ConservativeHome - The Jury

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What can and should still be done now to reduce the danger of a future debt burden?

Throughout this week we've compiled a special Jury to answer five questions:

  • How alarmed should we be at the growth in the total debt burden?
  • It may not be unprecedented by historical standards but isn't today's UK borrowing significant by international standards?
  • Is there a danger that the most talented young Britons will leave high taxed Britain in future years for less indebted nations?
  • What can and should still be done now to reduce the danger of a future debt burden?
  • How long can Britain continue to borrow at the current low interest rates?

Here are four answers to the fourth question — from Eamonn Butler of the Adam Smith Institute, Philip Booth of the Institute of Economic Affairs, Ryan Bourne of the Centre for Policy Studies, and the ConservativeHome columnist Andrew Lilico.

Eamonn Butler:We need some principles with the strength of constitutional law. Not principles like Gordon Brown's 'Golden Rule', or the Maastricht Conditions, that were abandoned at the first sign of a problem. Balanced-budget rules, maximum-deficit rules. But the most useful thing we could do is this: establish the principle that every Bill coming before Parliament must contain an estimate of its future costs over the coming years, decades and generations. Then politicians would not be able to vote benefits for this generation without paying any regard to the future cost. It would get us out of Ponzi-scheme politics.”

Philip Booth: “In the short term, there must be radical spending cuts, welfare reform, other supply-side reform and rises in state pension ages in order to raise economic growth, reduce taxation and reduce borrowing. This could change things really quite quickly. Indeed, we have such a dysfunctional tax and benefits system that we could create a win-win-win situation quite easily. This goes back to Reagan's 1964 line that there are simple answers but no easy answers (in terms of the vested interests that would be disturbed). This does not remove the fiscal headwinds. In the long term, we must move to much greater pre-funding of health and pensions for the younger generation. This would raise savings, make provision more efficient and responsive, and also create much better economic incentives for the types of behaviours that will help deal with the many problems that will be thrown at us over the next 50 years.”

Ryan Bourne: “There needs to be a combination of measures on the supply-side to raise the UK's underlying growth rate alongside attempts to constrain the growth of debt through fiscal policy. The Government have made a start on the latter, but thus far the bulk of any deficit closure has come through cuts to capital expenditure and raising tax rates, which evidence suggests has a more damaging effect on growth than cutting current expenditure. Over the next five years the Government must deliver on the current spending cuts it has outlined, but even this is unlikely to be enough given the somewhat optimistic outlook of the Office for Budget Responsibility in the future. In the shorter-term, the government can constrain spending through limiting the growth of streams like benefits, aid and public sector pay. Though it is appealing to suggest much larger immediate cuts elsewhere to eliminate the deficit, this ignores the ongoing commitments the government faces. It is more sensible and immediately palatable to take steps today which will make big savings in the future: reassessing retirement ages, the provision of state and public sector pensions, eligibility for a range of state transfers, and reassessing the scope of government departments. This method tends to be politically reasonable, as you can set clear future dates or cut-offs for various spending streams.

On the supply-side, key is to adopt measures which increase labour supply and encourage entrepreneurship/innovation: again, older retirement ages; tax reform which broadens bases and lowers marginal rates; welfare reform which makes work pay - particularly by shifting to more work conditional benefits from unearned income streams (the Government should look at 'earned income tax credits' here); a competitive corporate and investment tax regime; taking small businesses outside of as much regulation as possible; and pursuing a competitive energy policy (I.e. not adopting a unilateral carbon price floor!).”

Andrew Lilico: “The key need for the UK economy is, as it has been ever since 2008, to increase our medium-term growth rate.  Without reversing the decline in the medium-term growth rate, then unless there is inflation, UK households will default on their huge mortgages, the UK banks will go bust, and the UK sovereign as the backer of those banks will go bust.  The right fear for the UK government is not that the government goes bust because of going the way of Greece.  It is that it goes bust because we go the way of Spain or Ireland.

The right solution is to increase the medium-term growth rate.  The best ways to do that are: (a) to cut government consumption spending; (b) to increase the efficiency of government consumption spending (which means greater use of markets and profit motives – things still anathema); to increase workforce participation by increasing the retirement age (more workers equals more growth); accelerate household deleveraging (so they don’t go bust) by (i) stopping attempting to encourage them to borrow more, and (ii) raising interest rates; liquidating zombie companies holding growth back, but kept going by ultra-loose monetary policy, so that new growing companies can replace them (again, by raising interest rates); facilitating lending growth by healthy banks, by de-nationalising banks and imposing losses on their bondholders so as to recapitalise them and create a class of investor in them with an interest in restructuring them – banks should be broken up in the process of renationalisation so that there are more smaller and more competing banks, and new entry should be facilitated by the willingness to see market exit (i.e. banks going bust and being liquidated).

The government has shown a distinct lack of fear.  Not being afraid isn’t brave when fear is warranted, as it is now – it is foolishness.  Fear should have driven panic (which was warranted) and panic should have driven drastic action (which was necessary).

Alas, none of this will happen until we face disaster – probably in the form of high inflation annihilating savings and debts, followed by interest rate rises inducing another deep sting-in-the-tail recession (much as in 1980) and mass unemployment.  I am more pessimistic now than I have been at any point since August 2008 (if you recall my articles pleading for Brown to act then).  Politics has failed us.”

> Tomorrow: How long can Britain continue to borrow at the current low interest rates?


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