Sajid Javid is Conservative MP for Bromsgrove.
America’s debt ceiling has taken it to the economic precipice. This is both deliberate and welcome.
If political leaders fail to reach an agreement on slashing government spending by August 2nd, then the United States will default on its debt. Such an event would send shock waves through the global economy, putting the Eurozone’s problems instantly in the shade.
Few things are as effective as a looming crisis in getting politicians to act. It is precisely this prospect that has spurred American political leaders into action. They have no choice but to openly debate America’s out-of-control national debt and take immediate action.
This is exactly why Britain needs a debt ceiling too, and why I’ll be introducing the National Debt Cap Bill (under the ten minute rule) in the House of Commons next month. Once the Coalition government fixes the nations finances, let’s make it as hard as possible for a future Labour government to wreck them again.
The last government believed that the answer to society’s problems lay in more government spending. As public sector budgets rocketed, so did government debt.
Britain’s national debt stands at a massive £920 billion, up from £320 billion in 1997 – an increase of over 180%. Every British household is groaning under its own £35,000 share of government debt. In servicing this debt, Britain will spend £42 billion on interest this year – more than we spend on the defence of the country or educating our children.
Yet this debt figure is only a conservative estimate. It doesn’t include our off-balance sheet liabilities which also soared under Labour. If we add the full cost of unfunded projects, public sector pension liabilities and bank bailouts, the true size of the of our indebtedness is closer to £2.2 trillion.
Unfunded public spending can only be financed through the sale of government bonds. But the markets impose a limit on what governments can borrow, just as they do on individuals and companies. Everyone, Ed Balls aside, knows that you can’t force investors to buy your bonds. Just ask Greece.
But market discipline isn’t enough. There are too many temptations on politicians to buy now, pay later. Done in excess, this isn’t just economically wrong, but morally wrong too. We have no right to make future generations pay for our own day-to-day consumption. Why should we ask the younger generation to pay for our inability to live within our means?
That’s why I will be introducing this bill. It will cap the amount government can borrow as a percentage of GDP. We’re currently at 60%, and this is expected to peak at 71% in 2014.
Although my bill will leave it to the Treasury to define the cap level and to justify it, I personally believe that where we want to eventually end up is around 40% of GDP – which would clearly mean the cap would only kick in on a set date many years from now, perhaps with mandatory signposting along the way. The Office of Budget Responsibility (OBR) could be given the task of monitoring government compliance of the cap.
Ideally the cap should also include off-balance sheet liabilities – but given the current lack of transparency, it’s hard to nail down concrete figures. When the OBR devises an accepted way to measure such liabilities, perhaps they should be included in a revised cap.
We need to make it harder for politicians to rack up debt and thereby simultaneously risk our economic prosperity and burden the next generation. As with America’s “debt ceiling” and the “debt brake” in place in both Germany and Switzerland, if a government hits the cap, it will be forced by law to cut spending and potentially even repay some debt early.
Of course, a current Parliament cannot bind future Parliaments, so the government of the day could try to raise the cap. However, my bill will require it to secure the support of a majority of MPs – each having to justify themselves to their constituents. Such an open debate will make it harder for politicians increase national debt by stealth and take the easy way out.
What we really need to do is find solutions to the long-term challenges of public finances. This requires major political decisions, of the sort that the Coalition government is not shying away from. But there is always the risk that having taken and implemented the tough decisions, a future Labour government reverts to the old way of doing things. That’s why we need the legislative restraint of a debt cap.
The British people realize that debt is a threat. There is no copper-bottomed, rock solid guarantee against fiscal irresponsibility. But the National Debt Cap Bill could help ensure that the prosperity and opportunities that we enjoy remain open for future generations.