TIMEBOMB TICKING

John Boydell - Friday, 15 December 2023

As always, I’m not on anybody’s “side” politically, just trying to champion common sense.

Many of you will have experienced pressure to spend money you don’t have: perhaps it’s the kids revved up by peer pressure clamouring for the latest this or that and maybe it’s the car port demolished in a storm. Solutions? Say no to the kids and let the elements in by failing to do the repair work? Of course, there’s another way: borrow it. That keeps everybody happy and you just pay as you go. There’s a cost attached as there’ll be interest to pay, as well as paying back the borrowed money but as long as you have the income to cope, you can manage. You can repeat this cycle to keep pressure off your back and avoid those nasty hard choices, subject to two things: a) somebody will lend to you; and b) you can afford to service it all. It’s the same principle for governments. They have certain necessities to deliver, whatever, and there is incessant pressure from citizens for money to be spent on services. If you deny the citizens, you will discover their displeasure in lost votes, just as you will incur the wrath of your children if you fail to get out the credit card to upgrade the PlayStation or Xbox. Most governments are perceived as good lending risks, with the likelihood of debts being honoured, the British government included.

For your man in the street, if he’s always on the overdraft limit and has maxed out his credit card, there’s a choice to deal with this: stop spending and let your income gradually reduce the financial pain. And if you don’t? Well somebody else will make the decision for you: your credit card and overdraft limits will be reduced or worse, withdrawn. But it’s the British government, come on! Well yes, but in September 1976, Britain had maxed out everything it had and was living beyond its means. Further funds were needed but, as this particular elastic band had reached the complete end of its stretch, there were no takers: nobody wanted to lend. What do you do, when you’ve run out of cash – stop spending? Well, yes, but if it’s Friday and you’ve standing orders going out on Monday for things that absolutely have to be paid, that’s not really an option, there and then. For the government of the time, there had been rock-and-hard-place decisions: face the displeasure of disappointing the electorate or borrowing money you didn’t have and couldn’t afford. To the world-wide shame of the country, Britain turned to the lender of last resort, the International Monetary Fund. It made the tough decisions for us: you can have the cash but you stop spending so much and this is how you’re going to do it. That a government of this country reached such a position is testament to the power of political pressure to always provide more, in return for votes and to duck the hard decisions.

The IMF bailout was extraordinary though, and surely we’re not going to be back in that territory? Regular readers will know I’m a fan of facts, reality and common sense in policymaking. Let’s start with the facts. In the last twenty years, our borrowing (“Debt”) as a nation has risen from ￡300 million to ￡2.5 trillion, an eight-fold rise (huge, even including inflation). The difference between what we earn and what we spend (“Deficit”) is projected by the OBR to be ￡131.6 billion for 2023 – 2024. The OBR, however, uses government spending plans in its calculations of likely future spending plans. This, however, brings us back to the hard choices point and successive governments have not been able to either make hard choices or stick to tough spending plans (Cameron/Osbourne “austerity” excepted [and there are arguments still ongoing about whether that did more harm than good]). So, if the OBR receives wrong data at one end, the data coming out at the other end will be wrong.

If deficits continue, debt will rise. The OBR’s long term prediction is that in about forty-five years from now, Britain’s deficit, excluding interest will be around 10 % of GDP, before interest (and the interest bill, on top, will be huge) i.e. continuing to spend more than we earn. Will spending pressures ease, to help? Baseline pressure will increase, not fall, as we have an ageing population, where the number of people working for everybody retired will fall from four to three. Are we going to be given an extended break from extraordinary events that require extraordinary expenditure? Don’t bet on it: significant climate-change events, pandemics and others are likely, not unlikely. Overall, the OBR describes Britain’s debt trajectory as “unsustainable”, like that elastic band eventually refusing to stretch any more. What then? IMF bailout, again, with hard choices made for us? Worse?

If you give in to your kids, over and over again, their expectation will become ingrained. Expectation will become harder and harder to control, and appeasement by borrowing money you can’t afford does not make the demands go away. This is reality and common sense, the two other parts of my favourites. The same goes for voters, who do not want to be faced with hard choices and prefer kick-the-can-down-the-road solutions. Many politicians and some academics and economists argue that a growing pile of debt doesn’t matter as long as we can service it. The problem is that Britain’s dire productivity raises severe questions about our ability to do that and so, effectively, does the OBR. As has been the case, the solution is to spend less, earn more or both of those. A colleague of mine, in relation to controlling spending in companies, uses the expression “cut fat, not muscle”. It’s, effectively, continuing to spend on productive capacity, not on those things that are not essential. The long history of the UK has been to under-spend on critical infrastructure and skills likely to boost GDP (i.e. invest), while allowing expenditure to rise in non-productive areas that through public demand have been introduced and become baked in.

“Unsustainable” implies a bad end-point. It also implies that there’s time to address it and make some hard decisions. Perhaps mum and dad need to take courage, assert their authority and explain to the kids that they can’t afford the new PlayStation, unless it’s earned and saved up for. If they’re having trouble taking that on board, perhaps explaining that the end-point of spending above means will be that they’re homeless will help introduce a realistic sense of perspective. If the government (and any future government) can’t rapidly solve Britain’s productivity problem, it will need a similar discussion with its citizens, sooner or later. On reflection, now, is an appropriate time. Oh, but wait a minute, there’s an election coming up!?