Letter: False fears over the national debt

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From Mr M. C. Kennedy

Sir: It is about time we had a truly independent view of the public finances. Gavyn Davies ("A mountain of reasons to reduce the public debt", 9 October) likes to keep up with the latest academic papers - Ricardian equivalence and all that! But these, unfortunately, can spell disaster for the policy- maker who takes them seriously.

The interest-raising effects of public deficits can, are, and almost always have been corrected by accommodating monetary policy. The small rise in real interest rates since the 1960s is not due to higher public debt, but to tighter monetary policy in reaction to the inflation of the 1970s. Nice as it would be to have no national debt at all, the consequences of reducing it - whether to enhance a politician's reputation or to meet the Maastricht guidelines - are bound to deflate national income and employment.

If this is done globally, as Mr Davies seems to desire, the result could be a world recession (and also less inflation). If this is what we want, then say so. But let us not pretend that fiscal rectitude is itself a goal of economic policy.

The national debt is very largely owed to ourselves, and its main consequence is a transfer problem - an interest payment by taxpayers to the holders of government securities. With present levels of debt and deficits there is not the least danger of this getting out of hand.

The real goals are price stability and employment, and the politicians should focus on these. As for Mr Davies's pleas for a worldwide fall in interest rates (alias capital gains on gilts) this might be welcomed by the City of London, but would be unlikely to undo the ill effects of his proposed fiscal tightening.

Yours faithfully,

M. C. Kennedy

School of Economic Studies

University of Manchester


11 October