The Economy: Exploring The Answers 2: Debt

There was a time when debt was considered to be not a good thing. But times have very much changed. Now debt is  so much a part of the economic structure that it almost operates as a second currency.

Not only is the government in debt, borrowing is also the foundation of business. It is the foundation upon which many people are forced build their lives, starting with student loans to pay for their education, then a mortgage to buy their home, accompanied by credit cards to fund their spending. If they set up a business on their own, it is likely that the bank will give a helping hand. It all sounds very easy going and convenient, but like so many good things if overdone, it destroys what it creates.

For far too long successive British governments have failed to grasp both the function of government and the purpose of the modern state. They have delegated the responsibility of economic growth to the private sector and the responsibility of delivery of intended government legislation and policies to a nightmare agglomeration of watchdogs and regulators. Most of the operational service functions of the state are outsourced to private contractors who then make a killing for their shareholders.

In the early 1970s the government  handed the value and control of the currency to the markets.   Since the late 1990s governments have passed responsibility for setting interest rates to an allegedly independent central bank, but which in fact they own. This has stoked the inflation of fixed assets purchased with borrowed money, so that they  are forever on an upward spiral. When the money runs short because of an overheating market, the government steps in and prints more.

The impact on decent housing as a basic human need for everyone, has been disastrous. Because markets have been allowed not just to grow naturally, but instead to develop new spheres of activity, for example in energy, it is markets, not politicians, who now control the direction of travel.

When the markets hit the buffers as they did in the 2008 crash and the volume of debt massively outstripped the value of supporting assets, leading to suicide level losses and the insolvency of almost all the major banks, the West’s governments rushed to print money to shore up the failed system so it could reboot and carry on. The authors of the disaster were rescued and rewarded, while the ordinary people took the hit to their living standards and ambitions.

Unfortunately with the UK Tory led governments since 2010, their muddled ideologies have led to financial starvation of public services to the point where  they are mostly broken. Health, education, prisons. the courts, are frightening examples. But they have also led to rising national debt on an unsustainable path. We now have national debt in excess of GDP, and interest payments on that debt bigger than any other departmental expenditure annually, except the NHS.

The new Labour government is faced with unsustainable monthly borrowing to pay the bills, increasing the debt by the hour, while the economy is not growing and has not done so meaningfully for years. If the UK were a corporation it would be  in the sphere of qualified accounts, and close to the point of going bust.

Labour will do its best to shore up the system and there is a lot it can do which will help, but in the end nobody seems recognise that we are way past the point of good housekeeping. We have to gut the house, cut out the rot and rebuild it. Otherwise it will eventually fall down.

And the first principle of that reconstruction is that we cannot borrow money to pay for it.