Back in 2005, I listened to Gordon Brown make a speech at a private dinner. He mentioned Keynes, asking us to recall the 1920s, when the great economist’s “right-minded ideas” were rejected by politicians of the day. Keynes’s ‘spend your way out of trouble’ policies were so disliked that in the Treasury library there is apparently a copy of his paper, We Can Conquer Unemployment, on which an irate official has scrawled, “inflation, extravagance, bankruptcy”.
Brown made it clear what he thought of this: it showed a lack of open-mindedness, and worse, an unwillingness to turn ideas into action.
Yet if the past few years teach us anything, it is that the anonymous official was right. Regularly spending more money than you have is not a good idea. Once you start with other people’s money, extravagance rapidly comes upon you.
Drop £4bn on a couple of computer systems and it’s not hard to find yourself thinking that it’s perfectly reasonable to pay eight public-sector employees more than £1m and another 800 or so more than £150,000.
And from there it isn’t far to finding yourself, as poor Alistair Darling now does, needing to borrow £178bn, or around 10% of GDP a year, just to get by. Note that in 1930 the budget deficit ran at around 1%; even in the dark days of the late 1970s it only knocked around 6%.
Just behind extravagance comes bankruptcy. We aren’t quite there yet, but it’s no longer ludicrous to suggest we may soon be. Darling constantly talks about how he will halve our deficit from its current levels by 2013.
But even if he manages this (and I still can’t quite see how), it will still leave us adding vast amounts to the national debt every year. Right now the debt is around £650bn on the government’s numbers. By the end of this year it will be around £830bn. Add on Darling’s projections up to 2013 (when he forecasts the annual deficit to be £96bn), and you end up with a national debt of not far off £1.4trn. That will be over 100% of GDP.
And that’s being optimistic. Look at the New Party website, where the debt clock takes into account public-sector pensions and PFI obligations. You’ll see our national debt is already £2trn plus – £86,000 or so per household.
All this would be sort of fine if everyone felt the UK was able to fund this debt long-term. But they aren’t. The credit agencies are already eyeing us up for a downgrade; the fact that the pound was slammed as soon as Darling sat down from giving his last-chance Pre-Budget Report speech on Wednesday makes it clear that the market thinks they are right to be doing so.
Only inflation to go now… I wonder if Mr Brown remembers his 2005 speech. And if he does, I wonder if he wishes he had taken just a little bit more notice of the scribbled warnings of the long-gone Treasury official. We certainly do.