Borrowing

There’s a tired old myth peddled by politicians – usually the ones who wouldn’t know a balance sheet from a shopping list – that government finances are just like a household budget. You know the routine: “We must live within our means, just like families do.” It’s absolute nonsense, of course. A government is not a family. It doesn’t pop down to Aldi to see if it can stretch to a few more tins of beans before payday. If anything, government borrowing is more like a mortgage – especially a buy-to-let mortgage – than a household budget.

Let’s break this down, because politicians love to pretend they don’t understand basic economics when it suits them. When you take out a mortgage, you’re not borrowing just for the sake of it. You’re investing in something that will (hopefully) grow in value. The same goes for a buy-to-let mortgage – you’re taking on debt, but you’re also generating income from rent, which covers the repayments and ideally leaves you with a profit. In fact, lenders don’t even assess buy-to-let mortgages based on income multiples, like they do with residential mortgages. Instead, they focus on the expected rental income, requiring that it covers a certain percentage of the mortgage interest payments – typically between 125% and 145%. This ensures that borrowing remains sustainable, as the rental income should more than cover the repayments, reinforcing the logic that debt, when properly structured, is a tool for investment rather than a burden. 

That’s how well-functioning government borrowing works. A government doesn’t borrow just to fritter it away on trinkets. It borrows to invest – in infrastructure, education, healthcare, and other public goods that boost the economy and generate future returns.

Contrast this with the absurd household budget analogy. If governments really functioned like households, they’d never borrow for anything – no new roads, no schools, no hospitals unless they could be paid for upfront. Imagine trying to buy a house with that mindset. “Sorry, I refuse to take on debt, so I’ll just save up for 40 years and buy a shed instead.” It’s economic illiteracy of the highest order.

Of course, there are bad forms of borrowing. If a buy-to-let landlord took out a mortgage but never bothered to maintain the property, let it fall apart, and then wondered why the rental income dried up, they’d be a fool. Yet that’s precisely what governments do when they cut investment to “save money.” Skimp on schools, and you end up with an undereducated workforce. Underfund healthcare, and productivity plummets. Neglect transport infrastructure, and businesses struggle. In short, austerity is like a landlord who refuses to fix a leaky roof, then acts surprised when the tenants move out and the place becomes worthless.

And let’s not forget the most important point – governments, unlike households, issue their own currency, which allows them far more flexibility in managing debt. They can adjust monetary policy, control interest rates, and influence inflation in ways that no ordinary household can, reinforcing why the household budget analogy is fundamentally flawed. They control interest rates (to some extent) and have the power to stimulate economic growth in a way that no ordinary family can. If your household budget isn’t balancing, you can’t just tweak monetary policy to boost your income. But governments can and should. Instead, we get the same tired drivel about “maxing out the credit card” – as if national economies run on Visa and the chancellor is waiting for a payday loan to come through.

The real question isn’t “Should the government borrow?” but “What is it borrowing for?” Borrowing to invest in the nation’s future is sound economic sense. Borrowing to paper over the cracks of short-term mismanagement? That’s where the problem lies. And let’s not forget another crucial point – over time, the value of the asset purchased increases, while the repayments decrease as a proportion of income. Buy a house today, and in 20 years, not only is it worth far more, but the mortgage repayments become an ever-smaller fraction of your income. 

The same principle applies to government borrowing. Investments in infrastructure and education yield long-term growth, making past borrowing look trivial in hindsight. Just look at the post-war investment in the NHS and social housing – initially expensive, but instrumental in raising living standards and boosting economic productivity for decades. Buy a house today, and in 20 years, not only is it worth far more, but the mortgage repayments become an ever-smaller fraction of your income. The same principle applies to government borrowing. Investments in infrastructure and education yield long-term growth, making past borrowing look trivial in hindsight.

But the next time some politician – usually one who’s never inspected his mortgage – starts banging on about “living within our means,” ask them if they own a house. And if they do, ask if they paid for it in cash. Because if they didn’t, they’re talking nonsense.

And while you’re at it, remind them that taking on an ordinary mortgage puts their personal debt-to-GDP ratio at well over 300% – a figure that would have them screaming blue murder if it were a government statistic. Funny how private borrowing to make money is just ‘entrepreneurial,’ but public borrowing to invest in the country is ‘reckless.’