Controlling UK Debt

Suggested draft clause for the constitution (drawn from the thread below, many thanks):

"the Government must endeavour to manage the [UK] economy in such a way as to promote sustainable economic activity and use of resources for the benefit of the current and future generations and report to Parliament twice yearly how it is meeting this target."

Reasoning:

The UK has a huge national debt, spending billions every year on interest servicing this debt. We also have very serious levels of public and private net borrowings from the rest of the world. 

My proposal here is simply that you vote up here if you think that we should explore constitutional implications of our debt levels and how to deal with it in phase 2 of this project. 

My arguments that "UK" debts are a constitutional issue are:

- borrowing today affects future generations and so is not just an issue for any one or two parliaments;

- UK debts have the potential to cause serious if not catastrophic consequences for the UK's economic stability 

(I've amended this idea to use a general form of language, recognising that there are different kinds of debt which are measured by economists and which can be specified and explored in discussion below)

edited on Apr 18, 2015 by Ian Smith

Gavin Russ Apr 5, 2015

Firstly, being a bit obvious, we always have spent in debt ... We have always been in debt? Nations rely upon a 'notional' debt to fund vital and various services ? I have posted re the 'control' of national debt withn any proposed constitution, but  can't find It. 

As to 'catastrophic' ... We've lived for many more years with debt than the 'great catastrophe' of 2008? As a 'young worker gainfully employed ', my taxes and NI contributions were actually paying for national debt. Not quite sure how a consitutional proposal would be enshrined? Thoughts welcome 

Ian Smith Apr 5, 2015

Dear All,

I am posting a quick comment here and in my other ideas.

Firstly, I want to say how much I have enjoyed seeing all of your contributions on this and other ideas and how impressed I am with the range of expertise and erudition which has filled these debates.

Secondly, I wish to put forward a couple of suggestions as to a way forward at this stage.  They are:

A.   I suggest that we all refrain from further voting until the ideas have been refined and represented and have then been debated for a while.  My thinking here is that we will want to see the reshaped ideas and see the comments on those refined ideas before we decide whether they are to be voted up or down,  I do not think that we should refrain from voting on comments but perhaps try not to vote too hastily on them.

B.  Now that the hurly burly of the "Hacking" phase (some of it quite savage) has passed, I hope and wish that we will adopt a more collaborative and less combative approach in our commentary, so that commentary is given a chance to be constructive and really do the job of refining the ideas in question.

C.  I would hope that we can refrain from attacking the very existence of the idea under discussion in this phase or the fact that it has successfully gone through to this phase against the wishes of those who voted it down.  I sincerely hope that the previous critics of an idea, will still respect that it found favour with the crowd and now help to refine the idea in this phase.

Thirdly, I will try my best not to introduce any more typos and mangled phrases! 

Best wishes for the holiday weekend!

Ian 

John Hully Apr 5, 2015

The assertion that the 'national debt' is a burden on successive generations is erroneous. The national debt is a pile of interest bearing private assets, which are each time limited: it is in fact a pile of savings. The government could reduce the national debt to 0 at any time by creating the money to purchase all the debt and writing it off - to "monetise" it. It has done so recently to part of the debt: so-called "Quantitative Easing." However, if the national debt were 0 there really would be no money. We would have to revert to paying taxes in corn, oxen, and daughters. 

The national debt is the accumulation of public deficit, which is the additional money which government puts into the economy over what it removes from it through taxation. It should not be seen as a burden, but as a benefit: without the public deficit (and with a negative trade balance) private debt would soar as private savings were destroyed.

Attempts to bind governments to a "balanced budget" are, when not derived from a misunderstanding of money, naked attempts to prevent the government from spending on public investment and public services.   

John Robertson Apr 8, 2015

@pragmatistuk
I don't quite get this.

  • I get the idea that money is notional.
  • I get the idea that commitments over generations are all-over-the-place in UK politics and anything anyone says will sound odd
  • I get the idea that a government can go into the borrowing business, and produce interest-bearing private assets funded by taxpayers.
  • I get the idea that government gets different economic advice from households - some economists advise it to pay extra debt interest just to hike-up the exchange rate and reduce inflation. Some economists advise it to spend in a recession (if the money can be shown to circulate-around and not just go to China).
  • I still feel a bit like Sargeant Wilson in Dad's Army saying "are you sure that's altogether wise?"

John Hully Apr 17, 2015

Because it can create money, the UK does not need to borrow. That is the preferred method of issuing money.

Given that the UK runs a trade deficit, the impact of a "balanced budget" (that is, government not running a deficit) will be that private (non-government, and including personal and household) savings must fall. Once savings are destroyed, private (including personal) debt must rise to fill the gap.

Without deficit spending, how is a government to invest? The issue is what we must forego, not because we do not have the capacity, ingenuity, or resources, but because we would not create the money to fund it. http://thepragmatist.uk/?p=26  

Malcolm Ramsay Apr 17, 2015

However, money serves multiple functions – as medium of exchange; store of wealth; and standard of value / unit of account – all of which are important. Creating additional money compromises its function as a standard of value.

John Hackett Apr 17, 2015

It's more that adding more money to circulation compromises its function as a standard of value. Allegedly offshored funds run into the trillions: bringing these back on shore and spending them in the 'daily economy' you and I live in would cause sudden inflation.

This is why we're seeing low inflation at the moment, outside of housing: QE helped banks lend and created roughly £300bn. The problem is that much of this was not loaned straight into the real economy, and still more went on housing. Then there's the fact we cut roughly the same amount from government budgets over the same period.

All of which is to say, money as a store of value is pretty subjective - the situation is much more delicate than we usually care to think!

Malcolm Ramsay Apr 17, 2015

That's right, John. That's why my proposed 'Responsibility to provide a stable medium of exchange' – https://constitutionuk.com/post/85294 – involves separating the functions of medium of exchange and store of wealth.

John Hackett Apr 17, 2015

Oops, I missed that one. You're right that this isn't the phase to issue a "boo" or a "hurrah" too. I haven't been very active in this section so may have been a little hasty in jumping in here. Thank you for directing me to your post!

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Ian Smith Apr 6, 2015

I am perhaps being a bit thick (and it is a long while since my economics A-level) but why is it in the UK's interests to be paying billions of interests on debt?  I can understand that it may be ok to borrow to fund revenue-generating activities and I can also see it as less of a problem if the interest is being paid to UK residents/tax payers but do question whether it is desirable and secure to be borrowing and paying large sums of interest to non-UK residents/non-UK tax payers.  Perhaps, we should focus on the UK's external debts.  ian 

John Hully Apr 17, 2015

The UK does not have to pay billions of interest on debt. It chooses to. 

One issue here is that we do not know to whom the interest is being paid, or why the debt was issued. We should know this http://www.theguardian.com/commentisfree/2014...internationalim and this strongly suggests (as commented elsewhere) that rather than a "balanced budget" directive, a constitution should demand that the (public) deficit and debt are made transparent. 

And yes: if the beneficial ownership of any public debt cannot be identified, or is hidden by offshore arrangements, then the public debt should be immediately cancelled.

The UK does not need to borrow to create money. However, it does need to create money both to support the currency, pay for public services, and invest in the nation's infrastructure. The government deficit is a private sector surplus: the revers is also true (given a chronic trade deficit). 

Remember that PFI was created by government to hide govt spending off-account. There is a risk that a balanced budget mandate would encourage more such expensive trickery.  

Malcolm Ramsay Apr 17, 2015

"The UK does not have to pay billions of interest on debt. It chooses to."

The problem is that the choice to do that is made by people who have no clear long term responsibility but do receive short-term benefits from pushing the costs of their own spending onto future taxpayers.

John Hackett Apr 17, 2015

The people who really benefit are people buying bonds - they are, after all, essential for pension funds and the like to operate. Anyone with serious amounts of money knows bonds are among the best ways of keeping it safe - far better even than keeping cash in a bank.

The problem with that part is that we're effectively subsidising the rich by borrowing. It's an entirely fair point for someone to make that we choose to go into debt, and we choose to pay interest the way we do.

Malcolm Ramsay Apr 17, 2015

There's no problem as long as it is we who choose to go into debt. The problem is when we inherit debts which a previous generation chose to take on. That's what this provision is intended to constrain.

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David Andersson Apr 7, 2015

I'm not sure whether it should be a part of the constitution but having strong guidelines on how government finances should be managed over time seems sensible. Sweden has had a goal of 1% of GDP surplus over a business cycle since the crisis in the 90s, which seems to have served the country well. I think that goals like that, if they are followed, can provide stability and lower the interest payments since the risk of default is lower. Debt would still serve a vital purpose in capital spending, but would not be used as much for current spending. This would mean that future generations would pay interest on investments they benefit from, like infrastructure, but not current spending. So rather than a mechanism to control national debt, maybe a goal to control the deficit?

John Rye Apr 7, 2015

Politicians and commentators often talk of National Debt when they mean Government Debt.  National Debt is much the larger, very much more important and consists of all of our personal debt, mortgages and so on, (about 100% GDP), non-financial corporate debts and capital investments (about 100% GDP), Financial Institutions and Banking debt (about 220% GDP) and last and least, the Government debt (80-odd% GDP).

The total UK National Debt tells us much more about the economy and its health or ailments then the Government Debt.  Looking over the values above it is easy to see, for instance, where we had and still have many woes.... banking!

Debt itself is not always a bad thing.  And, if it is bad for the Government to pay interest then it is also bad for the rest of us - or is it?  How did you buy that house?  How did that company grow after investing in the new plant.  Government debt, if it is being used for capital investment, as an earlier contributor pointed out, is not a problem.

Also, post GFC, we ought to note that UK Government debt is no worse than that of the US, Germany or France; all countries (and economies) where Austerity has not been the prime focus of Government economic policy.  The UK coalition cut spending out of dogma not economic necessity, and in so doing in the eyes of many (even some of its supporters) damaged the UK economy even further.

It is the rest of the huge UK National Debt that we should really worry about.  And, perhaps a return to monitoring UK Balance of Payments as well as size of the economy might tell us a lot about how all that National Debt came into being.  The UK has in fact been in BoP deficit for 35 years.  For 35 years we have bought more from the world than we have sold to it.  That deficit, any way you want to paint it, adds up to private and institutional debt directly and indirectly bloating UK National Debt.

We should not focus on Government Debt alone, the National Debt is much more important.

 

 

John Robertson Apr 8, 2015

I worry about the pundit's consensus too.
Deflation is seen as bad because it encourages saving & prolonging the life of assets. Strange.

Malcolm Ramsay Apr 7, 2015

I did touch on this in my post on a stable medium of exchange (in the Government section) where I suggested (in a comment) a general requirement that legislation and policy respect the autonomy of future generations – which would include ensuring that governments limit borrowing to an amount that the current generation could be deemed willing to repay.

John Hully Apr 17, 2015

Impossible to set.

Malcolm Ramsay Apr 17, 2015

Impossible to set accurately but not too hard to estimate. In my thread on 'Responsibility to provide a stable medium of exchange' – https://constitutionuk.com/post/85294 – I said (in a first phase comment): That's obviously not something which anyone could pin a hard and fast figure to but, in the long run, I think it would be based on the average ratio between tax revenues and demand for savings.

John Hully Apr 17, 2015

It's impossible to set because your conclusion does not follow from your premise. You wish to respect the autonomy of future generations by an amount - what the current generation would be willing to repay (assuming there was some way to determine that) - not by what that future generation wishes to borrow. This is not appropriate for a constitution; it is a political decision for each generation to make and remake.    

Malcolm Ramsay Apr 17, 2015

If the current generation borrows more than it is willing to repay then it is clearly imposing a burden on its successors. Our view is that it has no right to do that. As I said in a previous comment, 'the choice to [increase public debt] is made by people who have no clear long term responsibility but do receive short-term benefits from pushing the costs of their own spending onto future taxpayers'. For that reason it is appropriate for the constitution to set limits to it.

I'll point out that this proposal was voted through into this phase and the main focus of debate in this second phase is meant to be on how a clause in the constitution should be phrased, rather than whether or not it's a good idea.

 

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Ian Smith Apr 7, 2015

Re-educating myself on this stuff.  Found some interesting basic statistics on different debts, both public and private including our positions against the rest of the world.

Here are some links.  The most interesting one I thought is the first which shows the UK's Net International Investment Position as against other that of other countries.  This is the net amount we in the UK owe to the rest of the world both in the form of government and private borrowing; i.e. how much more we owe than is owed to us.  We are substantially in (net) debt, with twice as much (net) debt as the average Eurozone country. Unsurprisingly, sitting at the bottom of the world on this indicator are Greece, Portugal and Ireland.  That should alert us to the dangers of slipping down the table.  Take a look and see whether you would rather we moved up the table than move down it!

I agree with Michael's sentiments above, that any generation needs to carefully consider how much debt it effectively imposes on future generations.  Perhaps I am being over-simplistic, but I see no good reason why any one generation should be entitled to mismanage its economy to the point that future generations then have to continually pay the costs of that mismanagement.  I also think that this is too important an issue not to at least consider saying something about it in any written constitution in one form or another.

I hope somebody can come up with some useful ideas as to:

- how much intergenerational NIIP debt is acceptable;

- how much net NIIP debt is prudent;

- Whether we can formulate, as a benchmark, value, or percentage or whatever, something which the government of the day must strive to maintain at any given time.

And perhaps do the same in relation to any other important economic health indices

Ian

http://en.wikipedia.org/wiki/Net_internationa...stment_position

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

http://en.wikipedia.org/wiki/Government_debt

http://en.wikipedia.org/wiki/United_Kingdom_national_debt

http://www.bbc.co.uk/news/business-25944653

John Rye Apr 12, 2015

Thanks for the list of links IanSmith1. The link to UK National Debt at:

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

comes close to what I was trying to show, even if it doesn't come out with the same figure as I did.

The Wiki pages that say that people often use the words National Debt and Government Debt to mean just the latter exemplify the basic problem I alluded to in explaining the different importance of debt figures.  There must be a clear distinction between the two, the entire UK national debt and just the Government's bit of it, in order to get a clear analysis of 'the problem' so as to get a best answer to how do we fix 'the problem'.

Another issue in all this is the skill of the professional accountant and other associated trades and crafts to be able to obfuscate the financial position of any accounting unit, in this case an entire country or its Government, by choosing what to include and how to include it on the balance sheet.  NIIP for example, smacks of that and I bet could be counted up in a myriad of ways.

We must cut through that to realise that the Government's debt problem, which is real, was caused by the nation's debt problem.  Structural debt within the UK as a nation - not just the Government - is particularly significant: it's that long-term BoP deficit.

The Government's debt and its rate of increase (often called the deficit) are both symptoms of the greater, the all enveloping long-term BoP deficit.

A future constitution would do well to demand that Governments look not only at 'value for money' but at the nation's (and I stress not just the Government's) BoP.  The OBR could then be required by law to scrutinise every Government spending or purchase decision not just for 'value for money' but for effect on the nation's balance of payments and that then to be put before the House for final approval.

 

 

 

Ian Smith Apr 7, 2015

Christine, you may be interested in this thread. Kind regards, Ian

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Ian Smith Apr 7, 2015

I should have tagged you all as well, ian

steveg33 Apr 7, 2015

I fully support Ian's idea and his commentary above - in particular :

"I see no good reason why any one generation should be entitled to mismanage its economy to the point that future generations then have to continually pay the costs of that mismanagement.:

I did post an idea a while back of 'balanced budget constitutional controls' which didn't make the cut last week, but may have some resonance with what is being proposed here:

https://constitutionuk.com/post/82603

John Robertson Apr 8, 2015

Like steveg33 I have a related idea -
https://constitutionuk.com/post/102224

My idea is that the insurance-like parts of government should vaguely be accounted for in a fund according to consitutional consensus (whether or not in a single constitution document). Something like the old consensus about national insurance a few decades back.

The connection to this idea is that if a government gets very interested in funding something that isn't insurance-like, then it shows as a bigger part of a smaller discretionary budget. Space programs, wars, circuses - anything that isn't like the boring insurance-like role of government. On the other hand if government spends for the usual boring reasons like people getting older or iller or less employed, then at least we can see the reason why and discuss it as we'd discuss an insurance service with fair deals for those who have paid-in.

John Hully Apr 17, 2015

The answer is simple: it is what is forgone if the government does not have a government debt. 

It is mismanagement not to run a public account deficit. 

The cost of such mismanagement is the real burden on future generations: a country with poor state education and health, crumbling infrastructure, outdated communications, inadequate security, run-down utilities. Future generations will not be prevented by the national debt from producing whatever they can consume: they will be forced to repair the damage we do by not investing.    

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Ian Smith Apr 10, 2015

Dear Cecilia and Salka,

I have just posted a suggested clause.

Kind regards,

Ian

David Andersson Apr 10, 2015

The first sentence in the clause I completely agree with; however, I think the last sentence is problematic for two reasons. Firstly, as Malcolm has pointed out, everyone cannot be above average. It is also quite vague - on what metric is the UK economy supposed to be above average? Secondly, if we accept that debt is not always bad and might sometimes be positive it seems odd to have a goal of repayment within 20 years which we are not going to aim to reach. 20 years would also be a very long time, and therefore any forecasts subjects to a lot of assumptions, which would mean that it would be hard to assess whether a government is failing this target or not. Economic forecasts are always subject to changes and manipulation, so a short time frame might make it easier to assess whether the current government is meeting this responsibility. Maybe we should aim for a more precise target when it comes to the budget and a softer target for the management of the overall economy?

Malcolm Ramsay Apr 10, 2015

I don't think "is and remains above the average level of all nations in Europe" is reasonable because, if every nation of Europe had that clause in their constitution, some of them would be bound to be in breach of it!

I've just been wondering myself, while drafting a clause for a right to land, what length of time should be considered to be within the current generation's sole sphere. I'd initially thought twenty but then tentatively settled on twenty-five. I think that's something we should aim to keep consistent across the different ideas.

Ian Smith Apr 10, 2015

Malcolm, you are conceptually correct that it would be impossible for all European nations to achieve the result of being "above average" but as we are not defining a constitution for the whole of Europe I do not see that as a problem.  The alternative would be to require our objectives to be at least "the average". 

What do others think?  And what about the period of time for repayability of debts: 20 or 25 years?

Kind regards,

Ian

Malcolm Ramsay Apr 10, 2015

I don't see why there need be any mention at all of other countries and I strongly object to anything which demands we stay ahead of the pack – we're not in competition with the rest of the world. I'm also a bit dubious about 'ensuring' good management. I'd prefer something like:

the Government shall endeavour to manage the [UK[ economy in such a way as to promote economic stability, security and prosperity.  It shall ensure that any borrowing by the [UK] government is capable of repayment within a period of [20] years.

John Hully Apr 17, 2015

Fully agree. 

Running a 'balanced budget' is an ideological and arbitrary objective. Comparisons with other countries are similarly and of no practical value.   

John Hully Apr 17, 2015

Moderator: This comment was deemed agressive and was removed

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Ian Smith Apr 10, 2015

Thanks Malcolm and Urbaniserad for your very helpful comments.  I like the look of Malcolm's formulation but would also invite you Urbaniserad to have a go at formulating a clause for the constitution.

By the way, I just happened across this Wikipedia reference to the discipline of constitutional economics:  http://en.wikipedia.org/wiki/Constitutional_economics

David Andersson Apr 10, 2015

I think there might be a role for something like the OBR to play in relation to this, but I am not sure exactly how that should be codified in that case. I would suggest something along the following lines, drawing loosely on  the Swedish fiscal policy framework (http://www.finanspolitiskaradet.se/download/1...+framework.pdf):

"the Government shall endeavour to manage the [UK] economy in such a way as to promote sustainable economic growth and use of resources, employment and welfare that is available to all its current and future citizens. The Government shall also seek to balance the public sector finances over a business cycle and report to Parliament twice yearly how it is meeting this target."

This leaves a fair bit of room for the government to use borrowing when necessary without loading future generations with debt, which seems to be one of the main concerns. It also emphasises the importance of an economy that works for everyone rather than a few. 

Malcolm Ramsay Apr 10, 2015

Yes, I agree that some independent body should play a role in setting limits to borrowing.

I'm against enshrining growth as a constitutional goal. It's fashionable currently but I'd say that's because we're still a relatively immature society; once we're fully grown there won't be the same possibility for further growth. So I'd prefer promote sustainable economic activity.

I don't see there's any need to specify in the constitution how often the Government has to report. Parliament has a duty to monitor it and I think it could be left to them to define the necessary rules.

I'm not sure at this stage exactly what phrasing I'd support for limiting government debt. I'm approaching the issue from a more radical angle – as discussed in my idea 'Responsibility to provide a stable medium of exchange': https://constitutionuk.com/post/85294 – and my proposals would alter the fundamentals somewhat.

David Andersson Apr 11, 2015

I see your point, it might be better to keep the constitution neutral on the matter of growth.

The reason I would suggest keeping the reporting mechanism defined is that it forces the Government to explain why they are not meeting the target and how they plan to compensate for this in the future, whenever they present the Budget or the Autumn Statement. Without the reporting mechanism I would worry that it would be less clear to the public whether the Government is meeting the target or not.

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Malcolm Ramsay Apr 17, 2015

I proposed some clauses limiting government debt a couple of days ago in my thread 'Responsibility to provide a stable medium of exchange' – https://constitutionuk.com/post/85294

  • Government may issue non-transferable debt ('government securities') up to a limit recognised by [the appropriate independent body] as the maximum that the current generation might reasonably be deemed willing to repay. Such government securities shall only be issued to regulated financial institutions; shall be purchasable only in the official currency at a price which shall vary according to a formula deemed by [the appropriate independent body] to be consistent with maintaining a stable medium of exchange; and shall be redeemable only in the official currency.
  • Holders of government securities shall be regulated to ensure that any loans they make are consistent with maintaining a stable medium of exchange and with maintaining their own solvency. Government shall not guarantee any private debt which is not fully backed by government securities.

(Transferable debt is limited, in my proposal, to anticipated total tax revenues for [the next eighteen months] and is required to be time-limited.)

A specific debt limit in the constitution might be unnecessarily restrictive so I'd be happier with leaving it to be set by an independent body – though there certainly could be a maximum set constitutionally.

Would the first sentence of this one be enough for you, Ian, as an overarching responsibility? As I proposed it above it would be: The Government shall endeavour to manage the [UK[ economy in such a way as to promote economic stability, security and prosperity.

Ian Smith Apr 17, 2015

Any other ideas, particularly from the moderator and any economists before we try to hone a finished clause?

Kind regards,

Ian

Cecilia Rossler Apr 17, 2015

Hi Ian. I like the formulation suggested by Malcolm above, with a minor addition: "The Government shall endeavour to manage the [UK[ economy in such a way as to promote long-term economic stability, security and prosperity." I would be worried about using any economic language more specific than that as I have no economic expertise. It may also be worth adding 'public spending'?

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Cecilia Rossler Apr 17, 2015

Ian, you might be interesting I asked someone who does know about economics, and apparently  the term 'business cycle' is not of much use as no one knows how long a business cycle is - basically it won't actually stop the government doing anything.

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