I have been reading some of the other local blogs and some national comment about the UK debt levels and I have been amazed at the complacency and disingenuity of Labour commentators, aided and abetted by their Green Party friends. Some economically naive people have taken some simple headline figures and leaped to some completely unrealistic conclusions.
Headline one is the supposed total of £850bn cost of the UK bank bailout. This huge figure is only reached by adding together every actual and potential cost of the bank bail out. The real figure is a fraction of this. The overwhelming majority of the £850bn was not in fact “spent”, it comprises guarantees offered by the government against potential bank debt (£280bn insurance of last resort for bank assets and £250bn guarantees of bank wholesale borrowing). To date the exact figure drawn down by the banks is not known but it is believed to be a few tens of billions and not the maximum potential of £530bn. The next biggest element was an indemnity of £200bn provided to the Bank of England against losses it may incur in providing liquidity support. Once again the final cost will not be known for several years. The “real” expenditure was £76bn to buy assets in RBS and Lloyds Banking Group and £40bn to provide loans to Bradford & Bingley and the Financial Services Compensation Scheme. These will in time be paid back with interest. Also around £100m was spent on advice with various financial agencies during the financial crisis.
The second headline number quoted is the Public Sector Net Debt of just over £900bn as at earlier this year. This is the accumulation of national debt arising from central government borrowing over many years. In simple terms the government raises money in taxes and spends on health, defence, education etc. The difference between the two is the annual borrowing requirement. The public sector net debt is a snapshot of the accumulated debt of previous years, minus the amount paid off that year, plus the annual borrowing requirement. The problem with the UK finances is that the existing and projected spending totals massively exceed the projected revenue from taxation. In the current financial year around 25% of government spending is being financed by borrowing. This is unsustainable.
The economy moves in cycles and it is normal to run a deficit when in recession but this should ideally be balanced by a surplus in times of growth. The problem with the current position is that the level of spending projected by Labour would exceed revenue even in the peak years of growth. That is what is called the “structural deficit”. Even former Chancellor Alastair Darling reportedly accepted this and argued for cuts in government spending to balance the books over the course of this Parliament. Only the most economically illiterate, deficit-deniers still argue that spending cuts are not necessary.
Hopefully you will now see that comparing the £850bn theoretical maximum cost of the “bank bail out” with the actual £900bn Public Sector Net Debt is nonsense. However, there is a further factor to consider. Some blogs and websites have used a chart of UK national debt showing debt back to 1900 in order to try to make the point that current debt is not a problem and that cuts are not warranted. This misses the essential point that I was making above. The current debt is high by recent historical standards but it is the projection of the debt level over the next 5 years or so that is truly frightening. Labour’s structural deficit means that the national debt would be projected to grow massively without corrective action.
It is also disingenuous to say the least, to claim that the public debt is “due to bailing out the private sector banks”. Setting aside the fact that the bail out of those “private sector banks” was conducted by a Labour government, the claim itself is simply untrue. The public debt is due to expenditure exceeding revenue over many years and only a relatively small part is due to the bank bail out. Of course it is perfectly normal for an advanced economy to run a level of debt. However, this must be seen as sustainable by the financial markets if the UK is to retain its top notch rating and keep its borrowing cost to the lowest possible level. In recent months we have seen Greece’s, Ireland’s, and Portugal’s ratings down-graded and thus their borrowing costs have soared. It shouldn’t need saying but every Pound spent on debt interest is a Pound that is not available for health, defence, education etc.
The good news (for there is some good news) is that the final net cost of the bank bail-out is likely to be minimal. It is even possible that the tax-payer will break even or make a small profit. That is because the billions spent on buying shares in Northern Rock, RBS and Lloyds can be recovered when the shares are sold back into the private sector. The National Audit Office (NAO) confirmed what I have said above when last month it estimated that UK government cashed borrowed in order to support the banks totalled £124bn in the previous 12 months. The NAO also confirmed that the total potential government exposure (including guarantees etc) had fallen from £955bn at its peak to £512bn at the beginning of December 2010.
The truth is that for the UK to retain its international credit ratings and keep the cost of borrowing under control, it is essential that public spending is brought back under control. It is the reckless increases in spending under Labour that has brought us to the current difficult position and only a relatively small part is due to the banking crisis. I would be interested to hear what the deficit deniers in the Labour and Green parties would do in the current climate. Doing nothing is not an option. However, let us have a debate based on facts and realistic comparisons.