Borrowing is Spent - 17th September 2011

All political parties agreed that it was vital to reduce our annual government deficit of spending over revenue, and that we could no longer go on spending more than the government raised in taxes, just adding the difference to our burgeoning national debt for our children and grandchildren to pay off. Of course, some people blame it all on the bankers –and they, and government failure to properly regulate them, have much to answer for, but the reality is that Britain has been borrowing beyond its means for years: even at the height of the boom when tax revenues were rolling in, the government continued to borrow as if there were no tomorrow.

The last government’s plan –the Darling plan- was to cut the annual deficit in half during the lifetime of this parliament, adding the other half to the already doubled national debt. The coalition government’s ambition was, and remains, to eliminate the deficit in this parliament. The critics of this strategy say that the resulting cuts go too far and too fast and, as consequence, make things even worse. They argue that the cuts in the public sector depress economic activity and increase unemployment to such an extent that the decline in tax revenues will make the deficit even bigger.

Too far and too fast? This year, notwithstanding all the painful cuts, the government is still going to have to borrow just shy of £50 billion. Do any of us have any concept of what these numbers actually mean? Even one billion –let alone fifty- is a mind boggling concept (and of course I refer only to the current usage where a billion is a mere one thousand million rather than the million million that English mathematicians used to use). Let me attempt to quantify it: a billion potato crisps, without any packaging, would require a convoy of 500 large vans to transport; think of it in time, a billion minutes ago Jesus was preaching in Galilee, and a billion hours ago we would have been with the cave men before recorded history. Yet a billion quid is something our government spends in just a couple of days.

We have to sell our debt to international markets which means those markets have to have confidence in our ability to repay. The notion that we can go on borrowing at this rate and still maintain that confidence is ludicrous. There is no doubt that the international rating agencies would have downgraded our credit status had we not embarked on the current path of deficit reduction. The consequence of that downgrading would have resulted in much higher interest rates for businesses and home owners. We need only look at the disaster unfolding in the Eurozone to see the consequences of not getting government borrowing under control. Despite our own -still dreadful- public finances, the action that the government has taken to sort them out has engendered such confidence in the markets that we can borrow at a lower price than ever before: you would have to go back to the fifteen thirties when Henry VIII was borrowing ducats from Venetian bankers to get as competitive rate as we are getting now.

Yet, growth in our economy is grinding to a snail’s pace, but then it is everywhere else in the western world -irrespective of each nation’s different government policies. It is a staggering fact, and a measure of how bad things are, that our growth rate is the second highest among the G7 developed nations. The sovereign debt crisis in Europe and the hangover from the banking crisis have some way to run before domestic demand, and demand in our principal export markets recovers. This will be a long and painful process for young and old alike. What we can still do –and must do-however, is release the creativity and competitive spirit of our people with a massive programme of deregulation to sweep away the restraints on enterprise. This now has to be the main effort of government, for it is here that jobs, growth and prosperity will really come. Borrowing as an economic strategy is utterly spent.