Most pundits assume the UK general election will be fought against a strong economic backdrop. The Conservatives certainly hope that buoyant consumer sentiment, including continued rock-bottom interest rates and stable financial markets, will help them secure victory, and even an overall majority, in May 2015.
After David Cameron’s conference speech in Birmingham earlier this month, complete with a promised £7bn income tax cut, some 39pc of voters said it was the Tories “they most trust to manage the economy”, compared to just 19pc backing Labour. It was in the afterglow of that Prime Ministerial speech that the Tories chalked up an overall poll lead for the first time in more than two years. A strong economy, then, will clearly be front-and-centre in any successful Conservatives general election campaign.
It’s politically significant, then, that public sector borrowing figures released on Tuesday were truly shocking – so bad, that further pre-election promises of tax cuts are now much less likely. Such promises, as we just saw, are vital when it comes to keeping the government’s electoral opponents at bay. If such terrible figures continue into the coming months, the Tories could even lose their reputation for superior economic management.
The economy is growing at 0.7pc per quarter, we learnt on Friday, far faster than last year. Yet public sector net borrowing over the first half of 2014/15 was 10pc higher than the same period in 2013/14. Borrowing in September alone was £12bn, a staggering 15pc up on the same month the year before. While tax receipts were up 3.1pc, revenue growth was outstripped by even higher spending. For all the talk of “austerity”, central government expenditure in September was 5.4pc above that during the same month a year ago, as welfare payments spiraled.
The government, having already borrowed £58bn between April and September, is almost certain to miss its £96bn annual target by a mile. It’s now all but certain the UK will post a sixth successive year of triple-digit-billion pound deficits, five of them under the Tories. Osborne has borrowed more in his half-decade as Chancellor than his predecessor Gordon Brown did during a decade at Treasury. The Conservatives’ 2010 “emergency budget” said the books would be balanced by next year. Official projections now suggest that won’t happen until 2018/19.
I’m not saying Osborne has had it easy. Tax receipts are lower than expected, despite unemployment falling, as many new jobs are low-skilled and relatively poorly paid. The Chancellor has also presided over a welcome partial rebalancing of the economy away from the state, with corporate investment now rising.
Yet the Conservatives seem determined to join Labour in refusing to come clean with the electorate about the scale of our fiscal predicament. When the Tories took office, total government debt was £811bn. On last week’s figures, it’s now £1,451bn – an 80pc rise in just five years, with a lot more to come.
This national debt matters. It must be serviced with regular interest payments, diverting money from front-line public services. Even at rock-bottom interest rates, the government spends as much on debt interest annually as on defence. As the national debt escalates, courtesy of £100bn-plus annual deficits, and as interest rates inevitably rise, we’ll soon be spending more on government debt service than on state education.
Why should we borrow so much, foisting our profligacy on our children and grandchildren – who will, even without the burden of our debts, face live in a much more competitive world. A spiraling national debt isn’t only bad economics, but is also morally repugnant.
Yet our public discourse constantly blurs this deficit/debt distinction, with politicians insisting “the deficit will soon be gone”. Yes, maybe, until we fall back into deficit the following year. And what about the debt? The spin-doctors figure these concepts are “too hard” for ordinary punters, while concluding that tackling the actual debt, which requires regular annual surpluses, anyway involves decisions that are simply too tough.
I’ve always felt that voters are smarter than the political classes think that are. I also think much of the public, not least crucial centre-ground floating voters, would welcome some honesty when it comes to crucial issues of tax and spend. The public needs to know that, to reach the current 2018/19 target of eliminating the deficit, real-terms cuts in day-to-day spending on public services in 2016 and 2017 will need to be twice as fast as those seen since 2011.
The Tories should also be highlighting that our national debt soaks up a massive £52bn in debt service costs annually. Talking about the cost of debt-financing more would sharply increase support for getting our national finances under control – rooting out waste and inefficiency, while preserving scare resources for those who truly need and deserve help.
I remains deeply concerned about our national debt, not only because of the absurdity of vast debt service payments, the damage to coming generations and the incentive politicians have to “inflate the debt away”. I also worry that our vast liabilities could ultimately spark another systemic meltdown, not least because such a high share of UK government debt is now owned by foreign creditors. And that makes our public finances extremely vulnerable if there’s a considerable weakening of the pound.
This issue has been on my mind for a while, but recently crystallized while talking to friends at the Social Market Foundation think-tank, where I’ve long served on the Advisory Board. As a result of quantitative easing, around a third of the UK’s gilt stock is owned by the Bank of England. That’s right, 32pc of our government bonds have been bought by our central bank, using virtually printed money. That’s helped to rig the market, keeping interest rates artificially low.
It also turns out that, as the SMF has highlighted, some 60pc of gilts held outside the Bank are owned by foreigners – around 42pc of the total. That’s a problem because such creditors, while almost certain to lose money on bonds that yield far less than the rate of inflation, are also exposed to a currency risk. In other words, if the pound falls, their sterling-denominated gilts become even less valuable. And if our overseas creditors sold their bonds, our government debt could go haywire.
The UK recently chalked-up the largest external trade shortfall in our history, with our so-called current account deficit registering well over 5pc of GDP. While our imports have long out-weighed our exports, our net income on overseas government investment and assets has recently swung from a surplus of 3pc of GDP to a deficit of over 2pc. A lot of the explanation for that is the vast interest payments the government now makes to the raft of foreign creditors propping up our public finances, payments which drag down our current account.
We now a budget deficit of 7pc of GDP and a external deficit of 5pc. That’s suggest sterling will eventually have to fall. The pound recent hit an 11-month low against the dollar and sterling seems also to have run-out of steam against a euro that’s gearing up for another bout of euro-QE. The pound is now roughly where is was during the Scottish independence scare.
We can ignore our national debts forever, until financial markets take umbrage and shove the debt firmly in our face. My fear is that sudden selling pressure on a fundamentally weak pound could prove to be a catalyst, causing an interest-rate spike, extreme financial angst and a significant loss of economic confidence. That, and an entirely upended general election campaign.