“I’m afraid there is no money”: is the West headed towards a reckoning on debt?

Henrik Helsen
Nov 12
5 min read

Updated: 9 hours ago

“I’m afraid there is no money – kind regards, and good luck!”

A self-explanatory quote if there ever was one, this message was written by the Chief Secretary of the Treasury, Liam Byrne, to his successor as Labour left office in 2010. You could be forgiven, however, for thinking it was of more recent origin. With the UK budget coming up, talk of tax rises and “fiscal rules” has dominated headlines. With public sector net debt at 95% of GDP and rising, debt burdens have once again been thrust into the spotlight as the issue has turned into the silent crisis that is only now finding its way onto the political agenda.

Indeed, the dire sounding note at the start of this article was written amid the biggest financial crisis in a century, when spending on emergency measures like recapitalisation of banks like RBS and Lloyd’s and fiscal support to consumers - like the temporary VAT cut - were putting a significant but temporary strain on public finances. Although the COVID-19 pandemic did once again precipitate extraordinary government spending, emergency expenditures have mostly ceased, so structural deficits are the key culprit here. A structural deficit, as opposed to a cyclical one, refers to the shortfall when the economy is at a “normal” level of employment i.e. in neither a boom nor a recession. Although increased spending and lower revenues are normal during downturns, a structural deficit like what is being observed across the western world is often an indicator of an underlying fiscal imbalance.

This issue is not solely a British one. France’s budget deficit is to be around 5.4% of GDP this year, and the issue of putting together a politically acceptable budget that also meets the target of reducing the deficit to 3% of GDP by 2029 has claimed two French heads of government (and counting...). In this article, we will focus mostly on these two countries, but in a future instalment we will consider how debt pathways are evolving among less-developed nations, particularly BRICS countries.

So, why has much of Europe and North America racked up this debt burden, and what are the potential implications?

Part of the answer is prosaic. To borrow money, governments issue bonds to investors. These bonds are sold on a competitive market like any other good. They pay back a fixed value when they “mature” (which can be anywhere between one and fifty years from their issuance), as well as annual interest. During Covid, governments issued a large amount of debt in a short span of time, and they must pay interest on this new debt and all outstanding debt. The UK for example spends around £105bn purely on debt interest payments. Bond markets have not been kind in this respect either. The price investors are willing to pay for bonds effectively determines the actual interest rate (if investors pay lower prices, the government must sell more bonds to raise the same amount. This actual interest rate is known as the yield. Yields have risen sharply in the UK, partially driven by the “disastrous” 2022 mini-Budget (which fuelled the perception that the UK government was taking on unsustainable spending commitments). Investors therefore require higher returns to offset the perceived increased risk. This is particularly true of France, which had its credit rating downgraded by S&P from AA- to A+.

A bigger part of the issue is that governments have maintained unusually high levels of post-pandemic expenditure. We are essentially in an era of “permanent emergency spending”. This is largely a political issue, and particularly impacts the structural deficit discussed earlier. Governments in the UK, the US, France and some other European nations are simply living beyond their means. This was not always the case. High growth in the 1990s and early 2000s meant that it was possible to finance expansive spending commitments – and the result was that many European countries acquired remarkably generous social programs. France spends over 30% of GDP on public welfare. This article is not here to make a value judgement about such spending, but it is to be noted that this has contributed to the fiscal pressure because productivity growth (and hence, economic growth) has not kept up since the financial crisis.

We are now in a new world where growth is sluggish, inequality in the developed world has risen, and many people feel increasingly left behind. In order to try and stave off the rise of the political extremes, many governments have dug in on social support. The 2023 French pension reforms were recently suspended until 2027. Although raising the pension age from 62 to 64 would bring France in line with European norms, this was the price that left-wing parties extracted of the country’s centrist government to try and shape a budget for 2026 – a budget which will now make fewer savings than will be necessary to meet France’s own deficit reduction goal mentioned previously.

Which brings us to another question: is a reckoning on the way? The consequences of unsustainable debt are potentially significant (as seen in Argentina), but they are unlikely to be felt immediately. One thing which may alleviate the issue is the increased political salience of the debt burden. It is now more politically acceptable to propose tax rises or spending cuts with the stated aim of reducing the structural deficit – not unimportant for governments whose main concern is the next day’s headlines (which is probably all of them). More importantly, western governments can still borrow at competitive rates, and this privilege is not going anywhere in the short-term. However, they are still at the mercy of the bond markets, who ultimately set the cost of borrowing. If over the longer-term bond markets start shaping fiscal policy, states will potentially have austerity measures forced on them – with political and social costs they would be wise to avoid.

The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.