Fiscal Fury

In the wake of the worst recession for over 100 years, it seems a logical necessity to bail out indebted banks in order to prevent financial chaos. After all, the UK has always been able to rely on complex fiscal and monetary policies to stabilise its debt.

However, are we not forgetting that the government is also constrained by the straight jacket, that is, money?

Public sector net debt is now estimated to be a whopping 54.7% of GDP (£774.8 billion). The month of May alone saw public sector net borrowing increase to £19.9 billion (once half of the borrowing requirement for the entire year).

What has shocked me is not merely the enormity of the debt, but the social risk that the government has exposed us to. A risk borne by the tax payer.

The fragility of this problem has been reiterated by credit agency Standard & Poor’s, which last month warned that it could downgrade Britain's top-notch AAA rating because of the deteriorating state of the public finances.

If Britain was to see a credit downgrade, it could prolong and deepen the current recession. The consequences of a credit downgrade should not be underestimated. Not only will the tax payer have to pick up the bill, either through higher indirect (e.g. VAT) or direct taxes (e.g. Income tax), but there is also a big question mark over the efficiency of our public services. Already an ageing population has put a strain on our hospitals and other public services.

Under the surface is more bad news. With fiscal policy already stretched to its limits and interest rates at rock bottom (0.5%), the Treasury seems to have, in desperation, used ‘quantitative easing’. This was tried by Zimbabwe and Japan with disastrous effect. This strategy to print more money has been used only as a last resort in the West, because of the dangers of inflation. This risk taking shows how serious this crisis is.

Core inflation rose from 1.5% to 1.6% over the last 12 months. Accordingly, the dilemmas facing the government are even more acute.

So what needs to be done? No political party wants to be associated with public spending cuts, but more effective spending is required. This is something that the Prime Minister and the Chancellor have never been able to achieve.

What is crucial is to protect the grass roots of our economy. Confidence is paramount. More incentives for small business and entrepreneurs, who are the seeds of our growth. We also need, not more regulation, but more effective regulation of the banks. We need more responsible banks and less banksters.

For comments click here