Should the national debt be reduced more quickly?
The All-Party Parliamentary Group on Management met this week to tackle one of the most pressing economic and political questions the UK faces: should measures to reduce the national debt be accelerated? Guest speakers Lord Burns, a CMI Companion, and Lord Eatwell, CMI’s Chief Economic Adviser, went head-to-head to debate the issues on Tuesday night.
Lord Burns, Chairman of Santander UK and a former Permanent Secretary at the Treasury, pointed out that debt reduction isn’t an option at this stage – the more immediate issue is cutting the annual spending deficit. He argued in favour of a tightening of fiscal policy, saying that the risk it would cause a “double dip” recession has been exaggerated. A substantial correction is needed because public spending plans have been based on higher, pre-recession economic growth trends.
Lord Eatwell opposed the motion, saying that, if anything, the UK’s fiscal stimulus was too small – indeed, it was the smallest of the G7 countries as a percentage of GDP, leaving the UK debt ratio currently the lowest of the G7 with the exception of Canada. The market still has a strong appetite for Government debt, with the latest bond issue oversubscribed by two and a half times. The UK Government has run a deficit for 220 of the last 250 years – current concerns have been overstated. He argued that Government has to keep spending. In the current economic circumstances, he said, “growth in demand can only come from the Government”. Lord Eatwell also welcomed the recent fall in the pound, arguing it “will do us a lot of good”.
The motion, “that debt reduction should be accelerated”, was put to a vote among all the Parliamentarians and CMI members present. The results were close, with a small majority backing Lord Eatwell in opposing the motion. But what do you think? Is the Government spending deficit a concern – or is it more important at present that Government continues to support demand? How does the state of the public finances affect your organisation?
I’m looking forward very much to your responses: we’re starting work on CMI’s latest Economic Outlook survey this week, so your thoughts will be read with interest! You can also let us know your thoughts in our latest poll.
Patrick - CMI Policy & Research
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Comments
So let me get this straight. We're in a financial crisis because people, both individually and collectively, borrowed far more than they could afford, and our solution is to borrow our way out? That doesn't sound particularly smart to me.
We are where we are, and have to navigate our way out of our present predicament.
Having heard both view points on the night I would certainly not be in favour of turning the government’s spending tap off prematurely. Not until there are real signs of recovery across the private sector. Business needs to start investing for the future and we the public have to have the necessary confidence to start spending; but at sensible levels. Government, business and society need to learn from the excesses of consumerism.
The thing is though Thomas maintaining public spending does a few things.
Firstly it increases the size of the state in our economy. I've read that in many parts of the country the government has a larger slice of local GDP than was common in Soviet Russia! If we're looking to jump start the private sector, increasing the role of the state is no way to go about it.
Secondly an important part of any recession is the harsh lessons it deals to companies. Failure is a crucial part of a market economy, and a recession is great for clearing out the dead wood, and subsequently leaving space for new and more innovative companies to take their place. If government props up companies then this doesn't happen. We're really seeing this in the finance sector, and none of the lessons seem to have been learnt, particularly with regards to bonus payments.
Mike, I would not argue with any of the points you make. I to believe the state has grown too large and that a clear out of failed businesses is a good thing. I also believe that paying down debt and living within our means is essential, rather than an economy based on tick. My point (or rather Lord Eatwell’s point as I understood it) simply concerns the speed at which we see the corrections taking place. It has taken years of reckless behaviour and poor leadership to bring us to this point. I would suggest that it would be prudent to consider with care what our short and long term economic strategy should be to ensure we do not move from the kettle to the fire.
Hi Thomas. It's funny you mention that because I was just reading about markets and how if you really analyse the complexity of what goes on it is a truely incredible thing. With all the supercomputers in the world we're not able to design that sort of complexity. So markets will always do a better job of these things than we will.
We musn't forget that this situation arrived due to improper lending. Governments around the world bailed out banks that messed up, then gave the people who had proven they could not lend well lots of cash so they would start lending again. We must be careful not to fall into a Plato like trap of thinking we know best. Brown is particularly guilty of this, as shown by his abolishing boom and bust nonsense, and the speed at which he has sought to take credit for 'saving the world economy'.
Just as Plato was a victim of his own vanity, so ultimately will any politician be that feels he can control the global economy.
I think Mike is absolutely right... and I was intrigued at the debate to see that most people still deal with even such a complex issue on the basis of their 'personality' type. The argument for debt reduction seemed to be one that espoused caution, the need for centrality and control, while that in favour of retaining public spending had a more 'laissez-faire' feel. MacGregor would have found it fascinating to see his 'Theory X & Y' appearing before his eyes. Does this mean we are slaves to our intrinsic character? I sense a similar dilemma in the forthcoming election. Life was so much simpler when people voted according to class and geography! All this focus on policy and the real issues is quite exhausting....