Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carol 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. And 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 have 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 Domocles is our colossal financial debt and twenty eight billion euros, and if we were not careful, it will put our country on the edge of a question.
The interest on the debt, for example, is estimated at around fifty 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 jobbed sharply during the COVID nineteen pandemic. Is economy 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 Trust offered a cautionary tale to governments, the UK recently saw its debt to GDP ratio surpass one hundred
percent 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 about the politics and the economics US. Is it a problem first of all, that governments have taken on a lot more debt in recent years.
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 nineteen thirties 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 in 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, continued 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 really interting piece of this puzzle because although this starts to come down in many parts of the world, they're still much higher than they were in twenty twenty two. So how does that factor into how much we have to worry about the debt.
It's always dangerous getting into comparison with households because governments are really different from households. But there is that if you think about how you pay back alone. The two things that will most affect your ability to pay back that loan is how high the interest rate is, so 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, that 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 fifteen 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're now got the US is spending three percent of GDP on debt interest, which is much more than a few years ago. It's actually more than the defense 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 of spending as well, which feels like went through quite a big shift, 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 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 that was the rhetoric around austerityk or Some people disagreed with George Osborne's assessment back in twenty ten, but there 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 lockdown, 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 in 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 have 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 people can also see that it's continuing to grow. They can also see that it's
continuing to have the world's favorite 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 eyewatering six percent 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 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 US. Whereas someone like France, for example, which also, as it happens, has an over six percent budget deficit. A lot of pressure on France because France is not growing fast.
Andy's 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 government 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 a particular level of debt being a
safe level. We used to think it was about sixty percent of GDP was a safe low level of debt. 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 all so 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 two thousand and seven. We used to grow too and a half percent. We've been barely growing zero point six percent a year the last ten years. If we just got back to two and a half percent 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 one hundred percent for the next fifty 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 ten years, debt won't be one hundred percent in fifty years time, it'll be seven hundred percent of GDP. So that's how much difference growth makes. So I would say if you focus on the growth, the debt take player 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 trust If a government looks like it's really not taking it seriously, I think we've obviously had some very sort of somber 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 step, I think that could get into you get into real confidence issues in the market.
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 twenty seven hundred 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.