It’s the little things that get to people. While Britain sinks still further
below the mountainous waves of public-sector debt, the entire nation seems
enraged by the £1,645 charged to us by a Tory MP for a “floating duck
island” in a garden pond.
When one thinks of the billions of pounds of taxpayers’ money that this
government has squandered on schemes of much less utility than Sir Peter
Viggers’s attempt to preserve his feathered friends from Mr Fox, the public
rage at the Tory member for Gosport seems, well, just a little
disproportionate.
Perhaps it is a form of displacement activity: the state of the national
finances (and what it will cost us personally) is so terrifying that we
block it from our thoughts and instead channel our concern into a welcome
distraction.
Thus the announcement from the world’s leading credit-rating agency that it
might downgrade our entire national debt – a bit like American Express being
advised to tear up your gold card – seems to have left the public unmoved.
In a way, that was a reasonable response.
The major credit-rating agencies had proved themselves to be worse than
useless in assessing the quality of debt over the past few years. It was
they who confidently slapped triple-A ratings on Wall Street instruments
that turned out to be little more than junk. If they got that so badly
wrong, why should we take their crystal balls seriously this time?
The government points out, additionally, that only one of the three main
credit-rating agencies, Standard & Poor’s, has put our national debt on
a so-called “negative” watch. It spoke as if this were some sort of
ice-dancing competition, in which one could strip out the lowest mark
awarded by one of the judges. Nice try. The real point, which the
Conservatives seized upon, is that the unprecedented warning from Standard &
Poor’s is the inevitable reflection of the fact that Britain’s national debt
is rising to an unprecedented level.
To put it into some sort of perspective: as a percentage of gross domestic
product, our budget deficit is projected to reach twice the level it did
either in the grim austerity years of the late 1940s or 30 years later when
the country was forced to seek emergency financing from the International
Monetary Fund.
For those who find historical comparisons lacking in immediacy, try this: the
British government is now borrowing more billions to pay the interest on its
– that is, our – existing debt. When this happens to individuals, we know
that they are on skid row.
Economists, and especially Keynesians, point out that nations are not like
individuals – they can reduce their level of debt not just by spending less
but also through tax-raising powers, or even by engineering a convenient
amount of inflation and thus depreciating the real cost of their interest
payments. This last (in the unlikely event that the governor of the Bank of
England, Mervyn King, were to succumb to any such demands from Gordon Brown)
is exactly what would provoke lenders to UK plc into demanding still higher
rates of interest: a spiral that would make our debts ever more painful to
finance.
The financial secretary to the Treasury, Stephen Timms, was charged last week
with the task of telling the good-news story about the financing of the
national debt. He toured the BBC’s news studios, pointing out that the
latest auction of gilts – government bonds – was heavily oversubscribed: in
other words, no problem.
That’s true as far as it goes, but there is a peculiar twist, explained to me
by Stephen King, the chief economist of HSBC. He points out that normally
the government would just be a seller of gilts; now, with so-called
quantitative easing, the Bank of England is also busy buying the
government’s own debt back from financial institutions. That has the desired
effect of oiling the stuttering engine of corporate credit, but it also
underpins and distorts the price of gilts.
In the 1980s the chief executive of Guinness, Ernest Saunders, went to prison
for doing something similar: in order to make the Guinness share price more
attractive as a currency for acquisition, he secretly financed a ring of
associates to buy Guinness stock in high volumes. In this instance there is
obviously no secret about what is going on – and in any case Mervyn King is
the last person to acquiesce in a conspiracy by Downing Street to delude the
debt markets. But the point remains that the exchequer can’t keep on eating
its own tail in this way.
This is why Standard & Poor’s is worried: when will Britain set out a
coherent and credible plan of public expenditure cuts, without which it has
no chance of bringing borrowing under control, or indeed of preserving the
currency from perdition? The Conservatives have enjoyed this moment,
describing it as an indictment by the markets of Gordon Brown’s economic
policies. That is how the media have interpreted it, too.
There is quite another way of seeing it. Look at the exact words of the
warning from Standard & Poor’s. It states: “The rating [of the UK] could
be lowered if we conclude that, following the election, the next
government’s fiscal consolidation plans are unlikely to put the UK debt
burden on a secure downward trajectory over the medium term.” Now, which
party is thought almost certain to be in power “following the election”?
That’s right: Standard & Poor’s is in effect saying that it has
considerable doubts about whether the Conservatives will “put the UK debt
burden on a secure downward trajectory”.
This is not so surprising, really. David Cameron abandoned his cherished
policy of matching Labour’s spending commitments “until 2011” only at the
end of last year. Although the Tory leader repeatedly charges Brown with not
mending the roof while the sun was shining, his own policy at the time was
to say that there was indeed no need to mend the roof. Like Brown, he
thought that the sun would keep on shining – even if he didn’t share the
view that it was Gordon who actually made the weather so splendid.
Even now, when the Conservatives insist that they alone have a proper concern
for the nation’s burden of debt, their plans for reducing it are made almost
incredible by their commitment not to shave a penny from the NHS budget, the
largest single component of government expenditure.
I understand that Cameron wants pre-emptively to neutralise Labour’s
traditional election rhetoric that the NHS is not safe in Tory hands; but to
reduce public expenditure by the necessary amount without touchinga hair of
the health budget would involve disproportionately harsh cuts in other
departments. Perhaps this is what the Conservative leader truly intends;
but, of course, that side of the equation is not being set out for all to
see, this side of a general election.
Everything Cameron says is now conditioned solely by the desire to annex the
votes of those who in recent elections backed either Labour or the Liberal
Democrats. It’s the marketing man’s way to maximise the chances of winning
all the crucial marginal seats– but the mushiness of the message is
simultaneously guaranteed to leave the financial markets profoundly
confused, as Standard & Poor’s has just confirmed.
Never mind; the Tory leader was crystal clear about the only thing that
mattered in Britain last week. Sir Peter Viggers found that he had
immediately announced his retirement as an MP – presumably to spend more
time with his ducks – “at the direct request of David Cameron”. What a
relief.
dominic.lawson@sunday-times.co.uk
