Today economists have written to the Sunday Telegraph warning against an over borrowed government trying to spend our way out of recession. They are right to be concerned about the rapid build up of debt in the public sector, and the careless attitude towards more debt by the authorities.
I have called both for lower interest rates and proper controls on the increase in public debt. The two go together. Just cutting the interest rates without taking action on public borrowing is likely to weaken the pound yet more. Doing nothing on interest rates and allowing the debts to mount up has triggered a very large devaluation in the last few weeks. The pound has fallen by almost a fifth against the yen in a few days.
These sharp falls in the currency will add to shop prices again, and mean we can afford even fewer imported goods. Just cutting rates and going on a rake’s progress will intensify the downward pressures on the pound, and cut living standards more quickly. It will also mean the Bank of England has to go easy on the interest rate cuts.
That is why we need urgent action to stop the build up of debt, beginning with a renegotiation of the banking support package in the light of recent falls in bank share prices. After all, Lloyds renegotiated its terms of take over of HBOS following an HBOS share price fall, so why can’t the government to protect the taxpayers interests?
We also need more progress in repaying debts incurred by the government to take over Northern Rock and the assets of Bradford and Bingley, and progress in returning those to the private sector, whilst there is still something worthwhile to return. So far all the government has been able to do is to run the Northern Rock business down thanks to competition law, at a time when we need more mortgage lenders to ply their trade, not less.
The longer the government delays in taking sensible advice, the more difficult it will prove to sort things out. The recent performance of sterling shows us that current high interest rates are not sufficient to protect the pound. It tells us something else is wrong. Markets are saying the government deficit is too large and the downturn will do too much further damage to the public accounts. That is why we need a lower deficit and lower interest rates, to help reduce the severity of the downturn.