Why additional public borrowing isn’t necessarily bad7 January, 2013 at 18:04 | Posted in Economics | 12 Comments
[The policy of austerity has failed. We need more investment in job]
Q: Wouldn’t this involve the government borrowing more?
A: Yes, it would involve paying for the investment by borrowing. That is what a company would do if it saw a good investment opportunity, and we are always being told that the public sector should learn from good practice in the private sector.
Q: Wasn’t it excessive borrowing that got us into this mess?
A: Borrowing for a good reason is not a problem, as anyone with a mortgage will tell you. Borrowing becomes a problem when it underestimates the risks involved, and when the borrower may not be able to afford the repayments. The financial crisis was caused in part by excessive borrowing by consumers who thought house prices could never fall, but mainly it was banks over-extending themselves. The recession caused high government borrowing, and not the other way around.
Q: But isn’t public sector borrowing at record levels?
A: Yes, but so is the desire of the financial markets to buy public debt. This is why interest rates on public debt are so low. The financial markets desperately want to buy government debt, and so they are prepared to get very little back in return. That is one reason why now is just the right time for the government to borrow to invest.
Q: The government tells us that if it borrows more we will become like Greece.
A: This is nonsense. It is no coincidence that all the major countries experiencing a government debt crisis are in the Eurozone, because Eurozone countries do not have their own central bank. Governments outside the Eurozone have no problem borrowing at the moment – as I said interest rates outside the Eurozone are at record lows. If there was a serious risk that the UK would become like Greece, interest rates would not be so low.
Q: Isn’t it wrong for the government to be borrowing more when consumers are so strapped for cash, and often cannot borrow or are trying to rebuild their savings?
A: Exactly the opposite is true, as any economics student will tell you. If consumers are saving more, there is less spending power in the economy. If the government also spends less, we get a recession. That is the basic mistake the government is making. This is the other reason, besides low interest rates, why now is just the right time for the government to borrow more. In a recession, there is no danger that government spending will crowd out private spending, and it is much more likely to stimulate the economy.
Q: But surely no government can keep on borrowing more forever.
A: Of course not. But the right time to cut government borrowing is when the economy is strong, and the cost of borrowing is high.
Q: All politicians will find an excuse to spend more or tax less, and put off the day that borrowing is brought under control. At least this government has had the courage to deal with the problem, unlike their predecessors.
A: As many countries besides the UK are finding, it is much more difficult to bring down borrowing when the economy is weak. By contrast, many governments have succeeded in reducing borrowing when the economy has been stronger. Before the financial crisis, the ratio of government debt to GDP in the UK was below the level when Labour came into office in 1997. Bill Clinton successfully reduced US government debt during the 1990s, when the US economy was growing strongly.
Q: But government borrowing more now will inevitably mean higher taxes in the future. We should not burden future generations in this way.
A: Not necessarily. By spending more today, we can reduce the need for the government to spend in the future, so taxes need not rise. As far as future generations are concerned, I suggest you ask some of the nearly one million young people who are currently trying to find a job what they think.