Three myths about UK borrowing and growth

Three myths shape debates about government borrowing and growth.

First, that the cause of our growth woes is an overbearing, miserly finance ministry. Borrowing too little has just not ranked among Britain’s recent weaknesses. Debt has doubled since the financial crisis. We now pay more to borrow than any other G7 economy. Consequently, debt interest consumes more spending than any public service bar the NHS. Painful as austerity was, the British state was about the same size just before the pandemic as it was before the financial crisis; and is today about 4% of GDP bigger than that. Lack of investment has been a problem, but we have spent and borrowed plenty.

The second myth is that we should seek growth to balance the books. This turns everything on its head. Rather, a sound fiscal plan is essential for growth. Without it, households and businesses are weighed down by uncertainty about how and when the ultimate correction will happen. This government’s welcome actions on growth – from planning to new trade deals – have been undermined by the uncertainty flowing from fiscal evasions before the election. Worse, as we saw under Liz Truss in 2022, a government that abandons good fiscal planning becomes the cause of, rather than cure for, an economic crisis.

Finally, the myths suggest that we can carry on as we are. As the UK population ages and ails, demands on the state rise, and established coping strategies are running out of road. Most obviously, the long squeeze on defence looks set to be reversed. What’s more often missed is that we haven’t balanced the books for a quarter of a century; doing so now will require a tougher tax or spending settlement than we’re used to.

Combined, these myths can lead to the presumption that containing borrowing and boosting growth are in conflict, when in fact sustainable growth requires a strong fiscal footing. A government with a growth mission must grapple more honestly with the size and shape of the future state.