You’d think that the message might be getting through by now.
If you spend too much money today, you’ll have to pay for it tomorrow. Or next week. Or next year. But at some point, you will have to pay it back.
This isn’t a moral point, or some sort of puritanical finger-wagging. It’s just the way the system works. People who lend you money tend to want it back at some point in the future. If they’ve been careless with their credit-checking, and you can’t pay it back, then they will lose money, no doubt hurting their creditors in turn.
Consumers are starting to get it. They’re spending less than they did. But the government seems to be having difficulty getting to grips with the concept…
The government will boost its spending to help the economy
Chancellor Alistair Darling reckons he can spend our way out of recession.
The big idea – inspired by the theories of John Maynard Keynes – is that we bring forward spending on various infrastructure projects so that the government makes sure that people stay employed and receiving salaries, while the private sector licks its wounds and prepares to make a comeback at some point in the future.
It’s a lovely idea in theory. The profligate old private sector can’t afford to spend any money right now, because it has to pay back its debts. If the private sector can’t afford to keep people in jobs and salaries, then the public sector will just have to step in and save us all.
Better yet, it means you never have to experience a downturn. The private sector spends, then the public sector spends. They each take it in turns to power the economy, and you never have to worry about boom and bust again. Everybody’s happy.
The huge flaw in Darling’s plan
Of course, if something sounds too good to be true it usually is, and it’s no exception here. For one thing, whether you agree with Keynes’s theories or not, the government has only taken on half of the idea. The point is that the public sector acts counter-cyclically. So you save money during the good times, and spend it during the bad.
You’re probably starting to see the flaw in the plan here. The government hasn’t been saving money during the good times. For all that commentators seem to be acting as if this resurrection of Keynes is some new thing, the truth is that the government has been ‘priming the pump’ for years now. The public sector has been awash with spending and job creation. And the really galling thing is that the money hasn’t even gone on useful projects, such as Crossrail, or a couple of high-speed links between the north and south of the country. It’s been used to create whole new tiers of middle-management non-jobs. The public sector is awash with co-ordinators and advisors and consultants, all highly-paid, and all doing nothing more productive than acting as little conduits for taxpayers’ money to be funnelled back onto the high street and into the housing market.
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So where will the money come from?
So if you don’t have any money in the kitty, then where’s it going to come from? There are only two places you can get it – from taxpayers, or by borrowing. Raising taxes during a recession is a no-no (although stealth taxes might still be the name of the game in the pre-Budget Report I suspect). So the money has to be borrowed.
That’s fine, the Treasury tells The Guardian. We’ll just borrow it from budgets in the future. “There is not going to be any new money but we are going to have to be imaginative. Nothing in the pre-budget report has been decided, but the key thing is going to be innovation – bringing forward spending.”
You should always be mildly worried when people start using words like imaginative and innovative when they’re talking about ways to make the books balance. We all know what “creative” accounting really means. And this whole mess has been, to a great extent, caused by the “imaginative” and “innovative” new financial products so enthusiastically embraced by the banking sector.
But the bigger issue is that the choice between raising taxes and borrowing more money is in fact an illusion. Borrowed money has to be paid back at some point in the future – whether that’s in the standard way, or via an inflationary currency crisis. So all government spending ultimately comes from the taxpayer.
So when and if the private sector returns to health, it immediately faces the prospect of higher taxes or higher inflation to pay for all the government “deficit spending”.
This ‘solution’ could just make things worse
The reality is that there is no easy way out once a bubble has burst. Even Keynes’s theory relies on the government making an effort to save while everyone else is spending. But unfortunately, the government has had as much fun spending during the good times as the rest of us did. This ‘solution’ could just make things worse – just ask the Japanese, who are into their 18th year of stagnant or falling asset prices.
We have to pay the bill sooner or later. As Ambrose Evans-Pritchard puts it in The Telegraph today, “the world stole prosperity from the future year after year, with the full collusion of governments, regulators and central banks. Now the future has arrived.”
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