Sajid Javid is the Conservative MP for Bromsgrove and was previously a senior Managing Director with Deutsche Bank. In this Platform, he builds on his Maiden Speech of last week, and argues that the global economic outlook puts even more pressure on us to start cutting public spending immediately.
Not only have we inherited an utter economic mess from Labour but the global economic outlook is about to complicate matters further.
Let’s remind ourselves of the domestic disaster that we have been left to clean up. At 12 per cent of GDP, Labour passed us the largest deficit in Europe. During their 13 years in office, Labour took our visible national debt from £351 billion to £894 billion, an increase of 155 per cent.
Labour also mastered the dark art of off-balance sheet borrowing, in much the same way as RBS, Citibank and Enron did. For instance, our PFI liabilities are estimated to be at least £150 billion and our public sector pension liabilities an eye watering £2,000 billion. Combine these with the visible debt and, at £3,044 billion, you have one of the most indebted nations on Earth. That amounts to over £49,000 per head.
We have no choice but to make big cuts in public borrowing and public spending. If we don’t, we will no longer be able to sell enough government bonds to fund the deficit, leading to an economic crisis of catastrophic proportions. It’s that simple. We can’t even plan to reduce the debt – we can, at best, only add to it less fast.
If we were looking for a little help from the global economy in putting things right, it most certainly isn’t forthcoming.
The world’s financial markets are at their most vulnerable since the collapse of Lehman Brothers in 2008.
First, after showing a few signs of life over the last year, the world’s credit markets have seized up again. Libor, the rate at which banks lend to each other, has doubled in a few weeks. Similarly, the iTraxx bank index, a barometer of banking sector default risk, is not far off all time highs. Unsurprisingly, banks are putting record amounts on deposit with central banks – rather than choosing to lend to the private sector.
Second, it’s clear that the Euro’s troubles are only just beginning. The Euro was always a political contrivance which had little to do with economics. The recent €750 billion bailout package will not be enough. The financial markets have already discounted it. Expect a fresh bailout package during the summer.
With 55 per cent of the Britain’s trade transacted with our European partners, the Eurozones troubles will entail painful consequences for us. When Canada took tough austerity measures it could rely on its big neighbour to provide a healthy market for exports. We cannot.
Third, the world’s largest emerging markets are overheating. We can no longer count on them to buttress global demand as they have done since the onset of the credit crisis. As countries such as China and India raise interest rates, we’ll see a fall in global growth.
Lastly, investor appetite for sovereign debt is very fragile. Much of it is being purchased because it’s the least bad option. The world’s industrialised economies, including Britain, can no longer take demand for their sovereign bonds for granted. Many sovereign credit default swap spreads, which act as a barometer of default risk, are approaching record highs.
Although demand for our own Gilts has been strong since the General Election – with the 10 year Gilt yield falling from 3.8% to 3.5% – we would be mistaken to take any comfort from this. It reflects Eurozone weakness as much as anything else.
It’s precisely because the global outlook is so poor, that we must make sure that we do not shy away from the tough decisions that lie ahead.
As well as reigning in public spending, it’s hugely reassuring to have a government that also recognises that we need to open up Britain for business again.
This means getting banks to start lending. This just isn’t going to happen until the banks are forced admit the true state of their balance sheets. As well as a thorough review of financial regulation and regulators, we need an independent audit – or stress test – of each British bank, eventually leading to a private sector recapitalisation of weaker institutions. The report issued over the weekend by the Future of Banking Commission, chaired by David Davis, makes some worthy suggestions.
We must be careful that the economic sectors where we possess a competitive advantage are not damaged by hasty legislation. Yes, we need to diversify our economy, but by promoting new industries, not crushing existing ones.
It goes without saying that taxes should be reduced, when we can do so. The benefits are myriad: lower income tax, especially for those on lower salaries, incentivizes work as opposed to reliance on welfare, while lower corporate tax attracts the businesses we need for growth.
Cutting regulations, unlike taxes, is something we can get on with right away. Labour destroyed many businesses through excessive regulation, and stopped many more from emerging. Recent announcements by Vince Cable are very welcome.
Although Britain faces the toughest economic challenge in a generation, we have a Conservative-led government that recognises the enormity of the problem. As public spending is cut we must take great care not to balance the budget on the backs of the poor. It’s going to be a tough ride, but I am convinced that Britain can regain her economic strength.