“The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills”. Common sense or what? The words are from a speech by the Prime Minister but they were never delivered. Somebody among his many advisors explained gently to him that if every household paid off its debts instead of spending the money on other things, the economy would collapse. Mr Cameron, certainly no economist he, hadn’t realised that. Unfortunately for him, the text of his keynote address to the Tory party conference the other week had already been released. Consequently, the two sentences he didn’t read out became the most remarked upon in the speech.
The government is all at sea over the question of debt and hence all at sea over the whole of the national economy. Today (Tuesday) the September rate of inflation as measured by the government’s favoured method, known as the Consumer Prices Index, was announced. At 5.2 percent, it is the highest it has ever been since the method was adopted 14 years ago.
Effectively, then, what we have now is what is called stagflation: a high and rising rate of inflation, a high and rising rate of unemployment and zilch growth. It’s a combination that reduces the value of money. And the usual counter to it is to increase interest rates. But to do that (which of course makes borrowing more expensive) will further reduce growth. The government has been relying on private sector growth to obviate the need for a level of public service and welfare cuts that will redound on ministers both on the street and in the ballot box. And it has made such a fetish of cutting government borrowing that to resort to Plan B or even Plan A-minus would be the most humiliating economic climb-down since Norman Lamont’s Black Wednesday. Cameron and George Osborne have steered us into a perfect storm and it’s hard to see that they are in any way equipped to ride it.
I got into a punishing level of personal debt in the 1990s. It’s bad enough when everything you purchase is expensive but when you have to purchase the money you need to make those purchases it soon becomes a vicious spiral. Running a debt on a credit card creates an illusion of painlessly burying debt. In reality, the proportion of the debt on the card that is the interest payment grows each month until it is the greater part of what you owe the bank. Banks were a lot happier to let their customers run debts then than they are now. And of course one’s chances of being allowed to slide into debt are greatly reduced if one’s prospects of securing future income are slight.
That is the main difference between the dangerously illusory debt of individuals and households – a road that can lead to repossession of one’s home if one’s home is no longer an asset that one holds – and the indebtedness that is the engine of capitalism. In business and finance, debt is called investment. Enterprises attract credit by looking as if such investment will help to grow the business and hence produce a healthy return. It’s a gamble, of course, and capitalism’s equivalent of homelessness is bankruptcy.
The present economic climate discourages investment. Hence existing indebtedness cannot be fed into something encouraging. Interest rates may be historically low but so is investment. Without growth, there is more homelessness and bankruptcy and the increasing incidence of these fell fates further discourages lending: another vicious spiral.
Osborne, Cameron and especially Business Secretary Vince Cable regularly exhort the banks to lend more money. But the banks pay no heed. The banks are afraid that they will be caught holding the bad debts when the music stops, an understandable fear. They also insist on paying their management teams grotesquely inflated salaries, bonuses, “golden handshakes” and “golden hellos”, even though many of these banks are owned at least in part by the government.
Cable itches to regulate the banks and cap the in-house rewards but Osborne and Cameron won’t let him. When Labour urges him to give Cable his head, Cameron chants his usual mantra, that Labour didn’t regulate the banks so they can’t talk. The PM subscribes to an unusual philosophy: two wrongs do make a right.
Like business and the financial sector, government also speculates and invests. So the indebtedness that fuels capitalism also is utilised by government. It is normal for government to operate a deficit. But there is a distinction, not always kept clear, between the deficit and the National Debt. Cameron wants to reduce both and there is some controversy over whether such reduction is truly necessary.
The National Debt is the net accumulation of government borrowing. 80 or 90 years ago, that debt was greater than the whole of Gross Domestic Product, which is the global market value of the national output. That was the age of the Great Depression, when poverty and unemployment were rife in Europe and the United States, and hyperinflation sent prices out of ordinary people’s reach. While the Great War had fanned global interest in revolution and Socialism, the Depression sowed the seeds of dictatorship and fascism. After World War II, Britain’s National Debt was 250 percent of GDP – hence the austerity programme instigated by the Attlee government. It didn’t prevent that government implementing Rab Butler’s Education Act, Nye Bevan’s National Health Service and Lord Beveridge’s welfare state.
At the beginning of 2011, the National Debt was 60 percent of GDP and Cameron made – and still makes – great play of Labour’s “failure” to control this figure. But under Margaret Thatcher, the National Debt was well above 50 percent of GDP and, because inflation was so much higher than the negligible rate that it fell to successively under Tony Blair and Gordon Brown, the cost of servicing that debt was much more punishing. Some twelve percent of tax revenue was swallowed in paying down the interest on Thatcher’s debt. As Chancellor, Brown made the reduction of the debt his top priority and, as a result of his much-vaunted “prudence”, the percentage of tax revenue required to service the debt by the time the coalition came to power was nearer three percent. Cameron infrequently gives Labour credit for that.
Here’s a further measure, found in the most recent figures courtesy of the Office of National Statistics. The current national budget deficit “excluding the temporary effects of financial interventions” was £13.8 billion as of August. The net borrowing with the same exclusions was £15.9 billion and the net debt £944.5 billion, equivalent to 61.4 percent of GDP. Two years previously, under Labour and after nearly a year of global economic turmoil, the equivalent figures were £12.8 billion, £16.1 billion and £804.8 billion, 57.5 percent of GDP.
A different measure of the economy is the balance of trade. Again taking ONS stats, one finds that the seasonally adjusted deficit on trade in goods and services in August this year was £1.9 billion. This raw figure masks a vast difference between the two halves of the economy. Trade in goods was in deficit by £7.8 billion whereas trade in services was in surplus by £5.9 billion. That disparity starkly demonstrates how Britain’s manufacturing base has shrunk and why the government is running scared when bankers and other city slickers threaten to take their business elsewhere if their bonuses are culled and if the government doesn’t abolish the 50 percent tax rate.
The figures from exactly a decade earlier make an interesting contrast. Then the trade deficit was £2.4 billion and no one was screaming about an economic crisis. But the two halves of the economy were rather closer together. The deficit in goods was £3.3 billion, the surplus on services £904 million.
On the basis of these figures, it is not unreasonable to surmise that, far from reducing the National Debt, the coalition is in fact increasing it. A flat-lining economy means that government revenue is stalled. Rising inflation this month causes increases in welfare payments to kick in next year. The debacle of tuition fees has led to the great majority of institutions of further education electing to charge the maximum for their courses, thereby requiring higher and higher lending by the government to students who are plunged further and further into the personal debt that Cameron affects to scorn.
Many of the government’s policies for cutting expenditure have proved to be so ill-conceived that they result in increased expense for smaller return. The savings that Osborne – like all in-coming Chancellors before him – was determined to make by cutting “waste” have proved to be a fantasy, as Osborne’s predecessors also found. And of course Cameron decided to add the excursion into Libya to the continuing unwinnable war in Afghanistan, at far greater cost than the government is prepared to divulge. The pain that has so far been inflicted on the electorate through cuts in public services and welfare has not been matched by any visible reduction in government borrowing. Ed Miliband ought to start using a mantra of his own, that “as usual Labour will have to come in after the Tories to clear up the mess”.
The pity of it is that Labour has not sought to put clearer ground between itself and the coalition. Miliband and Ed Balls have done little to discourage the belief that, had they been in government, they would have pursued similar policies of slash and burn, only slower. But is the reduction of the deficit and the National Debt so desirable or indeed at all necessary?
The Nobel Prize-winning economist Paul Krugman, who praised Gordon Brown’s leadership of Europe’s handling of the 2008-09 recession and who remains a trenchant critic of present policies pursued in both Washington and London, wrote that the Republican Party in the US “never cared about the deficit – not a bit. It has always been nothing but a club with which to beat down opposition to an ideological goal, namely the dissolution of the welfare state. They’re not interested, at all, in a genuine deficit-reduction deal if it does not serve that goal” [New York Times, June 24th 2011]. Looking at Andrew Lansley’s ham-fisted assault on the NHS and the coalition’s handling of education, the police, the BBC, local government and other public services, it’s hard to avoid the suspicion that the recently posited links between the Tories and the Tea Party go a lot further than agreement about fiscal policy.
Cameron and Osborne would do well to mark Keynes’ phrase “the paradox of thrift”. Keynes anticipated the error that Cameron excised from his conference speech at the last minute, that if people eschew spending in a recession (as Cameron almost advocated) the fall in demand leads to a fall in activity and so a recession becomes a depression. If the government doesn’t spend on promoting growth, it will have to spend more on saving the unemployed and their dependents from penury. This is the fundamental error that the Irish government committed last year and that the Greek government is sliding into now. And the people don’t thank their governments for making such poor judgments.
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