Prudence has been abandoned. The Prime Minister appears to have forgotten that it was he himself who said “you cannot spend your way out of a recession”. Now he is busy telling us that borrowing is good.
Actually, borrowing is an inevitable consequence of the boom / bust cycle that Gordon Brown boasted that he had abolished. As the trade cycle goes into recession tax revenues diminish and government spending has to rise in order to pay unemployment benefits. This gap between falling revenue and higher spending has to be filled with government borrowing. On the upside, the borrowing can be repaid with surplus tax revenue when the economy grows, reducing government expenditure on unemployment. These effects amount to an automatic stabiliser preventing the complete collapse of expenditure in a recession and restraining demand by taking money out of the economy through the repayment of debt when things are booming.
The problem with Gordon Brown’s policy is that he has borrowed throughout the economic cycle, even at the height of the boom. In the past we have always entered recessions with a surplus of tax revenue over expenditure, giving government plenty of scope to cut taxes and spend wisely to stimulate the economy. This time we are entering recession with an already whopping borrowing requirement.
It will take our children and grandchildren years of higher taxes to pay back all this borrowing. Now the Chancellor is talking of tax cuts and further increases in government spending. In ordinary circumstances this might be the right thing to do in a recession. Given however, the £60 billion he will already have to borrow this year and £100 billion next year (even before taking into account the rescue of the banks), it is very doubtful that he will be able to do it without provoking a sterling crisis, a run on the pound and a humiliating request to the IMF to bail Britain out. Who else would be persuaded to lend billions to a government in hard times, when that government has shown its imprudence by already borrowing so much in the good times? |
