Wednesday, 31 August 2011

Why the public debt does still matter

So I'm (not-so) famous for saying that Britain shouldn't be reducing its public spending deficit as far and as fast as it is.

In fact, most of the developed economies shouldn't be cutting back right now. They should be borrowing more, spending more, printing more money. As fast as they can.

But much of this is related to the hole we find ourselves in. Basically, there's a great big hole where demand should be. Borrowing to fill it isn't stupid. It's wise. If your family was in danger of being put out on the streets because you'd lost your job, wouldn't you take out another slice of mortgage debt to tide you over? I think you would.

And the public debt is still important. And in the long run, tough and painful choices are going to have to be made - about long-term care for the elderly, pensions, and the funding of public sector capital investment.

All three (especially the first two) are precariously poised. The Office for Budget Responsibility and its head Robert Chote (above) have long-term doubts, which really apply to the period between the 2020s and the middle of the coming century, about all three. You can read its first formal and full-length report here, if you've got the time.

In the short term? We've got to borrow more than we're planning. In the long term? We've got to borrow less than projected lest the debt stock really does become a drag on growth.

It doesn't actually matter how we close that gap. For myself, I'd throw a lot of new taxes into the mix - taxes on consumption and pollution, for a start. We should renegotiate many of our PFI contracts, a process on which the coalition has made a welcome (if uneven) start. Public sector workers are going to have to pay even more for their pensions if they want them to remain anything like as generous. And long-term elderly care requires a 'New Deal' agreed between the parties to a death or inheritance bond asking for but capping payments when people pass away - an emerging and sensible consensus so carelessly scuppered before the last General Election.

The truth is, we have the will and the means to close that gap. We can do it, and we don't have to be over-macho on the public finances right now to show that we believe in wise and well-designed public policy in the future.

I don't expect politicians to grasp either of these nettles voluntarily. But grasped they must be.