Not reducing debt is the greater danger


Whilst it might be presumptuous of me to disagree with the sixty eminent economists who wrote to the Financial Times last week, I would like to refer them and the reader to my paper A Bankruptcy Foretold, published by the IEA at the end of 2008. I calculated that, if you include accrued pensions commitments, then the UK government’s debt was a shocking 270% of GDP – over three times higher than the official figure used as evidence by Lord Layard et al. Moreover, the effects of the banking crisis and fiscal stimulus mean the situation will have worsened considerably since my research was undertaken.

Now one gets a sense that for some reason pensions are viewed as not being a “real” debt, but they are a legal contract that the government has entered into and will have to be paid, just like any other government debt. Baby boomers are starting to retire now – so pensions are not a distant future promise, but have a similar term to other forms of debt. Corporate and public accounting standards recognise this, but the government chooses to ignore these standards. So in advocating continued fiscal stimulus, Lords Layard, Skidelsky and others are addressing a minor risk (that the UK will fall back into recession) whilst ignoring a major risk (that we will spiral towards some form of bankruptcy). The government should formulate a credible deficit reduction plan before it has no choice.

It does concern me that there is no credible plan for dealing with the UK’s public finances. Opinions may vary about whether government expenditure should actually be cut now, or whether any cuts should be delayed for a time. But not publishing a plan, with amounts and timescales, seems hard to defend. Of course the future is ‘uncertain’: what else is new?No defence review before the election. No spending review before the election. Apparently every attempt to shield the electorate from any inkling of the ‘difficult times’ that lie ahead: both spending cuts and tax increases. That is hardly responsible behaviour.

The sixty economists present a false dichotomy – borrow or recession. The evidence is that in an open economy with a floating exchange rate you do not have to make that choice. What annoys me most about the 60 economists, Blanchflower and so on, is that they do not recognise that there might be a contrary opinion.

I agree with Philip’s “false dichotomy” point, but he doesn’t tell us exactly how to maintain the stimulus while reducing the national debt. One way is to buy more of it back partially with printed money (inflationary effect) and money from tax (deflationary effect). Get the mix right and the effect is neutral, i.e. the government’s present reflationary stance remains unaltered. Or if you want, alter the mix a bit for a bit more reflation. More on this at:

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