That did not stop TV news editors and newspaper journalists from focusing on lurid headlines demonstrating the impact of Covid-19 on UK economic prospects. But in my view, the narrative around the outlook was more interesting. In this context I was particularly intrigued by comments from the BBC’s chief political correspondent suggesting that public borrowing is at “absolutely eye-wateringly enormous” levels and that with regard to the 60-year high in public debt: “This is the credit card, the national mortgage, everything absolutely maxxed out.”
This was yet another example of the failure to grasp some of the basic issues of fiscal policy – an issue I touched on here. It was particularly interesting to hear these comments on a day when the Economic Statistics Centre of Excellence (ESCoE) issued a report highlighting the general public’s lack of understanding of economic issues. The report, which was based on direct surveys of the public, found that they “could give broad definitions and speak in broad terms about economic concepts. However, when they were asked to provide more detailed explanations, they were generally unable to do so, and had typically never considered factors beyond their ‘personal economy’.”
When it comes to issues of dealing with public debt, this distinction is crucial. A household has a finite life and has to repay its debt over its lifetime but a government has a much longer lifespan (if not infinite, then certainly over many generations). Accordingly there is no rush to repay debt so long as there are institutional borrowers willing to hold it in the form of government bonds. Indeed for all the talk of “paying down debt”, UK debt levels have fallen in only 22 of the last 100 years and the incremental declines have been small relative to those years in which it increased. But between 1945 and 2000 it fell sharply relative to GDP, from 250% to 30%, implying that the costs of carrying the debt fell relative to income. As I noted in this post, the economic conditions for debt solvency imply that so long as the rate of GDP growth exceeds the interest rate paid on debt, the ratio of debt-to-GDP will decline (other things being equal). This means that governments should worry less about paying down the debt than ensuring that the amount of debt relative to GDP can be reduced.
The non-specialist media made great play of the “eye-wateringly enormous” £2.3 trillion debt level. But what does this mean? As it happens, the UK national debt has risen to just over 100% of GDP, which is a 60-year high. However the last time the debt ratio was at similar levels, the outstanding debt was a mere £29.6 billion and when it was at an all-time high of 259% of GDP in 1946 it amounted to £25 billion. To put that into context, the UK recorded a fiscal deficit of £47.9 bn in April 2020 alone: in absolute terms, the April deficit figure was almost twice the annual debt which the UK racked up after the most expensive conflict in its history. Of course such comparisons are meaningless for they take no account of inflation but they illustrate the futility of trying to grasp what a £2.3 trillion figure means. It is perhaps not surprising that voters struggle to understand basic fiscal concepts.
On the basis that the survey indicates they can relate economics to their own experience, consider this thought experiment. Imagine that a household has a gross income of £50,000 and borrows £200,000 to fund a mortgage. To be sure, £200,000 is a tiny fraction of £2.3 trillion but it represents four times the household’s annual income compared to one times the economy’s total income (or three times the government’s annual tax receipts). Who is more indebted? Moreover, the household has to pay back its borrowing over a horizon of 25 years but the government can simply issue more interest-bearing IOUs in order that it can roll over its debt. Who has the more onerous debt repayment schedule? And it is not just the UK consumer who struggles. The German government has convinced its electorate that it also should pay down debt, with the consequence that many German economists bemoan the lack of investment in infrastructure in recent years.
I have made the point previously that the media has a big role to play in educating the public in the use of economic statistics and holding those politicians who misuse them to account. The most egregious misrepresentation of recent years was the claim by the Leave campaign that the UK could save £350 million per week by leaving the EU. When Boris Johnson repeated this claim in 2017 the head of the UK Statistics Authority called him out. However it was known to be a lie in 2016 before the referendum, and the popular press did nowhere near enough to call it for what it was. The comments by the BBC’s political correspondent, referred to above, were not (I assume) motivated by a deliberate intention to mislead but they nonetheless painted a false picture of an economic problem that affects all taxpayers. In that sense, the media can be said to be acting irresponsibly.
However the economics profession does not get off scot free either. Economists are often not good at explaining economic concepts in ways which relate to the everyday lives of most people. As the ESCoE report points out, “people are deeply interested in the economy and economic issues … However, at the same time, … they felt economics was difficult to engage with properly for the average person, and felt it was communicated it an inaccessible way, describing the economy as ‘confusing’, ‘complicated’ and ‘difficult to understand’”. In a speech given a couple of years ago, BoE chief economist Andy Haldane recounted an anecdote in which an academic tried to explain to an audience why leaving the EU would be bad for UK GDP. To quote Haldane: “A woman rose from the audience and, with finger pointed, uttered the memorable line: ‘That’s your bloody GDP, not ours!’” Indeed the ESCoE report suggested that “GDP was seen as economic jargon, contributing to the feeling that economics was largely inaccessible to them.”
This does suggest that there is a growing divergence between policymakers and the small group who understand the message they are trying to convey, and a sizeable majority of voters who do not. It certainly goes a long way towards explaining why the rational economic arguments against Brexit found such little resonance. The key lesson from all this is that the public needs to be more engaged with those economic issues which affect them in order that they can make more informed decisions. This in turn requires more effort across the spectrum in order to get the message across, and my first wish would be for the media to tone down the hyperbole when discussing matters such as fiscal issues. Economists have a duty to make some of the concepts more accessible as well, otherwise much of what we say will simply go over the heads of those who should be taking notice. On that front, I am more than happy to do my bit.
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