Tories must focus on getting deficit down
The US government shut down for a few hours yesterday, after a rogue senator filibustered a budget bill on the grounds of fiscal logic. Rand Paul, of Kentucky, described Donald Trump’s tax cuts as “great”, but demanded they be accompanied by desperately needed cuts in spending. The situation is comparable to Britain, with one distinction: Mr Trump is unbalancing the books with tax cuts while Theresa May is more likely to do so with spending. This is dangerous short-termism, especially given that the cost of borrowing is probably about to go up. The Tories have got to get the deficit down faster.
The good news is that the world economy is strong and wages are growing. The bad news is that we’re still living with the legacy of what was done to beat the financial crisis. Usually, when a recession hits, failing concerns go to the wall and the market corrects itself. In 2008, however, it was felt that the businesses affected were so big that they had to be bailed out. To cut the cost of borrowing money, interest rates were cut to new lows. Britain practised a little austerity, yes, but the Bank of England also pledged billions in quantitative easing – the digital version of printing money.
Britons made enormous sacrifices to get through the crisis with honest toil. Nevertheless, cheap money has encouraged under-productive, parttime and poorly paid work. Savings stagnated. And now that substantial growth has returned, supercharged by Mr Trump’s tax revolution, central banks find themselves under pressure to slow inflation. Every interest rate rise has winners and losers. But if rates are allowed to remain on the floor then, come the next downturn, they cannot be lowered again to stimulate recovery. So up they go, spooking the stock market.
It won’t just be businesses and individuals who feel the pinch. British public sector net borrowing runs at around £50 billion a year, a figure that has fallen but is still far too high. Our total net debt is £1.8 trillion and our interest payments represent billions that could go on schools or hospitals. That’s why Labour’s programme of borrowing, spending and nationalising is not only dangerous but hostile to the interests of its traditional constituencies. Debt has to be paid back with interest, making greater cuts to welfare inevitable in the future. Gordon Brown’s profligacy necessitated George Osborne’s austerity.
It really ought to be the natural function of the Conservative Party to point all this out. But the Government’s direction is unclear. They have floated revenue-raising ideas – a national insurance hike for the self-employed, a new social care formula that hit the middle-class hardest
– only to drop them when the economic and political consequences became obvious. Various departments are still clamouring for more cash, and some welfare costs will be passed on to local rate payers through hefty rises in council tax. Such fudges are inevitable if there is no central, guiding Conservative fiscal vision.
No one wants interest rates to leap overnight: a soft landing is preferable. The UK government can play its part. Businesses may find it harder to borrow in the coming years, but tax cuts would take some of the financial pressure off, while deregulation and trade deals open up new markets for entrepreneurs. Senator Paul, however, is correct to say that cutting taxes is only one half of a sensible conservative approach: the other is reducing expenditure. That means not only finding savings in Britain’s bloated budgets of, say, welfare or foreign aid but also encouraging voters to take greater responsibility for their own futures. As higher interest rates expand the returns from personal savings, so investment should be encouraged.
The global economy is entering a period of realism in which governments have to exercise prudence. Approached the right way, with clear Conservative leadership, this could be an opportunity as well as a challenge – much like Brexit. The British people have already proved in the past few years that they have the ingenuity and perseverance to make the most of any situation. They want honesty from government, not false promises. One doesn’t need a degree in economics to know that nations, like individuals, have to pay the piper some time.