A jubilee year is a perfect time for debt forgiveness

This year the Queen marks 70 years on the throne but the biblical origins of the word are a reminder of the need for a debt cancellation, writes Phil Thornton

Golden opportunity: the Queen celebrates 50 years on the throne in 2002 (Getty)

The modern economy cannot run without debt. Governments need to borrow to fund improved services, businesses to enable expansion and families to take on mortgages to buy homes.

As former US banker Richard Vague says in his recent book The Case for a Debt Jubilee, debt is like water – neither intrinsically good nor bad but indispensable and unnoticed until there is too much (or too little) of it. “This is the paradox: debt growth brings economic growth, but too much of it impedes growth,” he says.

As the world enters “another year older and deeper in debt” – to paraphrase an American folk song – alarm bells over the mountains of debt built up will start to ring louder especially as people start counting the cost of festive celebrations.

Total global debt dipped slightly to $296 trillion (£216 trillion) at the end of September 2021 – after an increase to record highs in the second quarter – according to the Institute of International Finance. That’s $36 trillion above pre-pandemic levels. When looked at another way, the total debt mountain is three and half times the annual output of the global economy. Two decades ago, the debt/GDP ratio was “only” 228 per cent.

There are similar trends in private debt. In the UK, the Jubilee Debt Campaign estimates total private-sector debt, eg companies and households, to be over four times annual GDP. Within that, households owed £1.75 trillion at the end of October 2021, up by more than £60bn from £1.69 trillion a year earlier. This is the equivalent to an extra £1,136 per UK adult over the year, according to The Money Charity. Meanwhile, UK corporate debt soared by £1.9 trillion in 2020 to £6.6 trillion.

The realisation that debt burdens that are never likely to be repaid can keep economies locked into stagnation has been the motivation for debt cancellations over the millennia.

In the Old Testament, the ancient Israelites called for a ram’s horn to be sounded on the tenth day of the seventh month every 50 years, at which points debts were cancelled.

Economist Michael Hudson, a professor at the University of Missouri-Kansas City, has documented in his book ... And Forgive Them Their Debts how the inventors of interest-bearing debt in Bronze Age Babylonia realised that avoiding economic instability required regular royal debt cancellations.

Although jubilees have gone out of fashion in the modern economy where debts are held by financial institutions rather than monarchs, there has been increased pressure for debt forgiveness since the turn of the millennium. In 1996 the International Monetary Fund and World Bank launched the Highly Indebted Poorer Countries (HPIC) Initiative that by 2019 had led to debt relief for 36 countries at a cost of $76.2bn to creditors.

In the wake of the Covid-19 crisis that saw low-income countries further plunge into debt to fund urgently needed healthcare costs, the G20 group of rich nations launched the debt service suspension initiative (DSSI) that has delivered more than $10.3bn (£7.5bn) in relief to more than 40 countries – albeit in the form of suspension of interest payments rather than a write-off.

Although jubilees have gone out of fashion in the modern economy, there has been increased pressure for debt forgiveness since the turn of the millennium

Household loans are as great a problem as public sector debt, but here there are clear philosophical and ethical challenges. First, it may seem unfair to someone who scrimped and saved to keep their debts under control to see a neighbour’s spendthrift behaviour is rewarded by having theirs written off.

Second, cancelling debts will require someone to pay for them. If governments take the cost, they will have to pass that on in the form of larger public sector debt or higher taxes. Third, if debtors see their loans written off, they will have every incentive to be imprudent in the future – something economists call moral hazard.

Those are all strong arguments but, curiously, there is strong evidence that creditors have decided to offer mini-jubilees that slip below the moral-hazard radar.

The most prominent is Joe Biden’s decision on his first day in office to pause federal student loan repayments (since extended to May 2022). On the campaign trail, he went further by promising to cancel $10,000 per borrower. Official UK figures show the Department for Education expects more than half of the £19.1bn paid out in student loans in the 2020/21 financial year will be written off.

In both countries, households hit by Covid were given either a grant ($1,200 (£870) per adult and $500 (£364) per child in the US) or a furlough payment worth 80 per cent of salaries for UK workers not needed by their employers.

Governments could go further by making direct payments to all households on the condition that debtors must reduce their debts while the debt-free must buy newly issued corporate shares whose revenues would be used to cancel corporate debt as part of a “modern debt jubilee” as set out by UCL Professor Steve Keen.

These ideas may not be the “biblical-style jubilee” called for by the late anthropologist and campaigner David Graeber. But signs that policymakers and creditors are thinking about living with non-repayable debts, just as we are learning to live with Covid, could be a worthy way to mark the Platinum Jubilee.