The UK owes a lot of money: over one and a half trillion pounds (or ￡1,593,225,455,234.00 when I last looked). And we’re adding to it by the day as the government borrows more and more.
The chancellor, George Osborne, has made it a totem of his tenure that he wants not only to slow and eventually stop that extra borrowing by eliminating the budget deficit (largely by cutting government spending) but he even wants to run a surplus by the end of this parliament so he can actually start to pay off the national debt, a task which will take many decades.
It’s a cod-liver-oil type of remedy. It’s unpleasant but sounds like it will do us good and Mr Osborne has successfully hammered home this message so much that he has pretty much dominated the debate around economic policy, both before the election and since.
So why is his opposite number, John McDonnell setting out a contradictory strategy today in which he confirms a Labour government would borrow even more?
The answer lies in what that borrowing would be for.
In his first major speech since becoming shadow chancellor a full six months ago, Mr McDonnell says he wants to use the government’s current ability to borrow at very low rates to invest in the country: in infrastructure, for example. Over a five year cycle, a Labour government would have to balance the day to day spending but that pledge would exclude investment.
The IMF is among many observers which support the idea of borrowing to invest.
Unlike borrowing to fund day to day spending (the running costs of the country) borrowing to improve the roads, schools and housing stock of the country can improve economic growth both in the short term (all that construction activity!) but also with a lasting effect of better infrastructure.
According to the World Economic Forum, the UK currently ranks 27th in the world for the quality of our infrastructure and it’s seen as one of the “most problematic factors in doing business” in the UK.
The other advantage to growing the economy centres on simple arithmetic. What matters is not the size of national debt but its size relative to the economy.
At the moment, our national debt is about 82 per cent of the size of the economy (which is very big, it was about 40 per cent before the financial crisis in 2007/8). But if the economy grows faster than debt, so the ratio will fall. Indeed this is another of the rules Mr McDonnell is setting for a Labour government, that debt should be lower as a percentage of GDP at the end of a parliament than at the beginning.
Mr McDonnell has the task of re-establishing Labour’s economic credentials. His policy announced today isn’t much different from that of his predecessor, Ed Balls, but it is different to the chancellor's.
Next week Mr Osborne may have to unveil more austerity cuts in order to meet his self-imposed budget rules. Mr McDonnell has set out today a less-austere alternative.