Considering that the UK's total indebtedness, which is what really matters, since it includes debt held by financial and non-financial businesses, and households, in addition to the government itself, actually stands at an almighty £12 trillion, it seems completely disproportionate that the government is worried about holding a mere £1 trillion of this, especially when they have guaranteed revenue streams that businesses do not. Government's can "force" revenue through taxation, and although there is a slight issue of tax avoidance through legal means or not, ultimately the state has much more control over its revenue than businesses do. Whatever the advertising prowess of a business, its revenue is ultimately subject to the performance of the market. Whilst it is true that individual businesses compete for market share (penetration), the total revenue of all businesses in the economy is largely a function of consumer confidence.
The real problem is not Government debt, which stands at about 45% of GDP, and is on average owed over a term length of 14 years at an interest rate of about 5%, meaning that only 4% of GDP must be found each year to meet the government's debt bill. The real problem is that total debt now comes in at approximately 500% of GDP. Because they are generally regarded at less creditworthy than the government, businesses and consumers find it more difficult to aquire long term debt at low interest rates. When we take into account debt that is not held by the government, the nation may well be approaching a strain of nearly 50% of its gross domestic product to foot the mounting bill of debt.
In order to understand why the UK's economy - and most others for that matter - have reached this stage, we only need to consider some basic facts about the banking system. Roughly a decade ago, the UK abolished its banking reserve requirement in order to let the banking system lend more freely, partly as a political strategy pulled in order to fuel New Labour's housing bubble. The reserve requirement is the amount of money that banks must keep in "reserve" from each deposit. Since it does not matter where the deposit came from - i.e. it is likely to have come from another bank - this in effect allows banks to constantly re-distribute money through lending it, and then re-lending it as it is redeposited in the system. Of course, all money works it way in and out of the system, so as long as the banks can maintain asset sheets that exceed liabilities, they always have enough money to satisfy demand for withdrawrals. With the fast transition away from the use of paper money, banks have been subject to less and less risk regarding the threat of excess demand for cash withdrawrals. In turn, this has fuelled the rapid expansion in credit.
In the late summer of 2008 we found out that this was unsustainable, as the banks could no longer manage to keep the balance between healthy assets and minimal liabilities in place. As the economy faltered due to the effect of consumers and firms of high commodity prices, their ability to repay debts, which was in turn predicated on non-inflationary GDP growth, stopped, and bankruptcies destroyed the asset sheets of some major banks, slashing the gap between assets and liabilities and drainig "reserves". Because the amount of outstanding debt includes both principal and interest, wheras the money that has been loaned into circulation is only the principal, in order to provide the interest, there must be constant monetary expansion. If this montary expansion is not backed up by real growth in GDP, the inflationary effect will render the ability to repay debt's increasingly difficult, as profits and revenues in the economy collapse. Because the trend of debt always needs to grow in order to stave off a collapse in the system, it is particuarly dangerous that the economy has not resumed strong GDP growth.
Instead, what has happened is that now that a small amount of growth is back, the economy seems to be overheating, wherby excess aggregate demand again manifests itself in soaring commodity costs. For instance, pretty much every time in history that the oil bill has exceeded five and a half percent of GDP, the economy has shrunk. Right on que, the UK has recently experienced a "shock" contraction in GDP, arguably caused more by the oil price than the snow. Osborne's blaming of this slip on leaves on the track is immature, and incorrect, and he probabaly knows it. In normal economic circumstances, there would be nothing wrong with borrowing lots of money to fuel the economy. Of course, they know that the overheating trap of 2008 is now returning, but they are too timid to admit it, for fear of panicking the markets, so they simply blame the austerity on the debt itself. These are difficult times indeed, and the government are correct when they say so, but their excuse is profoundly incorrect.
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