Here's Why Governments Just Keep Piling Up Debt
09:39 Share

You made it through all the starts and stops of your tech business.

And when you're with Amex Business Platinum, you can count on a network of benefits to keep going, including access to over $1,000 in business and travel value annually. And thanks to five times membership rewards points on flights and prepaid hotels booked on amextravel.com, you and your plugged-in engineers can get rewarded for working in the cloud. That's the powerful backing of American Express. Terms apply. Learn more at americanexpress.com slash amexbusiness. Meta's open source AI is an open invitation.

It enables small businesses, startups, students, researchers, and more to download and build with our models at no cost, which means more people can build amazing things. Because when AI is open source, it's available to all. And when AI is available to all, everyone benefits. Learn more about Meta's open source models at ai.meta.com slash open. Bloomberg Audio Studios. Podcasts, radio, news.

I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. Now, when you hear politicians talking about government debt, it usually means taxpayers aren't going to like what comes next.

The whole world now realizes that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. There's no free lunch in this world and eliminating the national debt, while it may sound attractive, has its costs as well. And so the fundamental problem is not the debt. The fundamental problem is that we are not managing to pay our way. The real sword of Damocles is our colossal financial debt.

3,228 billion euros. And if we were not careful, it will put our country on the edge of a cliff.

The interest on the debt, for example, is estimated at around 50 billion euros a year. That is more than the entire French budget for education. Debt levels for the world's biggest economies have been creeping up for years, but they jumped sharply during the COVID-19 pandemic as economies shrank and public spending ballooned.

But the return to normality hasn't fixed that. In fact, stimulus policies like the US Inflation Reduction Act have involved even more government spending. While the UK's mini-budget crisis under Liz Truss offered a cautionary tale to governments, the UK recently saw its debt-to-GDP ratio surpass 100% too. So here's why governments just keep piling up debt.

Bloomberg's head of economics and government, Stephanie Flanders, is with us now for more. Stephanie, you are the perfect person to talk about this because you follow both the politics and the economics of it. Is it a problem, first of all, that governments have taken on a lot more debt in recent years? Well, if you take the sort of longer view going back to the global financial crisis, I mean, we have had a lot of exceptional crises and...

taking on debt to confront those kind of situations, obviously much better than not doing anything. I mean, we saw in the 1930s when governments tried to balance the budgets when you had collapsing demand and you ended up with a depression and a downward spiral. So, you know, the fact that governments stepped in and spent extraordinary amounts to

sort out the banks or to respond to COVID. That's not bad in itself. I think the worry comes from what that money was spent on long term, the slower growth that we've had, we sort of didn't get a very good bang for our buck. And the fact that even as the economy has got a little bit stronger, as you mentioned, governments have continued to borrow, continue to spend. So all of that makes it much harder to climb out from under that debt, especially when you now have rising interest rates, which you didn't have when those crises were actually happening.

And interest rates are a really interesting piece of this puzzle because although they're starting to come down in many parts of the world, they're still much higher than they were in 2022. So how does that factor into how much we have to worry about the debt? It's always dangerous getting into comparisons with households because governments are really different from households. But if you think about how you pay back a loan, the two things that will most affect your ability to pay back that loan is how high the interest rate is. If you have a lower interest rate, you can service a higher debt.

The other is your income. If your income is growing quite fast, that also makes it easier to make those interest payments. So the same applies to governments. The faster they grow or faster that the economy grows, the more money they have coming into tax revenues, the easier it is to pay back the debt.

And if you're growing faster than that total stock of debt, you can actually shrink the debt relative to the economy without having to do anything horrible. And that used to happen in the old days. But in the past sort of 15 years, most economies, certainly the UK, but a lot of advanced economies, they've been growing a bit slower.

But it didn't matter so much because interest rates were extremely low, indeed falling. So you could service more and more debt. In fact, the extraordinary thing was even in a quite slow growth environment, advanced economies managed to more or less double their debt. But their actual interest payments every year went down. So you can see why they didn't feel much pressure.

to get a handle on that debt. I think that the problem now is that you've had a sharp increase in interest rates and that is feeding through into higher debt interest. In the US, for example, you've now got the US spending 3% of GDP on debt interest, which is much more than a few years ago. It's actually more than the defence budget. It's not just that it's a lot of money, it's money that you really want to spend on other things. And then there's the attitude to spending as well, which feels like went through quite a big shift recently.

particularly after the pandemic, everyone understood why governments were spending more during the pandemic. But then afterwards, we had policies like the Inflation Reduction Act, which was more on top of that. Yeah, I think it's that sort of taboo that's broken, right? We were always told, well, it's just if you're absolutely in the teeth of a crisis, you could borrow, but then you have to quickly get back to balancing the books. And that was obviously the

That was the rhetoric around austerity. Of course, some people disagreed with George Osborne's assessment back in 2010. But there was a feeling that you couldn't just borrow forever. There was no magic money tree. And then I think the slight problem with the pandemic was that the numbers were so large. It suddenly had the government paying a huge chunk of the nation's wage bill in effect while we were all in lockdowns.

down. And the world didn't stop moving on its axis. And the government continued to be able to pay for itself. And the US has grown, its borrowing has increased and more and more stimulus packages. And nothing so far has broken in a sense. So you can see politicians, but also voters saying, oh, hang on. So if you can spend money on that,

Why not spend money on an equally important crisis, they would argue, maybe even worse, the climate crisis, and on these other things? That basic taboo has just lifted. And I think that makes it much harder for politicians to say, no, no, we've really got to tighten our belts. But is there a risk that something breaks, essentially, and that we end up in a situation where we have to either go back to austerity or something much more dramatic has to happen?

I think we're already running a risk, certainly in countries which are not growing very fast. So that's the crucial difference between the UK and the US and certainly parts of Europe and the US. The US has continued to grow, in fact, increased its productivity. Productivity, you're making more stuff

with the same number of people. That is the only way to increase your living standards. And ultimately, it's the only way to start growing your way out of debt, right? Because you're growing faster than your stock of debt, your debt payments are growing. And the US still is seeing rising debt stock. But

But people can also see that it's continuing to grow. They can also see that it's continuing to have the world's favourite currency. So people want to lend to the US government because they don't really like euros as much or pounds or there isn't a good competition. And all those things makes the US special. So even though you look at the numbers now and it's eye-watering, 6% of GDP budget deficit in the US, despite having a strong economy, low unemployment, you know, that's the kind of deficit you would normally get worldwide.

when you're looking at a recession, there isn't a feeling that it's about to head off a cliff, that investors are about to suddenly demand much higher interest rates to lend to the U.S. Whereas someone like France, for example, which also, as it happens, has an over 6% budget deficit,

a lot of pressure on France because France is not growing fast. Yes, so perhaps a different sort of set of concerns in Europe. Big picture, can we ever actually expect governments to be able to bring down debt? Is there a bit of a magic money tree involved? I think, again, going back to the difference between governments and households, it's quite hard for a government that has control over its own currency to actually go bankrupt. You can always print more money. You may end up with

inflation and there's lots of problems that go with it but you can't be bankrupt in the same way that a household is and equally I think you don't have to be precious about you know a particular level of debt being a safe level we used to think it was about 60% of GDP was a safe low level of debt I

I think probably that's gone up quite a lot because we've seen it's possible to sustain higher rates. We've seen Japan have much higher rates and also not fall off a cliff. Fundamentally, the thing to focus on is growth. It makes such a difference. We had the fiscal watchdog in the UK the other day, talked about the sort of long-term risk to the public finances. And it's extraordinary, actually. I mean, we've been growing a fraction of the rate we grew before 2007. We used to grow 2.5%. We've been barely growing 9%.

0.6% a year the last 10 years. If we just got back to 2.5% a year, which is what this government very ambitiously is trying to get to, you wouldn't have to do anything to keep the debt stock at 100% for the next 50 years, even with all the spending pressures coming down the track. But if we carry on growing at the rate we've been growing just the last 10 years...

debt won't be 100% in 50 years time, it'll be 700% of GDP. So that's how much difference growth makes. So I would say, if you focus on the growth, the debt takes care of itself. And that's what you want. You want to be not worrying all the time about debt. Is there a risk that something provokes a kind of a crisis? Is there a tipping point that we should be watching out for? Well, we saw that obviously with Liz Truss. If a government looks like it's really not taking it seriously, I think we've obviously had some very sort of sombre music out of the UK government recently, less so out of the

presidential candidates in the US. But if a government can't show it's even remotely on a path to getting a handle on its debt, I think that could get into, you get into real confidence issues in the markets. Stephanie, thanks so much for joining us. That's Bloomberg's Head of Economics and Government, Stephanie Flanders. For more explanations like this from our team of 2700 journalists and analysts around the world, search for Quick Take on the Bloomberg website or Bloomberg Business app.

I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

In today's data-driven world, you need real data to shape an effective marketing strategy. That's where Ahrefs comes in. Ahrefs is a marketing intelligence platform powered by big data. It shows you exactly what your target audience is searching for and how you measure up to your competitors. Whether you're making day-to-day marketing decisions or defining your long-term digital strategy, Ahrefs delivers real-time insights that help you grow your brand. Head over to Ahrefs.com to get started.

That's A-H-R-E-F-S dot com. This podcast is supported by BetterHelp, offering licensed therapists you can connect with via video, phone, or chat. Here's BetterHelp Head of Clinical Operations Hesu Jo discussing who can benefit from therapy. I think...

A lot of people think that you're supposed to be going to therapy once you're like having panic attacks every day. But before you get to that point, I think once you start even noticing that you feel a little bit off and you can't maintain this harmony that you once had in relationships, that could be a sign that maybe you want to go talk to somebody.

There's always a benefit in talking to someone because we can all benefit from improved insight about ourselves and who we are and how we behave with other people. So if you're human, that's like a good indicator that you could benefit from talking to somebody. Find out if therapy is right for you. Visit BetterHelp.com today. That's BetterHelp.com.