Sunak should be modelling his fiscal rules on Clem Attlee’s, not Margaret Thatcher’s

Normally, reading economic statistics is, for almost everybody, a sure-fire way of curing insomnia. Not anymore. The Office for National Statistics came out with yet another attention-grabber last week. Government debt in the UK, the august body pronounced, is now bigger than GDP for the first time in over 60 years.

The statisticians did qualify the number – 100.1 per cent. They also said that data can be revised. But the sheer scale of government borrowing – the addition to debt in any period   – is such that the 100 per cent mark will soon be exceeded unequivocally.

Shock, horror. And yet, the ratio of debt to GDP has been very much higher. Immediately after the Second World War, for example, it was some 260 per cent.

It was a matter of serious concern to the then Labour government of Clem Attlee. But the percentage subsequently fell in every single year until the early 1990s, when it troughed at around 24 per cent.

A key reason why this happened is inflation. Between 1946 and 1990, inflation in the UK averaged 6 per cent a year. This was boosted considerably by the 1974-81 average of 14 per cent, but every single year over the entire period saw an increase in prices.

In those days, government bonds were only denominated in money terms. If you bought one today for £100, you, or whoever held it at the time, would get £100 back when it matured. In the meantime of course there would have been a flow of interest on the bond, but the capital value was fixed.

Inflation erodes the value of anything fixed in money terms. At present, for example, monies tied up in current accounts are losing their purchasing power due to inflation. In the same way, the value of government debt relative to GDP in money terms was being reduced every year by inflation.

From the mid-1940s to 1990, economic growth was healthy, averaging 2.5 per cent a year. This increase in GDP also reduced the level of debt relative to the size of the economy. The nominal value of GDP was rising due to both inflation and real growth. The nominal value of debt was fixed. So the ratio fell dramatically.

A problem for the Chancellor is that these factors, a sort of get-out-of-jail free card on government debt, are not currently working in the same way. Between the end of 2019 and now, for example, there has been zero growth in the economy.

Inflation of course is very much still around. But some 25 per cent of all UK government debt is now index linked, which means that its value is not eaten away by inflation.

There is, however, one more difference which is even more telling. Between 1946 and 1960, British governments carried out no new borrowing. As a consequence, it did not need to issue new debt.

The Attlee government, by reputation the most left-wing which Britain has ever had, was even more frugal than its Conservative successors, who won in 1951 and remained in power until 1964.

In its last two years of office, the post-war Labour government ran a surplus which averaged 4 per cent of GDP. In today’s money, this translates to £90bn. In stark contrast, in 2022/23 , according to the ONS, the government had a deficit of £134bn.

Contrary to much current wisdom, the huge surpluses run by the Attlee government did not cause a recession. Indeed, they laid the foundation for a very successful period for the British economy. Lessons all round from this.

As published in City AM Wednesday 28th June 2023
Image: Wikimedia
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