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0:10
Hi, everyone, and welcome to the sad lecture of our seminar series, The Economics of Postcrisis for Coverage. My name is Heloise, the director of OUBEPit is great to have so many of you joining us today. Thank you for taking the time. I also want to say a big thank you to our sponsors for this series, Jason and Kate, and particularly the chief investment officer. Chris was back. And we had a great conversation with two weeks ago with economist here in Oxford
0:34
on the short and long term impact of Kobe on the economy and more broadly, the society. And we are going to share a video this conversation next week on our website and through channels. There are some great insights. So I highly recommend that you take a look and take part in the conversation, if you will. Without a housekeeping or participants on it, please use a Q&A function to ask questions, and I would call strategy sessions to pass them on to Martin. We've only got one hour.
0:58
So if we don't get to your questions. Apologies in advance, but e-mail us. Connect with us on LinkedIn or Twitter. And we can carry on the conversation afterwards. So today we're going to talk about fiscal policy and the national debt going forward. Quite timely as it was announced this morning that the government borrowed nineteen point one billion in February, the highest figure for that month since the began in 1993, Samuel Martin.
1:20
We got a view on whether or not that's a big problem or not. Maybe. And hopefully we'll have the answer at the end of this lecture. So I'm delighted to introduce Martin Allison, professor of economics at University of Oxford, a fellow at Nothings College. He was previously a consultant for the Bank of England and he's currently a consultant to the European Central Bank, a member of the Finnish Economic Policy Council and a fellow of the Centre of Economic Policy
1:44
Research is research interest of many areas of theoretical and applied macroeconomics. The recent papers concentrating on the management of the UK national debt, the road leading the gold standard played in the Depression and the economic value of increases in longevity, and also contributed to a recently published volume of readings by the IMF called The Debt and then Singleman to the Wars. And he's published many economic journals. So we leave you in his expert hands. Thanks, Martin.
2:11
Over to you. Thank you very much. Calories. It's very nice to be here. And very nice to share this lunchtime date with so many people. In response to Hillary's question of nineteen point two billion is not a good idea. I might have said no, but I'm due to get my vaccination tomorrow. So I think that's probably a bargain on my own personal point of view. OK. Today, I'm going to structure my talk around four different questions. It's going to start with what has happened.
2:48
And then I'm going to go to a historical sweep to say, well, can we take any precedence for what has happened now from what has happened in the past? In the third section, I'm going to change gear and start to give you opinions about what should be happening now. I'll be drawing on work of economists and some of my colleagues. Having put those in place, I'll conclude with my view of what is likely to happen and you will no doubt be quite interested to know how three and four meet.
3:28
That is what is likely to happen. What we think should be happening. Let's start with a discussion of what has happened. Well, you don't need a professor of economics in Oxford to tell you we've had a bit of a crises. We're in the middle of a pandemic. That pandemic has had significant effects on public finances. Not surprisingly, government tax receipts have been falling and simultaneously, government spending has been increasing.
4:10
That's going to lead to a big deficit on the government's account. To put that in context of the last 100 years. Here's a plot which shows in yellow. Government tax receipts as a proportion of GDP and in blue. Government spending as a proportion of GDP. Looking first at the tax receipts, the yellow line, you can see that's hovered around about 40 percent of GDP since the end of World War Two. It doesn't vary that much even in that pandemic where you could see the far right.
4:53
It's staying roughly at about 40 percent. Now, of course, that's in part because GDP itself has fallen, but relative to GDP, it's quite stable. Looking at the blue line spending, you can see that's much more dramatic fluctuations on the left. You've got big increases in spending in World War One and World War Two. And then in the right hand side, you've got a spending increases in 2009, 2010, the financial crisis, and now in 2020,
5:30
2021, where we have the KOVA 21 pundit said the big things that leave power to you here are wars and financial crises. And now the corona virus crisis. Let's look in a little bit more detail of what's happened over the last year. Stop on the left hand side of this chart. Before the pandemic started a March 2020, the forecast was that government borrowing would be about 50 billion. Fifty billion is about three percent of UK GDP.
6:14
But then the pandemic hit and that causes all sorts of trouble for the government budget. First up is the big red part, which is receipts. The economy goes into lockdown. People are laid off. A lot of economic activity doesn't take place. So income tax receipts go down. National insurance receipts go down. The receipts go down. The government brought in on all those taxes, roughly a hundred billion less than what it was expecting for 2020 21.
6:51
Next, move up to welfare spending. Almost no change there. There's a little bit of a red. Extra spending concurrent with the uptick in universal credit. But that's really quite small. Debt interest spending actually fell slightly as interest rates were lower than expected. And there was very small changes in other spending. Now that come to the next big red bar, that's public services. That's really health. Hundred billion extra spending on health.
7:25
You'll have seen this in the news. This is getting hold of PPE. It's the test and trade system, its investments in vaccines. Two more big ones. Next one is support for households. So this is the Corona virus job retention scheme. The self-employed retention scheme. These other furlough payments that's helping to pay wages. That's coming in at some 70 billion. And then finally, the last. Big expenditure is grants to businesses.
8:03
Business support, things like business rates, holidays, add all that up and you've got the very far blue bar. Instead of borrowing 50 billion, the government is borrowing 350 billion, an extra 50 percent of GDP. Not surprisingly, if you borrow an extra 50 percent of GDP, you lead to a big increase in the public sector debt. This chart shows you that debt to GDP in the U.K. was hovering around 80 percent from 2006 sixteen through to 2019 2020.
8:52
It was expected to very mildly drift below the 80 percent level up to 2025. But then the pandemic arrived and there's a big jump up the. Yellow line shows you the situation that was forecast in November 2020. That's slightly improved by March 20 21 in the blue line. But you can see all of the 20 percent, 20 percentage points increase in the debt to GDP level. No great surprises there. A big increase in the national debt.
9:33
About a third of which is coming because of lack of government tax receipts. And about two thirds is coming for various support schemes and spending on health during the pandemic. That public sector debt at one hundred percent of GDP. Let's have a look at how it is composed. This chart is showing you the maturity of that debt. So let's go to the far right hand side, which is the most interesting go to 2020. The black horizontal line, that is the start of the pandemic.
10:19
You've got a big proportion of the debt is college in Greek. That is the proportion of the debt that only needs to be repaid in at least 15 years time. So more than 40 percent of that debt is actually tied up and doesn't need to be repaid for at least 50 years. The next chunk is that the purple chunk, which is eight to fifteen years. So really, there's only about one third of the national debt that needs to be repaid in the next eight years.
11:00
I'm going to use that as an argument for not being overly concerned about this national debt because it's tied up for such a long time. We have time to wait. We can work on the supply side of the economy and then worry about repaying that debt. It's important to to look at who owns that national debt. Here's a breakdown of the two trillion that we owe. By different institutions. So about a third is owned by you. Essentially, it's owned by your pension fund that you've contributed to.
11:48
And insurance companies that you may be holding your insurance policies with. About a third of it is held overseas and about a third is held by the Bank of England under their asset purchase facility. Remember QE two, QE one, the quantitative easing programmes, those things are essentially sitting as reserves in the Bank of England now. And they are owned essentially by can think of financial institutions.
12:24
There's then a smattering of the debt held by other financial institutions, monetary finance institutions. What I want you to take home from here is that. Three quarters of the debt is essentially held domestically. It's held by citizens of the United Kingdom. That's going to be important when we think about how we should address the size of the debt. Let me finish up this section on what has happened by giving you some data on the very latest government borrowing.
13:04
Here is some information about debt that the government issued on the 16th of March. So just three days ago. So it raised one point six billion. With guilt that was set to mature in 33 years, the way this works. The government offers that we would like to borrow and we would like to pay back in 33 years. We will pay you coupon payments during those 33 years. What price would you like to bait for those? And for those gifts.
13:47
The prices then determined in the market. That price was one point three percent. So the government was able to borrow at an interest rate of one point three percent for thirty three years. So pretty low interest rate. The bid to cover ratio is how many bids they had relative to the amount they wanted to sell at its two point low. So this suggests that the government can borrow low interest rate. And there is quite considerable demand from financial markets to make that lending.
14:27
The government also borrowed a three year maturity of four point four billion. It was able to borrow at nought point two percent. So, again, very low interest rate and a bid to cover ratio of two point five. There was a lot of interest in that debt issuance. Finally, the government also issued index linked gilts. So these are ones that are protected from inflation by the return being linked to CPI or some other inflation measure.
14:59
Those similarly proved popular, perhaps because people think there's going to be inflation or perhaps because they are more worried about inflation, uncertainty and the yield to maturity on those actually was negative minus two point six percent. So if you think that you they are expecting about 2.5, two point six percent, they're essentially demanding a zero. We'll return. We can generalise.
15:31
There's those prices to the whole of the yield curve, which is what I'm doing here on the left, showing you the nominal forward curve. So this is like the first two of those gilts that were issued, the 33 year old, the three year old. And you could see at all horizons ahead. The nominal interest rate is pretty low, 40 years out. It's about one percent. A little bit more for intermediate and very, very low for the shot maturities.
16:05
So interest rates are low. We can use the difference between what people were prepared to pay for the standard non index gilt and the index gilt to work out what people must be expecting about inflation. That's what the middle child here is showing. Showing inflation expected to be about two and a half to three percent over the next 40 years. All the way out. I suspect that's a little bit overstating. Those guilds, the Index-linked, are not quite as liquid as the ones that are not index-linked.
16:49
And so they may be a little bit of a liquidity premium out there. This may slightly overstate inflation expectations, but let's leave with that at about two and a half percent inflation expectations all the way out 40 years hence. But, of course, on the right hand side means that the real curve is very, very negative. The markets are paying the government to borrow money from them in real terms.
17:20
Quite remarkable situation to be at. Our pause there and see whether there are any comments or questions, they are a couple of questions, Martin. They're ready. Yes, sir. Do you have any indication of the depth percentage to be competitive in the UK compared to other economies in the West, particularly? Yes. How do we compare? I think we've got a little bit of that world beating flavour where we're a little bit higher. As I said, I'm on the Finnish Economic Policy Council, sir.
17:57
So, Phil, this is very worried that the debt to GDP is getting above 60 percent. But, of course, if you look at Greece and Italy, then we do look quite good. I don't have the precise figures on my fingertips, but we are higher than many countries that I would prefer is not to be higher than we are lower than countries which are very relieved that we are lower. Okay, that's a good answer. And then the second one is, if inflation is to come back, given the massive increases in government debt,
18:33
is the government hamstrung in its ability to raise interest rates to control inflation, or is inflation desirable to revert the that? So I got to postpone that one. I look at it and say I think inflation is a big desirable to to it to repay the debt. But I think that's a limited possibility because of what will happen to know middle rates. And I'm I'm worried that if inflation goes up, nominal rates go up as well. And so we're back to square one. OK. I'll let you carry on.
19:06
Thank you, Martin. Thank you for those questions. This is good because I. I feel like I'm in some Cavin here and there's nobody there listening or there's nobody talking. I'm shouting at clouds here. I doubt we're going to have people out of line. Definitely. But maybe they should be a cheer voted or something I, I like in Facebook. You could put a love heart and simple love heart would appear on my screen. But what happened before? I'm getting older, so I get interested in economic history.
19:39
And this has been motivating quite a lot of my research over the last few years. So I want to take you back to 60. 94. King William, the third he. He needs money because he wants to go to war. Nine year war is going on and he needs cash to pay for his soldiers on whatever you need to go to war. And so he decides to raise money from a syndicate of merchants. This is the picture of King William, the third surrounded by his merchants.
20:17
I'd say he borrows one point two million pound at an eight percent interest rate. This arrangement eventually became the Bank of England. Yes, I got it. He won the war, although that ended up in Bolaños afterwards. But it became the Bank of England. I don't want you to kind of bury me. I think what's happening here that the king, on behalf of all the subjects in the kingdom, I suppose,
20:48
is borrowing money from a selected group of people in the kingdom, and he's going to use tax revenues to repay that money. Incidentally, that original load of one point two million, it was repaid 300 years later in 1994. Two, they kept on paying the coupon payments. The eight percent payments were paid. But it was not repaid until 1994. Having established that precedent, in sixteen ninety four weeks, they used debt to fund a whole host of things over time.
21:33
Here's a plot of the size of the debt to GDP from sixteen ninety four of what's right at the very left hand side. That is the very first. King William the third. Borrowing debt was rising up until the end of the Napoleonic Wars in 1850. UK has a remarkable taste for war invasions. One after the other, one after the other. And the king is borrowing more and more money to pay for those wars up until age 50. It 1850 at its top, the debt to GDP was about 200 percent.
22:15
We then had a long period of peace time following to the to the start of World War One. In which debt to GDP ratio fell by by more than 100 percentage points. We then had World War One where debt again picked up. Many of you will know about Waldbaum's, and that country needs you wanting you to invest your savings in Roldan's. We also invest. We also borrowed heavily from the US. So there's two lines here. There's the solid line is the borrowing we did in the market.
22:53
The dash, lightning bolts. Also some borrowing we date internationally. So if you have national savings certificates, premium bonds, all those borrowing, we did not through the market after World War two, we then have a fall of about 100 basis points in the debt to GDP ratio, this time over about 50 years. So I want to talk to you about those two long periods when we repaid the debt, because we can learn lessons for those one,
23:29
how we are able to repay the debt and to what that might imply for what we're doing now. I've it on the very far right. The latest estimates of the debt, the black line there, you could see, was rising with the financial crisis and the very far right in red is what we've done through Corona virus borrowing. So we'll get a bit more on there following Louise's point, about an extra nineteen billion. But within the context of this picture, that debt to GDP level doesn't look too bad,
24:09
it's nowhere near the levels that we saw at the end of the day, only wars. And it's nowhere near the level we saw at the end of World War Two. Let's then turn to these two periods where the debt to GDP level was falling dramatically. How can we get the debt to GDP ratio to fall like we're all amateur epidemiologists now? We all know about the number four diseases and how important it is to get the order.
24:42
But for diseases less than one of then we eradicate the virus so we can think the same way about an honour before the debt to GDP ratio. If we can get the are less than one, then the debt to GDP ratio will fall. Whereas if you are is above law, it's going to rot. These are for the debt to GDP ratio is going to depend on four things. It's a ratio. So some of these will affect debt. The numerator and some of weights will affect GDP. The DENOMINATE. First up, the budget balance.
25:27
Is the goal of getting more in tax revenue that it's spending? Or is it actually spending more than it's getting a tax rate that's going to feed directly into debt? So the most recent tax year, 2021, we saw that the government spending a lot more than tax revenue. That's going to be a budget deficit. That's going to feed directly to. Similarly, you have to pay interest payments on the debt. You have to pay for coupons. That is going to do the same thing. It's going to increase the debt.
26:02
But you can reduce the GDP ratio, debt debt to GDP ratio by working on the DENOMINATE. If you get nominal GDP to increase that, even if nothing's happened to tech itself, it becomes smaller relative to the size of the economy. So we could have real GDP growth. All we could have inflation. In terms of they are no. If I if I munching I mean the Downing Street press briefing room before the pandemic.
26:38
And somebody goes, what's the answer for that? It's probably less than one, but not much less than one. So we were all the world where the debt to GDP ratio was falling before the pundit. Let's have a look then those two big falls in the debt to GDP ratio. Start with what happened after the Napoleonic wars. I know there was water that came before, but before that, before we got to say 1860, end of the Napoleonic Wars, debt to GDP is just shy of hundred and twenty percent by 1913.
27:21
So before the outbreak of World War World, that it fell into 60 percent. So almost a hundred percent fall in the debt to GDP ratio. One was driving while looking at the data. The first big contribution is from punji balance. The government run surpluses between 1860 to 30. And so that reduced the size of the debt by about three percent every year by running a surplus. One of the things that caused the surplus was caused the introduction of income tax.
28:04
That was a new invention after the Napoleonic war. So running surpluses pulled down the debt. Interest payments costs still had to be made and they pushed up the debt. Looking at those those two numbers, though, they're roughly in balance that together run a big enough surplus that it was able to fund the interest payments on debt. Are they the kind of offset each in? The country did grow, and so GDP growth is reducing the debt to GDP ratio.
28:43
Actually, that was not inflation, but there was deflation in this period. So the inflation, which was deflation, actually caused the debt to GDP ratio to go up rather than go down. But put all those together, Vidino Meat industry grows, enumerator doesn't grow. And you end up with debt to GDP falling by about one percent. You. The motivation for this is what was called the the English method of war fighters.
29:20
The thinking was that the costs of war should be borne by the current generation and not passed on to future generations. That later became what was known as the McCain rule in nineteen fifty. What about the other war? Paying off World War One and paying off. Well, go to. Same exercise. Nineteen forty seven. Debt to GDP ratio. A hundred and twenty seven percent over the next 50 years or so. It fell to 18 percent. So, again, a one hundred percentage point fall in the debt to GDP.
30:01
Rich. The story here, though, is very, very different. Budget balance. No surpluses here. If anything, the budget was slightly in deficit. This was a change in mentality. We launched the welfare state. We introduced not more state spending. We liked to spend. We raised taxes to fund those. But we were left not running any surpluses. If anything, there was a slight increase in the debt to GDP ratio because of that budget deficit.
30:41
Interest payments still had to be made. So the debt is rising in absolute terms throughout this period. It was good. It contributed to reducing the debt to GDP ratio. We had a post-war boom in essence, so that reduced by one point seven percent. But the big thing here is we have inflation. Inflation was sufficient to reduce, on average, the debt to GDP ratio by two point seven percent.
31:20
Many of you will be remembering the sorts of inflation we have in the 1980s where we got to double digit inflation. So the story here is the interest rate was quite low, but inflation was quite high. Which sounds great. Excellent way to repay the debt. Wait, wait. We inflated to it. Well, that's all right. As long as you could keep those interest rates low. It is true that paying off the well will undergo while to debt was largely achieved by savers receiving poor returns on their savings.
32:05
But how can the government and sure, you get poor recent turns on your savings? Well, what the government did is they forced very high reserve requirements on banks. So they said, look, you have to keep a lot of your deposits in gilts. So they forced banks to hold gilts. They then said, well, if you lend to some private company, you could only charge a certain amount of interest rate. So there was a cap on bank lending rates.
32:39
Now, if you're a bank and you said, well, if you lend it to the company, you could only get a poor interest rate that makes you more willing to save. With the government. So there's lots of restrictions domestically, stopping returns on savings getting high. Furthermore, because we're in the Bretton Woods exchange rates regime and we have capital controls, the domestic savers, they didn't have access to better interest rates abroad.
33:15
They were forced to save domestically in banks, which were pretty much forced to hold government debt. So you put all that together, you are forced as people to lend to the government. We call this financial repression. Not necessarily aimed at reducing debt, but it certainly helped. That was the story for how we repaid the debt after World War Two. I'm sceptical that we can do this again.
33:49
Is it really possible that we can put such limits on the domestic financial markets that we can keep the interest rate well below the inflation rate? Is it possible we can stop people moving their money abroad to take advantage of better interest rates that are not subject to this financial repression? I have my doubts. Over to you. So I've just been back to the question, so, yes, we have. Do we have a sense of how different factors influencing you are? No.
34:30
Connected. So, for instance, usually in balanced budget could raise the risk premium and in turn increasing the interest or interest payments. Are we hitting some tipping points, for example, with the current huge increase in debt? So good question. I think not. So I as you saw from the graph, we have had 200 percent debt to GDP ratios and we're now up 100. I also think it's a very different situation.
35:03
So if you think post-war, there's a lot of uncertainty out there as to what what the post-war economy is like. Now, it's true. There's some uncertainty out there now about, you know, are we going to go back to the office or not? Or is there going to be change? To me, that seems a whole order of magnitude less that the uncertainty of what is going to happen when all these people are demob and covering the economy. So while I see the the argument, I see the uncertainty.
35:35
And I'm not too worried. As we saw from those yield curve estimates, financial markets do seem to be too worried about tipping points. I think, if anything, the relationship is Libya. As you get more debt. The interest rate gets steadily worse. But it's not like that discussion we had some years ago where you're fine until you get to 90, then all [INAUDIBLE] breaks loose after. Okay, thanks. And there's one question from Simon.
36:06
Do you know how much of the national debt overseas portion that you talked about is held by China specifically? Do we have those numbers on top of it, too? I don't have the policy. It's it's less than a quarter because of the whole quarter is is that I have got to look that up as soon as I get to the end of the lecture. So when we come back to Simon and many of the over email olinka billion things, I think. Carry on. Thank you. What should happen now?
36:43
Important to remember here is that the national debt is not the nation's debt. Go back to that idea of the founding of the Bank of England. It's the king borrowing from some UK citizens. Keynes understood this. He had lots of things particularly understood this national debt is not a question of the amount to the national wealth, but solely of its distribution. The fact that the UK has got debt of a hundred per cent of GDP does not in any way tell you whether we are a rich or a poor country.
37:23
It's completely irrelevant. But that stuff that's held abroad. As case putting, we should not be a penny of the rachet either for waging war or for social reform if we have practically no internal debt. So putting my slightly lefty hats on, don't tell me that we can't have school dinners free for children because of the size of the national debt. Those are not two things that are connected. We could pretty much cancel all of the national debt.
37:57
We would have just the same amount of resources available. Final quote from tapes is simply a question of distribution of the current national income between individuals and if the tax instrument as a factor in modifying this distribution. So at the moment, you've got a whole set of taxpayers transferring resources now to the bond holders to the guild. But it's it's a transfer within the United Kingdom. It's a transfer of our national wealth between ourselves. It's not wealth in itself.
38:33
I'm stressing that important because it feeds in to the question of what timeframe we should take to repay this national debt. If ever. Economists have been thinking about this for a long time. And as ever, there's always economists who have got different views. And then we talk and we discuss and we find out we don't have different views. We come up with a compromise and we go for. So the basic argument was between Pigou. I'm Cades.
39:07
So Pigou said, look, you've got this situation where money is being transferred from a lot of people, the taxpayers, to a small group of gilt holders. That's a big distortion in the distribution. It's treating people differently. There's inequality. We should pay the debt down quickly. So we remove that distortion between the distribution within the current people along. Cain said, Now, I'm not having that. What we can do is we can keep the debt and let it be repaid in the future.
39:48
Well, it to be less of a burden. People are going to be richer in the future. They're going to be better off. So they'll be better placed to repay the debt that we are currently now. So let's repay into the future. If you like, Pigou is worried about the the distortions that happen now between those who are taxpayers and. Those who I killed told us Cahn's is worried about distortions between people alive today. People alive in the future, if you see that second distortion.
40:25
More important than you will actually go for a slower creeping. We do still lock down to modern thinking on the national debt, and the chap most associated this is, is Robert Barrow. Pretty much economists signed up to this. The basic idea is that debt should act as a buffer. If you have Shock's say to spending or a tax, you should let debt. React to those shocks. It should absorb swings in the deficit.
41:10
Some of you may have read the little bow tie circulated before this talk where I talked about the debt bucks. I think national debt is a is a really great thing. This means that we can insure ourselves against things like conservative high rate shock. This is absolutely what we should be using debt for. We have a terrible shock, which is potential to cause huge damage to our economy.
41:41
This is the time to let debt take the straight. What do you should do is look at that third equation tells you how debt evolves. You said taxes at the right levels to give you long run solvency. You decide how much you want to spend. Usually you set the right amount of taxes to fund that. But then you keep the taxes the same. Let the government spending move through various crises and let debt take the straight. What this means is that debt is going to be a very slow moving variable.
42:21
So after that, when the pandemic hits, there's going to be a big increase in debt, use it as a buffer, and then it should be very, very slowly coming back down. It should be the most persistent, the most swinging variable that you see in macro economics, which means there should be a time frame of decades in response to big shocks. Corroded virus Shell hits, it's a one in 50 year shark on it 100 years,
42:52
we should be thinking about 50 years time to repay that debt, just like you saw after the periodic wars and after you show the. Well, like to. It's going to take time. And that's the right thing to do. Taking Barrow's argument a little bit further, if you take his purest form, then you do have a plan to repay the debt. I think most economists wouldn't go that far.
43:28
The key thing that Parro is they're assuming relates to the question that just came up, that if the debt rises, does that push up the interest rate? But who is thinking no? If you think yes, then that takes a little bit of the sting out of Baros argument. And you should indeed plan to repay the debt, but not very quickly. So perhaps that shouldn't be just around the wall. But it's very, very slow. Maybe that. And there are various extra arguments we can put on the table to further strengthen.
44:05
So one that's always made is we need fiscal space for the next crisis. So maybe this was OK. We managed to borrow enough to cope with the corona virus pandemic. We've got to stop 20, 30 percent of GDP nicely to. To pay for the crisis. But what happens if. There's another virus comes out in five years time. Well, if we are only very, very slowly paying off the debt, we'll be starting that crises from a hundred and ten. And we may be going up to one hundred and thirty and so on.
44:43
So I don't think we really know whether this is a once in a five hundred years crisis for health. But you can argue we need to make our fiscal space because otherwise we will be running into higher interest rates. The second argument is essentially to say that maybe we will we'll have trouble rolling over our debt and that will push up interest rates in the future. Finally, maybe Cades,
45:10
he's kind of wrong because we're in an ageing society and actually that burden is going to fall on a small group of people in the future. Not a larger group of people. So it might be that those people in the future are actually worse off. And so we should be thinking of paying off our debt now rather than when they have. So that's a little bit of sort of extra spice for repaying more quickly. I think most economists would still say it should be very slow.
45:45
This is not the time for a huge austerity drive to make sure we pay down the debts. It's the time for a plan that generally brings down the debt back to where it was. There are, of course, other arguments for not repaid. This is this is a very nice quote. A national debt, if it's not excessive, will be to us a national blessing. This is this is Hamilton back in 1871, founding father of the U.S. And, of course, inspiration for Broadway musical, which I've heard is very, very good.
46:25
He's talking about debt as a good, safe asset. He seems like it's it's good to have this financial asset that is backed by the whole country. It's backed by the whole of taxpayers because you can use it to store value as a pension fund. It's very handy to have this very safe, very own risky asset to put your assets in. People can use these as collateral for borrowing. You could as a firm, you could put your holdings of Treasury bills as collateral and a general lubricant of business activity.
47:07
Quite how much of that we should have? Not clear, but some estimates I've got here about sixty seven. Two hundred and forty five percent. So it's not a good idea to pay down all the national debt anyway. OK, it's it's time to see if people are still alive or are they also a little asleep? I think they are. But with a couple of questions that I had sort of prepared and to do better in the background as well.
47:39
And do you have a good understanding of what all the big events, those one hundred years event that we talked about, I'm putting in the conversation that we've had with Michael Beckman and Hamish Loeb and Chris Roback as well, because that's something that came up in my Michael actually saying we should repay those debts over a hundred years. And if is that there are once in 100 year events every decade, almost a pandemic, the financial crisis, the Asian crisis.
48:04
How should we take this type of uncertainty into account if if at all, do you think. Yeah. Thank you. Going to go back to this picture. I could find it. We look at launching a hundred years, if I if you if you take up Dushan line. These look like wars and. This is a mild event by consequence. And so, yes, these are one in 10 years or something, one to one in 20 years, I say. But the scale of the repaying of the debt is is smaller. Appropriately that you look at our little red tick. There you go.
48:54
Okay. That we can probably get it back down to where it was in in 10 years. It's not the whole it's it's not the one in 100 year event. I agree. But it's not the one in a 100 year plan to repay the debt to GDP that we need. OK. And you mentioned the optimal debt between 70 and Horen, 40 percent. So are we not getting into the tipping point that we talked about earlier? Potentially, yes. But those are the 67 245. That's purely on the basis of thinking about this debt as each safe asset growing.
49:37
So there's there's nothing wrong with having both, say, Fossett, if you like. So a huge leak. A problem. Yeah. There's a little bit, but it's not it's not a tipping point. Problem is just kind of wasting money a bit by having too much of a good thing. OK. Rather than how this is going to cause lots of problems by having too much of it. OK, another method. Thank you, Martin. Let me finish. The last part is we will continue what is likely to happen and what is likely to happen.
50:11
OK. OK. So this is this is inevitably getting more my opinion rather than other people's opinions. It seems the markets think this is going to get sorted out. And I'm. I basing that on those big colouration. So when the government is trying to raise money, it's not that this is a thin auction where there's hardly anybody wanting to buy these things. They're oversubscribed by a factor of two, by a factor of three. And the price that's being paid is pretty low.
50:53
So it doesn't look like there's some sort of default premium. It seems that financial markets think that things are going to get sorted. So given what we've just learnt about the R and about how that is driven, it's got to be one of these things. It's got to be real GDP growth. It's got to be inflation. Interest payments on debt has got to be. Budget surpluses. One of those things has to work to make the debt to GDP come back down.
51:27
So let's look at those. In turn and see what we think good, Chidi. Let's start with real GDP growth. So. Real GDP growth here is a plot over the last 40, 50, 60 years or so, we know that real GDP growth is being weak for quite a long time. It's been falling, as you can see on this graph, since about 1960. And so it's not looking good for this being a huge driver out of the debt to GDP problem.
52:06
It'll help a bit, but it doesn't look like we're going to see a post-war boom where we saw growth rates at four percent, five percent, which really do bite and really help you to repay the debt. A part I think that relates to what I was talking about earlier, this is very different to the post-war post-war. You've got to have a lot of investments as you rebuild the capital of the economy. You've got essentially bombed out cities that need to be rebuilt. There's a lot of scope to do things.
52:38
Now we've got maybe empty retail premises and empty offices that are going to be moved a bit, but that doesn't see the same size of task. So I wouldn't expect real GDP growth to be particularly strong to really drive. But what about inflation? There's a lot of talk about inflation. As I said from the data we have from financial markets, it seems they're expecting moderate inflation. And if that's true, a lot will.
53:13
Gradually inflate away the debt, especially in the U.K., since we've got quite a lot of debt locked up in long maturities. Doesn't work with your index-linked deck because it's obviously index-linked. But as I already hinted earlier, I think if you do get inflation, higher inflation, that's likely to be driving up interest rates. So that might be the Bank of England reacting to the inflation and trying to get a lid on it.
53:46
Or it might be demands from savers that they want to be compensated for that inflation. So I can't see how we're going to get a big burst of inflation while keeping nominal interest rates low. That's what we would need to really get inflation to wipe out the debt. And as I said earlier on, it worked after World War Two because of all that financial repression, because saving Drake were artificially kept low by a whole set of restrictions on financial markets and the banking sector.
54:24
It's hard to see that coming. So I'm thinking more a gradual inflation eating away at the. What about the interest payments on the deck? This is a graph of the real interest rate, which is consistent with full employment. This is what we call aasta. So you can think of just this as a real interest rate and you could see that that's been dropping for a long time. So people call this secular stagnation. One of the most popular stories here is that an ageing population with more demand for saving.
55:06
And say that drives down savings rate. That would help a little bit. No doubt that even if other things stay sane, the real interest rate, we are expecting to be quite low. But there's no silver bullet here. There's no financial repression going on. There's no real GDP growth. Which leads us to. But, gee, whether that's going to be in surplus or in deficit. So let's have a quick look at what the government spends its money on.
55:45
If they want to run a surplus, something here has to give the big blue cheese at the bottom, is healthcare really difficult to see that that's going to be falling in the near future? Preventative health care in particular, we would think would start to get more money. So if I have to pick one here, the red what looks to me the most vulnerable. Pension spending, 18 percent. We have the triple lock on pensions, which looks crazy in a world of very low inflation.
56:22
To give them 2.5 percent guaranteed. Oh, then if we did have inflation rising to three, three and a half. Like financial markets are expecting to allow pensioners to get that automatically. Looks difficult to defend in a world where you are trying to create surpluses. So I think that one looks the most vulnerable. On the revenue side, the government has made very public its increasing corporation tax, but that's not going to do the job at the end of the day.
57:00
Firms don't make much profit. So taxing their profits doesn't bring much money in. They left with income taxes. We left with indirect taxes. I think maybe income taxes look more vulnerable than that. Indirect taxes. Remember again, what I said about William Younger. We invented income taxes to pay off. That opposed it was I wouldn't be surprised to see more things happening there.
57:29
Personally, I think we should revisit wealth taxes. I think there is scope to do things there that would help to increase budget surpluses. Of course, what's likely is pretty much determined by political feasibility. And we're going to see a lot of sensical steed here. Lord, make me chaste, but not yet. We are going to see politicians announcing all sorts of spending reduction plans and tax increase plans that will be somehow kicked in to longer grass of being brought in to it in a few years.
58:19
And so I'm expecting to see quite a lot of these. Let us sum up. Take homes. I'm probably one of the few people who is quite happy about that government debt. I think the government should be an insurer of last resort and the ability of the government to borrow on behalf of all the people. It's just it's a very useful policy to. I'm very happy that the government is the insurer of the last result. That was one of the things I tried to push in the debt, vaccine them to circulate.
58:59
It's quite right to let the debt rise in response to the temporary shocks. So back to Hillary's first thing. It's Friday. This is what we should be doing. There's a very nice piece. Just come out by the Resolution Foundation. Spend fast, tax slow. We are in a pandemic. This economy is struggling and it's in trouble. Now is the time to use the power of government to borrow and to spend. To help us all through this crisis. Temporary.
59:32
There is a key word. We have to make sure that the debt rises in response to temporary shocks, but conditional to that. I'm quite relaxed about the rising debt. We then will let the debt to GDP ratio gradually fall back an hour of point nine, five or something to get that thing back. And that's going to be achieved by mild GDP growth, mild inflation and mild budget surpluses. I will finish the. Thanks, Martin.
1:00:06
That was very insightful, as usual, so thank you so much. And there's a couple more location in the in the in the chat. I think we have time for one, which is kind of linked to your your conclusion here. As soon as the crisis and the shock appear to be coming closer together. If this is true in is it perceived reality and does that as a mechanism to absorb the shock become less useful? You think. I sorry, I don't follow the defence.
1:00:32
So as the crises and the shocks appear to be coming closer, to be happening more often, does the debt as a mechanism to absorb the shocks become less useful? It's a question from David. OK. So I think no is my answer. Of course, what you might worry about is that there's a series of shocks that come very much back to back. So we get Roadshow this year, won't you? If we're worried that as the debt goes, higher interest rates on that debt. We'll get higher. Yes, David is correct.
1:01:15
But I'm not sure I think that there's going to be a particularly pleasant road of things if they if they're still reasonably spaced out. The fact that they markram every five years, we wouldn't even if you're expecting them to come forth every five years, it will be very, very lucky to get five in a row every year. OK, methods. I think that's all we have time for. And unfortunately so. Thank you, Martin, for being with us and sharing your research. Thank you to everybody for joining us.
1:01:44
We look forward to seeing you next month with Tim Willams from the IMF to talk about experimentations, say. And I said I will release a video on our Web site next week and a conversation between Jested and CO. Chris was back and Hamish Lowe and Michael met. The head of the Oxford University says, look out for that. I believe that we can anybody by.
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