Mark Dampier: Sadly, the West has hit its credit limit
Saturday 06 August 2011
News of the American administration finally reaching an agreement to raise the US debt ceiling certainly gave short-term relief to global stock markets. However, it hardly solved the long-term problem. The truth is the Western world has been on a borrowing binge for at least the last 15 years. Unfortunately governments of all persuasions have confused the effects of borrowing with genuine economic improvement, and some even seem convinced that their policies have actually driven growth. This was certainly true of the previous Labour government, and of Gordon Brown who famously pronounced the end of "boom and bust". Such misplaced confidence that growth was here to stay exacerbated the problem as proceeds were largely spent on the public sector rather than used to reduce borrowing.
Sadly governments are, and always have been, poor spenders of our money. We see examples of it all the time in the UK: Bloated IT budgets, spending binges from local governments and even the profligacy revealed by the MP expenses scandal.
The financial crisis (which in my view is still continuing) has brought these problems under the spotlight, and closer scrutiny has revealed a level of government spending out of touch with economic reality. The boom in public spending is now over. We have hit our credit limit, and according to Richard Jeffrey of Cazenove, it is on track to show a decline of around 0.8 per cent in real terms.
Governments on both sides of the Atlantic and in Europe have tried to offset such problems by inducing consumers to spend more. In my opinion, these policies have been counterproductive. Like governments, consumers are indebted too. Borrowing more to spend our way out of a recession will only postpone the painful but necessary process of reducing our collective debt burden.
The trouble is that the public in most countries has become accustomed to unsustainable levels of government spending and state benefits. Understandably, no one likes the idea of "making do with less". This has been demonstrated spectacularly in streets of Athens, and to a lesser extent in rows and protests over public-sector pensions and benefit cuts in this country.
Unfortunately, most politicians are only really interested in the electoral cycle, and the mantra of "save more and spend less" isn't a vote-winner. Therefore they devise ways of spending more in the name of economic growth so that people feel happier.
Ed Balls' grand idea of an emergency VAT cut is a prime example. It seems similar to giving an alcoholic another bottle of vodka, yet politicians often remain deluded that they can actually do something to improve long-term economic growth with these kind of measures. All they really do is draw out the problem and postpone the day of reckoning.
The amounts of money we are still borrowing are scary – the UK's national debt is set to balloon from around £780bn today to almost £1,200bn in 2014-15, despite "austerity" measures to keep it under control. So far we have been fortunate that international markets have focused their attention on the eurozone and America. The UK gilts market has been an amazingly safe place to be with the 10-year gilt yield falling below 3 per cent, but these low costs of borrowing will soon evaporate if the market loses confidence that the Government is committed to debt reduction.
Unfortunately, just like the person who has maxed out on his credit cards, the only way to recover is to give up some of the things we like and slowly pay back our debts. It might be painful, but it will give us a firm foundation for future growth and ensure we are not at the mercy of financial markets. Naturally this process will take a long time, and while it is happening consumer spending is likely to remain weak and growth anaemic. Not a winning electoral message for the present Coalition, but a realistic one for those with longer-term concern for the economic health of the country.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
Compare with the Independent: See how much you could save by switching credit cards. Compare now
easyJet founder Sir Stelios Haji-Ioannou aims to make buying a home easier
Solar on Schools project offers green investors 'tangible, ethical assets'
Life expectancy calculator will allow people to plan ahead but needs to be handled carefully
How to start your own internet business
The whole truth about legal fees: Conveyancing can knock a big hole in home-buyers' finances. To get the best deal you must cross-examine solicitors about their charges, says Sue Fieldman
- 1 William Shakespeare's 450th birthday: 50 everyday phrases that came from the Bard
- 2 David Cameron's constituency office calls police on food bank campaigners Bishop of Oxford and Reverend Keith Hebden
- 3 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 4 Women take on Bear Grylls over 'sexist' male-only desert island show
- 5 Malaysia Airlines flight MH370: Concerns grow among search officials that missing jet ‘may have landed somewhere else’
Ukip election posters: Nigel Farage defends 'racist' campaign anti-immigration campaign ahead of Europe elections
Is Britain really a land of God? Furious debate after David Cameron claims we are a Christian country
Ukip leader Nigel Farage defends employing German wife, at launch of anti-immigration poster campaign
An open letter to Nigel Farage: you may smile, but I am not seduced
'Sinful': Video of British Muslims dancing to Pharrell Williams's hit Happy comes under attack
David Cameron's constituency office calls police on food bank campaigners Bishop of Oxford and Reverend Keith Hebden
iJobs Money & Business
£90000 - £110000 per annum + full Package: Harrington Starr: Director of Cons...
Negotiable: Harrington Starr: Automation Test Manager (C#, C++, VB.NET, QTP, M...
£20000 - £26000 per annum + benefits+bonus+package: Harrington Starr: Data Qua...
£25000 - £32000 per annum: Harrington Starr: Graduate Developer/QA - (Java, C+...
Day In a Page
A five-bedroom house with awe-inspiring Scottish scenery on the shores of Loch Goil
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace