Hamish McRae: We have to learn to live with debt, but let's be open about its consequences

The numbers are disturbing. If you add together all debt — government, company and household — Japan tops the league table with debts equivalent to 400% of GDP.

Most of us probably knew that, because we knew that its public debt was by far the largest in the world.

But other countries with smaller public debt have higher private debt. Thus Ireland comes right behind Japan, with total debts of 390% of GDP, followed by Singapore, Portugal, Belgium, the Netherlands, Greece, Spain and Denmark, all with debts of more than 300% of GDP.

Total debt in the UK is “only” 252% of GDP, a little lower than France and Italy but more than that of the US at 233% and Germany at 188%.

The study looks at the emerging world too. Here the main concern is China. While overall debt is still only 217% of GDP, it has shot up since 2007.

China escaped the great recession by gunning up domestic investment, particularly in infrastructure and housing. It was able to do so because debts then were very low.

The price has been a tripling of debt in seven years, with particular concern about the debt load of the property sector.

Absolute debt is not the only factor in economic health. For example, the Netherlands is in vastly better shape than Greece because although it carries more debt, it is much more competitive and therefore able to service it.

At the bottom of the debt league, there are some real basket cases: Argentina on this measure is the least indebted country on earth, with debts of only 33% of GDP.

But that is because it has reneged on much of its debt and cannot borrow abroad as a result. Russia has low debt levels, 65% of GDP, but its chances of borrowing abroad are not too bright either.

There are two further points. One is that net government debt is typically a lot lower than gross debt, and this makes the figures — particularly for Japan — look rather less frightening.

The other is that debt in the developed world is much higher than in the emerging world. The most-indebted Bric country, China, is the only Bric member with higher debt than the least-indebted G7 country, Germany. But you would expect this.

Developed economies have a lot more invested in all forms of infrastructure and housing than emerging economies.

Debts are the flip side of this investment. As long as the investment is productive, and interest payments can be serviced, there should not be too much of a problem.

The issue, unfortunately, is that a lot of the debt accumulated in the developed world has been to pay for past higher consumption, public and private, and so has not really been productive.

Still, whatever excuses you make, there is a problem. So what’s to be done? There is no magic wand to waft away the debt mountain, but there are ways of chipping away at debt so that it becomes less of a drag on growth. These include better-designed mortgage contracts to try to cut defaults. So there could be risk-sharing between lender and borrower, sharing the bonus of rising house prices but also the pain if prices go down.

Governments and central banks could use better regulation and other macro-economic policies to damp down the credit cycle — smaller booms and busts — although our experience in the UK has been discouraging.

One obvious win would be to remove incentives for companies to add to debt rather than equity capital.

It is a bit ridiculous that owners are encouraged to load debt on to companies, thereby cutting corporation tax liability, while dividends on equity capital are highly taxed. But that would need international co-operation — not easy.

There are other things that can be done to manage the debt burden better, but there will always be cases when the borrower either can’t pay, or refuses to do so.

Look at Greece now, a story that cannot end well and may end quite badly. We need to be honest about debt, and particularly on the obligations on both sides of the deal, as I think is happening at a personal level in the UK. It was so easy then — too easy in fact.