While still in opposition, David Cameron used to promise that a “Conservative government would share the proceeds of growth” between higher public expenditure and tax cuts. That was the Tory mantra – repeated ad nauseam from 2005 until the summer of 2008. It was a slippery phrase, allowing the Cameroons to have it both ways. By pledging to “match Gordon Brown’s spending plans”, Cameron hoped to banish the Tories’ “nasty party” reputation. The promised lower taxes, meanwhile, placated his core vote.
While “sharing the proceeds of growth” seemed like clever political positioning, it was actually economic nonsense. Brown’s spending plans, coming after years of turbo-charged state borrowing, were profligate. Matching them was “me too” student politics. Talk to some senior Tories now and, when recalling the “sharing the proceeds of growth” years, their eyes roll as their right index finger faintly twirls.
The 2008 sub-prime collapse obviously changed the terms of the political debate. All the main parties accepted the need for “consolidation”, lest our public finances spin out of control. While the coalition has implemented some nominal budgetary repair work over the last five years, the pace of change has been glacial. Beyond the headlines, in fact, the underlying fiscal picture has become far worse. The only reason the gilts market hasn’t rebelled, exposing that reality in the form of a cataclysmic creditors’ strike, is that yields have been artificially suppressed by an edifice of printed money. That’s the unpalatable truth – and, for my money, impartial economists should be shouting it from the rooftops.
The need to level with the public on the extent of our fiscal predicament has been put off, though, masked not only by quantitative easing but also sophistry similar to “sharing the proceeds of growth”. Since taking office in 2010, not least at last week’s party conference, the Tory leadership has spoken, repeatedly, of “paying down the deficit”, “dealing with Labour’s deficit” and “solving the deficit”. By conveying resolution and finality, these phrases, too, are an economic nonsense. Getting the deficit to zero, far from marking the end of our fiscal woes is, at best, the end of the beginning.
The “fiscal deficit” is the degree to which spending exceeds revenue in a particular year. So, it’s the amount of additional debt the government takes on. That extra borrowing is then added to our stock of national debt – which must be serviced, year-in year-out, either from tax revenues or even more borrowing. The UK government now spends more on interest payments than on defence. Pretty soon, on current trends, debt service will exceed what we spend on education, an outrageous disservice to our children and grandchildren – and that’s at unsustainably low borrowing costs. When yields rise, as they must, these trends become even worse.
When George Osborne became Chancellor, the deficit was 11pc of GDP – a post-war high. During the fiscal year 2012/13, that figure was 7.4pc. So the deficit has fallen, but it’s still massive – higher as a share of national income than when we were bailed-out, “cap-in-hand”, by the IMF in 1976. And, of course, as long as we run deficits, our national debt keeps growing.
In 2008, UK net public sector debt was £580bn. By 2010, Brown’s imprudence and then the banking collapse had pushed our sovereign debt stock to £820bn – a 40pc rise over two years. Since then, you’d be forgiven for thinking, given all the “austerity” talk, and Tory claims of “paying down” and “solving” our fiscal excesses that our national debt has fallen.
If only. Our national debt is now £1,190bn, having risen 45pc under Osborne. On official estimates, that total surges again above £1,500bn by 2016-17. That’s what happens when you continue to chalk-up annual deficits of £100bn and more, as we’ve done since 2008 and will do until 2016. By then our debt stock will be 86pc of annual GDP, or over 100pc on international measures. And that doesn’t include the plethora of accounting wheezes employed to keep public sector pensions and PFI liabilities off the books.
Yes, the UK’s sovereign debt stock has a relatively long 14-year average duration, providing some repayment headroom. But, even if we avoid a disorderly QE “exit”, debt service will become a serious issue as yields rise – and then our burgeoning debt stock will loom large. These are the fiscal realities our political classes, and almost all our mainstream media, seem to pretend don’t exist. Yet we ignore them at our peril. If problems aren’t acknowledged, how can they be fixed?
“I can tell you,” said Osborne in Manchester last Monday, “that when we’ve dealt with Labour’s deficit, we’ll have a surplus in good times as insurance against difficult times. Provided the recovery is sustained, our goal is to achieve that surplus in the next Parliament”.
This phrase, coupled with some frantic post-speech spinning, meant the story went out that the Tories are “turning the screw” on Labour by being “even tougher” on the public finances. That interpretation, widely promoted and by the Westminster village, is ridiculous. When the coalition first laid-out its fiscal plans, the aim was to “balance the budget” by 2014/15. In March, that target date was pushed back to 2017/18. Last week the Chancellor effectively said the “deficit will be solved” (that phrase again) by 2019/20. Yet this further slippage was trumpeted as a display of “fiscal discipline”.
No one is arguing that, in some localities and some departments, spending cuts aren’t biting. Of course they are – and that will always be so when government spending is almost half our GDP. The big picture, though, is that UK “austerity” aims to lower real terms “departmental expenditure limits” only to 2005 levels. Add in welfare and interest payments and public spending remains on a sharply upward trajectory.
When the deficit is zero, that’s when your debt has peaked. That’s when the really hard work of national debt reduction begins – when the choice must be made between grinding out annual surpluses or stoking price pressures to inflate away our debts. These are the very grown-up issues we face, yet the deliberate conflation of “deficits” and “debts” means such realities are almost entirely absent in our political debate.
In the US, of course, Congress continues to squabble over the future trajectory of government borrowing. The row has become incendiary – and, I’d submit, it’s increasingly clear, as this column has been arguing, that the Federal Reserve was leant on to delay QE “tapering” back in early September due to the prospect of this now very major “debt-ceiling” row.
Of course, there’s no good reason why the US should default. Debt service is 7pc of state revenues, so there should be no problem. Yet with control of Capitol Hill split, and the national debt having ballooned from 70pc of GDP in 2008 to 102pc now, tempers are rising, with some lawmakers feeling duty-bound to call time on the growth of state spending.
America’s 2011 debt-ceiling row sparked serious market turbulence, as S&P curtailed Uncle Sam’s triple-AAA rating. If either Moody’s or Fitch were to follow, a lot more volatility would ensue.
America’s debt-ceiling row is unseemly and could yet generate global financial turmoil. Yet at least these political pyrotechnics are forcing Washington’s lawmakers openly to debate the country’s vast fiscal liabilities. America, however crudely, is gradually face up to reality. In the UK, our fiscal woes are still firmly under wraps – even further, then, from being “paid down”, “dealt with” or “solved”.