Borrowing from the future
Figures for December show that government borrowing exceeded the predictions of the Office for Budget Responsibility. Although overall government borrowing for the financial year is set to be lower than the previous year, this is due to some interesting accounting tricks, including the transfer of the Royal Mail pension fund to the government, and a change in the way that interest income from the Bank of England’s assets are booked. Without these wheezes, the Financial Times reported that government borrowing is seven per cent higher than last year . So much for George Osborne’s goal of dealing with the national debt. He has actually made it worse.
The reason is neatly summed up by John Lanchester in an excellent article in the London Review of Books. Lanchester suggests that the one sentence that would pack in as much knowledge about economics as possible would be ‘Governments are not households .’ When households cut back on spending they don’t affect their income;, when nations cut back they do. This is an economic truth that Osborne doesn’t get – or thinks it suits him to pretend not to get. Talking about the nation ‘maxing out on its credit card’ is flawed reasoning, and the numbers are proving it. But the household metaphor is firmly engrained in people’s minds; it sounds like common sense, and, more importantly perhaps, it feels morally right for the government to be limiting its debts. So Labour’s counter-argument will need to rely on more than pure logic – we need to tell a story every bit as evocative as that of a nation maxing out on its metaphorical credit card.
The American economist and former Treasury secretary Larry Summers commends the concept of repressed budget deficits . Economists will be familiar with the concept of repressed (or suppressed) inflation, when a government uses price controls to repress inflationary tendencies – the problems don’t disappear but show up in other ways, and the inflation is merely postponed. For me this is more than an idea from a textbook, since I was in post-communist central Europe for some of the early 1990s. The communists had managed to keep prices low (when I arrived in Prague a pint of beer cost 4p), but shops were often empty and people had to queue for hours for basic commodities (not beer, though – that was always in plentiful supply!). And when the economic reform process started, living standards were hit by a series of massive price rises. The price controls only artificially repressed inflation for a time.
Similarly with Osborne’s deficit-cutting efforts. Focusing on the deficit year-by-year, he is storing up spending needs for future chancellors in future years and decades. Future governments will need to address crumbling schools, hospitals and roads. Failure to invest in clean energy will cost us lost income long into the future. The folly of this inept stewardship is compounded by the fact that interest rates are at a record low, meaning the opportunity of investing now is being missed. Pushing 200,000 more children into poverty entails building up massive costs for the future, as does axing thousands of police officers.
Most disgracefully of all, Osborne’s accounting tricks make him look good (or save his skin) for now, but will create needless additional costs in the years to come. Far from solving the deficit, he’s repressing it at the expense of all of us who will have to pick up the bill in the future. In other words, he’s borrowing from the future. We have a convincing story to tell, backed up by facts, of a chancellor who thinks we’re rich enough to buy cheap, who’s failing in the present and storing up problems that will hit us in the years to come. The comparison with the former communist bloc is unflattering, but not entirely inappropriate.
Tanweer Ali is a member of Progress. He tweets @Tanweer_Ali
coalition government, economy, George Osborne