Policy Research in Macroeconomics

Letter to FT: A modest test for debt/GDP in UK

By Ann Pettifor and Jeremy Smith, Originally published in the Financial Times (log in required).

Sir, In “Why Reinhart and Rogoff are wrong about austerity” (April 18), Professors Robert Pollin and Michael Ash do a fine job of dissecting research errors with damaging real-world consequences.

Our mini-research on the UK’s postwar experience, is a modest test of the debt-austerity “thesis”. Using International Monetary Fund and Office for National Statistics numbers for 1949-2011, we found that UK gross domestic product increased at its fastest average rate – by 3.19 per cent – during the 18-year period (1949-66) when the debt-to-GDP ratio was more than 90 per cent (and mostly way over 100 per cent). This compares with an average of 2.60 per cent for the 36 years when the ratio lies between 30 and 60 per cent. For the other nine years (60 to 90 per cent), the average is 1.93 per cent.

What is more, during the 18 years when the debt-to-GDP ratio was more than 90 per cent, that ratio fell every year without exception. We do not, of course, seek to argue from this that a high debt-to-GDP ratio leads to, or is associated with, higher growth. We simply note that increased economic activity will tend to shrink the debt-to-GDP ratio, while falls in economic activity tend to increase it.

Ann Pettifor and Jeremy Smith, Directors, Policy Research in Macroeconomics, London NW1, UK

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