Hamish McRae: The politicians are starting to feel the heat – and it's only going to get hotter

Economic view

It takes a while for messages to sink in. We are gradually becoming aware, here in Britain and elsewhere in the developed world, of the fiscal cost of this recession and the effect that will have on the pace of the recovery.

Two events last week focused attention on the plight of the UK. One was a warning from the International Monetary Fund. It supported the government's fiscal boost but warned that once growth returned it would have to set out a clear profile for cutting debt. The other came from the ratings agency Standard & Poor's which suggested that the UK's AAA rating might be downgraded if the country does not curb its borrowing and the deficit reaches 100 per cent of GDP.

Three things need to be said. First: neither the IMF nor S&P are perfect. Both have made mistakes and the ratings agencies in particular should hang their head in collective shame, as their failure to rate debt sensibly contributed hugely to the present crisis. Second: they are, however, reflecting a common sense point – if you are going to more than double the national debt and want people to buy gilts with confidence, you had better have a clear idea of how you will start paying it all back. And, third: we are not alone, this is a global issue as much as a national one.

I want to look mainly at the third point because, by the end of last week, concern was starting to shift towards the US, which has in some ways an even worse debt profile than Britain. If the US were to lose its AAA status, as is being suggested, that would send a shock wave through the world markets, affecting the dollar and its status as a reserve currency, but also other sovereign borrowers. The possibility that major economies may not be able to honour their debts is not something that was on most investors' radar. It is now.

To get a perspective on this, have a look at the UK's long-term record as a sovereign borrower. In the mid-Victorian period debt was above 100 per cent of GDP as we were still paying back the cost of the Napoleonic Wars. Then the First World War pushed debt to over 150 per cent of GDP and the Second World War to over 250 per cent of GDP. We were, however, able to inflate away the burden of the Second World War, paying back debt with devalued money.

What is happening now is unprecedented in peace time. We are doubling the national debt to offset a recession that will, on the Treasury's figures, be less serious than that of the early 1980s. We got through the post-war recessions with only little blips in debt levels compared with what is happening this time. As for the possible path to get this under control, some research by the economics team at Commerzbank suggests three possible profiles. The point that comes home to me is that even on favourable assumptions, debts in 2020 will still be much larger than today. The bank comments that S&P's downgrading threat tells us what we already know, "that the UK public finances are in a very poor state and will take many years to fix".

But just about every country's finances are in a poor state and this leads to the big point. If all governments are having to devote more tax revenues to paying debt interest, and to cutting the debt, then the dynamics of democratic politics will change. At the moment, governments in Britain, in Europe and even in the US, preen when they announce they are "investing" in this or that. Our present government is particularly prone to this, with ministers trained to use "investment" when what they are doing is actually classified as current spending.

While there is little constraint on borrowing and debt service is a tiny proportion of national spending, there is a clear political benefit in boasting about "investment". But when debt service costs rise, as they will savagely, and when governments have to run an annual surplus year after year, the political dynamics will change. People will realise that excessive spending means higher taxation, whether it is presented as investment or not.

You can start to see a shift of attitudes already. The government has sought to offset the downturn by increasing the size of the public sector. Pay has not been frozen, as it is in much of the private sector. Employees are still being taken on. The government assumed that because it is taking steps to boost demand these would be welcomed. But it is generating huge resentment in the private sector, which feels it is bearing the whole burden of recession, while public-sector employees are being protected.

That is here now. As the scale of state borrowing becomes evident to voters around the world, electorates will ask different things of politicians. They will want money to be spent carefully, as prudently as they themselves will spend money. The political elites are not stupid; they will respond because they have to. The votes will be in prudent management of national finances. Governments will be rewarded for keeping costs under control, or at least by enough voters to enable them to sustain fiscal prudence.

Politicians may find they need to find new institutional structures to support them in their effort. That has started to happen too. One obvious example is monetary policy, with the transfer of interest-rate setting power to independent central banks. Another, here in Britain, will be having independent scrutiny of MPs' expenses. The Tories are thinking of having an Office for Budget Responsibility to scrutinise fiscal policy.

Expect similar institutional changes around the world. In Europe, the Maastricht rules have been blown out of the water. None of the large eurozone countries will have debts below the 60 per cent of GDP ceiling that was in the formal entry requirements. All will be above the 3 per cent of GDP annual deficit ceiling. So something will have to replace Maastricht. In the US, there will have to be greater control of deficits, particularly if the country loses its AAA status, and the dollar's reserve role shrinks.

We cannot see the detail of these changes because we are only just beginning to contemplate the scale of the disaster. But what we can see is that it will suit politicians to make such changes as it will help make more explicit the pressures they are under. They will seek institutional "cover" for what might appear as unpopular tax and spending decisions – though as I suggest above, parsimony may prove more popular with voters than politicians now appreciate.

Things move fast in politics, as the past two weeks have shown. But they also move fast in the markets. Concern about national deficits is only just rising, but countries would be wise to have a fiscal consolidation plan in place by the autumn and if that means a change in government, so be it. A case for an October election here, perhaps?

Green must be serious when Goldman Sachs gets in on the act

Some really welcome news on the climate change front: the big guns of Goldman Sachs are being trained on the issue.

Goldman Sachs has set up a "Sustain" team to look at the consequences for investment. Its argument is that we are approaching a tipping point not so much in climate change (though we may be) but in investment perceptions of climate change. So it has examined 800 companies around the world, assessing them among other things, for the effectiveness of their response to the challenges.

In particular it has identified three categories of company: abatement leaders in carbon-intensive industries; adjustment leaders in less intensive industries; and solutions providers that have growth opportunities.

Some British companies feature high in the rankings. Centrica and BG Group are relatively high in the carbon-heavy group that are doing well in abating their impact. Among the adjustment leaders HSBC comes top of the banking category and Reed does well among the publishers. Not many British firms, however, can be found among the solutions providers: most of the main alternative energy companies are foreign.

For investors this research will be a useful checklist. If, for example, you want to invest in a particular sector, why not go for the "greener" companies? If you want to build a "green" portfolio, here is a ready-reckoner. But the real significance will be its influence on corporate behaviour, encouraging companies to take such issues more seriously.

The practical point is that by being "green", companies protect themselves against all sorts of attacks: consumer challenges; public relations problems; legal issues and so on. Most important of all, a good reputation for environmental behaviour makes a company more attractive to young, skilled staff. What graduate wants to admit working for a company with a bad environmental reputation?

Up until now "green" ratings have been pretty arbitrary, often carried out by lobbying organisations, and done without reference to investment performance. Goldman Sachs will help change all that.

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
ebooksAn unforgettable anthology of contemporary reportage
News
Wilko Johnson is currently on his farewell tour
people
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?