A Working Class Alternative To Labour
What is the National debt?
It is the amount of money the government owes to the private sector. At present it stands at around £1200bn. That is
about 75% of the GDP (GDP=what we produce per year).
Who owns the debt?
In the past it was usually held internally, now a third of it is held by foreign banks.
The Bank of England owns 25% of it.
Other banks and building societies own 10% of it.
Pension funds and insurance companies own 25% of it.
Foreign holdings own 30% of it.
Others, including households, 10%
What is it?
It is more correctly called the Public Sector Net Debt because it is the result of accumulated yearly borrowing by the
government to meet its annual spending requirements. Government spending, (NHS, defence, social security etc.) at
present exceeds what the government gets in from taxation.
Is the debt decreasing or increasing?
The debt is increasing because the government is still spending more than it gets in taxes, by about £120bn per year.
(Recently the monthly figures indicated it was around £116bn). That is about 8% of the GDP (just after the crash it
went up to 11%). Government spending has gone down only slightly, but it now represents a smaller proportion of the
GDP as revenues have increased.
Is that level of debt high?
The debt is higher now than it was in 2002, and higher than it was in 1991. If you judge the debt by how big a
percentage of the GDP it represents, then in those years it was lower than it had been since 1912. Between 1916 and
1952 the debt was more than 150% of the GDP.
So if it is lower than it has been for a lot of the century, why does it matter?
It is harder for the UK to borrow at good rates than it was then. In 1952 Britain received a large loan from the USA (to
pay for the cost of fighting the war against Nazi Germany, which we have only just paid off). That is not likely now, as
America too is in debt. The global crash means that it is harder to borrow, especially for the UK which has a higher
debt to GDP ratio than many other countries, and the 4th largest debt by amount in the world. Everyone, including the
private sector, is in debt and so there is less saving, and so the government cannot sell its bonds (IOUs with interest) as
easily (another disadvantage of keeping one third of the population in poverty is that they can't buy government bonds).
Interest rates might go up suddenly and that would have a disastrous affect on the government's ability to spend.
Repayments now cost £48bn per year, half as much as the NHS.
It matters also because the government is already having to borrow to meet its spending; if interest rates went up we
would get rapidly deeper into debt.
Just as with a household's debt, even a large debt might not matter if you are earning enough to pay the interest, and if
you don’t have to keep borrowing. But if your income doesn’t cover your debt repayments and interest, and you have to
borrow to pay even the interest on your debt, then you are in trouble. And that is our position, as the government is
borrowing £120bn per year, 2.7 times what the debt repayments are.
Why did the debt suddenly get so big since 2002?
Partly because of the Labour government’s high levels of spending on the NHS and on social security (including in-
work benefits). After 2008 and the crash, tax receipts fell drastically, because the economy shrank and because the
receipts from stamp duty (tax on house sales) fell dramatically. So the government had to borrow more to fill the gap in
Does the National debt have anything to do with the trade deficit?
Not directly. Another measurement, the Net International Investment Position, shows a more complete picture; it
shows the net of the country's external liabilities and assets, it includes both government and private external debt.
Britain's position is a net liability of -£182bn 2012 (Source: Office of National Statistics). Germany's position is net
assets of +£776bn (Source: Eurostat).
British governments, along with many other governments, have spent more than they get in from taxes. Each year they
face a shortfall of around £120bn. They can do a few things, or a combinations of things; they can cut spending to
within what they can afford, or they can increase taxes to raise money, or they can borrow the money to spend what they
want to spend. Or they can cut spending by a little bit and borrow the rest. The present government is doing the latter.
The shortfall is so vast that it is hard to make any inroads on it by cuts. Government spending, such as social security
spending, usually benefits the less well off, and to cut that spending causes hardship which any government wants to
avoid. If they raise taxes, it is unpopular at the ballot box, because most people resent taxation (although they expect
the services it pays for) and most people in Britain think we pay more tax than other countries even though we pay less
than many comparable European countries; it's just something people insist on believing.
How much tax do we pay?
The list below shows the overall tax burden of each country in Europe as a percentage of GDP. This is not just income
tax, but includes National Insurance, sales taxes (VAT), Corporation Tax, Council Tax. (Source: Eurostat).
Czech Republic 34%
Labour, while having strongly criticised Tory Cuts, and vigorously deny plans to borrow or raise tax at the same time
pledges that they will cut the deficit each year and clear the deficit within the parliament (5yrs) This must mean that
they do indeed plan to cut spending, put up taxes or borrow money. It has to be at least one of those, if not all three.
This is because they do not have plans like ours to significantly increase the minimum wage and thereby increase tax
receipts. (as of 29th April 2015)
Difficulties facing all governments
A look at the British Parliament website will reveal the kind of amounts that can be raised by putting up certain taxes;
A penny each on Income Tax, National Insurance, VAT and Corporation Tax, could raise about £10bn. To get any
more than that would require more drastic measures such as removing current VAT exemptions (on food), abolishing
first-residence capital gains exemptions, and abolishing the lower Corporations Tax rate for small companies (the
suggestion in this book is to raise the higher rate for big companies). Most of that would directly affect the incomes of
the low paid, and would therefore be politically hard to do. But it would raise another £35bn. Remember the spending
shortfall is £120bn. You can see how hard it is for governments to balance their books. Because of the recession,
receipts from taxes went down by roughly £40bn per year (this does mean that even without the recession, the shortfall
would still be £80bn each year). It is clear from this that business is bad, we are not paying our way.
Those who think you don’t have to worry about national debt believe that debt is alright if you can pay the interest, and
carry on. And that is true up to a point. But we cannot pay the interest. We are borrowing further to pay it. And the
worse your finances are the harder it is to get loans on good terms. That is a debt spiral, and it can only end in disaster.
That disaster would be: an eventual inability to borrow further without very severe cuts being imposed as a condition,
(such as those imposed upon Greece); a drop in living standards; a shrinking of the economy; unemployment, and
further cuts in spending. It would mean more poverty for the already poor, and a collapse of public services, including
the NHS and social security.
Balancing the budget and starting to pay off the debt
The suggestions in this book identify both areas for cuts in spending, as well as ways of increasing the government's
revenue. These have already been outlined. They are: 1. The cuts to in-work benefits (which are at present at £60bn
and could be substantially reduced) that would come from a high minimum wage 2. The increase to government tax
revenues which the high minimum wage would bring, through Income Tax and National Insurance receipts. The higher
spending by the new higher paid wage earners would also increase VAT revenue (on the money being spent by workers,
one third of which money would otherwise be leaving the country as outward investment).
If there was an accompanying use of the new savings of higher paid workers, as investment for small businesses, then
unemployment would reduce and those in new work would also be paying income tax where they were absorbing it before