ONE of the joys of Scottish public policy is that few people ever mention debt. It’s such a dull, depressing thing. And terrible though it is, there’s not much we can do about it. So why waste our time and our PC keyboards getting exercised about it?
Better, surely, that we concentrate on what good news there is, since it’s in such short supply. And last week brought some stunningly good news: a far bigger than expected 1 per cent bounce in UK Gross Domestic Product in the third quarter. Not only are we out of recession, but with this rate of expansion we seem to be steaming into a convincing recovery.
This is not, of course, the consensus view. Virtually all the commentary has been sceptical of this number and even more sceptical that such a pace can be maintained. In fact, the latest signs point to a slowing in the economy in the fourth quarter.
And in Scotland, there is vigorous debate as to whether we have enjoyed an upswing at all, considering our jobless rate is continuing to rise and that much of the third quarter uplift was due to the London Olympics and the hiring and spending that surrounded this.
The reason for doubts surrounding recovery is debt: the bad debt overhang on bank balance sheets; the persistent high debt ratios of millions of households, and government debt. Especially government debt.
I am grateful to the economist Liam Halligan for the following. This year the UK will borrow £120 billion, with the outstanding stock of government debt set to triple between 2008-09 and 2015-16.
A misprint? No. I repeat: our outstanding debt will triple over this period.
Little wonder it is tempting to brush this off as something true in the statistical bulletins of the Office for Budget Responsibility but with no meaning in real life. Well, the figure may be a statistical abstraction. But the debt interest isn’t. By 2015-16 our annual debt interest bill will be more than £60bn – comfortably double the annual managed budget of the Scottish Government.
I set this out for two reasons. The first is to try to lift economic debate in Scotland higher than a facile flurry of finger pointing at the “anti-Scottish London-based parties”. This monumental debt legacy is the biggest single challenge to the survival of our economy, our welfare system and our living standards.
It is not “austerity” that has made us weak. In fact, as public spending has continued to grow, austerity has barely begun (other than in the construction industry where politicians have been happy to let public sector investment take the hit while vote-maximising welfare spending has been protected).
The reason for the doubts over the strength of recovery from recession is that household consumption remains depressed because of continuing high levels of personal debt and underlying growth is weak because banks have either been unable to lend due to balance sheet strengthening requirements or because they lack the confidence after the unholy mess left behind by previous lending policies.
How ironic in this context that the Financial Services Authority, having been taken to task for not regulating bank lending tightly enough, has recently relaxed the very rules on bank lending urged upon it by politicians and the public. Indeed, it is not unreasonable to argue now that banks should be relaxing controls on lending given the greater risk to the health of banks caused by prolonged economic weakness.
It was into this night and fog that Bank of England governor Sir Mervyn King stepped last week with renewed warnings about the time it is going to take for banks to deleverage and cleanse their balance sheets of billions of pounds of toxic loans.
He brought no comfort at all to those arguing that the Bank should cancel its holdings of gilts and simply expand the money supply.
Such a course, he argued, would be to conflate monetary with fiscal policy – a road that would threaten the Bank’s solvency and “down which the Bank will not go, and does not need to go”.
However frustrating it may be to listen to King’s reminder of our responsibilities and his pessimism about how difficult the future is, this is what central bankers are for. We need them to be miserable old gits and not just passive tools of politically popular fiscal policy.
He highlighted private sector deleveraging as a drag on growth. “Lower asset values.” he declared, “have left debt levels looking too high. Households, businesses and, especially, banks are all deleveraging.”
He warned that poor credit availability will remain a drag until banks recognise losses and recapitalise adequately, not just in the UK but also elsewhere: “I am not sure that advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing down of asset values and recapitalisation of their financial systems. Only then will it be possible to return to a more normal provision of the vital banking services so crucial to an economic recovery.”
This task has to be pursued if we are not to pass to successor generations an economy permanently impaired by debt. Here he is voicing the need for action to correct the economy on a longer term basis and to do right by a new generation that is not at all to blame for the mess we created. Unfortunately, the lot of the current generation looks none too good, either. That is why there has been pressure on the Bank to ease credit conditions.
This is what he referred to as the “paradox of policy”: while, in the long term, savings must rise and the economy rebalance away from consumption, the short-term policy aim is to boost domestic demand so as to keep employment up.
The Bank, he says, is trying to speed up the necessary adjustment and at the same time slow it down to make the necessary adjustment for better employment conditions for youngsters. Stephen Lewis, economist at Monument Securities, says: “The rebalancing is necessary… but future historians may judge the Bank’s current strategy as nothing more than procrastination.”
For now our best hope is a recovery in enterprise and entrepreneurialism. The business cycle is turning and prospects should improve next year. But, compared with previous recoveries, it is going to remain a slow process until our animal spirits on the way up meet our deleveraging – public and private – on the way down.