Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies.
A new Centre for Policy Studies report by Jon Moulton published today says that more companies in the UK should be failing, and public spending cuts are not happening quickly enough.
Britain’s leading turnaround specialist – with an impressive track record of reviving ailing companies – likens our debt situation to the treatment of heroin addiction in his Centre for Policy Studies Pointmaker. Attempting to solve debt with more debt is just like treating heroin with heroin, he argues. It makes us feel temporarily better, without ever solving the underlying problem.
Just last week the ONS revealed that including the financial interventions for the first time increased public sector net debt to a staggering £2,323 billion – 154.9% of GDP or £89,000 for every household in the UK. Meanwhile, total debt in the private sector now stands at 450% of GDP – £259,000 per household. But despite this financial storm cloud, Moulton shows that the ground is still rather dry. Unemployment has not skyrocketed, and corporate failure rates since 2008-09 have been much lower than in both the 1980 and 1991 recessions.
This – he suggests – has been achieved by a conscious decision by governments to avoid short-term pain. Policies designed to lower interest rates have made debts more serviceable, whilst governments have been supporting businesses to the tune of £30 billion in unpaid corporate taxes. And prior to balancing the budget in 2015/16, the government will continue to borrow further in order to make interest payments on its own debt.
These actions have stifled the natural adjustments that would usually occur as the economy recovers. Uncompetitive enterprises are still trading, the banking sector remains largely unreformed and housing repossessions are startlingly low. Savers and pensioners are being hit, and those with high borrowings rewarded. And the government debt isn’t being paid off. We are taking the easy way out today and piling the damage into tomorrow – in turn punishing those who currently have no power or control.
Whilst this is clearly morally unacceptable, Jon Moulton also highlights the long-term negative economic effects that this short-termism will bring. At some point in the future all of this debt is going to have to be serviced, defaulted or inflated away. And unchartered debts across developed western countries mean that uncertainty is high. What is certain, though, is that when creditors fear default or inflation, interest rates will rise substantially and the game will be up.
Moulton is experienced in managing a crisis. The founder of Better Capital has enjoyed a brilliant career picking up the pieces of financially mismanaged companies, helping to transform the fortunes of the likes of Parker Pen and more recently saving Reader's Digest. The turnaround remit of his company means that he undertakes extensive research into companies with deep debt levels, and he is convinced that the policy conditions are sparing firms that are not viable long-term businesses.
The conclusion of his work is simple. Much stronger medicine is needed sooner. More draconian cuts are required now to provide a better base for future growth and to enable a faster rebalancing towards the private sector. Likewise, business failures and unemployment should be tolerated for the long-term greater good.
The Coalition government does not appear to have the political will to grant his wish. The question is, even if they did, would the electorate be patient enough to accept it?
Pain Aversion: Addictive, but no basis for medium-term economic policy by Jon Moulton is published today by the Centre for Policy Studies.