The more you repay debt, the more the government lands you in it

The people get it, the government is in denial.

People in Britain and their government are diverging on how to deal with overborrowing. The people know you need to save to sort out a credit crunch. The government thinks you need to borrow more!

Many families are cutting out the luxuries and the inessentials from their budgets, to cut their borrowing. They are dining out less, cancelling the exotic holiday, taking fewer trips to the pub and reducing the purchases of designer clothes.

The government meanwhile is increasing its spending on administrative staff, on adverts and spin doctors, on Identity Cards and much else that we don’t need.

Many families are repaying credit card borrowings and stopping use of their old flexible friend. They know it all has to be repaid and the interest rates on them are still high.

The government meanwhile presses on with more PFI and PPP contracts, its equivalent of very expensive credit card borrowing, and flexes its plastic whenever it can. It has a weakness for ruinously expensive bad banks and can’t walk down the High Street without buying another.

Many families are repaying some of the mortgage, aware that their property is falling in value and all too conscious that the debt on their home is too high. Government in contrast is taking out record levels of borrowing, increasing the nation’s mortgage like there’s no tomorrow.

They can’t both be right.

The truth is the public understand that together we borrowed too much, imported too much, saved too little and produced too little. They are desperately trying to correct all this, by reining in and repaying debt. As predicted here, the savings rate is shooting up, mainly through debt repayment.

People are therefore angry and frustrated that just as they are getting their own finances into shape, the government is debauching the national finances. We all know we are responsible for the debts the government builds up. Long after these reckless Ministers have gone we will be working harder to repay the bills they incurred. No wonder the public mood is so bad.

The scale of it all is so worrying. If you take the more accurate government balance sheet I have set out each man woman and child is now in debt to the tune of £50,000 including the banks and £75,000 if you include the public sector pensions deficits. That’s the magnitude of the risks and borrowing this government has taken out. It was around £5000 each plus say £5000 for pensions in 1997.

It means the government is increasing the borrowing of every one of us quicker than we can repay our personal debt. That’s why so many of us are hopping mad.

I agree with those who say Labour think they can get through the next year without a formal trip to the IMF for a big loan. My point is they are getting into a position where they could borrow from the IMF if Plan A, domestic borrowing and printing, starts to go wrong. They are afraid the past will come back to haunt them and are lining up as many credit cards as possible, just in case. It will be a disaster indeed if the domestic borrowing and printing runs out in under a year of maximum overspend.


  1. Jim Pearson
    April 4, 2009

    Mr Redwood, if banks are writing off toxic loans, could the governemnt encourage it’s creditors to write off their loans to UK plc? If this was possible, could there be a way out, if a little humiliating?

    Reply I don’t think anyone will willingly write off their loans to the government – many of the loans are owed to UK pension funds and small savers.

    1. Jim Pearson
      April 4, 2009

      Thats intresting, cheers for that, it must be a daft question for you. Sorry.

  2. Brian Tomkinson
    April 4, 2009

    JR: “The people get it, the government is in denial.”
    What the people also understand is that this situation is deteriorating daily. They want a say in how much public debt they are having forced on them whilst they are being prudent. They want it now. Recklessness will always prevail over prudence whilst Brown is allowed to stay in office. Sadly, the Conservative party does not portray itself as a confident alternative government which is eager to begin the task of rectifying Brown’s colossal mistakes and ready to take control now. Just how much more difficult the task will be after Brown has had another year to further impoverish us with even more debt is too bleak a prospect to contemplate.

  3. Man in a Shed
    April 4, 2009

    The problem here, it seems to me, is a lack of moral hazard. If I fail to repay a mortgage, then my home is repossessed and I’m still liable for the outstanding debt which bailiffs and the courts will chase me for.

    The Labour government on the other hand expects that someone else will have to repay its debts, and the individuals who ruin our country just to try to extend their own lack lustre political careers get to retire on gold plated pension schemes.

    The problem is they have nothing to lose, and patriotism or shame seem to count for nothing with them. They are smug in the knowledge that someone else pays.

    Its time to start talking about future criminal charges being brought against senior politicians and government officials in the event that they drive our country into ruin. In effect what they are doing is illegal since it binds future parliaments. Its time to start talking about putting Brown, Darling and Mandelson on trial after the next general election.

    I know it sounds extreme, and politicians may be reluctant to treat each other this way, but the scale of Brown’s actions now demand he pays for the consequences ( which in the real world will include deaths and lives destroyed as the NHS and government are forced to cut back ).

    1. John Redwood
      April 4, 2009

      This is extreme. There is nothing illegal in a government running up large debts to bequeathe to aq successor government, however undesirable it may be. It does show the danger of the public giving one group of politicians so long in power with a large Commons majority, so Parliament is unable to stop their reckless borrowing.

      1. Derek
        April 4, 2009

        There is such a thing as wrongful trading. The Prime Minister, Chancellor and Ministers are directors of ‘UK PLC’.

        As a company director if I engage in wrongful trading, taking on debts knowing full well they cannot be repaid within the terms of the agreement, then I can become personally and criminally liable.

      2. Man in a Shed
        April 4, 2009

        It is extreme, but so is the situation and the abuse of power and mandate.

        If, as a director of a limited company, I knowingly trade whilst insolvent then I can expect the to suffer the full consequences of the law. But a Prime Minister running a country to insolvency – just to try to grab an election – walks of with his very generous pension.

        And yet my country is being driven to financial destruction by people immune to any consequence, except the possibility of having to find another job in the cases of those with marginal constituencies.

        Is not the problem that, as you identify John, “There is nothing illegal in a government running up large debts to bequeathe to a successor government”. There should be. If a government wishes to run up large debts, not identified in the manifesto it was elected with, it should be forced to go to the country for permission and approval. If it doesn’t then its officers and officials should be liable to subsequent prosecution.

        Remember I didn’t, like anyone else except the good people of Kirkcaldy and Cowdenbeath, vote for this prime minister, yet I will – along with my children – have to pay for his mistakes for decades to come.

        1. jim
          April 5, 2009

          Well the conservatives would not put Labour on trial because it might be their turn next. If, however, we suffer complete economic collapse as I expect, then all bets are off. Anything could happen in that scenario. I know most people think it is unlikely, but as each day passes this situation gets worse and it will continue to do so for many years. The bust equals the boom, and it was a long boom.
          I think the crash will start soon, the markets will be interesting next week. We’ll have to see how many foreigners with assets in Britain are spooked by the trip to the IMF talk, if they start running, then we are likely to be in a currency crisis quickly. If the IMF recommends a 40% cut in public spending, as they have in Latvia, then we are going to see a total collapse in the housing market, loss of pensions etc.
          There are far more things that can go wrong, than can go right at this point. So I think you’ll see Brown gone soon, whether he gets justice from the court of public opinion is up to the people.

    April 4, 2009

    QUITE! Your comparison between the public’s new frugality and the government’s ‘spend and be damned’ (but not before an election) approach reminds us of our blog last month…

    “We participated in some interesting research amongst middle-market voters this week run by our friends at ESSEX VOTERS VOICE.
    The objective was to gauge how the public is coping and adapting to the current economic climate. Their broad findings bode rather unfavourably for an early recovery from recession.
    Without exception people in all categories – those who have lost their jobs, those fearful of that and even those feeling secure – have changed their shopping, buying and social habits markedly. Income and savings are being put aside for ‘must pay’ items – housing, utilities, food and motoring costs – often in cash tucked safely ‘under the mattress’ it emerged – but strangely many previous regular purchases and treats are not being missed at all.
    Many people (and certainly a high enough percentage to influence the economy) are ‘living off stock’, not buying new clothes and definitely not considering a new car, a home move or a fancy’ holiday. Most are not looking for a bank loan.
    Many see this as a personal/family challenge and the older ones compare it to wartime or early-50s rationing. The young feel it’s rather innovative and ‘trendy’ even. Most feel this is one positive thing to has emerged from the current crisis and that these newfound habits are likely to become part of their lives and as ‘good training for children’ and grandchildren.
    The other feeling evident was ‘relief’ that bankers, financiers and ‘fat cats’ were being brought down to size and that future society might become a fairer place.
    The research was conducted across 10 groups of up to 12 people randomly selected and, if it’s a general consumer trend as we suspect from personal observation, it may take many years for the economy as we knew it to return.
    More likely is that it could change forever with the realisation that folk need fewer new belongings and as a consequence the world economy needs far less manufacturing capacity.
    “Old does just as well” as one lady put it.
    “We had a lovely evening at home with a Tesco gourmet meal and a Sky movie – we’ll be doing that quite often now, perhaps with friends around” said a young couple.
    “Every cloud has a silver lining” was the positive summary that emerged more often than any other!
    All this tends to confirm our belief and that our main problem is likely to be lack of consumer demand rather than lack of credit and lending. As we blogged here recently:
    The thought that occurs to us is that we should be gearing the country’s overheads and cost structure for a diminished consumer society where ‘quality’ – of life, of performance and of goods, rather than volume – is the criterion and where the absence of ‘economic growth’ does not throw us into panic and confusion.
    We must liken ourselves to a business that has seen its core market decline and adjust our overheads and strategy accordingly. Immediately stop financing those things that ‘would be nice’ in better times and concentrate on necessities.
    That gives enormous scope and we must hear an end to the castigating of ‘cuts in services’ and start applauding ‘cuts in waste’ in every aspect of our lives – starting with HM Government please!”

  5. Demetrius
    April 4, 2009

    Back in the mid 60’s I devised a monster flow chart to set out the Keynesian principles involved in economic management at the time. It owed much to the Phillips Machine, but more to the clarity of JMK’s prose and lucidity. Nevertheless, having done this, in applying it to current conditions it was clear that their were serious practical issues. One was leads and lags, another uncertainities and the reliability of the figures, a third, unintended consequences that is unpredictables (events dear boy events), and last but not least George Brown, Richard Crossman, and the trade unions. But I sensed that we were were in for a devaluation, cuts (e.g. leaving East of Suez), and more taxes. Inevitably, I was rounded on for disloyalty to my country, failing to understand the critical importance of prestige, and Whitehall knew best. Ho hum…………

    Fishing out the battered copy I still possess and pawing over it, much has changed, notably in terms of information flows, the financial instruments available and the way the world works. Some things have not. Money is still money, debt is still debt, and sadly politicians and their lobbyists have not changed for the better. Only this time it is all going to be a lot worse.

  6. oldrightie
    April 4, 2009

    A further addition to this mess is the viscious circle of benefits. As we go ever deeper towards depression, our liabilities increase. Much of that liability is servicing the hangover from mass immigration, that continues today. Every corner of our economy is restricted and squeezed to fund this bloated, incompetent state. The child poverty fund announced for Monday is a further shameful sign of the mess Labour have put us in. I have blogged on that shameful matter today.

    1. mikestallard
      April 4, 2009

      My daughter in law lives in Thailand. She was a stewardess for Emirates. Her friend had a boyfriend who stole a bottle of wine from the company and was instantly, and quite fairly, dismissed.
      I asked my daughter in law whether he would get any financial support from Thailand now he was unemployed.
      The look she gave me – part incredulity, part compassion – has remained with me for several months.
      That is the opposition our economy faces!

      1. Bazman
        April 5, 2009

        A race to the bottom it then Mike! Spend more money on the police and then go into a Daily Mail diatribe about the country going to the dogs.

  7. Atlas shrugged
    April 4, 2009

    £75,000 is clearly a wild underestimation of the problem. Although we all pay indirect taxes one way or another, the vast amount of this debt will have to be payed back (or interest payed on ) by the small business community and net tax payers.

    Which of course basically means the debt will never be payed off. An ever increasing amount of future taxation will simply go to paying interest on our own money that our own government has wasted bailing out the international banking system. Which will continue to invest in places like China, so as to further enslave, control and impoverish the unfortunate inhabitants of western nations.

    John, it is well past the time when yourselves and others started calling this scam by its real name, which is deliberately conspired to happen INTERNATIONALIST MARXIST COMMUNISM. Or if you prefer, WORLD FASCISM, as either of these descriptive names will do.

  8. alan jutson
    April 4, 2009

    Your post this morning is the very reason why the Conervatives should be ready for a General Election later this year.
    Dear (Expensive) Gordon will want to go to the Country on the back of the Publicity of the G20, “Saviour of the World” tag before the true finances of GB PLC are made fully aware to the Public, and before he has to go to the IMF.

    The problem the Conservatives have is that they have not yet got their act together.
    Or it would seem at the moment, the correct strategy in place.
    You as a Party (not you yourself) are simply not getting enough of the right publicity, to convince enough people, that you have the right answers.
    Your Party needs to sort itself out, and get real on the big issues, otherwise I am afraid it may be another 5 years of spin, lies, increasing debts, more regulation, State control, and curtailment of peoples freedom in this Country.

  9. Acorn
    April 4, 2009

    The trouble is JR, we don’t have enough QUANGOs. Now the boys and girls at the WGA, are doing their best to find the buggers; but, I reckon there are still a lot of them hiding in the long grass.

    The government is very economical with what it calls a QUANGO (NDPB). But, I am putting my money on the WGA team ferreting them out.

    Caution! The following link may upset many Redwoodians. Keep in mind that local government spends about a quarter of government sector spending and the rest of the NDPBs spend about a fifth. Total government sector spending will be north of £620 billion in this fiscal year. (This is SI 2008/1907 if the link stalls.)

  10. Denis Cooper
    April 4, 2009

    But because one arm of the government – the Bank of England – has the right to conjure new money out of thin air, and because two thirds of that new money is being used to buy up bonds previously issued by another arm of the government – the Treasury – some of the debts may end up being cancelled.

    If I had the same right to print money, I might be tempted to play the same kind of trick.

    I could run off enough fifties to clear the credit card debts of my wife and children; so then they would be indebted to me, rather than to the credit card companies; but as we’re a family, I might be persuaded to simply forgive and forget their debts.

    It seems to me that Osborne has been completely wrong-footed by the Labour government’s sly, but fairly primitive and transparent, abuse of “quantitative easing”, and the Tories may pay a heavy political price for his continuing failure to speak out against it.

    If the government’s plan works –

    They’ll break the rule that every Labour government eventually runs out of money;

    They’ll be able to mitigate the impact of the recession, and buy electoral support, by spending more even though tax revenues are falling;

    They’ll avoid going cap in hand to the IMF, with or without stigma; and after being re-elected by a grateful population,

    They’ll quickly slash the national debt, by the simple expedient of arranging for a lot of it to be cancelled.

  11. Ruth
    April 4, 2009

    Quite right – Polly Toynbee wrote an article for today’s Guardian saying Labour should spend more and borrow more and be “brave”. More like foolhardy. Last time I looked she was being slammed in the comments, for the second time in a week. Times are indeed changing.

    Most of us knew that 100% mortgages were a bad thing, most of us knew that self cert mortgages were a bad thing, most of us knew that the credit splurge was going to end in tears and some of us reduced our debts in the good years in anticipation of the crash.

    Pity the government didn’t have the same sense…

  12. thespecialone
    April 4, 2009

    Mr Redwood you are so correct. I was talking to a solicitor the other day and she said she and others from her firm will be made redundant from this Wednesday coming. She also said that a large firm of solicitors in my home town had laid off 20 of its staff. Solicitors?????? I thought that that would be one profession that would be bomb proof. How wrong I was!

    However, Gordy doesnt really care does he? He doesnt care that although yes, there are problems worldwide, the problems in Britain could be a lot less than they are. Any decent 6th form student of economics could tell you that you should not spend more than you can afford, or else it will always always always come back to bite you. Still that is what socialists are all about arent they? Spend spend spend because it is ‘only’ taxpayers money (and ssshhhh we need to buy votes!)

    For your information I come from a very poor background where money was really tight (and often non-existent). I learnt early on that you should not spend money you dont have; or if you have to borrow, make sure you can pay it back.

  13. DiscoveredJoys
    April 4, 2009

    I’m not normally prone to paranoid fancies, nor do I normally repost what I’ve commented elsewhere, but….

    And if we had to go to the IMF, what would their conditions be?

    What if they stipulated that to stabilse the currency we had to adopt the Euro?

    What if they stipulated that to cut costs we needed harsh pay control in the public service?

    What if they stipulated to cut expenditure by withdrawal of troops from Afghanistan?

    Any of these could destabilise the Government (of any stripe). I wonder if Brown is wicked enough to borrow from the IMF and then immediately call for a General Election.

  14. David Belchamber
    April 4, 2009

    Mr Redwood, would you like to remind us all of the items that Gordon Brown conveniently leaves off the nation’s balance sheet and suggest what percentage of GDP government debt would reach, if these items were to be added back in?

    Reply: Banks, unfunded public sector pensions and PFI/PPP take it up to 300% of National Income.

    1. David Belchamber
      April 5, 2009

      Thank you very much for the courtesy of a reply. As Gordon Brown claims that debt/GDP is currently only c43.6%, can the conservatives not use your figure to embarrass the government?

  15. Robin
    April 4, 2009

    Nothing wrong with borrowing … and going to the IMF to borrow to pay the debt back. It’s just like going at a spa.

  16. Matthew Reynolds
    April 4, 2009

    I paid a bank loan off two months early and always pay my credit card bill off every month via direct debit so that I have to just spend what I have got and there are no nasty interest charges. I save with an ISA every month and with the company pension and with a share save scheme. I use a CO-Op dividend card and a Boots loyalty card to save myself money down the road & am now always in credit at the bank.

    Just think if the government had adopted that type of approach with the UK’s public finances over the last decade or so then we could have had a large tax cut designed to get our economy going. My policy is one of prudence & thrift – if I had followed the Gordon Brown approach with my finances then I would be broke.

    John is dead right as folk like me know that over-spending & excess borrowing is mad as debt always bites you in the end. If you have not got the cloth then trying to make the coat is a waste of time…..

  17. mikestallard
    April 4, 2009

    And the text for tomorrow’s sermon is this:
    “He doth ravish the poor when he getting them into his net.”
    Come on. Everyone knows that, once the money goes, it isn’t the rich that suffer: it must be the poor. Hence all those forbiddings of usury in the three monotheistic books.
    “The rain it raineth on the just/and also on the unjust fellah./But chiefly on the just because/the unjust’s pinched the just’s umbrella”
    We are being taken into heavy debt by, of all people, Mr Brown who, by all accounts actually feels strongly about looking after the poor!
    He won two elections because he increased public spending. Remember “Schools’n’ospitals”. Remember when poor Mr Letwin had to go into hiding? “Tory cuts.”
    Nobody in the Labour party, it seems, can tell the difference between teachers, policemen and nurses and public fat cat waste.

    If I was a Labour Party supporter who actually was on the side of the poor against the rich, as they say they are, I should be up in arms by now.
    But that, of course, doesn’t apply to their MPs who are, no doubt, making steady progress towards their imminent employment as dinner ladies.

  18. ManicBeancounter
    April 4, 2009

    People reducing their personal debts is due to many seeing their jobs at risk. The consequence of this is that there will not be sufficient numbers entering the housing mark to stop the current falling prices until unemployment stabilises (as happened in the 1980s). As any recovery real recovery will need some upturn in the volumes of house transactions (with the consequent spending on DIY, furniture etc.) Further, as you have pointed out yourself Mr Redwood, interest rates will have to increase sometime to atttract purchasers of government debt.
    (for more see

  19. sm
    April 5, 2009

    Currently it appears legal and fairly easy for a current government to practically bind a future one , at least fiscally.

    The alternative would be renege on labours ‘debt for bankers’.

    So why not have some thought to some constitutional legal protections put in place to prevent this happening without a further mandate i.e an election. (One major benefit of legal protections-not that the EU cares)

    Manifestos and corresponding financial budgets should bet set out and become legally binding , non achievement should trigger an election.

    Recklessness in running a countries finances should render a government MP’s personally liable to the limit based on their salary and expenses taken in the prior 5 years.

    Aren’t the conservatives sick of picking up the pieces, taking the really tough choices and explaining them to an incredulous public.

    Who will not be willing to see the weak suffer for this and in the future potentially blame the incoming government.

    Or does the status quo suit too nicely and ‘let them eat cake’?

    Should QE be legally controlled?

    Currently we have no effective control on MP’s own behaviours other than via the parties and ‘Good decent independent MP’s’.

    Why should key decision makers be completely or virtually immune from the financial consequences of their actions. Its not just Fred. Its most of the uberelite in the public sector earning more than an MP.

    We are powerless to change anything powerless to influence anything and lose our jobs,houses and also if you have any get savings confiscated and debased to fund something close to if not corruption.

    Why would be constitutional protections be extreme in these circumstances?

    Keep up the good work-at least your exposing it.

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