Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol and
Speaker 1: this is Here's Why, where we take one news story
Speaker 1: and explain it in just a few minutes with our
Speaker 1: experts here at Bloomberg. And when you hear politicians talking
Speaker 1: about government debt, it usually means taxpayers aren't going to
Speaker 1: like what comes next. The whole world now realizes that
Speaker 1: the huge overhang of debt means that the recovery will
Speaker 1: take longer and be harder than have been hoped.
Speaker 2: There's no free lunch in this world, and eliminating the
Speaker 2: national debt, while it may sound attractive, has its costs
Speaker 2: as well, And so the fundamental problem is not the debt.
Speaker 2: The fundamental problem is that we are not managing to
Speaker 2: pay our way. The real sword of Domocles is our
Speaker 2: colossal financial debt and twenty eight billion euros, and if
Speaker 2: we were not careful, it will put our country on
Speaker 2: the edge of a question.
Speaker 3: The interest on the debt, for example, is estimated at
Speaker 3: around fifty billion euros a year. That is more than
Speaker 3: the entire French budget for education.
Speaker 1: Debt levels for the world's biggest economies have been creeping
Speaker 1: up for years, but they jobbed sharply during the COVID
Speaker 1: nineteen pandemic. Is economy shrank and public spending ballooned, but
Speaker 1: the return to normality hasn't fixed that. In fact, stimulus
Speaker 1: policies like the US Inflation Reduction Act have involved even
Speaker 1: more government spending. While the UK's mini budget crisis under
Speaker 1: Liz Trust offered a cautionary tale to governments, the UK
Speaker 1: recently saw its debt to GDP ratio surpass one hundred
Speaker 1: percent too. So here's why governments just keep piling up debt.
Speaker 1: Bloomberg's head of Economics and Government, Stephanie Flanders, is with
Speaker 1: us now for more. Stephanie, you are the perfect person
Speaker 1: to talk about this because you follow about the politics
Speaker 1: and the economics US. Is it a problem first of all,
Speaker 1: that governments have taken on a lot more debt in
Speaker 1: recent years.
Speaker 3: If you take the sort of longer view, going back
Speaker 3: to the global financial crisis, I mean, we have had
Speaker 3: a lot of exceptional crises, and taking on debt to
Speaker 3: confront those kind of situations obviously much better than not
Speaker 3: doing anything. I mean, we saw in the nineteen thirties
Speaker 3: when governments tried to balance the budgets, when you had
Speaker 3: collapsing demand and you ended up with a depression and
Speaker 3: a downward spiral. So you know the fact that governments
Speaker 3: stepped in and spent in extraordinary amounts to sort out
Speaker 3: the banks or to respond to COVID. That's not bad
Speaker 3: in itself. I think the worry comes from what that
Speaker 3: money was spent on. Long term, the slower growth that
Speaker 3: we've had, we sort of didn't get a very good
Speaker 3: bang for our buck, and the fact that even as
Speaker 3: the economy has got a little bit stronger, as you mentioned,
Speaker 3: governments have continued to borrow, continued to spend. So all
Speaker 3: of that makes it much harder to climb out from
Speaker 3: under that debt, especially when you now have rising interest rates,
Speaker 3: which you didn't have when those crises were actually happening.
Speaker 1: And interest rates are really interting piece of this puzzle
Speaker 1: because although this starts to come down in many parts
Speaker 1: of the world, they're still much higher than they were
Speaker 1: in twenty twenty two. So how does that factor into
Speaker 1: how much we have to worry about the debt.
Speaker 3: It's always dangerous getting into comparison with households because governments
Speaker 3: are really different from households. But there is that if
Speaker 3: you think about how you pay back alone. The two
Speaker 3: things that will most affect your ability to pay back
Speaker 3: that loan is how high the interest rate is, so
Speaker 3: a lower interest rate you can service a higher debt.
Speaker 3: The other is your income. If your income is growing
Speaker 3: quite fast, that also makes it easier to make those
Speaker 3: interest payments. So the same applies to governments. The faster
Speaker 3: they grow or faster that the economy grows, the more
Speaker 3: money they have coming into tax revenues, that easier it
Speaker 3: is to pay back the debt. And if you're growing
Speaker 3: faster than that total stock of debt, you can actually
Speaker 3: shrink the debt relative to the economy without having to
Speaker 3: do anything horrible. And that used to happen in the
Speaker 3: old days. But in the past sort of fifteen years,
Speaker 3: most economies, certainly the UK but a lot of advanced
Speaker 3: economies they've been growing a bit slower, but it didn't
Speaker 3: matter so much because interest rates were extremely low, indeed falling,
Speaker 3: so you could service more and more debt. In fact,
Speaker 3: the extraordinary thing was, even in a quite slow growth environment,
Speaker 3: advanced economies managed to more or less double their debt,
Speaker 3: but their actual interest payments every year went down, so
Speaker 3: you can see why they didn't feel much pressure to
Speaker 3: get a handle on that debt. I think that the
Speaker 3: problem now is that you've had a sharp increase in interest
Speaker 3: rates and that is feeding through into higher debt interest
Speaker 3: In the US. For example, you're now got the US
Speaker 3: is spending three percent of GDP on debt interest, which
Speaker 3: is much more than a few years ago. It's actually
Speaker 3: more than the defense budget. It's not just that it's
Speaker 3: a lot of money, it's money that you really want
Speaker 3: to spend on other things.
Speaker 1: And then there's the attitude of spending as well, which
Speaker 1: feels like went through quite a big shift, particularly after
Speaker 1: the pandemic. Everyone understood why governments were spending more during
Speaker 1: the pandemic, but then afterwards we had policies like the
Speaker 1: Inflation Reduction Act, which was more on top of that.
Speaker 3: Yeah, I think it's it's that sort of taboo that's broken, right.
Speaker 3: We were always told, well, it's just if you're absolutely
Speaker 3: in the teeth of a crisis, you could borrow, but
Speaker 3: then you have to quickly get back to balancing the books.
Speaker 3: And that was obviously that was the rhetoric around austerityk
Speaker 3: or Some people disagreed with George Osborne's assessment back in
Speaker 3: twenty ten, but there a feeling that you couldn't just
Speaker 3: borrow forever. There was no magic money tree. And then
Speaker 3: I think the slight problem with the pandemic was that
Speaker 3: the numbers were so large it suddenly had the government
Speaker 3: paying a huge chunk of the nation's wage bill, in effect,
Speaker 3: while we were all in lockdown, and the world didn't
Speaker 3: stop moving on its axis, and the government continued to
Speaker 3: be able to pay for itself, and the US has
Speaker 3: grown its borrowing, has increased in more and more stimulus packages,
Speaker 3: and nothing so far has broken in a sense. So
Speaker 3: you can see politicians but also voters saying, oh, hang on,
Speaker 3: so if you can spend money on that, why not
Speaker 3: spend money on an equally important crisis, they would argue,
Speaker 3: maybe even worse the climate crisis and on these other things.
Speaker 3: That basic taboo has just lifted, And I think that
Speaker 3: makes it much harder for politicians to say, no, no,
Speaker 3: we've really got to tighten our belts.
Speaker 1: But is there a risk that something breaks, essentially and
Speaker 1: that we end up in a situation where we have
Speaker 1: to either go back to austerity or something much more
Speaker 1: dramatic have to happen.
Speaker 3: I think we're already running a risk, certainly in countries
Speaker 3: which are not growing very fast. So that's the crucial
Speaker 3: difference between the UK and the US, and certainly parts
Speaker 3: of Europe and the US. The US has continued to grow,
Speaker 3: in fact increased its productivity. Productivity, you're making more stuff
Speaker 3: with the same number of people. That is the only
Speaker 3: way to increase your living standards, and ultimately it's the
Speaker 3: only way to start growing your way out of debt,
Speaker 3: right because you're growing faster than your stock of debt.
Speaker 3: Your debt payments are growing, and the US still is
Speaker 3: seeing rising debt stock, but people can also see that
Speaker 3: it's continuing to grow. They can also see that it's
Speaker 3: continuing to have the world's favorite currency. So people want
Speaker 3: to lend to the US government because they don't really
Speaker 3: like euros as much or pounds, or there isn't a
Speaker 3: good competition, and all those things makes the US special.
Speaker 3: So even though you look at the numbers now and
Speaker 3: it's eyewatering six percent of GDP budget deficit in the US,
Speaker 3: despite having a strong economy, low unemployment, you know, that's
Speaker 3: the kind of deficit you would normally get when you're
Speaker 3: looking at a recession. There isn't a feeling that it's
Speaker 3: about to head off a cliff, that investors are about
Speaker 3: to suddenly demand much higher interest rates to lend to
Speaker 3: the US. Whereas someone like France, for example, which also,
Speaker 3: as it happens, has an over six percent budget deficit.
Speaker 3: A lot of pressure on France because France is not
Speaker 3: growing fast.
Speaker 1: Andy's perhaps a different sort of set of concerns in
Speaker 1: Europe big picture. Can we ever actually expect governments to
Speaker 1: be able to bring down debt? Is there a bit
Speaker 1: of a magic money tree involved?
Speaker 3: I think, again, going back to the difference between government
Speaker 3: and households, it's quite hard for a government that has
Speaker 3: control over its own currency to actually go bankrupt. You
Speaker 3: can always print more money, you may end up with inflation,
Speaker 3: and there's lots of problems that go with it, but
Speaker 3: you can't be bankrupt in the same way that a
Speaker 3: household is. And equally, I think you don't have to
Speaker 3: be precious about a particular level of debt being a
Speaker 3: safe level. We used to think it was about sixty
Speaker 3: percent of GDP was a safe low level of debt.
Speaker 3: I think probably that's gone up quite a lot because
Speaker 3: we've seen it's possible to sustain higher rates. We've seen
Speaker 3: Japan have much higher rates and all so not fall
Speaker 3: off a cliff. Fundamentally, the thing to focus on is growth.
Speaker 3: It makes such a difference. We had the Fiscal Watchdog
Speaker 3: in the UK the other day talked about the sort
Speaker 3: of long term risk to the public finances and it's
Speaker 3: extraordinary actually. I mean, we've been growing a fraction of
Speaker 3: the rate we grew before two thousand and seven. We
Speaker 3: used to grow too and a half percent. We've been
Speaker 3: barely growing zero point six percent a year the last
Speaker 3: ten years. If we just got back to two and
Speaker 3: a half percent a year, which is what this government
Speaker 3: very ambitiously is trying to get to, you wouldn't have
Speaker 3: to do anything to keep the debt stock at one
Speaker 3: hundred percent for the next fifty years, even with all
Speaker 3: the spending pressures coming down the track. But if we
Speaker 3: carry on growing at the rate we've been growing just
Speaker 3: the last ten years, debt won't be one hundred percent
Speaker 3: in fifty years time, it'll be seven hundred percent of GDP.
Speaker 3: So that's how much difference growth makes. So I would
Speaker 3: say if you focus on the growth, the debt take
Speaker 3: player of itself, and that's what you want. You want
Speaker 3: to be not worrying all the time about debt.
Speaker 1: Is there a risk that something provokes a kind of
Speaker 1: a crisis. Is there a tipping point that we should
Speaker 1: be watching out for.
Speaker 3: Well, we saw that obviously with Liz trust If a
Speaker 3: government looks like it's really not taking it seriously, I
Speaker 3: think we've obviously had some very sort of somber music
Speaker 3: out of the UK government recently, less so out of
Speaker 3: the presidential candidates in the US. But if a government
Speaker 3: can't show it's even remotely on a path to getting
Speaker 3: a handle on its step, I think that could get
Speaker 3: into you get into real confidence issues in the market.
Speaker 1: Stephanie, thanks so much for joining us. That's Bloomberg's head
Speaker 1: of Economics and Government, Stephanie Flanders. For more explanations like
Speaker 1: this from our team of twenty seven hundred journalists and
Speaker 1: analysts around the world, search for Quick Take on the
Speaker 1: Bloomberg website or Bloomberg Business app. I'm Stephen Carroll. This
Speaker 1: is here's why. I'll be back next week with more.
Speaker 1: Thanks for listening.