Nick Clegg, David Cameron and Margaret Thatcher all think the National Debt is too small

At conference Nick was implacable, you should manage state finances like that of a family home:

It’s [the UK Public Finances] the same as a family with earnings of £26,000 a year who are spending £32,000 a year. Even though they’re already £40,000 in debt. Imagine if that was you. You’d be crippled by the interest payments. You’d set yourself a budget. And you’d try to spend less. That is what this government is doing.

The economics is simple for David Cameron:

The country has got an overdraft. The interest on that overdraft is swallowing up things that the nation should otherwise be spending money on.

Thatcher was no less certain, a government should borrow like a household (thanks to LFF and The Staggers):

Why don’t you look at it as any housewife has to look at it? She has to look at her expenditure every week or every month, according to what she can afford to spend, and if she overspends one week or month, she’s got to economise the next.

How does a household borrow? We’ll look at a chart below the fold. http://anmblog.typepad.com/.a/6a00d8341c565553ef0120a8d3196e970b-pi

Today, the average mortgage is five-and-a-half times the average wage. That figure comes after a boom, so for our thought experiment we can assume a more sustainable level, as was achieved in 1997, at around three times average earnings.

What would state borrowing look like if we actually acted like a household?

A household, we can generously assume, consists of two wage earners bringing in around £40,000 between them. In our experiment they would have a mortgage of no more than £60,000. This gives them a debt to yearly earnings ratio of 150%, how does the British state compare?

The British state currently has a debt to GDP ratio of approximately 60%, and the Tories do not plan to let it exceed 70% of GDP. If we assume that the British state should be run like a household we can only assume it is being run very prudently indeed!

Even if the Tories falter and net debt reaches 75%, then that is still half the debt burden our imaginary household might incur. If the state is a household that surely settles it?

Nick, Dave and Maggie must all think the state has borrowed too little. Either that or they are lying manipulative toads.

(Inspired by Tom Freeman)

Advertisements