One of George Osborne’s favourite mantra’s is the above one. Unfortunately it’s based on a rather school-boy understanding of economics.
Of course everyone is familiar with the personal debt spiral. Adam and Eve enjoy the good life. They spend a bit more than they earn and make up the difference with credit card debt. Once they’ve maxed out their credit cards they start taking out pay-day loans at exorbitant interest. Before you know it their mole-hill of debt has turned into a mountain and they have no way out except bankruptcy and/or years of austerity.
Mr Osborne would like us to believe this has what has happened to UK plc. Labour overspent in the good years, maxed out their credit, and now the only way out is austerity, austerity and even more austerity.
I’ll leave aside for a moment the fallacy that Labour massively overspent and ran up a huge public debt – they didn’t, certainly not before the Global Financial Crisis (GFC) hit. And up until then (2007) everyone, including Mr Osborne, thought Labour’s spending levels were sustainable (Mr Osborne has clearly forgotten that in 2007 he was pledged to match Labour’s spending plans).
Mr Osborne is overly fond of using household analogies so here’s another one for him.
Fred and Ethel have a large house. Unfortunately they also have a largish mortgage and credit card debts. As they’re both in reasonably well paid jobs, this isn’t a problem. But then Fred has to go on short time working and Ethel has a wage cut, as the recession bites. They find they can’t service their credit card and mortgage payments anymore. They can cut back, but their “fixed” expenditure is too big for their new, lower, income.
So, do they sell their house, pay off all the debt (including the mortgage) and move into a caravan? (I exaggerate for effect).
No, Ethel and Fred are a bit cannier than that (and Mr Osborne). They realise they are sitting on a big asset – their house. It’s four bedroomed and there’s only the two of them.
So, they go along to their friendly local bank manager and explain their problem, and their solution. Being a wise and sensible bank manager she lends them the money they need. (I know, I know, this bits pure fantasy).
Ethel and Fred take the money, refurbish the top-floor two bedrooms and bathroom as a self contained flat-let, rent it out and make enough money to cover the new (small) loan and make up the fall in income they’ve recently experienced. After a couple of years of this they are back to an even keel and – hey presto – “they have borrowed their way out of a debt crisis”.
It’s not difficult to scale this example up to the level of a business of even a country. Of course, it relies on you being able to (a) borrow some extra money; (b) invest it in something that will make you more money than it costs; and (c) also makes enough to compensate for previous losses/problems. This is not always possible, but it is possible.
Adam and Eve were stuck because they had no way of growing their income but Ethel and Fred found a way to do just that, using extra borrowing.
This is what organisations like NIESR (National Institute for Economic and Social Research) have been arguing – the Government should precisely try and “borrow its way out of a debt crisis”. By borrowing around £30bn – at historically very low interest rates – and investing it in areas that have high-leverage impact of stimulating economic growth, the Government would more than recoup the money through increased tax revenues and lower public spending on unemployment benefits etc.
Mr Osborne sort of admitted this in the Autumn Statement when he decided to shift £5bn from current to capital spending. But by doing it this way he’s robbing Petra to pay Pauline. £5bn of current spending cuts will negatively impact the economy, in a way that £5bn of additional borrowing wouldn’t (see previous blog post on the Autumn Statement Blame Game). So the £5bn of investment will have to work even harder to get any real benefit.
So, a few marks for at least recognising, if only implicitly, that public sector investment can be good for the economy and the Exchequer. But George really does need to try harder to understand his economics.
3 thoughts on “’You Can’t Borrow Your Way Out of a Debt Crisis’. Er, actually you can Mr Osborne. It depends….”
Quite right too !
And of course there is the small matter of what Britain did successfully in 1945 – borrowing to invest in infrastructure despite a much larger public deficit than now (as a proportion of GDP).
You can take the analogy further, if Ethel and Fred had children, would they pull them out of school and send them out to work to bring in more more or would they see their education as an investment? A household is not a the same as a Nation a Nation is like a business, it needs investment, innovation and smart leaders