Baroness Vadera the Prime Minister's confidante, allegedly known as Shriti the Shriek for her manner in dealing with civil servants, was hauled over the coals recently for saying she had already detected the green shoots of economic recovery. She may have been premature but it is important that we remain optimistic and believe that there is going to be a recovery. The one bright spot in the IMF’s latest report, notwithstanding its gloomy assessment that the recession will be worse in the UK than almost anywhere else, is that it does consider that the recession will be shorter than many economists have been forecasting. I do believe there is real a danger that recovery might be delayed by misguided government policies which end up prolonging the very recession that they are trying to alleviate (for example, borrowing billions to cut VAT only to put taxes up again when the economy struggles to emerge from the downturn. For all the effect that the cut in VAT has had, the Government might have just as well set fire to the money). Delayed or otherwise, there will be a recovery, and we ought to consider how, when it comes, we are going to rebuild our economy and avoid the mistakes that have landed us in the present mess with a worse recession than anywhere else.
One of the alarming features of the last decade has been the collapse of saving. Even as the economy boomed we saved less and less, in fact, less than ever before. The notion of saving up for something has almost completely disappeared. It is now commonplace for people to borrow for the “holiday of a lifetime” and I have seen advertisements from loan companies encouraging exactly that. It is not for politicians to tell people how to live their lives but clearly, economic risk is minimised if you save up for luxury consumer goods and holidays before you consume them rather than attempting to do so afterwards when you have the interest on the debt as well to repay. MPs and the Citizens Advice Bureau are being inundated by people who find themselves in debt, as if they just woke up one morning and discovered it. If the tax system did not punish savers and, instead rewarded them, then we might restore the virtuous habit of saving. I repeat that it is not for politicians to tell people how to live their lives but the level of consumer debt is a significant economic fact and it used to be the role of the Bank of England to monitor, and if necessary restrain the growth of credit. Unfortunately, Gordon Brown took that role away. Perhaps if he had not done so, the boom (which he claimed to have abolished) would have been more modest and the bust (which he also claimed to have abolished) would now have left us with us with much less of a hang-over.
Of course, the principal borrowers during the last decade of irresponsibility have not been consumers but rather, the banks and the Government itself. The mind-boggling risk taken on by the banks points to a massive failure of regulation. I am not usually an enthusiast for regulation and regulators, who generally restrain enterprise and end up making us all poorer, however the banks are a special case. We cannot allow them to go bust (as they properly ought in punishment for their stupidity and greed) because of the disastrous consequences that would follow for us all. So, we must protect ourselves from the scale of their folly by effective regulation. The regime designed and implemented by Gordon Brown a decade ago to carry out this role has failed spectacularly and will need to be rebuilt.
As for the Government, it has been the greatest borrower of them all. We expect governments to have to borrow in difficult times when tax revenues decrease with the decline of economic activity, but equally, we expect the government to prepare for that event by prudent management in the good times. Our problem is that this Government was borrowing billions at the height of the boom so that now when we have hit bust, we are facing a national debt doubling to £1trillion with higher taxes over generations to pay it back. The proper mechanism to hold government’s to account is an election, but by the time the voters have their say, the damage is already done. Maybe, we should put some institutional or constitutional limits on the government’s financial irresponsibility between elections, perhaps by creating an Office for Budget Responsibility reporting to Parliament.
Finally and perhaps most important of all, we are being left with a legacy of enormous government debt. Every child born arrives with £17,000 as their share of it. There will be enormous temptation to erode the burden of repayment by simply making it worth a lot less through inflation. Hopefully, the history of Germany in the inter war years has taught us a lesson. If not, the present state of Zimbabwe should be a powerful corrective for any flirtation with inflation. Yet governments have been very foolish in the past and may be so again. It is the job of their elected representatives to be extremely vigilant. |
