Monday, 23 November 2009

Debt - The Business Viewpoint

As the Government hit an unpleasant new record on borrowing in October taking borrowing to £175bn for the year, it seems that the mantra is that debt is good.

Meanwhile, out in the world of business, we seem to think the opposite. In the building sector, companies like Persimmon who were particularly debt laden at the start of the recession have slashed their debt by 58% or £960m. Other builders like Barratt and Taylor Wimpey have followed suit but on not such a grand scale.

But across business generally, borrowing is down - £4.6bn down in September, sending the 12 month growth rate to its lowest level since 1999. RBS has over £27bn of approved credit not being used while other banks have a similar situation.

The situation runs at loggerheads to the Government viewpoint as Alistair Darling marched smartly into the banks in July and told them that he was very angry about them denying businesses credit. The simple fact is that businesses are reining in their borrowings in and not asking for more credit.

Here lies the gap between Government and business thinking. In a recession, businesses look to conserve investment as there are fewer opportunities. It's all very well famous entrepreneurs like Lord Sugar telling us the recession is non-existent and opportunities are high, the reality is that few companies thrive in a recession - and it isn't for the lack of trying. The markets are down - that's a simple reality and businesses have to cut their cloth accordingly. They have conserved their cash and credit lines for the upturn and that is good business sense.

While Friedman may be the mantra at the Government level, just wishing companies to grab credit and spend it for the sake of it is not just wishful thinking but it shows a complete lack of business acumen on behalf of ministers. Businessmen understand that profitable sales drive their business and without them they have to make sure they can survive until they increase. Sure, some companies may miss the odd opportunity for growth in a recession but it is the wise businessman who survives.

I may not agree with David Cameron's total argument on the economy but I do believe that you cannot solely wish for growth to solve this country's debt problem. You have to make cuts - that is a reality. And the longer we leave it, the worse it will get.

What I would like to see is an emergency budget that identifies immediate savings through slashing inessential costs, wastage and inefficiencies and then puts more spend directly into areas that will help boost business such as cutting tax in the short term and offering subsidies to firms on wages to keep people employed.

The two different mindsets are dangerously polar and too much money has been sunk into banks in preference to general business for zero return. Businesses understand the need to get sales before they invest - the Government is going down completely the wrong direction by wishing only for growth when they should also be driving down costs.

It's a recipe for disaster in the long term.

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