Debt is the curse of our age. Public debt, private debt, personal debt [85] – in every case we have, as a country, borrowed too much and too fast.
In doing so we have distorted and destabilised the economy, not only harming our own future, but those of our children and grandchildren.
Debt undermines home ownership, job creation and the savings culture
Our national over-indebtedness does particular damage to the foundations of the mass middle class.
By pumping money into the property market it causes house price inflation – pushing home ownership out of the reach of ordinary working people. Asset bubbles also suck talent and investment out of genuinely productive enterprises – damaging job creation and suppressing wage levels. And even more damage is done to the whole economy when those bubbles burst – as they inevitably do.
Above all, a debt culture is the antithesis of the savings culture. Ordinary working people are impoverished by the accumulation of liabilities, while the rich – who own wealth beyond a home and basic savings – get richer as the rising tide of cheap money lifts the value of property investments and other fixed assets. The unfairness is further exacerbated by government bail-outs and financial repression (see chapter 3).
In the previous chapter we set out a programme to restore the savings culture. But bearing down on personal and private debt is not enough. We also need to deal with public debt – because as long as the state is deep in the red, governments will be under overwhelming pressure to pursue the cheap money and easy credit policies that got us into this mess in the first place.
Living within our means
Ultimately, the only way for both households and governments to free themselves from debt is to live within their means. Keynesian economic theory has long been used as an excuse by governments to run budget deficits. But for too long, government policy has only been ‘semi- Keynesian’ – running deficits in bad times, but failing to balance this with surpluses in good times. [86] Running deficits in both good times and bad is unsustainable and ensures there will be more bad times than good in the future.
Though the cuts we’ve seen as part of the current austerity have been painful – they don’t deal with the structural causes of our national indebtedness. Over-spending is built into the very way that government works in this country – and across most of the western world:
• Fiscal rules in this country are weak.
• The process of setting budgets is inflexible.
• Incentives to drive down costs in the public sector are limited.
• And, in the long-term, politicians face no accountability for the effect that their decisions have on our national solvency.
Unless these structural factors change, we will see future governments pushing the country’s finances to the cliff-edge over-and-over again.
Therefore, while the current Government is absolutely right to pursue a programme of deficit elimination, we also need much deeper reforms that embed financial responsibility into the very fabric of our system of government.
Fiscal rules that stand the test of time
It’s very easy for governments to set financial rules for themselves. It’s even easier for them to break those rules.
Currently, the government is on course to eliminate the deficit by 2019. However, that will still leave an enormous outstanding level of net debt – peaking in the next few years at more than 80 per cent of GDP. [87] The responsible thing to do next would be to get this down to a lower level – because while we’ve been able to finance our debts at a comparatively low rate of interest and with a comparatively long repayment period, there’s no guarantee that we’ll be able to refinance as cheaply in the future.
In short, it would be wrong for us to bequeath an unexploded debt bomb to future generations.
However, in defusing this debt bomb, governments now face an acute moral dilemma. If one government exercises the fiscal and political discipline necessary to get debt down to a lower level, what’s to stop the next government from pushing it back up to the previous level – and claiming credit for the ‘generosity’ of its spending policies?
The British constitution does not allow one government to bind the hands of another, but it can embed fiscal responsibility within a legal and institution framework that a future government would not be able to dismantle without paying a political price.
Therefore, we propose:
Near-range and long-range zero-base budgeting
To stick within spending limits, governments need to control public spending with much greater success than they have done so far. Part of the problem is a budgeting process in which spending on particular items in one period sets a precedent for spending on the same items in future. While new items might get added, old items stay in place with no more than a small variation (usually upwards) in the money allocated to them.
This has three serious consequences: Firstly, a ratchet effect on the overall level of spending. Secondly, a culture of complacency and entitlement, in which the continuation of various programmes is taken for granted. And, thirdly, the inability to free up resources for innovative policies that might actually solve social problems instead of merely managing them.
It is vital that we free ourselves from the inflexibility and short-termism of the current approach.
Therefore, we propose:
Fiscal decentralisation
Successive governments have tried and failed to reduce the supply of government. The only way in which we can permanently ensure the sustainability of our finances is to reduce the demand for government – and this requires social innovation.
The financial flexibility of zero-based budgeting will remove one of the biggest of impediments to such innovation, but we also need to incentivise it. Even within a decentralised public sector, where various players at all levels of government are able to identify ways of saving money, the motivation for doing so will be missing if only one player – the Treasury – hogs the financial benefit.
Therefore, we propose:
Long-term liabilities
So far we’ve only mentioned the debts that appear on our national balance sheet. Unfortunately there are many more ‘off-sheet’ liabilities that don’t appear in the headline figures. For instance, public sector pension liabilities, the long-term costs of decommissioning Britain’s nuclear power stations, and the sums owed under the terms of various PFI deals.
All of these incredibly complex arrangements have allowed successive governments to run up enormous debts on behalf of the nation, without being held accountable for them. In fact, it is a key weakness of our system of government that senior politicians and officials can make the most irresponsible decisions and yet face no personal comeback because the consequences aren’t felt until long after they’ve left office.
This cannot be allowed to carry on.
Therefore, we propose:
Priorities for tax reform
Budgetary policy is too often presented as a simple trade-off between spending (which left-wingers want to maximise) and taxation (which right-wingers want to minimise). It has taken the financial crisis of the last few years to remind us of the third basic element in any budget, which is borrowing.
Therefore, as well as the choice between lower taxation and higher spending there is another balance to be struck – between lower taxation and lower borrowing. The old excuses for not making this choice no longer wash. For the most part, tax cuts do not pay for themselves – nor is it the case that tax cuts ‘starve the beast’ i.e. force governments to curb their spending. [93]
At a time when income tax rates are still a long way from the punitive levels of the 1970s, and borrowing levels are dangerously high, a new order of priorities is required.
Therefore, we propose:
• Within the tax system, reliefs should be redistributed to provide greater benefits for ordinary working people and all remaining loopholes must be closed for the rich.
Footnotes
85 McKinsey Global Institute, ‘Debt and deleveraging: Uneven progress on the path to growth’, January 2012, pages 13 and 23
86 Jonathan Jones, The Spectator, ‘Ed Balls tells porkies about the deficit’, 25 October 2012 !28
87 BBC News, ‘UK debt and deficit: All you need to know’, 21 February 2014
88 For instance, see Ben Gummer, Financial Times, ‘Struggle against public debt must go on’, 4 December 2012
89 Emran Mian, Prospect, ‘HS3: Does a high speed rail project mean austerity’s over?’, 24 June 2014
90 For how debt retirement might take place see Jo Owen, The Financial Times, ‘Bank of England should retire QE debt’, 11 March 2012
91 The Economist, ‘Zero-base budgeting’, 26 January 2009
92 For a comprehensive reform programme see Jesse Norman, Centre for Policy Studies, ‘After PFI’, May 2012 !31