk, certainly in countries 125 00:06:05,040 --> 00:06:08,040 Speaker 3: which are not growing very fast. So that's the crucial 126 00:06:08,040 --> 00:06:10,560 Speaker 3: difference between the UK and the US, and certainly parts 127 00:06:10,560 --> 00:06:13,200 Speaker 3: of Europe and the US. The US has continued to grow, 128 00:06:13,240 --> 00:06:16,520 Speaker 3: in fact increased its productivity. Productivity, you're making more stuff 129 00:06:16,839 --> 00:06:18,719 Speaker 3: with the same number of people. That is the only 130 00:06:18,760 --> 00:06:21,920 Speaker 3: way to increase your living standards, and ultimately it's the 131 00:06:21,920 --> 00:06:24,839 Speaker 3: only way to start growing your way out of debt, 132 00:06:24,920 --> 00:06:27,800 Speaker 3: right because you're growing faster than your stock of debt. 133 00:06:28,080 --> 00:06:31,320 Speaker 3: Your debt payments are growing, and the US still is 134 00:06:31,400 --> 00:06:35,039 Speaker 3: seeing rising debt stock, but people can also see that 135 00:06:35,080 --> 00:06:38,000 Speaker 3: it's continuing to grow. They can also see that it's 136 00:06:38,040 --> 00:06:40,640 Speaker 3: continuing to have the world's favorite currency. So people want 137 00:06:40,680 --> 00:06:42,839 Speaker 3: to lend to the US government because they don't really 138 00:06:42,920 --> 00:06:45,400 Speaker 3: like euros as much or pounds, or there isn't a 139 00:06:45,400 --> 00:06:48,120 Speaker 3: good competition, and all those things makes the US special. 140 00:06:48,240 --> 00:06:50,160 Speaker 3: So even though you look at the numbers now and 141 00:06:50,200 --> 00:06:55,280 Speaker 3: it's eyewatering six percent of GDP budget deficit in the US, 142 00:06:55,400 --> 00:06:58,200 Speaker 3: despite having a strong economy, low unemployment, you know, that's 143 00:06:58,200 --> 00:07:00,360 Speaker 3: the kind of deficit you would normally get when you're 144 00:07:00,400 --> 00:07:03,080 Speaker 3: looking at a recession. There isn't a feeling that it's 145 00:07:03,120 --> 00:07:05,440 Speaker 3: about to head off a cliff, that investors are about 146 00:07:05,480 --> 00:07:08,279 Speaker 3: to suddenly demand much higher interest rates to lend to 147 00:07:08,320 --> 00:07:11,160 Speaker 3: the US. Whereas someone like France, for example, which also, 148 00:07:11,200 --> 00:07:14,160 Speaker 3: as it happens, has an over six percent budget deficit. 149 00:07:14,440 --> 00:07:16,280 Speaker 3: A lot of pressure on France because France is not 150 00:07:16,360 --> 00:07:16,960 Speaker 3: growing fast. 151 00:07:17,000 --> 00:07:20,000 Speaker 1: Andy's perhaps a different sort of set of concerns in 152 00:07:20,040 --> 00:07:23,320 Speaker 1: Europe big picture. Can we ever actually expect governments to 153 00:07:23,320 --> 00:07:25,120 Speaker 1: be able to bring down debt? Is there a bit 154 00:07:25,160 --> 00:07:26,640 Speaker 1: of a magic money tree involved? 155 00:07:27,000 --> 00:07:29,160 Speaker 3: I think, again, going back to the difference between government 156 00:07:29,200 --> 00:07:31,280 Speaker 3: and households, it's quite hard for a government that has 157 00:07:31,320 --> 00:07:34,640 Speaker 3: control over its own currency to actually go bankrupt. You 158 00:07:34,640 --> 00:07:37,160 Speaker 3: can always print more money, you may end up with inflation, 159 00:07:37,200 --> 00:07:38,680 Speaker 3: and there's lots of problems that go with it, but 160 00:07:38,760 --> 00:07:40,680 Speaker 3: you can't be bankrupt in the same way that a 161 00:07:40,720 --> 00:07:43,280 Speaker 3: household is. And equally, I think you don't have to 162 00:07:43,320 --> 00:07:47,240 Speaker 3: be precious about a particular level of debt being a 163 00:07:47,280 --> 00:07:49,400 Speaker 3: safe level. We used to think it was about sixty 164 00:07:49,440 --> 00:07:52,200 Speaker 3: percent of GDP was a safe low level of debt. 165 00:07:52,760 --> 00:07:55,000 Speaker 3: I think probably that's gone up quite a lot because 166 00:07:55,000 --> 00:07:57,600 Speaker 3: we've seen it's possible to sustain higher rates. We've seen 167 00:07:57,680 --> 00:08:00,880 Speaker 3: Japan have much higher rates and all so not fall 168 00:08:00,920 --> 00:08:04,080 Speaker 3: off a cliff. Fundamentally, the thing to focus on is growth. 169 00:08:04,160 --> 00:08:06,480 Speaker 3: It makes such a difference. We had the Fiscal Watchdog 170 00:08:06,560 --> 00:08:08,640 Speaker 3: in the UK the other day talked about the sort 171 00:08:08,640 --> 00:08:11,240 Speaker 3: of long term risk to the public finances and it's 172 00:08:11,280 --> 00:08:13,880 Speaker 3: extraordinary actually. I mean, we've been growing a fraction of 173 00:08:13,920 --> 00:08:16,000 Speaker 3: the rate we grew before two thousand and seven. We 174 00:08:16,080 --> 00:08:17,960 Speaker 3: used to grow too and a half percent. We've been 175 00:08:18,000 --> 00:08:20,920 Speaker 3: barely growing zero point six percent a year the last 176 00:08:20,920 --> 00:08:22,480 Speaker 3: ten years. If we just got back to two and 177 00:08:22,480 --> 00:08:24,360 Speaker 3: a half percent a year, which is what this government 178 00:08:24,440 --> 00:08:26,880 Speaker 3: very ambitiously is trying to get to, you wouldn't have 179 00:08:26,880 --> 00:08:28,440 Speaker 3: to do anything to keep the debt stock at one 180 00:08:28,520 --> 00:08:30,800 Speaker 3: hundred percent for the next fifty years, even with all 181 00:08:30,840 --> 00:08:32,840 Speaker 3: the spending pressures coming down the track. But if we 182 00:08:32,920 --> 00:08:35,120 Speaker 3: carry on growing at the rate we've been growing just 183 00:08:35,160 --> 00:08:37,840 Speaker 3: the last ten years, debt won't be one hundred percent 184 00:08:37,880 --> 00:08:40,680 Speaker 3: in fifty years time, it'll be seven hundred percent of GDP. 185 00:08:40,840 --> 00:08:43,080 Speaker 3: So that's how much difference growth makes. So I would 186 00:08:43,080 --> 00:08:45,199 Speaker 3: say if you focus on the growth, the debt take 187 00:08:45,240 --> 00:08:47,440 Speaker 3: player of itself, and that's what you want. You want 188 00:08:47,440 --> 00:08:49,400 Speaker 3: to be not worrying all the time about debt. 189 00:08:49,600 --> 00:08:51,640 Speaker 1: Is there a risk that something provokes a kind of 190 00:08:51,640 --> 00:08:53,439 Speaker 1: a crisis. Is there a tipping point that we should 191 00:08:53,440 --> 00:08:54,040 Speaker 1: be watching out for. 192 00:08:54,160 --> 00:08:56,080 Speaker 3: Well, we saw that obviously with Liz trust If a 193 00:08:56,080 --> 00:08:58,480 Speaker 3: government looks like it's really not taking it seriously, I 194 00:08:58,480 --> 00:09:00,920 Speaker 3: think we've obviously had some very sort of somber music 195 00:09:00,960 --> 00:09:03,360 Speaker 3: out of the UK government recently, less so out of 196 00:09:03,400 --> 00:09:06,959 Speaker 3: the presidential candidates in the US. But if a government 197 00:09:07,040 --> 00:09:10,280 Speaker 3: can't show it's even remotely on a path to getting 198 00:09:10,280 --> 00:09:12,319 Speaker 3: a handle on its step, I think that could get 199 00:09:12,360 --> 00:09:14,760 Speaker 3: into you get into real confidence issues in the market. 200 00:09:14,960 --> 00:09:17,280 Speaker 1: Stephanie, thanks so much for joining us. That's Bloomberg's head 201 00:09:17,280 --> 00:09:21,200 Speaker 1: of Economics and Government, Stephanie Flanders. For more explanations like 202 00:09:21,240 --> 00:09:23,720 Speaker 1: this from our team of twenty seven hundred journalists and 203 00:09:23,840 --> 00:09:26,360 Speaker 1: analysts around the world, search for Quick Take on the 204 00:09:26,400 --> 00:09:31,480 Speaker 1: Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This 205 00:09:31,559 --> 00:09:34,000 Speaker 1: is here's why. I'll be back next week with more. 206 00:09:34,200 --> 00:09:35,079 Speaker 1: Thanks for listening.