Britain is not free from the laws of finance, which say that debt eventually has to be repaid and cash is king. Gordon Brown will go to the G8 on Wednesday as the leader of what is becoming a debtor nation.

We have been here before. On July 31, 1931, the Labour Government of Ramsay MacDonald published the report of the May commission on national expenditure, which recommended substantial cuts in government spending. The Cabinet was split on whether to accept these cuts; the majority was against them. MacDonald was in favour; he formed a national government, dominated by the Conservatives, on August 24.

On September 19, the National Government abandoned the struggle to maintain the gold standard and allowed the pound to float. On October 27, MacDonald’s coalition won the 1931 general election, with a majority of 473 seats to Labour’s 52. The National Government went on to win another landslide in 1935 and, at least nominally, held office until the end of the Second World War.

There is no longer a gold standard to maintain, but many of the other factors of the 1931 crisis are present in 2009, including unemployment, public service pay and the recession itself. However, we now have a prime minister who is on the other side of the argument. MacDonald had become convinced that national finance required public expenditure to be cut; he accepted this as an overriding national necessity, more important even than the unity of the Labour Party, which has never forgiven him and probably never will. Mr Brown has taken the other view, and gone for debt as his policy. He has failed to address the issue of public expenditure; indeed, he has repeatedly attacked the Tories for their supposed intention to make extreme cuts; he clearly intends to fight the next election on the slogan “Labour investment or Tory cuts”, although this can be seen as bogus by anyone who can count. After the election, there will be cuts, whether they are Labour or Tory ones.

The figures in the May plan were very different from today’s. The May commission calculated that the budget deficit, before cuts or changes in tax, would be £120 million, which the Treasury soon had to raise to a forecast of £170 million. The Government made heroic efforts to balance this budget.Nowadays, our budget deficits have to be measured in billions rather than millions. The current debt situation is probably worse in real terms than in 1931.

Mr Brown is probably facing a more serious deficit than MacDonald, but the Prime Minister is still adding new expenditure to it, whereas MacDonald and the May commission were trying to make cuts. Mr Brown has to face two very different communities, with very different characteristics. He is dependent on both. Not later than June 2010, he will have to face British voters. He also has to satisfy the requirement of the bond market. Britain has to borrow unprecedented sums. That is the result of past and present policies. If the international bond market loses confidence in British economic policy, borrowing will cost more and interest rates will rise, risking a second bout of recession. The confidence of the bond markets relies on international expectations. The financial expectation is that Britain will need to borrow excessive sums.

Bond markets always prefer prudent economic policies. They liked the Gordon Brown of 1997, committed to following Conservative spending plans; they worry about him now. They want cuts in public expenditure because countries with low expenditure need to borrow less and therefore enjoy higher credit ratings. Bond markets dislike budget deficits; the bigger the deficits, the more they worry about them.

In 1931 they thought the May commission was correct and backed MacDonald. The Labour Party has usually seen the bond market as an enemy. After the Second World War, Labour spokesmen used to talk about the “gnomes of Zurich”. They now have to worry about the more powerful “gnomes of Shanghai”. That is where the global money now is.

The Conservative Party starts with greater trust among foreign bankers, although with two drawbacks. The first is that foreign bankers, with rare exceptions, do not have votes in Britain. Any party that wins the votes of the bankers but is short of the votes of the British will be in trouble.

The second drawback is that, even now, it is the expectation of a Tory victory in 2010 that is maintaining global confidence in future British policy. The markets expect a Tory victory. They think the Tories will be more willing than Labour to move towards a balanced budget. International confidence depends on that. If the bond market thought that Gordon Brown would win the next general election, they would sell sterling; that would be a rational reaction to the prospect of more of Mr Brown’s policies.

It may be irritating for David Cameron that the international confidence that the Conservatives enjoy should allow Mr Brown to continue with policies in which neither the Tory leader nor the international bankers have any confidence. It is a paradox that Mr Brown’s affinity for debt is trading on Mr Cameron’s credit.

Balanced budgets are the condition of political freedom. So long as the budget is in reasonable balance, no one outside Britain can overrule British financial policy. If we want a bigger health service, that is our business. When borrowing rises too high, we have to borrow further to finance our national policies on health, education or defence.

If we are unable to borrow, except at rising rates, we will lose our national freedom to decide these policies. There is nothing that says that the people of China have to finance the British health service. After a serious recession, when inflationary finance may become unavoidable, nations have to get back into balance. That is the next task for Britain — and for the G8 itself.

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