You can’t borrow your way out of a debt crisis

Why is it that some politicians and commentators, when faced with the financial disaster that is the European economy, put their fingers in their ears and sing la la la. Even politicians who should know better. Take Ed Balls for example. He and his boss, Ed Miliband, have thought up a five point plan to rescue the British economy. It involves creating jobs, building houses and cutting taxes. All paid for by a little bit more borrowing. Its as if public sector borrowing is a heroin addiction Balls just cannot kick.

This Government, Tory led, is borrowing more each month than we can afford. The last Government, Labour, was borrowing more each month than we can afford. The only reason we are not in a situation similar to Greece right now is that the Tory commitment to deficit reduction has allowed the UK to maintain low interest rates and a triple A credit rating.

Labour’s David Ellesmere proudly stands behind a banner proclaiming the emergency response Ed Balls prescribes for the British economy (note nothing there about not contributing yet more to Euro bail out funds) and says that this is a worrying time for families in Ipswich, worried about their jobs, struggling with rising bills (as inflation hits 5.2%) and their children’s futures. He is right.

What Cllr Ellesmere may not understand, or simply chooses to ignore, is that if the Government followed Labour’s plan, based on increasing the amount we’re borrowing, we stand a risk of losing our triple A credit rating. That would make it more expensive to borrow the extra money he wants us to borrow. It would mean interest rates rising. Which would mean more jobs going, more people being made homeless as mortgage rates rise. To increase our borrowing requirement beyond that which was budgeted for would push an economy teetering on the edge into an abyss of bankruptcy.

Mr Gummer has been very strong on reminding everyone who will listen that we are in the middle of one of the trickiest economic periods for a very long time. Deficit reduction is the over riding priority of the Government, taking precedence over every aspect of public life. To put it simply, as the outgoing Labour Chief Secretary to the Treasury did, there is no more money left. This country splurged on credit, expecting the bills to be paid off by future tax income from an ever expanding economy. The credit crisis of 2008 and the consequent recession, which we’re barely out of now, has led to those bills coming due whilst the country has much less income than it needs.

Labour will not be electable without a credible economic policy. Borrowing more money simply isn’t a credible economic policy. No matter how much the five steps proposed by Ed Balls and endorsed by David Ellesmere may appeal to the electorate, voters know that they can only pay for them with more of what got us here in the first place – fake money. Mr Balls, Mr Miliband and Mr Ellesmere have three and a half years to work out a real economic strategy to take us forward from 2015.

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10 Responses

  1. Anyone with a Private Eye subscription knows that the same old PFI schemes are going on, creating ruinously high debt for hospitals etc. so the Conservatives have not turned their back on those. Nor have they condemned the outrageously high subsidies going to useless wind farms: Chris Huhne’s determination to support these means unaffordable energy bills for thousands of people, thereby increasing personal debt.

    Labour certainly failed to heed the warning given to Pharaoh in the book of Genesis that the good years would be followed by lean years and that saving for the lean years was therefore the best economic policy! (What’s new eh?)

  2. You certainly can’t cut your way out of a recession. Learn from the economic lessons of the 1920s and 1930s.

    • We’re not in a recesion, we’re in a debt crisis.

  3. You have to ask why the government is borrowing more.

    Even the Tories said that private sector growth would make up for public sector spending cuts. But this has not happened. In fact it’s only public sector spending that’s keeping us barely out of recession (http://liberalconspiracy.org/2011/10/11/why-a-second-recession-is-now-more-likely-than-not/)

    We’re not in Greece’s situation because our debt to GDP ratio was relatively healthy.

    To me it’s common sense that debt reduction needs to be managed during a recession. To simply say that the debt must be eradicated as quickly as possible is foolish.

  4. Your assertion is incorrect. Borrowing to spend is an effective technique for deficit reduction if it results in higher tax revenues and reduced expense on benefits etc. These improvements in the govt balance sheet will outbalance the extra repayments. It is particularly powerful when interest rates are as low as they are at present. And if the spending programmes are suitably chosen, they will help restore economic growth generally, multiplying the effect.
    Osborne is now seeing exactly the opposite: cuts in govt spending programmes reduce tax revenue and increase the need for benefits, so his cuts are actually worsening the deficit on a monthly basis. It’s a shockingly illiterate economic policy, which can only be seriously advocated by people who have an agenda to shrink the state and who don’t care who gets hurt in the process.
    The important thing to bear in mind is that economic shrinkage has a dreadfully adverse effect on the govt spending deficit. Borrowing which prevents recession will more than repay itself.

  5. This seems to be a pretty Tory-biased site!

    • Thank you. Yesterday we were told we were Labour biased.

  6. I would like to know where these deep and too fast cuts are, that the left say are so damaging. We haven’t even got started yet! of course the budgets are there and some services are cut but the worst is yet to come.

    Of course its the right thing to do. Anyone in debt will tell you that borrowing and hoping it will go away just makes it more unmanageable when the inevitable arrives to smack you in the face (and then we would be as bad as Greece, make no mistake about that). Labour knew this and would have had to do the same thing. For them to say it would not have been so quick and deep is just a big fat lie. It really isn’t that big and deep. Some economists even think it should go further.

    And as for same old stuff. Thatcher managed to sort out the ruination by a labour government and union leaders, and the Tories will have to do it again. The time this government has had to change something so massive is miniscule but of course the left want to blame so instead of being part of the solution they make matters worse.

    the one thing I have learnt the last few years are the Left are not the kind caring crew they portray themselves as and their tactics are shrewd, selfish and distorted. Of course that’s just my experience!

  7. One other thing, I agree with Sally about the wind farms and green taxes. i tried telling as many people as I could that green taxes are the biggest scam of our times, but everyone got caught up in the hysteria brought on by liberals and if I am disappointed in this government for one thing, it is absolutely that.

  8. [...] that Labour’s five point plan for jobs is now partially funded by a bank bonus tax, as before it seemed Mr Balls wanted to fund it entirely from extra borrowing which most commentators realised …. The feeling that the bankers should take a greater share of the pain than everyone else is having [...]

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