WEBVTT - Here's Why Governments Just Keep Piling Up Debt 0:00:02.440 --> 0:00:10.240 Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol and 0:00:10.360 --> 0:00:12.880 this is Here's Why, where we take one news story 0:00:12.920 --> 0:00:14.880 and explain it in just a few minutes with our 0:00:14.920 --> 0:00:21.200 experts here at Bloomberg. And when you hear politicians talking 0:00:21.239 --> 0:00:24.639 about government debt, it usually means taxpayers aren't going to 0:00:24.800 --> 0:00:28.400 like what comes next. The whole world now realizes that 0:00:28.520 --> 0:00:32.320 the huge overhang of debt means that the recovery will 0:00:32.360 --> 0:00:34.920 take longer and be harder than have been hoped. 0:00:35.040 --> 0:00:37.879 There's no free lunch in this world, and eliminating the 0:00:37.960 --> 0:00:41.559 national debt, while it may sound attractive, has its costs 0:00:41.600 --> 0:00:44.479 as well, And so the fundamental problem is not the debt. 0:00:44.680 --> 0:00:49.440 The fundamental problem is that we are not managing to 0:00:49.920 --> 0:00:52.800 pay our way. The real sword of Domocles is our 0:00:52.840 --> 0:00:58.160 colossal financial debt and twenty eight billion euros, and if 0:00:58.160 --> 0:01:00.639 we were not careful, it will put our country on 0:01:00.680 --> 0:01:01.520 the edge of a question. 0:01:02.720 --> 0:01:06.640 The interest on the debt, for example, is estimated at 0:01:06.680 --> 0:01:10.520 around fifty billion euros a year. That is more than 0:01:10.600 --> 0:01:14.880 the entire French budget for education. 0:01:15.280 --> 0:01:17.639 Debt levels for the world's biggest economies have been creeping 0:01:17.720 --> 0:01:20.240 up for years, but they jobbed sharply during the COVID 0:01:20.319 --> 0:01:25.000 nineteen pandemic. Is economy shrank and public spending ballooned, but 0:01:25.080 --> 0:01:28.520 the return to normality hasn't fixed that. In fact, stimulus 0:01:28.520 --> 0:01:31.839 policies like the US Inflation Reduction Act have involved even 0:01:31.880 --> 0:01:35.440 more government spending. While the UK's mini budget crisis under 0:01:35.480 --> 0:01:38.679 Liz Trust offered a cautionary tale to governments, the UK 0:01:38.800 --> 0:01:42.080 recently saw its debt to GDP ratio surpass one hundred 0:01:42.080 --> 0:01:46.839 percent too. So here's why governments just keep piling up debt. 0:01:51.280 --> 0:01:53.960 Bloomberg's head of Economics and Government, Stephanie Flanders, is with 0:01:54.080 --> 0:01:56.720 us now for more. Stephanie, you are the perfect person 0:01:56.720 --> 0:01:58.680 to talk about this because you follow about the politics 0:01:58.920 --> 0:02:02.240 and the economics US. Is it a problem first of all, 0:02:02.280 --> 0:02:04.720 that governments have taken on a lot more debt in 0:02:04.800 --> 0:02:05.720 recent years. 0:02:05.520 --> 0:02:07.320 If you take the sort of longer view, going back 0:02:07.320 --> 0:02:09.280 to the global financial crisis, I mean, we have had 0:02:09.360 --> 0:02:13.560 a lot of exceptional crises, and taking on debt to 0:02:13.600 --> 0:02:16.600 confront those kind of situations obviously much better than not 0:02:16.639 --> 0:02:18.640 doing anything. I mean, we saw in the nineteen thirties 0:02:19.040 --> 0:02:22.079 when governments tried to balance the budgets, when you had 0:02:22.120 --> 0:02:24.280 collapsing demand and you ended up with a depression and 0:02:24.280 --> 0:02:27.280 a downward spiral. So you know the fact that governments 0:02:27.320 --> 0:02:31.320 stepped in and spent in extraordinary amounts to sort out 0:02:31.360 --> 0:02:34.040 the banks or to respond to COVID. That's not bad 0:02:34.080 --> 0:02:36.200 in itself. I think the worry comes from what that 0:02:36.280 --> 0:02:39.680 money was spent on. Long term, the slower growth that 0:02:39.720 --> 0:02:41.320 we've had, we sort of didn't get a very good 0:02:41.360 --> 0:02:44.600 bang for our buck, and the fact that even as 0:02:44.600 --> 0:02:47.480 the economy has got a little bit stronger, as you mentioned, 0:02:47.520 --> 0:02:50.200 governments have continued to borrow, continued to spend. So all 0:02:50.280 --> 0:02:52.440 of that makes it much harder to climb out from 0:02:52.520 --> 0:02:55.560 under that debt, especially when you now have rising interest rates, 0:02:55.600 --> 0:02:58.639 which you didn't have when those crises were actually happening. 0:02:58.720 --> 0:03:01.080 And interest rates are really interting piece of this puzzle 0:03:01.120 --> 0:03:03.359 because although this starts to come down in many parts 0:03:03.360 --> 0:03:04.960 of the world, they're still much higher than they were 0:03:04.960 --> 0:03:07.520 in twenty twenty two. So how does that factor into 0:03:07.560 --> 0:03:09.399 how much we have to worry about the debt. 0:03:09.480 --> 0:03:12.040 It's always dangerous getting into comparison with households because governments 0:03:12.040 --> 0:03:13.760 are really different from households. But there is that if 0:03:13.800 --> 0:03:16.440 you think about how you pay back alone. The two 0:03:16.480 --> 0:03:18.480 things that will most affect your ability to pay back 0:03:18.520 --> 0:03:21.560 that loan is how high the interest rate is, so 0:03:21.600 --> 0:03:23.680 a lower interest rate you can service a higher debt. 0:03:24.240 --> 0:03:26.800 The other is your income. If your income is growing 0:03:26.880 --> 0:03:29.600 quite fast, that also makes it easier to make those 0:03:29.639 --> 0:03:32.359 interest payments. So the same applies to governments. The faster 0:03:32.480 --> 0:03:35.640 they grow or faster that the economy grows, the more 0:03:35.640 --> 0:03:37.720 money they have coming into tax revenues, that easier it 0:03:37.760 --> 0:03:39.960 is to pay back the debt. And if you're growing 0:03:40.040 --> 0:03:42.880 faster than that total stock of debt, you can actually 0:03:42.920 --> 0:03:45.720 shrink the debt relative to the economy without having to 0:03:45.760 --> 0:03:48.200 do anything horrible. And that used to happen in the 0:03:48.240 --> 0:03:50.640 old days. But in the past sort of fifteen years, 0:03:50.760 --> 0:03:53.200 most economies, certainly the UK but a lot of advanced 0:03:53.240 --> 0:03:55.960 economies they've been growing a bit slower, but it didn't 0:03:56.000 --> 0:03:59.920 matter so much because interest rates were extremely low, indeed falling, 0:04:00.080 --> 0:04:01.920 so you could service more and more debt. In fact, 0:04:01.960 --> 0:04:04.520 the extraordinary thing was, even in a quite slow growth environment, 0:04:04.880 --> 0:04:07.600 advanced economies managed to more or less double their debt, 0:04:07.840 --> 0:04:11.200 but their actual interest payments every year went down, so 0:04:11.240 --> 0:04:13.600 you can see why they didn't feel much pressure to 0:04:13.760 --> 0:04:15.720 get a handle on that debt. I think that the 0:04:15.760 --> 0:04:18.640 problem now is that you've had a sharp increase in interest 0:04:18.680 --> 0:04:21.600 rates and that is feeding through into higher debt interest 0:04:21.640 --> 0:04:23.520 In the US. For example, you're now got the US 0:04:23.560 --> 0:04:28.640 is spending three percent of GDP on debt interest, which 0:04:28.680 --> 0:04:30.360 is much more than a few years ago. It's actually 0:04:30.360 --> 0:04:32.560 more than the defense budget. It's not just that it's 0:04:32.600 --> 0:04:34.200 a lot of money, it's money that you really want 0:04:34.200 --> 0:04:35.240 to spend on other things. 0:04:35.400 --> 0:04:37.440 And then there's the attitude of spending as well, which 0:04:37.640 --> 0:04:40.920 feels like went through quite a big shift, particularly after 0:04:40.960 --> 0:04:44.400 the pandemic. Everyone understood why governments were spending more during 0:04:44.480 --> 0:04:46.719 the pandemic, but then afterwards we had policies like the 0:04:46.720 --> 0:04:49.080 Inflation Reduction Act, which was more on top of that. 0:04:49.400 --> 0:04:52.320 Yeah, I think it's it's that sort of taboo that's broken, right. 0:04:52.360 --> 0:04:54.880 We were always told, well, it's just if you're absolutely 0:04:54.880 --> 0:04:56.520 in the teeth of a crisis, you could borrow, but 0:04:56.560 --> 0:04:58.599 then you have to quickly get back to balancing the books. 0:04:58.600 --> 0:05:02.240 And that was obviously that was the rhetoric around austerityk 0:05:02.320 --> 0:05:04.919 or Some people disagreed with George Osborne's assessment back in 0:05:04.960 --> 0:05:07.520 twenty ten, but there a feeling that you couldn't just 0:05:07.560 --> 0:05:10.080 borrow forever. There was no magic money tree. And then 0:05:10.120 --> 0:05:12.200 I think the slight problem with the pandemic was that 0:05:12.240 --> 0:05:14.760 the numbers were so large it suddenly had the government 0:05:14.880 --> 0:05:18.320 paying a huge chunk of the nation's wage bill, in effect, 0:05:18.400 --> 0:05:21.080 while we were all in lockdown, and the world didn't 0:05:21.120 --> 0:05:24.960 stop moving on its axis, and the government continued to 0:05:24.960 --> 0:05:27.040 be able to pay for itself, and the US has 0:05:27.080 --> 0:05:30.839 grown its borrowing, has increased in more and more stimulus packages, 0:05:31.080 --> 0:05:34.320 and nothing so far has broken in a sense. So 0:05:34.440 --> 0:05:37.600 you can see politicians but also voters saying, oh, hang on, 0:05:37.680 --> 0:05:39.720 so if you can spend money on that, why not 0:05:39.760 --> 0:05:42.640 spend money on an equally important crisis, they would argue, 0:05:42.680 --> 0:05:45.960 maybe even worse the climate crisis and on these other things. 0:05:46.040 --> 0:05:48.480 That basic taboo has just lifted, And I think that 0:05:48.480 --> 0:05:51.080 makes it much harder for politicians to say, no, no, 0:05:51.120 --> 0:05:52.599 we've really got to tighten our belts. 0:05:52.640 --> 0:05:55.839 But is there a risk that something breaks, essentially and 0:05:55.880 --> 0:05:58.160 that we end up in a situation where we have 0:05:58.240 --> 0:06:00.719 to either go back to austerity or something much more 0:06:00.800 --> 0:06:01.799 dramatic have to happen. 0:06:02.000 --> 0:06:05.039 I think we're already running a risk, certainly in countries 0:06:05.040 --> 0:06:08.040 which are not growing very fast. So that's the crucial 0:06:08.040 --> 0:06:10.560 difference between the UK and the US, and certainly parts 0:06:10.560 --> 0:06:13.200 of Europe and the US. The US has continued to grow, 0:06:13.240 --> 0:06:16.520 in fact increased its productivity. Productivity, you're making more stuff 0:06:16.839 --> 0:06:18.719 with the same number of people. That is the only 0:06:18.760 --> 0:06:21.920 way to increase your living standards, and ultimately it's the 0:06:21.920 --> 0:06:24.839 only way to start growing your way out of debt, 0:06:24.920 --> 0:06:27.800 right because you're growing faster than your stock of debt. 0:06:28.080 --> 0:06:31.320 Your debt payments are growing, and the US still is 0:06:31.400 --> 0:06:35.039 seeing rising debt stock, but people can also see that 0:06:35.080 --> 0:06:38.000 it's continuing to grow. They can also see that it's 0:06:38.040 --> 0:06:40.640 continuing to have the world's favorite currency. So people want 0:06:40.680 --> 0:06:42.839 to lend to the US government because they don't really 0:06:42.920 --> 0:06:45.400 like euros as much or pounds, or there isn't a 0:06:45.400 --> 0:06:48.120 good competition, and all those things makes the US special. 0:06:48.240 --> 0:06:50.160 So even though you look at the numbers now and 0:06:50.200 --> 0:06:55.280 it's eyewatering six percent of GDP budget deficit in the US, 0:06:55.400 --> 0:06:58.200 despite having a strong economy, low unemployment, you know, that's 0:06:58.200 --> 0:07:00.360 the kind of deficit you would normally get when you're 0:07:00.400 --> 0:07:03.080 looking at a recession. There isn't a feeling that it's 0:07:03.120 --> 0:07:05.440 about to head off a cliff, that investors are about 0:07:05.480 --> 0:07:08.279 to suddenly demand much higher interest rates to lend to 0:07:08.320 --> 0:07:11.160 the US. Whereas someone like France, for example, which also, 0:07:11.200 --> 0:07:14.160 as it happens, has an over six percent budget deficit. 0:07:14.440 --> 0:07:16.280 A lot of pressure on France because France is not 0:07:16.360 --> 0:07:16.960 growing fast. 0:07:17.000 --> 0:07:20.000 Andy's perhaps a different sort of set of concerns in 0:07:20.040 --> 0:07:23.320 Europe big picture. Can we ever actually expect governments to 0:07:23.320 --> 0:07:25.120 be able to bring down debt? Is there a bit 0:07:25.160 --> 0:07:26.640 of a magic money tree involved? 0:07:27.000 --> 0:07:29.160 I think, again, going back to the difference between government 0:07:29.200 --> 0:07:31.280 and households, it's quite hard for a government that has 0:07:31.320 --> 0:07:34.640 control over its own currency to actually go bankrupt. You 0:07:34.640 --> 0:07:37.160 can always print more money, you may end up with inflation, 0:07:37.200 --> 0:07:38.680 and there's lots of problems that go with it, but 0:07:38.760 --> 0:07:40.680 you can't be bankrupt in the same way that a 0:07:40.720 --> 0:07:43.280 household is. And equally, I think you don't have to 0:07:43.320 --> 0:07:47.240 be precious about a particular level of debt being a 0:07:47.280 --> 0:07:49.400 safe level. We used to think it was about sixty 0:07:49.440 --> 0:07:52.200 percent of GDP was a safe low level of debt. 0:07:52.760 --> 0:07:55.000 I think probably that's gone up quite a lot because 0:07:55.000 --> 0:07:57.600 we've seen it's possible to sustain higher rates. We've seen 0:07:57.680 --> 0:08:00.880 Japan have much higher rates and all so not fall 0:08:00.920 --> 0:08:04.080 off a cliff. Fundamentally, the thing to focus on is growth. 0:08:04.160 --> 0:08:06.480 It makes such a difference. We had the Fiscal Watchdog 0:08:06.560 --> 0:08:08.640 in the UK the other day talked about the sort 0:08:08.640 --> 0:08:11.240 of long term risk to the public finances and it's 0:08:11.280 --> 0:08:13.880 extraordinary actually. I mean, we've been growing a fraction of 0:08:13.920 --> 0:08:16.000 the rate we grew before two thousand and seven. We 0:08:16.080 --> 0:08:17.960 used to grow too and a half percent. We've been 0:08:18.000 --> 0:08:20.920 barely growing zero point six percent a year the last 0:08:20.920 --> 0:08:22.480 ten years. If we just got back to two and 0:08:22.480 --> 0:08:24.360 a half percent a year, which is what this government 0:08:24.440 --> 0:08:26.880 very ambitiously is trying to get to, you wouldn't have 0:08:26.880 --> 0:08:28.440 to do anything to keep the debt stock at one 0:08:28.520 --> 0:08:30.800 hundred percent for the next fifty years, even with all 0:08:30.840 --> 0:08:32.840 the spending pressures coming down the track. But if we 0:08:32.920 --> 0:08:35.120 carry on growing at the rate we've been growing just 0:08:35.160 --> 0:08:37.840 the last ten years, debt won't be one hundred percent 0:08:37.880 --> 0:08:40.680 in fifty years time, it'll be seven hundred percent of GDP. 0:08:40.840 --> 0:08:43.080 So that's how much difference growth makes. So I would 0:08:43.080 --> 0:08:45.199 say if you focus on the growth, the debt take 0:08:45.240 --> 0:08:47.440 player of itself, and that's what you want. You want 0:08:47.440 --> 0:08:49.400 to be not worrying all the time about debt. 0:08:49.600 --> 0:08:51.640 Is there a risk that something provokes a kind of 0:08:51.640 --> 0:08:53.439 a crisis. Is there a tipping point that we should 0:08:53.440 --> 0:08:54.040 be watching out for. 0:08:54.160 --> 0:08:56.080 Well, we saw that obviously with Liz trust If a 0:08:56.080 --> 0:08:58.480 government looks like it's really not taking it seriously, I 0:08:58.480 --> 0:09:00.920 think we've obviously had some very sort of somber music 0:09:00.960 --> 0:09:03.360 out of the UK government recently, less so out of 0:09:03.400 --> 0:09:06.959 the presidential candidates in the US. But if a government 0:09:07.040 --> 0:09:10.280 can't show it's even remotely on a path to getting 0:09:10.280 --> 0:09:12.319 a handle on its step, I think that could get 0:09:12.360 --> 0:09:14.760 into you get into real confidence issues in the market. 0:09:14.960 --> 0:09:17.280 Stephanie, thanks so much for joining us. That's Bloomberg's head 0:09:17.280 --> 0:09:21.200 of Economics and Government, Stephanie Flanders. For more explanations like 0:09:21.240 --> 0:09:23.720 this from our team of twenty seven hundred journalists and 0:09:23.840 --> 0:09:26.360 analysts around the world, search for Quick Take on the 0:09:26.400 --> 0:09:31.480 Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This 0:09:31.559 --> 0:09:34.000 is here's why. I'll be back next week with more. 0:09:34.200 --> 0:09:35.079 Thanks for listening.