Thursday, December 01, 2011

Taking on more debt does not solve the debt crisis

The usual suspects have been out in force on the subject of the British Chancellor's Autumn statement. The mostly left-wing commentators have been imploring Mr. Osborne to switch to Plan B. "The cuts"- they say- "are too severe, and will damage growth". 

I am almost tempted to say "what cuts?"

In fact, "If only..." because, although the government has talked big on the subject of government spending cuts, the fact is that the deficit remains close to its record high, and every month that passes adds yet further billions onto the national debt, which is already stretched way beyond the normal limits for a AAA credit risk. The coalition has established credibility with the financial markets, and retained its AAA- for the time being- but it is still a question of statements of intent rather than goals that are being achieved.

It is just as well that the UK government has gained a breathing space, because even compared to the peripheral Euro zone countries, the toxic legacy of Labour's debt binge has left the British economy in a very precarious position indeed. In fact, one could almost say that the scale of the problems in the Eurozone have distracted attention from the UK's own miserable debt plight.

The fact is that leverage in general is becoming ever more dangerous- which is why the UK private sector paid down over £ 9 billion of mortgage debt last quarter. Unfortunately, the British government has not been able to do the same thing- but that does not mean that it should stop trying.

The Labour government wasted billions on the public sector, and the bloat that remains is crippling the UK economy. Even now, and for several years to come according to the IFS, public sector jobs are set to pay better than the private sector. That is in addition to the fact that public sector workers are entitled to pension benefits that have had to be abandoned in the Private sector, because they were literally bankrupting the companies that were funding them. If the UK does not change the rules on public sector pensions now, then it will face a future where it will not be able to fund those pension liabilities at all. The strike in Britain yesterday, called to protest against those necessary changes, may or may not have been a damp squib- but the fact is that the government has no choice, and indeed arguably the changes may still not be sufficient to bring the pension funds back to any kind of solvency.

This week came close to seeing a meltdown in the global banking system. The interbank market froze- as it did at the time of the Lehman collapse in 2008. The central banks have been forced to flood the market with extra liquidity, but there is no doubt that there is the very real prospect of both a sovereign default and a banking collapse. The ability even of governments, to place more debt into the market is being severely limited.

That is what the left wing commentators don't get: unless the UK addresses its debt, it may not be able to access the debt markets at all. It is not a question of funding growth through added public spending, it is a question of national survival. The public spending that Labour funded was the creation of non jobs in regulation and control, restricting the ability of entrepreneurs to generate real wealth creation. the cost of that is crushing. Doing more of the same will not solve the crisis- it will inflame it.

So while this government considers how it can find money to invest in critical improvements in infrastructure, the burden of unproductive pensioners and excessive pay and benefits in the public sector must be reduced and this talent must be put to more productive use. It is not enough to create "make work" jobs, they must be jobs that add value and create wealth. 

Tax inspectors don't do that.

1 comment:

company debt advice said...

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