I blogged only this morning on Alistair's Darling's dogma about borrowing to rescue Britain from the recession - 'borrowing to grow' is the mantra that he and the PM repeat endlessly.
I had a discussion with someone today about my negative response to this sentiment. And I tried to explain, beyond Alan Greenspan's gloomy view about borrowing too heavily as to why I believed it is not the only way out. I acknowledge that running a business is not the same as running a country but certain principles about debt are true no matter how you look at it.
Today, Government debt has been easily 'sold' as bonds as the main buyer in recent months have been ourselves - Quantitative Easing (QE)has allowed the UK to buy its own debt and so make it look very attractive. QE is drawing to its conclusion and the Government has indicated it will not spend any further than the £175bn already spent. Some speculate that when our bonds go on the wider market there may not be the enthusiasm by institutions and other Governments to buy our debt so willingly.
The reason is this, in my view. Anybody looking at loaning a person or a business more money will look closely at how it is run. If the lender (effectively the buyer of the bonds in our debt) sees that the person or business is not making efforts to create cash of its own, then there are warning signs about the long term ability of the person or business to keep up the payments on the debt. For an individual, a lender will look at income, savings, assets, prospects, other loans and current spending habits - indeed, new mortgages are rumoured to require much more rigorous scrutiny of how income is disposed of before assessing how much can be afforded. Business has the same scrutiny - the last thing that any lender wants to do is to lend money for an expensive lifestyle or wasteful use of money by a business. So if the MD wants a loan to buy a yacht to take customers around the Mediterranean while business is bad, the lenders will not be keen, just as Citigroup could not buy Corporate jets during the credit crunch.
What lenders would certainly want to do is to see how an individual or business accommodates their lifestyle or business to service the debt. If an individual receives the money and blows it on champagne and high living, the lender will not be happy as this is not helping the servicing of the debt and may well end up with the individual getting into more difficulties financially. For a business, if the business does not look to its own cost line, income or cashflow to maximise the use of the money, lenders, particularly in austere times, may not believe the business is going to be able to keep servicing the debt without coming back to ask for more.
A good example of this for our Government is the fact we borrowed, yet again, at much higher rate than previously forecasted in September, once again missing our forecast on borrowing and requiring us to borrow yet more. This lack of understanding of our own 'business' by the Government has to make lenders think twice about our long term ability to run the 'business' that is Britain. Further, we are not growing - despite spending astronomic sums pushing our borrowing sky high, Britain's GDP contracted again last quarter when other countries emerged from recession. Time and again, our Government has repeated the views that Britain's economy was strong and resilient to the recession and we were not overly reliant on the house market.
Time and again, the Government has been wrong.
Like a bad management team in any business, a lender will take a dim view of those managers who do not fundamentally have a good grip on their business. It is clear that our finances are run more in hope than in knowledge and lenders cannot lend endlessly against such poor management. The fact that there is a clinging belief that growth will come so just spend more, is a sure symptom that our 'management' has little clue as to what is going on.
But there is another big issue. The Government's stubborn refusal to cut costs is a major factor in putting doubt into would-be lenders' minds. Just like a person who takes a loan and blows it on champagne and good living, lenders will want to see where our money is going. If all we do is support the lifestyle of rich bankers, it has to be a worrying sign. The fact that we have written an open cheque to underwrite banks' bad business for the future is another serious issue - this is not supporting growth, this is supporting liability - to a lender for a mortgage this would be akin to another loan having a preferential or equal charge on your assets, this would have to limit the size of available loans and the appetite of the lender to risk it. Further, the Government just keeps avoiding the issue of making efficiencies and saving money. We need to show that we can create cash to help service debts so that if the economy remains in recession for longer, we can at least cover part of the 'miss to the forecast' if nothing else.
Finally, there is the taxpayer. While we are the 'collateral' for the loan as Britain has few assets left to sell, if growth is slow or the debt burden gets too high, then the Government will keep turning to us to get more of the money in tax to service the debt. If unemployment continues to grow, less tax is taken and the burden on the welfare state increases as a result, then we can borrow money to pay for the 'miss in forecast' but the debt servicing on the increased borrowing comes from increased taxes. It isn't rocket science. Lenders will observe that as time goes on and the tax burden increases, the appetite of British people to continue paying will decrease and this spells danger to the country's ability to service the debt.
Today, the Government are acting as if there will never be a time when it cannot go to the open market and raise money or take it from taxpayers. I think that lenders will start taking a dim view of Britain's ability to repay soon. From my own perspective, I am getting more shirty about where that increase in tax would be spent - if it is on wars I don't agree with or MP allowances or bureaucracy and inefficiency, I will not be happy to pay it.
I believe that making cost savings on our budget is essential to the country's good let alone to prove we can manage ourselves. We have too much flowing through the public sector and too much inefficiency - we can easily save money if we want to. We must prioritise what is important and cut costs where we can meaning some services will be affected, that's just a fact. Only when we have our house in order will be be able to see where we can invest money that we may have to borrow to create growth. Today it is just pure guesswork and it has almost exclusively been wasted on the financial sector.
Given that everyone pounds on that the financial sector is only 9% of our GDP is has taken a disproportionate amount of money on a grand scale to bail it out. This means that our dependency on this sector is far greater than its contribution to our wealth would suggest. That also suggest that we are pouring money down a drain in saving it - this is not good news for would-be lenders as right now we are funding lifestyles in the banking sector as much as if the Government borrowed £100bn before the crash and handed it all back to us in tax cuts to spend on what we wanted - they wouldn't have done it as it made no sense. But that's what they have done - but the billions have gone to a small percentage of people to not just save their careers but to make them far richer than they were before. It is that stupid.
In simple terms, if Britain were an individual wanting a mortgage and it had a budget and sources of income as it is today, our finances would not stack up. The lender would want to see how we adjust our spending and plan to grow and to be right on top of our 'managing the debt' before lending us more money.
Because the prospects right now are not good. We need to staunch the losses we are making as a nation to slow down our rate of burning money which is fuelling our requirement for more debt. Until we get that balance right - Britain is a bad debt in the making.
No comments:
Post a Comment