Sunday, January 05, 2014

On the road to bankruptcy

I didn't catch the name of the female member of the panel who were reviewing the papers today on the BBC News channel.

I was not tremendously impressed with her - she described the NHS as suffering "savage cuts" when in fact the NHS is one of only two areas of government spending which the present government has protected in real terms. She referred to the "coalition government" as "underfunding" the NHS which presents at least two problems

1) To describe any given level as "underfunding" and for that statement to be meaningful you have to define a level of funding you would regard as adequate, and as demand for NHS spending is for practical purposes infinite I don't believe this can be done, and

2) singling out the coalition government spending on the NHS as inadequate when Labour's shadow secretary of state, Andy Burnham, said that the present government was irresponsible in NOT cutting the NHS is a little slanted to say the least.

But the more serious problem I have with this lady is that she appears to think it is "ideological" to try to get the country's finances into a more sustainable position.

Now, there is room for some genuine debate about how much a government can afford to spend. But there is no reasonable doubt that when a government's spending gets way out of line with what can effectively be raised from taxation, this has to be corrected or the long term consequences are very serious.

This is as well known to intelligent Democrats in the USA - as shown in today's quote of the day - and intelligent members of the Labour party such as Alistair Darling and Jim Callaghan as it is to people on the right.

If you spend much more than your income, you have to print or borrow money or liquidate your savings. Printing lots of excess money leads to hyperinflation: if you are not going do that you have to borrow the money or spend your past savings and your net debts go up. That isn't ideology, it's a mathematical fact, as obvious as stating that 2 + 2 = 4.

Keynes and some other economists have argued that in some circumstances a government can have quite a bit more flexibility in this area than an individual household in the short and medium term. But no serious economist has ever argued that governments are totally exempt from the need to keep some kind of balance between income and expenditure.

A government can no more sustain for year after year expenditure of four pounds for every three coming in without serious consequences than you or I can in our own household finances.

If you dramatically increase your debts, you will have to pay dramatically more interest to service those debts. Again, this is not ideology, it is a mathematical fact as obvious as the fact that 2 + 2 = 4.

Hence if you try to run a country for any length of time by spending much more than you are prepared to raise in taxes, first your debts, then the interest rates you have to pay on those debts, will go through the roof. And your failure to correct the imbalance will only delay the pain, because within a few years you will be needing more money, not for schools or hospitals, but to pay the interest on the debts you have already incurred.

This is exactly what Gordon Brown did to the British government's finances, which is why the national debt doubled under his stewardship and is now £1.2 trillion. And trying to correct that problem is not the action of an ideologue, it's the action of any responsible government who have the ability to do basic arithmetic. The alternative is national bankruptcy and the sort of measures we have seen in Greece and Cyprus.

The real argument is not whether the government should have made efforts to cut spending. The real argument is whether it has cut spending by enough.


Jim said...

I never saw the programme, but it sounds to me like Polly Toynbee.

BBC often have her on, then an economic round up with Stephanie Flanders, then a question to a tory supporter for "balance"

Chris Whiteside said...

You're right about the way the BBC often presents things, but on this occasion it wasn't Polly Toynbee who I would have recognised - it was someone who makes her look like a model of balanced impartiality.