News of the US administration finally reaching an agreement to raise the US debt ceiling did not solve the longterm problem.
The West has been on a borrowing binge for the last 15 years. Governments have confused the effects of borrowing with genuine economic improvement – and some seem convinced their policies have actually driven growth. This was true of the previous Labour Government and of Gordon Brown, who famously pronounced the end of “boom and bust”. Such misplaced confidence that growth was here to stay exacerbated the problem as proceeds were spent on the public sector rather than used to reduce borrowing.
Governments have always been poor spenders of our money. We see examples of it all the time in the UK with bloated IT budgets and spending binges from local governments. The financial crisis has brought these problems under the spot-light and closer scrutiny has revealed a level of government spending out of touch with economic reality. The boom in public spending is over. We have hit our credit limit and, according to Richard Jeffrey of Cazenove, it is on track to show a fall of around 0.8 per cent in real terms.
Governments on both sides of the Atlantic and in Europe have tried to offset such problems by inducing consumers to spend more. These policies have been counterproductive. Like governments, consumers are indebted. Borrowing more to spend our way out of a recession will only postpone the necessary process of reducing our collective debt burden.
The trouble is the public in most count-ries have become accustomed to unsus-tainable levels of government spending and state benefits. No one likes making do with less, which has been demonstrated in the streets of Athens and, to a lesser extent, in protests over public sector pensions and benefit cuts in this country.
Most politicians are only interested in the electoral cycle and the mantra of “save more and spend less” is not a vote-winner. They devise ways of spending more in the name of economic growth to make people feel happier. Ed Balls’ grand idea of an emergency VAT cut is a prime example. It seems akin to giving an alcoholic another bottle of vodka, yet politicians are often deluded they can do something to improve long-term economic growth with these kind of measures. All they really do is postpone the day of reckoning.
The amount of money we are borrowing is scary and the UK’s national debt is set to balloon from around £780bn today to £1,200bn in 2014-15, despite “austerity” measures. So far, we have been fortunate that international markets have focused their attention on the eurozone and the US. UK gilts have been a safe place to be, with the 10-year gilt yield falling below 3 per cent but these low costs of borrow-ing will soon evaporate if the market loses confidence that the government is committed to debt reduction.
The only way to recover is to give up some of the things we like and pay back our debts. This will be painful but will give us a firm foundation for future growth and ensure we are not at the mercy of the markets. It will take a long time and while it is happening consumer spending is likely to remain weak and growth anaemic. Not a winning electoral message for the coalition but a realistic one for those with longer-term concerns for the economic health of the country.
Mark Dampier is head of research at Hargreaves Lansdown