Sunday, June 23, 2013

The harsh economic truths that no politicians can ignore

Borrowing is cheap with interest rates continuing at a historic low level. But when they increase ( as they will) the cost of Government debt will increase – potentially to levels that will make repayment not expensive but impossible. It is irresponsible to propose significant increases in public expenditure at this time unless they can be offset by reductions elsewhere – even then it’s highly problematic.
Whilst current borrowing is at fixed and very low interest rates (Bonds and Gilts) there will be a substantial need for new borrowing at gradually rising interest rates. The combination of servicing the existing debt and servicing the new higher cost debt will be potentially crippling. As "The Spectator recently put it even at the current low interet rates the cost of "Servicing debt will soon be more than the [budgets for] education, policing or defence". 

There is no real alternative to a major restructuring of the British economy and society to bring government revenues in line with expenditure – and this means a comprehensive redefinition of the welfare State. I say this as a Fabian and (broadly) a Labour Party supporter.

We cannot spend our way out of trouble when every pound we spend is likely to cost us more. As a Nation we are not technically bankrupt at the moment but rising interest rates will push us in that direction. And as we do move that way the ghastly ratings agencies will write our rating down and our borrowing costs will rise even more!

The solution has to be a proper look at the National Balance Sheet and the National P&L. Stop spending on vanity projects like Trident. Reconsider the shibboleth that the standard rate of Income Tax must not rise. Introduce a financial transactions tax. Freeze all universal benefits and Public Sector pay. Look again at Public Sector pensions – even post Hutton they will be increasingly unaffordable. Introduce a Super Tax on earnings above £1m per annum. Realise that big as a Nation as we are we cannot go it alone and discard the idea of an EU Referendum – work closely with our EU partners most of whom share our problems. And so on.

This is not a Keynes v Hayek/Friedman type problem. There is a new paradigm in our economy and we need a new solution and that will require us completely to redesign what we do as a Nation and how we do it.


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