Compared to Germany, the less attractive circumstances in the UK stand out. But there is no need to compare countries. A look at their own past is enough to show the British how much more carefree life can be. The question is, why is nobody doing anything about the development? Why don't the citizens rebel against their politicians? Why don't the politicians the direction of the country? Fo example by putting more money into infrastructure, housing, childcare or universities?
The latter question is the easiest to answer. Even if the political will were there, the money is lacking. What we have almost forgotten by now, the financial and economic crisis of 2008, was the most drastic of its kind since the Great Depression. In the ensuing debt crisis, the focus was on countries like Greece, Spain, Portugal, Italy or Ireland, where there were doubts whether they could pay their debts.
But in other countries the debts skyrocketed, too, because revenues were lacking and state support had to be paid to citizens, companies and banks. In Germany, public debt rose from just under 1.6 trillion Euros in 2007 to about 2.2 trillion Euros in 2012. An increase of more than 35 per cent in 5 years.
How burdensome these liabilities are for countries depends on their economic strength, just as it does for private individuals. Therefore, it makes more sense to look at the debt ratio of a country than at the absolute value; the liabilities are given as a per centage of the gross domestic product.
Greece's debt burden of about 350 billion Euros would be peanuts for Britain or Germany, whereas the corresponding ratio of 180 per cent would be a serious problem.
The debt ratio is a useful indicator for comparing the financial burden of different countries and its development over time [1]. For Germany, the debt ratio rose from 64 per cent to almost 79 per cent between 2007 and 2012, an increase of 15 points in 5 years. Quite a lot, isn't it?
Honestly, I have no idea. I lack experience with international financial crises. The percentage increase doesn't sound very impressive. Some stocks in my portfolio had a much bigger increase (or loss) in a year. And a few years ago, even my deposit account had a higher interest rate. For a better classification, perhaps I should look for another example, one at the state level, with drastic changes for the country. How about German reunification?
By 1990, the GDR had become ramshackle, its infrastructure was decaying and the economy had been weakening for years. With reunification came the abrupt transition for East German industry from a planned to a market economy, from a closed to an open system. A large part of the industry did not survive the change.
East Germany was not only hit by a simple economic crisis. Entire regions were deindustrialised within a short period of time. Some of the affected regions are still feeling the consequences today, both economically and socially. Many East Germans lost their jobs and some never found work again.
The collapse of the East German economy caused many human tragedies. But it also dealt a hard blow to the German state finances. The infrastructure of the former GDR had to be modernised, the economy had to be supported, the population had to be provided for. On their own, the newly formed federal states in the east would have been hopelessly overburdened with the tasks.
The federal government, and thus West Germany, stepped in. East Germany accounts for almost one third of the area and about one fifth of the population of reunified Germany, or about one and a half times the population of Wales, Scotland and Northern Ireland combined. The investments were correspondingly large. According to a study by the Ifo Institute, approximately 2 trillion Euros(!) were pumped into East Germany between 1990 and 2014. Reunification was, and is, an ongoing task of gigantic proportions.
The expenditure was financed by new taxes, tax cuts and debt. Germany's debt ratio rose from 40 to about 55 per cent between 1990 and 1995 and to 65 per cent by 2007, an increase of 15 points in 5 years, or 25 points in 17 years.
Now we have a figure for comparison. In the early years, the financial crisis had the same devastating effect on German public finances as the measures taken after reunification to deal with the breakdown of a hole country.
In later years, however, the developments diverge. After 1995, the debt continued to rise, also due to the sustained weak economic development of East Germany. Until today, the GDP per capita in East Germany is about two thirds of the value in the west.
After the financial crisis however, Germany recovered quickly. In 2019, the economy had a decade of growth behind it, unemployment was at an historically low level. After 2013, the absolute public debt decreased every year until the pandemic hit. Both had the effect of greatly reducing the debt ratio. In 2019, it was 58.9 per cent and thus below the value before the crisis. There was no long-term negative impact.
In Great Britain, to return to the actual topic of this post, the consequences were quite different. Compared to Germany, the debt ratio before the financial crisis was low. It was around 41 per cent of the GDP in 2007. With the crisis, it rose sharply and reached 86.9 per cent in 2015, an increase of a staggering 45 points! In other words, the public debt ratio had more than doubled!
After that, it fell slightly to 83.8 per cent in 2019. The decline was due to economic growth, which in the 10 years before Covid was even 1 per cent stronger than in Germany.
Absolute debt, on the other hand, continued to rise every year, reaching £1.89 trillion in 2019, almost triple the 2007 level! Even though the British unemployment rate fell to an historically low level as in Germany, therefore increasing the number of taxpayers.
The increase of the debt ratio would have been less dire if the liabilities had been created by large-scale investment programmes or at least by support for the population. This kind of debt would have made the consequences of the crisis more bearable or would have paved the way for a better future.
Unfortunately, the opposite was the case. Investments, social programmes and other state services were severely cut, while the VAT was increased from 17.5 to 20 per cent.
The central government reduced the funds allocated to cities and counties by 60 per cent. This effectively meant lower budgets for road construction, libraries, rubbish collection, local transport or support for childcare and public housing. To partially plug the holes in the budgets, local taxes and fees were raised. The benefit cap, which limits the total amount of social benefits one can receive, was also created in this period.
Other budgets were temporarily frozen or grew slower than before the crisis. This included the budget of the public healthcare system. In the 2000s, the budget grew by over 6 per cent a year (in real prices), from 2010-2015 by only 0.84 per cent a year, then a few tenths of a per cent more. Even though the population got bigger and older.
Children were affected in several ways. Firstly, through the precarious situation of many parents. The number of children living in poverty rose by 500,000 to 4.1 million between 2013 and 2018.
Secondly, because of the limited support for their development and educational opportunities. Many Sure Start Centres, which offer free childcare, play sessions, counselling for parents, medical support or care for psychological problems in the poorest areas, had to close their doors. In 2010, there were about 3,600 centres, until 2018 almost 1,000 vanished.
Spending on education was frozen at the national level. Budgets at the local level, which fund transport, administration, or tuition for students with special needs, declined. According to the Institute for Fiscal Studies, the education budget in England got cut by 8 per cent between 2010 and 2018, even though the number of pupils increased.
For universities, the budget was cut by almost 50 per cent. To compensate for the loss of funding, the tuition fee cap got more than tripled. As a result, student loan debt in England increased fivefold between 2010 and 2021, rising to £160 billion, with an average debt per student after graduation of £45,000.
In Germany, the financial crisis caused enormous damage, but in the end, it only created a dent in the economic development. In the UK, I rather feel that society has gone into a downward spiral. Despite economic growth and low unemployment, the state and the population had to cut back. We can only hope that no economic crisis will hit Britain soon…
Oh wait, then came the pandemic (and Brexit). In 2020 alone, public dept in the UK went up by £314 billion, while the GDP dropped 11 per cent. Britain got hit much harder than Germany (debt increase: 267 billion Euros, GDP drop 4 per cent). Partially due to the less robust conditions of the public budget and the economy, but mainly due to the disastrous mistakes of the British government made while fighting Covid. However, that is a story for another post.
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[1] Whereby it still depends on who the state is indebted to. Domestic debts are easier to bear than those to foreign creditors.