Last year on the 13 December 2011 Newsnight asked a group of economists to identify the most important chart of the year. I chose this one, which had appeared in the first paragraph of the British government’s Budget Report of 23 March 2011. It shows, as you can see, the extraordinary high levels of UK private debt – but makes no reference to public debt. So do read on.
The data for this graph is taken from an important report by the McKinsey Global Institute, published in January, 2010, “Debt and De-leveraging: the global credit bubble and its economic consequences.”
At the time of publication, McKinsey Global Institute (MGI) estimated UK total debt at 466% of GDP, with public debt only 59% of GDP. You will note that the McKinsey Report included public debt in its chart – the smallest part of the UK’s total debt burden.
The Budget Report, by contrast, chose not to include public debt in its chart. But the Treasury writers of the 2011 Budget Report were quite upfront about the real crisis facing the UK. In para 1.1 entitled “rebalancing the UK economy” they wrote:
- Over the pre-crisis decade, developments in the UK economy were driven by unsustainable levels of private sector debtand rising public sector debt. Indeed, it has been estimated that the UK became the most indebted country in the world.
- Chart 1.1 highlights the rise in private sector debt in the UK. Households took on rising levels of mortgage debt to buy increasingly expensive housing, while by 2008 the debt of nonfinancial companies reached 110 per cent of GDP. Within the financial sector, the accumulation of debt was even greater. By 2007, the UK financial system had become the most highly leveraged of any major economy. The level of public sector net debt as a share of GDP steadily rose from 2001-02, as the government ran a persistent structural deficit, despite continued economic growth. (My emphases)
As you no doubt can surmise, I made much in my Newsnight interview of this chart, and of the Treasury’s emphasis on the levels of private debt which eclipses UK public debt. I also pointed out that the Treasury had carefully omitted to include McKinsey Global Institute’s full chart – which includes the much smaller share of public debt.
The Budget Report of 21 March 2012 made a startling u-turn. Para 1.1. titled “A stable economy” opened with:
1.1 The financial crisis of 2008 and 2009 exposed an unstable and unbalanced model of economic growth in the UK based on ever-increasing levels of public and private sector debt. As a result of that crisis, and unsustainable levels of public spending, the Government inherited the largest deficit since the Second World War and the UK economy experienced the biggest recession of any major economy apart from Japan.
The chart on private debt was dropped.
(This is the introduction to an excellent but much longer piece by Ann based on a recent talk she gave entitled “Five Tools and Six Steps towards global economic recovery: Making finance servant, not master of the economy“. You can find it at Debtonation.)