Britain is facing – depending who you ask – a crisis of variously dire proportions. The worst recession since WW2, a potential depression, a return to the 1970s, a rerun of 1990s Japan; all of these are predictions made by journalists over the last year who have been darting through history like aspiring Doctor Whos in the search for an easy comparison ideal for a simplistic background graphic laden with nostalgic archive footage.
And with them has gone the Government in the search for an easy answer and suitably simplistic sound bite to parrot on Newsnight. And as ever there isn’t an easy answer, but someone will offer one – it just won’t work. Of course that answer is from John Maynard Keynes, a man who once dismissed fears about the future debt levels on the basis that “in the long run we are all dead.” How reassuring, no wonder he chose economics rather than medicine.
So debt is back on the menu, and back big time. It’s like the Spam sketch – you can have anything as long as it comes with spam debt. “VAT cuts with spam debt, capital projects with debt, postponed taxes with debt, debt with debt, debt on debt, fried debt, scrambled debt, hidden debt, debt surprise…” But wasn’t excess debt part of how we got into this mess?
The Government is borrowing to boost demand, but the public sector crowds out the private; there is only so much credit out there and the more the government Hoovers up, the less there is for everyone else to borrow and the higher the real interest rate goes. And is boosting demand in this artificial way the right thing to do? We have got to face facts. The old levels of spending were built on unsustainable levels of debt and “easy credit” that aren’t coming back, we have got to once more adapt to survive.
Now I am not an expert, but I do know that most businesses facing difficulty are in trouble because of a lack of previously available credit, that the housing market is dire because of a lack of credit in the form of mortgages, and that consumer spending is falling because of a lack of credit. It is a largely credit related issue, hence the term “Credit Crunch”. Therefore the government gobbling up what limited credit is out there is a terrible idea – we need less credit crowding, not more, and this means reducing the current operational deficit as well as the ‘extra deficit’ being created for the stimulus. We need to make huge savings, and fast.
As even if the fiscal stimulus does boost demand it’s temporary. Therefore priority – other than reducing the government defect to ease credit demand – should be for tax cuts and measures that help businesses stay afloat on the new sadly lower levels of demand.
I imagine it as a treadmill, let’s call it the cost treadmill. The burden of debt and other costs has been speeding it up more and more; the runner has been running at an unsustainable rate, is now out of breath and can’t go on much more. Brown’s answer is a fiscal stimulus to artificially boost demand – an injection of some dodgy performance enhancing drug or adrenalin. It may restore the old turbo speed for a while but sooner or later will wear off, leaving us with the nasty side effect of a faster treadmill in the form of higher taxes. And what if natural demand doesn’t return, another dose? Surely the better answer is to slow the treadmill and get our breath back at a sustainable speed?
Cutting or abolishing Business Rates and Employer NIC would reduce the costs of running a business so far more could survive on the new lower “post-easy credit” levels of demand. It would slow the cost treadmills faced by businesses. So too would cutting regulation, red tape and other costs created by government.
Over time individuals, firms and the government would then sort out their finances by repaying debts, with credit become freer and spending begin to rise again – natural spending, rather than artificial; sustainable growth, rather than debt growth.
And to speed these individual recoveries the government can help individuals sort out their finances by giving them lump sum rebates (if affordable, and they sadly aren’t). Rather than VAT cuts purely to boost demand, this would let families utilise the money in the way that best suits them. Some would save it, but what is the problem with this? Banks need greater reserves to lend, and having savings with boost the individuals own confidence, in turn leading to spending. Some would repay debts, aiding banks again and reducing their monthly outgoings, leading to their recovery and return to spending; and others may spend immediately, boosting demand (although as I said, I believe supply-side measures of debt reduction and individual financial recovery the key).
In short what we need is to look again at this crisis and – instead of believing we can stop the recession, keep spending unsustainably and beat the markets – work to minimise the damage, minimise the time span and position ourselves for the strongest recovery possible. And come to think of it, didn’t a previous Prime Minister have doubts about “all sorts of curious notions, like the more you spend, the richer you get”.
