Money is still easy for the public sector. For all the talk of cuts, tight and tough public spending conditions and the need to rein in, the monetary easing has all been concentrated on providing huge sums of borrowed money for the public sector at interest rates below the rate the market would normally charge without the Bank’s interventions. For all the talk, there is no evidence yet beyond the reductions in allowable expenses for MPs and a few cuts for Higher Education that the public sector has truly got the message that it has to do more with less. Today’s announcement of “low” Council tax rises comes at the price of a further substantial increase in grant funding for Councils. Only some Councils are pressing on with business style changes to raise productivity and efficiency. Those that have done this well already have actually cut the Council tax, or managed without an increase for more than one year.
Meanwhile money is still very short and expensive for many businesses. The private sector has completely transformed its behaviour. In 2006-7 some individuals were taking out large mortgages and many businesses were taking out large loans during the last wild fling of the private sector credit boom. Today companies are repaying debts, husbanding profit and cashflow, keeping stocks low, and cancelling capital projects. Individuals are not moving home, not buying the first house, or moving up the housing ladder in anything like the numbers of three years ago. Some are paying off credit card debts and saving more. In 2006 the private sector had a small overall deficit of 0.6% of GDP. The surplus in 2009 was 10% of GDP, and is likely to be at least that again this year.
Banking regulators seem to want to perpetuate this hot and cold world. They have set regulations which mean the private sector has to keep on generating surpluses and repaying debts, to get the bank balance sheets back into the much more prudent shape the regulators belatedly want. Meanwhile the authorities say they might do some more quantitative easing if there is a threat of much dearer money for public borrowing.
This lop sided economy is not going to deliver a strong sustainable recovery. It is only a matter of time before markets impose stiff penalties on a government which is persisting in borrowing too much. The Uk needs a strong and growing private sector to get out of this mess. Curent banking policy, tax policy and the public sector deficit prevent this. All the time the public sector runs such a huge deficit, the private sector has to save more to offset it and finance it. Later on the private sector will be squeezed again by the higher taxes to pay for the excess debts. We need to change policy before it becomes a vicious circle we cannot easily break.