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Lord Flight: Britain's public spending crisis is not the fault of the banks - both the Labour Government and consumers were over-spending

FLIGHT Howard 2 Lord Flight is a former Shadow Chief Secretary to the Treasury who is now chairman of Flight & Partners Recovery Fund.

I am a patriot and continue to believe that, given the right, capitalist, fiscal environment, the British people have the inventive and entrepreneurial talents to restore our economic health.  What is concerning is that people such as the Archbishop of Canterbury and his like, both amongst the Opposition and in the Coalition, do not seem to realise that the position of the UK is not far off that of Greece - “there but for the grace of God...” - and that the UK has to change its ways, if we are to recover.

The public has been misled, mostly by Labour politicians, into believing that the public spending crisis is the fault of the banks.  The reality is that from 2001, the Labour Government borrowed and spent too much, and also relied upon massive tax income from the financial sector at “the top of the froth”.  Thus, at the top of an economic cycle, not only was there an official deficit of £40 billion per annum, but also a reliance upon such “frothy” tax revenues of some £50 billion per annum.  Inevitably, tax revenues fall in less frothy economic times:  thus the Labour Government built up a structural deficit of the order of £100 billion per annum  The extent to which Britain consumed more than its income in the course of the first decade of this Century is reflected in the cumulative current account deficit built up over the period of £600 billion; in other words, we consumed £600 billion more than we produced.

The point also needs to be made that while the major problems which hit only two particular large banking groups owed much to their irresponsible leadership, the totality of the banking problems was the result of the Government’s mistaken monetary, economic and regulatory policies and, in particular, lax monetary conditions between 2001 and 2007.  If money is too easy, particularly in boom times, banks always tend to make unwise lending decisions.

Thanks to George Osborne’s Budget and, to some extent, to be fair, Alastair Darling’s final Budget and the fact that we retained our own currency, so far the UK has remained credit worthy.  But even after the planned reductions in inflation-adjusted real (rather than monetary) spending and the increases in taxation, it remains questionable as to how easily the Government will be able to finance the major deficits which will continue in the next three years. 

91% of recent £40 billion gilt sales were purchased by the UK banks, reflecting substantially Quantitative Easng which has pumped £200 billion of “printed” money into the economy.  In the six months to last October, foreign buyers bought £33.5 billion, but in the six months to March they bought only £12.4 billion.  Under Labour, Britain’s Savings Rate also collapsed from 9.7% of GDP to virtually zero, so there are not the significant domestic savings available to buy Government debt – as there were to finance the large deficits during and after World War II.

Moreover, it is not just the Government which has been over-spending but also consumers.   Consumer debt is, moreover, forecast to increase from £1.6 trillion to £2.1 trillion by 2015.  This is notwithstanding the fact that overall consumption is likely to remain relatively stagnant.  People will be borrowing more to maintain their living standards.  The truth is that under the Labour Government, and particularly post-2001, both the Government and citizens got into bad habits, where the out-going Conservative Government, much though it was criticised, left the economy and the public finances in 1997 in remarkably good order. The UK cannot afford to spend unlimitedly on the National Health Service; it cannot afford a total of approaching £220 billion of welfare expenditure (after including the accounting fiddles).  As well as Government, citizens need to re-learn to live within their means and to save for their retirement.

Writing as a financier and economist, I do not think the Conservative Deficit Reduction programme is tough enough.  There is still massive waste of public expenditure.  Remuneration in the public sector which should under economic principles be marginally below that in the private sector, is 40% higher, taking into account the more generous public sector pension arrangements.

Our economic position has also been worsened by a deterioration in the terms of trade against us since 2006, where this improved through the 1990s.  And while the 27% effective devaluation of Sterling may help our export industries, it also means that our imports and, in particular, our growing Energy imports cost even more in Sterling.

It is, moreover, pathetic that since 1997 we have slipped from being the seventh to the twelfth most competitive economy in the world, reflecting both tax increases and the growing burden of unnecessary regulation.

The bottom line is that over the next five years Britain will have to persuade a lot of foreigners to buy a lot of British Government debt.  With inflation rising, the interest rate on this will also have to rise.  With growing concerns with regard to the credit worthiness of sovereign debt emanating from Greece; inevitably, the surplus economies will be more cautious going forward as to where they invest.

It was, I believe, correct as an “insurance”, to “pull the Keynesian levers” in 2008 when there was the risk of economic collapse; but this needed to be a temporary measure.  We now have to get back to a sustainable economic path, “balancing the books” and saving and investing more.  The Government can only continue borrowing to the extent there are buyers of its debt.  Anyone who thinks there is an easy option or we can continue with the bad habits of unsustainable public and private sector consumption, is “living in a fool’s paradise”.


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