Emily Thomas explains why the government’s continued reticence to ‘lend’ money is deeply worrying for the UK’s economic recovery.
Emily Thomas is former Treasury Special Adviser and Director of Aequitas Consulting
At Prime Minister’s questions today, David Cameron asserted that “you can’t borrow your way out of a debt crisis”. However, given unemployment figures released today this statement is now very much up for debate.
Borrowing in itself is not automatically a bad thing. After all, the capitalist economy is built on people spending beyond their means. While it is probably not desirable to borrow money if you are already in considerable debt the justification for borrowing really depends on how you spend this additional money.
If you find managing your finances difficult it can reasonably be assumed that borrowing more money will simply increase your debt. However, at governmental level the UK does not generally have difficulty managing the public finances.
True, Labour’s last government spent billions bailing out the banks, cutting VAT and on new spending to stop the economy going into a tailspin. And that needs to be repaid. But in general we are well respected for our financial integrity. We are not Greece. We have a fully functioning civil service and less than half the public debt of that of Greece.
The government’s approach to the UK’s economic challenges is entirely inconsistent. On the one hand, they believe that the banks can responsibly borrow money as they will make good investments and rebuild their capital to become self-sustaining once again. In turn, this will mean banks lending to individuals and small businesses so that they can buy houses and expand their industry to drive economic growth.
This is the government’s position despite the fact that banks are failing to meet their lending targets to small businesses and that the average deposit required for a mortgage has risen from £6,793 in 1990 to nearly 10 times this amount – £65,924 – today.
On the other hand, the government is refusing to ‘lend’ money in the form of capital expenditure and job creation in the economy as a whole, believing that such lending is inefficient at best, and completely pointless at worst.
This is deeply worrying for the UK’s economic recovery. Successful economies work in extremely complex ways and governments have an essential role to play in the economy and in our economic recovery.
Refusing to spend money to create jobs and stimulate industry means more people unemployed, less people paying taxes and more people drawing money from the state, which only serves to increase the country’s debt, not reduce it, on top of the fact that depressed consumers do not spend even if they have some spare cash to spend.
The British people are suffering. With increasing unemployment, the rising cost and falling standards of living, and in the worst cases relying on food handouts to keep going. They deserve more than a government who is sticking its head in the sand and hoping one policy for the banks and another for everyone else will save us all.
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• Just who WILL Osborne listen to? – Cormac Hollingsworth, October 3rd 2011
• Osborne dreaming of a race to the bottom – Alex Hern, October 3rd 2011
• Osborne set to U-turn on QE – so why not on Plan B? – Shamik Das, September 12th 2011