Reading Evening Post

The government is taking too much financial risk. Taxpayers are being dragged further and further into massive debt.

A couple of years ago the government claimed that national debt was around £500 billion, or under £10,000 a head. This was understated. You really needed to add in the pension liabilities of the state, and the money borrowed under the so called Private Finance Initiative. Even a cautious accountant would have concluded the total was around the level of the national income, or say £30,000 a head.

Today the numbers have gone crazy. RBS has a balance sheet larger than the National Income. We the taxpayers now own most of it. That more than doubles the national debt if you add it to the state’s balance sheet. Meanwhile the government aims to borrow another £157 billion this year and almost as much next year on its current probably understated forecasts. The national debt and the state’s liabilities now add up to more than £4000 billion , or nearly £70,000 each.

The government defends this rapid run up in debts and guarantees on the grounds that there is no alternative. They say they need to underwrite all the big banks, and offer them as much as it takes. They also think they need to spend more than they collect in taxes on an ever bigger scale to “reflate” the economy. The banks after all have assets as well as liabilities.

So far there is no sign of either of these very expensive policies working. What should they do instead to get us out of this ever bugger economic hole we are in?

They need to offer the banks tough love. They should not rush to put so much money in. It just delays cutting the costs, writing off the bad business and sorting out the casino banks that the majors all added to their balance sheets for no obviously good reason. I do not want to see a major bank go under, but I do want to see government tell them to clean up their acts for themselves, with as little recourse to taxpayer loans as possible and no recourse to taxpayer share capital.

They should remember that spending more to “reflate” means the private sector spending less. The private sector either has to save more and lend them the money, or pay more in tax so they can spend more in the public sector. Neither way of paying for it is necessarily reflationary. It just intensifies the squeeze on the poor private sector.

The private sector needs more demand, more orders, more money coming in from customers,. It does not want more bank loans if there is going to be no improvement in demand, for that just delays bankruptcy a little and means the business ends up losing even more. If the public sector keeps on squeezing, that will make matters worse.

We need the government to understand there is no quick fix or magic formula. You cannot borrow your way out of a crisis caused by over borrowing. There needs to be intelligent and painstaking work to right the banks and right the economy. The government is borrowing too much to support the banks, and needs to stop.

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4 Comments

  1. Oranjepan
    Posted March 16, 2009 at 10:37 am | Permalink

    Err, isn’t the title just the slightest bit misleading/lacking in relevance?

  2. Sousbois
    Posted March 16, 2009 at 11:15 am | Permalink

    “ever bugger economic hole” – Freudian slip? 😉

  3. oldrightie
    Posted March 16, 2009 at 12:02 pm | Permalink

    “We need the government to understand there is no quick fix or magic formula. You cannot borrow your way out of a crisis caused by over borrowing.”

    They’re in a hurry because there is an election looming.

  4. Denis Cooper
    Posted March 16, 2009 at 1:38 pm | Permalink

    Arguably the present crisis is not caused by “over borrowing”, as such, but by the sudden inability to continue borrowing at the previous rate.

    Of course if you’re going along at 100 mph, and you’re brought to a sudden stop by a wall, then the damage will be much greater than if you’d been going along at 60 mph, or 30 mph; even so, if you drive into a wall at only 30 mph there’s still a chance that it’ll kill you (about 5%, apparently, while at 60 mph it’s about 50%).

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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