The Sunday Telegraph: Now is not yet the time to spend

What with Donald Trump’s striking statements on North Korea and steel, and Britain’s renewed Russia standoff, it’s easy to overlook the regular business of government. That includes this week’s Spring Statement on the UK’s public finances. On Tuesday, Chancellor Philip Hammond can declare that UK borrowing in 2017-18 will be around £40bn – under 2pc of GDP, the smallest deficit in almost two decades.

The Conservatives have finally fulfilled, albeit three years late, their target to eliminate the £100bn annual deficit inherited in 2010 from Gordon Brown, the absurdly self-styled “Iron Chancellor”. As the US continues to borrow with abandon, not least to finance Trump’s tax cuts, some say our improved fiscal position means Britain should follow suit. Shouldn’t we now accelerate public spending and/or slash taxes to boost the economy as we wade through Brexit uncertainties? Er, no. That’s because, despite this recent good news, the UK’s long-term public finances still look absolutely ghastly.

A budget deficit of 2pc of national income would normally provide some fiscal headroom. It’s near the average borrowed by the Government each year from the late Sixties through to the 2008 financial crisis.

Back in 2008, though, the stock of national debt, on which we pay interest each year and must ultimately pay back, was just 35pc of GDP – again, like the deficit, roughly equal to the average over the previous 40 years.

Yet during the decade since the Lehman Brothers collapse, while our budget deficit is now back under control, the national debt has ballooned. It now officially stands at 87pc of GDP, which is dangerously high. In those circumstances, given the future fiscal impact of our fastageing population, the UK should now prioritise getting that vital debt-to-GDP ratio firmly on a downward trajectory. That makes even more sense given that global financial markets are extremely over-valued and fragile.

Only last month, the Dow Jones Industrial Average of leading US stocks plunged 5pc in a single day, its worst drop in six years. The sense that another systemic collapse looms is heightened by the fact that the world’s leading central bankers are still trying to wean the global financial system off the economic crack-cocaine which is quantitative easing.

But the Federal Reserve and the Bank of England have now stopped printing virtual money, I hear you say. Yes, but only because they’ve passed the global QE baton to others, with the European Central Bankpumping €30bn (£27bn) a month into global markets and the Bank of Japan still QE-ing like billy-o. That electronic liquidity moves like quicksilver, recognising few borders – and is propping up financial assets worldwide. And QE is also supporting sovereign debt markets across the Western world, keeping yields artificially low.

No one has the first clue what will happen as this unprecedented decade-long money printing binge ends. What I know is that this transition poses massive dangers, and this is the time for any well-run country, especially one that already has high government debt, to reduce its liabilities.

Yes, our budget deficit is now low. That’s a big achievement. This column has often (rhetorically) kicked George Osborne in the shins. I’d like now to congratulate the former chancellor, and his successor. Managing the finances of the world’s fifth biggest economy is harder than writing articles about those finances. Too many departments were “ring-fenced” (such as international development), shifting too much of the adjustment elsewhere (on local government, for instance). But Osborne and Hammond deserve credit.

What, after all, was the alternative? In 2010, the UK faced oblivion. Had steps not been taken to rein in our public finances, Britain would have faced a gilts strike. Those still bitterly critical need to read some history and understand what happens to the poorest – and the state’s broader ability to help all its citizens – when a highly indebted nation can no longer raise money on international markets. The UK had a gargantuan budget deficit – above 10pc of GDP and set to rise further. The suffering related to “austerity”, and it has been real for many, needs to be set against the alternative of a Greek-style bond market meltdown.

Yet a budget deficit of 2pc of GDP is still a deficit. Our national debt is still rising. How about running a surplus for a few years, given demographic and market dangers, so we start reducing our national debt? The UK hasn’t run a budget surplus since 2001. Governments have spent more than we’ve raised in tax, loading liabilities on future generations, in 52 of the last 60 years. Consider that, even with government yields nailed down by ongoing global QE, the UK Government spent over £55bn on debt interest last year.

That’s 8pc of the entire tax take – approaching double what we spend on defence, more than we spend on schools. And as interest rates rise, those interest costs can only increase.

Consider that our near-90pc national debt number doesn’t include the £200bn-plus the Government owes on those ghastly private finance initiative contracts over coming decades. Consider that it ignores the £1,500bn-plus future bill for the public sector pensions held by less than one in six UK adults.

America’s national debt has ballooned since the 2008 crisis, from around $9,000bn to over $20,000bn. But the dollar is the world’s reserve currency and the pound is not. Let us do what we can to boost growth, and reduce our debt burden by expanding our economy. But this is not the time to shrug the lessons of history and let public spending rip.

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