Cambridge Historian: High National Debt Scares Us Without Good Reason

British historian Martin Daunton, Emeritus Professor of Economic History at the University of Cambridge, argues that the debt-to-GDP ratio — one of the most widely discussed economic indicators — is, in fact, greatly overrated. According to him, history does not support any rigid link between high debt and low economic growth.

Daunton is the author of the recently published book The Economic Government of the World, which examines 90 years of international economic institutions at work. He shared his findings on the PFI Talks podcast, produced in collaboration with Seznam Zprávy.

Debt as a Tool of Empires

In the 18th and 19th centuries, national debt served primarily as an instrument of power: states used it to finance military campaigns and colonial expansion. Today, it tends to do the opposite — it forces governments to keep borrowing in check, since international investors will simply stop lending otherwise. But there is no automatic formula that says "higher debt equals lower growth," the historian stresses.

Around 1810, Britain's debt-to-GDP ratio reached roughly 200%, and society accepted this because the country had a strong fiscal state capable of servicing such obligations and enjoying investor trust. Even then, sceptical voices existed — the economist David Hume was convinced that such a policy would inevitably lead the country to bankruptcy.

How Markets Began Punishing Debt

Over time, the market's role in the life of the state changed. "The situation has now clearly reversed: bond markets punish high debt levels," Daunton notes. Some countries, including Germany and the Czech Republic, have even introduced a legal "debt brake" — statutory limits on public debt with penalties for breaching them.

A significant contribution to this debate came from the study Growth in a Time of Debt by Harvard economists Kenneth Rogoff and Carmen Reinhart, published right after the global financial crisis in 2010. The authors claimed that once debt exceeds roughly 90% of GDP, an economy loses about one percentage point of growth annually.

"That thesis turned into a widely accepted truth: high debt kills growth, and it simply must not be allowed to happen," says Daunton. In Britain, this logic was used by then-Chancellor George Osborne to justify strict austerity policies, and the IMF, the European Central Bank and the European Commission relied on the same principles during the Greek debt crisis. "Even back then, some of us said this was wrong and that Osborne was mistaken," the historian adds.

Debt After the Two World Wars

During the interwar period, British debt approached 200% of GDP, and during the Second World War it exceeded that threshold by an even wider margin. In the first case, Daunton believes, low growth did indeed follow — but for other reasons: in April 1925 Britain returned to the gold standard at an overvalued exchange rate, which undermined its export industries and triggered mass miners' strikes.

After the Second World War, however, despite debt significantly exceeding 200% of GDP, the country experienced rapid postwar growth. "It all depends on what happens to interest rates, how society perceives taxation, and what happens to international trade flows," the historian lists as the real factors behind debt sustainability.

In his view, the debate cannot be reduced to a single debt-to-GDP figure — what matters is also what assets a country holds. "Money spent on war is not the same as money invested in infrastructure. We need to move away from the mechanical view that crossing the 100%-of-GDP threshold is automatically harmful," Daunton concludes.

Punishing a state solely on the basis of one indicator, without regard to context, is pointless, the historian says, in situations where far more complex factors — interest rates, political legitimacy, trade flows and the geopolitical interests of major powers — play the decisive role. Until politicians acknowledge this, humanity will keep making the wrong decisions, Daunton concludes.

As for the Czech Republic, the country is relatively lightly indebted, yet its economy is growing extremely slowly. Without pension reform amid a rapidly ageing population and without streamlining an inefficient healthcare system, public finances are unlikely to improve — and the country's debt should rather be reduced, or it risks spiralling out of control.

Around Prague, based on reporting by seznamzpravy.cz