Britain’s debt crisis is a danger to democracy

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‘If something cannot go on forever, it will stop.’ This is what Herbert Stein, chairman of the Council of Economic Advisers under Richard Nixon and Gerald Ford, once wrote. It’s accurate when we think about public debt. The question is not whether it can continue forever, but when and how it ends. Some are already warning that the alarm is on and that we are heading for an IMF bailout. The mainstream argument against debt focuses on its economic risks, but there is another aspect to it: public debt is a danger to democracy itself.

The UK now has the highest level of debt since the early 1960s. According to the ONS, government borrowing since April has hit £60 billion. Public sector net debt (excluding public sector banks) is provisionally estimated at 96.1% of GDP, and according to the Taxpayers’ Alliance, the new Government has already increased debt by almost £200bn since coming to office. Looking at the trend, two major shocks stand out. The 2008 financial crisis pushed public debt from 35% of GDP in 2007–08 to 70% in 2010–11. The upward trend has not stopped since, but the most eye-catching rise came with the Covid shock, which increased public sector net debt from 85% of GDP in 2019–20 to 96% the following year. The last time the UK economy had three continuous years of debt above 90% of GDP was when Harold Macmillan was the prime minister. The new reality we are living with is high debt, but unlike the 1960s, there seems to be no will to cure it.

Balanced budgets and paying back debt are no longer popular. There are reasons for that. On one side are the intellectuals, in Hayek’s words, the ‘second-hand dealers of ideas’: economists who treat government as a magic money tree, such as Stephanie Kelton in ‘The Deficit Myth’ or Barry Eichengreen and his co-authors in ‘In Defense of Public Debt’. They argue that the ability of governments to issue debt has played a critical role in addressing emergencies and financing good things like healthcare and education. On the other side, the idea of a balanced budget has become a curse word, associated with austerity and somehow blamed for all of the world’s problems. The intellectuals on the Left have made balanced budgets and debt repayment sound like sins. But the real danger lies in delaying the hard decisions, which only leads us to a situation where austerity is no longer a choice but a necessity. At that point policymakers will not have the luxury of weighing which path harms people less, they will be forced into immediate measures that hurt people more.

Intellectuals aside, debt is the perfect choice for politicians. Modern governments can finance spending in three ways: taxation, money printing, or borrowing. The first two have short-term visible costs, making them unpopular. Debt is politically convenient because it defers the cost. That is what makes debt a danger to democracy: it spends other generations money without their consent. As David Hume warned centuries ago:

The practice, therefore, of contracting debt will almost infallibly be abused, in every government.

But why is debt-to-GDP rising in democracies all across the West? Because policymakers still cling to the Keynesian idea that ‘we owe it to ourselves’. But we don’t. Looked at individually, one group is spending another group’s money without their choice. Supporters respond with a more thoughtful argument: what if the debt is spent in a way that leads to growth? In that case, we are making life for the next generation easier. Here is where the early academic work of Nobel laureate James Buchanan sheds light: the man behind public choice, or perhaps one would call it the revival of classical political economy. 

The beauty of public choice theory lies in its simplicity and depth, beginning with the realistic assumption that politicians, like other people, are motivated by self-interest. In this incentive structure, it is hard to imagine that spending other people’s money would lead to growth. When you spend other people’s money, you lack the incentive to spend it wisely. Debt is just a transfer of problems to the next generation of taxpayers. As Buchanan wrote in 1964:

The essence of public debt, as a financing institution, is that it allows the objective cost of currently financed expenditure projects to be postponed in time.

Even if, in an ideal world, debt did lead to growth, it would not change the fact that it is undemocratic. Voters do not want to bear the pain of government spending, and politicians do not want to make hard decisions, so the easiest option is to transfer the problem to the next generation of taxpayers. When that day comes, they will pay it back with lost welfare, whether through higher taxes or higher inflation. They will bear the cost of choices they never made. This is what Buchanan and Wagner called ‘Democracy in Deficit.‘

How do we find a way out of this democratic deficit? As Greg Mankiw noted in his July lecture The Fiscal Future, the rising trajectory of debt can end in only five ways: (1) tremendous economic growth; (2) government default; (3) massive money creation; (4) major spending cuts; or (5) significant tax rises. In rhetoric, Reeves is laser-focused on growth (option 1), but in practice the response has been limited to tax rises (option 5).

That is the price of failing to grow, spending more than government collects, and postponing tough decisions. When the path of growth is consciously neglected, the harsher options inevitably become unavoidable.

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