The nub of the political argument today is over borrowing. The government claims that state borrowing huge amounts now helps recovery, keeps the economy going, and is evidence of its economic prowess. The Opposition says that borrowing too much is risky, could push interest rates up, lead to a loss of confidence, and shows economic incompetence.
There is another argument critics of too much taxpayer borrowing should use as well. It goes like this.
Borrowing is deferred taxation. It damages output and demand. When the government borrows on behalf of taxpayers, it takes the money from companies and individuals who lend it. They no longer have that money to spend. The government spends it on their behalf instead. So the borrowing cuts private sector demand at the same time as it boosts public sector activity.
Worse still, people sense that whatever the government might say, taxpayers will have to help repay all that debt with interest in the years ahead. They know that means tax increases to do so. More borrowing can make people more negative about spending up to their current incomes, as they are always looking over their financial shoulders at the next increases in taxes and charges the government will place on them.
Under the current regime there is another negative complication. Much of the money the government is borrowing will be lent by banks. This is money the banks will not then be able to lend to the private sector. Instead of the banks’ deposits being available to lend out several times over to the private sector (through fractional reserve banking where a bank can lend out multiples of its cash and capital), the new banking regulations mean the money can only be lent out once to the government. No wonder money supply growth is weak, and no wonder the private sector finds it difficult to borrow enough at a sensible rate.
So far from being expansionary, helping pull us out of recession, all this borrowing takes money directly and indirectly away from the private sector. That is why the economy remains weak.
If they really wanted a strong economy they would change the bank regulations to allow more private sector lending, cut the deficit to take less money away from the private sector, and cut taxes on income and employment to encourage more enterprise. That would be a way of supporting the eocnomy and fostering growth. There seems no danger of them doing that any time soon. They would rather go on misleading us about the consequences of too much borrowing.
If they simply print the money to spend in the public sector it is a different matter. Even this government has stopped that, as I presume they now see that can have inflationary consequences. In the short term it can push up prices by lowering the pound. In the longer term it can trigger a more general inflation as too much money chases too few goods.