Hands up everyone who thinks that the UK “maxed out” on its credit card in recent years and needs to make the budget deficit the government’s top priority. If you put your hand up I have to tell you that you are just plain wrong. And so is the government.
Here’s why. The financial crash was not caused by consumer debt or by a splurge in public spending. It was an international phenomenon, starting in the United States. Governments bailed out the financial sector and in the UK some banks were effectively nationalised.
The sudden contraction of credit and financial uncertainty caused the recession. Businesses postponed or stopped investing and consumers began paying down debts.
For the government then to focus on deficit reduction as it did when businesses, consumers and the EU, our largest export market, were spending less, meant even more economic contraction.
The Bank of England set its base interest rate at 0.5 per cent, the lowest rate in over 300 years, and became so concerned about recession that it created £375 billion, using it to buy financial sector assets, hoping that, with more cash on hand, banks would lend more.
Incidentally, if we had “maxed out” on the national credit card, where did this gigantic sum come from and wasn’t it the height of irresponsibility to throw it at the banks? What about the effect on inflation?
Well, there was a better approach than this so-called “quantitative easing” and, no, there has been very little inflation.
In these specific economic circumstances, where cheap credit isn’t enough to boost the economy significantly, the government should have borrowed more, not less, and spent it on building public assets such as infrastructure and new housing. If you think a national economy is just like a corner shop or a household budget, only bigger in scale, as so many seem to do, this seems wrong. But they are very different things.
Once economic growth is well-established is the time to be aggressive about debt and deficits. Government debt has been very much higher in the past than it is now and was reduced by economic growth. This is very far from a wild idea. In fact, it is what the overwhelming majority of professional economists believe.
Alasdair Rankin is finance convener at Edinburgh City Council