Leading article: A nation in danger of drowning in a sea of debt

This crisis is global in scope, but Britain is especially badly prepared
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The Independent Online

The global economic storm continues to rage and national governments seem about as commanding in these conditions as small boats tossed around on a tumultuous sea.

The week began with an emergency bailout of Citigroup, the world's biggest bank, by the United States Treasury. A few days later the Federal Reserve released news of an $800bn credit market intervention. This was followed by a €200bn European Union-wide stimulus package from the European Commission. And expectations are rising that Barack Obama is planning an even bigger spending plan for when he takes office in Washington next year.

Yet the discomforting truth is that no one can say with any confidence that these various rescues and interventions will have any effect on the underlying crisis. Everything policymakers have thrown at the emergency thus far has had a disappointingly small effect. Our leaders appear to be surviving on a diet of hope. Nowhere is that truer than in Britain.

The Government presented its own contribution to the EU stimulus package in the pre-Budget report this week. But the real story of the PBR ended up not being the widely trailed £20bn stimulus, but the alarming projected borrowing figures.

The Chancellor of the Exchequer, Alistair Darling, revealed that Britain will need to borrow a sum equivalent to 8 per cent of our GDP next year. And our national debt will rise to 57 per cent of our GDP by 2013. Such unprecedented peacetime borrowing levels have profoundly worrying implications for the public finances. It is not inconceivable that investors will lose confidence in sterling and decline the opportunity to purchase UK Treasury bonds. Without anyone to finance our borrowing, our only recourse would be to the International Monetary Fund.

It is true that Britain's national debt as a percentage of GDP is relatively modest compared with the Untied States' colossal public deficit. But there is a crucial difference. The greenback is the world's reserve currency. Investors feel they have no choice but to buy dollars. Sterling has no such privileged position in world currency markets. We scare off investors at our peril.

Prudence discarded

The folly of the Government in running a budget deficit at the very height of the boom is now painfully apparent. It is true, of course, that public borrowing would have needed to increase sharply even if the government books had been in balance. Higher welfare payments and falling tax revenues would have seen to that. But we would not be staring at a debt mountain anywhere near as large as this if Gordon Brown had been more cautious in his final years as Chancellor.

Britain might also have been able to afford a more effective fiscal stimulus than the 2.5 percentage point cut in VAT unveiled on Monday if prudence had not been so hastily discarded. As it is, £20bn is the most the Treasury dares to throw at the problem of shrivelling consumer demand. Many doubt that it will be enough.

There are other profoundly unpleasant implications from this week's PBR. An ominous question mark now hangs over the Treasury's forecasting reliability. Mr Darling predicted only eight months ago that growth would be 2.5 per cent next year. Yet he is now forecasting a 1 per cent contraction. The latest assertion is that our economy will begin to recover in the second half of next year. There will be few who will be holding their breath in anticipation of such an outcome.

Confidence has also been dented by Mr Brown's decision to play party politics with the new tax rate on those earning more than £150,000. The new rate, when it eventually comes in, will not raise enough tax revenue to help to balance the Government's books. This is no attempt to reassure foreign investors, but a tune designed to please the Labour gallery.

The other major problem facing us is, of course, the unrelenting credit squeeze. The Government's recapitalisation of the Royal Bank of Scotland was completed yesterday. The bank is now majority owned by the British state. This gives the lie to the Government's suggestion that this crisis is essentially an imported problem. The truth is that British banks were at the heart of the reckless financial innovation that led to this crisis. That is why they are in such a dire state now.

There can be no doubt that this crisis is international in scope. And preventing a reoccurrence of a 1930s-style depression will be the co-ordinated work of nations. We cannot afford to lose sight of the fact either that the banking crisis is an even greater threat in the short term than a contraction of consumer demand.

But we should not be in any doubt that the manner in which our own Government has administered the public finances over the past five years has left us painfully exposed in this most bitter of storms.