Here is George Osborne accusing Labour of wanting to ‘borrow forever’.
The funny thing about this turn of phrase, which is meant to make us gasp in horror, is that it actually shows why the government, in principle, never needs to run a surplus. That’s exactly the point: it can borrow forever. (Of course, I don’t think it’s really borrowing, but I’m happy to play along with the conceit for the sake of argument.)
If I borrow, I need to run a surplus at some point to pay back my debt. I can try to keep borrowing to repay my debt, but at some point nobody will be likely to extend me a new loan to refinance my existing loans. Why? Because at some point I’ll die, and the last person holding my debt will get nothing but my feeble assets. Death is the ultimate default.
But the State doesn’t die. It doesn’t even retire. So it can borrow forever. Think about how simple this actually is. You, the immortal State, borrow from person 1 now. Then you pay back person 1 by borrowing from person 2. Next, you pay back person 2 by borrowing from person 3. How easy is this? Hilbert’s Hotel is a great place in which to do your fiscal operations.
If the series came to an end, there would be somebody at the end who lent the government money and didn’t get paid back. But the nice thing about borrowing forever is that there need be no such person. Everybody is paid back from a loan issued by the next person in the chain. And there’s always a next person. Or if there isn’t then public debt is the least of our worries.
Sensible economists recognise this, which is why they focus on the sustainability of public debt. Of course the government can roll over its debt forever. But it needs real income from which to service the debt – to pay the interest. There’s a whole separate conversation to be had about that. For now just note that all economists recognise that there’s nothing unsustainable about the government borrowing forever as such. Sustainability only becomes a concern if the interest rate on the debt comes to exceed the rate of growth in income available for the government to tax.
Of course there could be situations in which the government should run a surplus. If spending is too high, in general, for the productive capacity of the economy, then the government might need to run a surplus, if that is the best way to suppress spending and prevent inflation. But there’s absolutely no reason why the government shouldn’t be in an average net borrowing position over the long run, as in fact it is. The long run is really very long.
So what is Osborne’s problem? We mortals have to worry about debt because we can’t borrow forever. But if you can borrow forever, why on earth wouldn’t you? If the interest payments are sustainable, who exactly is losing out? The infinity-plus-one-th person? It’s the best deal in the world, and its win-win. Actually it’s win-win-win-… etc. ad infinitum. You’d have to be a fool not to take that deal. You’d have to be a fool even to abstain on the decision. What a waste of sovereign immortality. Lord what fools these mortals be.