debtI found the following, apparently authoritative, statement in a report from the New Economics Foundation (entitled “How did we get here?”):
“Increased public indebtedness has nothing to do with excess public spending. It is the direct result of the 2008 financial crisis.”
There is no indication of which country the statement applies to, but as it is a UK-based organisation, I assume it includes the UK. Is this view generally agreed amongst economists as the cause of increased public indebtedness, or does it indicate some political bias? As a long time reader of The Economist, I don’t remember ever seeing such an unequivocal statement of the cause.
Update: Summary of nef report context
The report mentioned above explains that the 2008 crisis occurred because banks had accumulated too much debt, much of it high risk and of poor quality. Defaults on subprime loans caused their value to fall, pushed Lehman Brothers to collapse and triggered financial panic. This panic was halted by governments pumping in hugh amounts of money (£1.3tn in the UK), saving the private sector, but at the expense of increased public sector debt. The report goes on to say that states themselves are now at risk of default and because of this and the interconnections between banks and states, the banking system is once more at risk.
The 2-page report is here for anyone wanting the whole thing.
Excess public spending is the only cause of the increase of the increased public indebtedness.
Excess being spending more than the tax revenue generated, however you could argue (not unreasonably) that excess public spending was (partially) caused by the 2008 financial crisis, along with a decrease in tax revenues, also caused by the 2008 financial crisis.
Technically, excess public spending is the only possible source of indebtedness. However, if you take into account the nature of that excess public spending, then structural deficits in the budgets only account for a small proportion of the huge increase in public debts.
My point of view: What happened after the credit crunch is that private debts of banks were tranformed into public debts of governments, because economists believed that the nature of the crisis was a lack of trust in the markets, and that governments were per se trustworthy enough, such that the financial system would go back to normal once governments vouched for private credits.
Looking at the dynamic equation governing public debt, $B_t=B_{t-1}(1+i_t)-PS_t$, where $B$ is the stock of public debt, $i$ is the nominal interest rate, and $PS$ is the primary surplus, it’s easy to see what drove $B$ to record levels: a) an increase in $i$ (most of which is panic or contagion-induced), b) a strong decrease in the primary surplus and c) already high levels of $B_{t-1}$ to begin with.
Along the way the story got complicated, as many countries revealed that their true indebtedness was in fact higher than expected (due to the likes of state-owned enterprises having accumulated lots of debt or PPPs with ruinous terms for the tax-payer).
In short, the answer is: a mix of the two; yes the financial crisis didn’t help (it pushed up refinancing rates, made credit more scarce, and reduced the nominal GDP, as well as making tax revenues fall and force governments to bail out banks and spend more on social transfers), but there was an underlying rottenness in the public sector in many countries, along with structural deficiencies.
All in all, a politician will always take up the opportunity to spend more in a downturn - exacerbating the overall deficit and worsening the cyclically-adjusted deficit as well.
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