How strange - suddenly everyone wants to pay off their debts

Those on the left who call for increased government borrowing don't realise that, these days, such a strategy punishes the poor
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The Independent Culture
MAASTRICHT SAID NOT more than 60 per cent of GDP; now Gordon Brown and Tony Blair say 40 per cent. Suddenly, cutting the size of the National Debt is all the rage.

A few years ago, politicians did not worry too much about increasing public borrowing. The left said that borrowing would pay for much needed investment, investment would increase growth and we would all benefit as a result. The right had greater reservations about the wisdom of this, but when push came to shove they increased borrowing as fast as anyone. The sharpest rise in UK public debt in peacetime came under the last Tory government, as the deficit widened during the early 1990s recession.

Now all is changed. A few die-hards of the left still call for more borrowing - Ken Livingstone did so in these pages yesterday - but for most of the world this is no longer a left/right issue. All over Europe, governments of left, right and centre are desperately trying to cut their debt, using the excuse of the Maastricht target but being pleased to have that discipline.

In the US, both sides of Congress now support the principle of balanced budgets, which would - if they came about - lead to a gradual reduction in the proportionate size of the National Debt. Only in Japan is it thought respectable to call for a rise in government borrowing to try to kick- start the economy out of recession. But this is seen by all as a short- term measure and not a policy that could be sustained in the long-term.

Why? Why this gigantic change in global fashion? This is not just a British thing, although to read the comment on the Brown/Blair 40 per cent target, expected to be announced next month, you might imagine it was. No, cutting the size of public debt is a gale sweeping round the world and we are caught up in it just like everyone else.

When you get a change like this there has to be a reason, and there are, I think, four: two middlingly important ones and two absolute clunkers.

The two less important ones are the loss of faith in the quality of public- sector investment and the apparent ineffectiveness of borrowing as a counter- cyclical weapon. Not everyone accepts that the public sector is bad at making investment decisions, but the record around the world has led to a marked disenchantment. We have had nuclear power stations and tower blocks, the French have had Credit Lyonnais and Air France, the Japanese have built bridges that lead to nowhere, and so on.

Not everyone accepts that counter-cyclical fiscal policy is useless, and it probably works to some extent. But even assuming that governments make the right decisions as to timing (not something that is absolutely guaranteed), running deficits does not seem to work very well in stimulating an economy. Our own experience points this out: running a public-sector surplus in the late 1980s did little to check the boom, while the enormous deficit of the early 1990s failed to restart growth. It was cutting interest rates and getting sterling down that hauled us out of the recession.

At the moment, more public spending is being urged on Japan, but seeing as the country has had six (or was it seven) fiscal packages in the last year it is hard to see what number seven or eight might do.

But on their own, I don't think either of those changes in attitude would have transformed the global mood towards government debt. There are still disagreements about the effectiveness of public investment and counter-cyclical policy.

The two absolutely devastating changes between now and 20 years ago - changes of fact, not of opinion - are what has happened to real interest rates and what is happening to the age structure of the population of the developed world.

From the 1950s to 1980, real interest rates were either low or negative. That is how we paid off the debts of the war. In 1945, UK national debt was more than 200 per cent of GDP, but low nominal interest rates, gradually rising inflation and steady growth whittled away the debt. In effect, we stole from savers, for anyone who had invested in government debt saw the real value of their savings destroyed.

Then, around 1980, everything changed. Real interest rates, which had been negative for much of the 1970s, became very high everywhere. Inflation started to decline and has now virtually disappeared in the developed world. Borrowers had not only to pay a high real return to savers, but face the prospect of having to pay back the real capital value as well.

This is not just a financial matter. It completely changes the political dynamics. Until 1980, increasing public borrowing transferred resources from people who saved to people who benefited from public services. In so far as the savers tended to be better off than the beneficiaries from public services, borrowing transferred from richer to poorer.

Now it is the savers who are rewarded and the broad mass of taxpayers who are hit. The balance of saving undoubtedly does come from the better- off, while in practice the tax system raises money pretty equally from all the middle-income-and-above groups. So, increasing borrowing, far from transferring from richer to poorer, if anything, tends to have the opposite effect.

The other great change is demographic. Most people are now aware that one of the effects of an ageing population is that the next generation of workers will have to support a larger number of pensioners.

In the 1960s, no one needed to worry about this: the birth rate was high, the proportion of pensioners still small. Now politicians are beginning to come to terms with pension reform, for the fall in the ratio of workers to pensioners is a catastrophe for the state pension schemes. Instead of there being about seven workers to pay for each pensioner, there will be nearer two.

But there is also a profound implication for general state borrowing, for there will be fewer workers to pay interest on that too. So, running a deficit now imposes a devastating tax on children and the unborn.

Present voters may live a little better now - have slightly better services, pay a bit less tax - but our children and their children will pay the price. Put this way, running deficits becomes a moral issue: do present voters have the right to impose obligations on people who cannot yet vote?

Politicians on the Labour left who call for more borrowing do not seem to realise that they are seeking to transfer resources from poorer to richer, and from children and the unborn to the present generation of adults. Morally this is disgraceful - their only excuse would be that they are not bright enough to see the consequences of their suggestion.

But Gordon Brown and Tony Blair are. So when they announce the aim to cut public borrowing, remember that they are not speaking for the interests of the world bankers or the prosperous middle-class, but for the less well-off and for the future generations. And they deserve to be praised from the rooftops.

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