We have mistaken the symptom for the condition. This is a crisis of growth, not of debt. The misunderstanding of our current circumstances is compounding the problem it was intended to cure
Noun (Origin: Greek)
A moment of decisive intervention – medically, the critical point at which the doctor’s intervention proves decisive, one way or the other, in the course of the illness and the life of the patient.
If this is what a crisis is - a moment of decisive intervention - then we have simply yet to get
to the moment of crisis.
Crises are, to a large extent, what we make of them. For what we do in response to a crisis depends to a very considerable extent on how we perceive the problem – we respond not to the condition itself but to our diagnosis of it. What is clear about the current crisis is that it has come to be seen as a crisis of (public) debt. However, this is not the only way in which the crisis could be understood. Indeed, as I will argue, it is precisely the wrong way to look at it.
This may sound like a narrowly academic point; but it is not. For it is our seemingly shared conviction that this is a crisis of public debt that makes austerity and deficit reduction the logical solution. Change our sense of the crisis and we change the range of responses considered appropriate. Were the crisis conceived of differently, as a crisis of growth not a crisis of debt, then austerity and deficit reduction would be no solution at all. Indeed, they would almost certainly be seen as likely to compound the problem.
To put right what went wrong, it is first imperative that we get our diagnosis of the affliction correct. This is not a crisis of public debt – and to see in such terms threatens to lock-in self-defeating policies. To see the British crisis or, indeed, the Eurozone crisis as one of debt, is to mistake a symptom for the condition itself; and the risk is that, in mistaking the symptom for the condition, we choose a course of medicine only destined to reduce further the life expectancy of the patient.
To see why we need look no further than the origins of the looming fiscal crisis of the state. Had taxation revenues continued to grow at pre-crisis levels, they would have exceeded the actual tax take by around £35 billion in 2008-09 and £92 billion in 2009-10 (and this despite the fact that budget revenues in 2009-10 had returned to pre-crisis levels).
Put differently, approximately 70 per cent of the budget deficit in 2008-09 and 86 per cent in 2009-10 is attributable to lost taxation revenue alone. It is, in other words, lost taxation revenue that accounts for most of Britain’s current account deficit.
If this is indeed the case – and it is difficult to argue with the logic – then to commit to reducing the deficit in the absence of growth is a near suicidal policy. For if the problem is, indeed, a lack of growth, then to withdraw public spending and hence demand from the economy in order to rebalance the public finances is both unnecessary and deeply counter-productive. It can only reduce further economic output, compounding the problem it was intended to cure – all the more so given the peculiarly strong link between growth and consumer demand in the British economy in recent years. Indeed, recast in this way, deficit reduction becomes a tacit acceptance of the idea of Britain as a smaller economy – an economy which can and will no longer be able to afford the public sector to which it had previously become accustomed.
Unremarkably this alternative vantage point also generates very different expectations about the likely effects of deficit reduction – expectations, I would contend, much closer to exhibited patterns of economic performance since 2010 than, say, government or Office of Budget Responsibility (OBR) growth projections.
Nevertheless, this is no manifesto of despair. Quite the opposite. For there is much that follows from the preceding discussion and the wider analysis on which it is based. Seeing our crisis as one of growth not debt leads to a series of practical policy suggestions that can make a substantial difference in the long-overdue search for a new more sustainable and, indeed, inclusive model of growth – in which the proceeds of economic success are more evenly distributed.
Amongst them are the following:
1. Politicising the cost of borrowing:
If the economy is to be ‘rebalanced’, then the government and the Bank of England need to be putting concerted downward pressure on the actual cost of borrowing (independent of the Base Rate), particularly in sectors where a clear link to the growth strategy for the economy can be made and substantiated. The banks have, in effect, been allowed to recapitalise themselves by charging commercial borrowers, mortgage holders and those servicing consumer debt a sizeable interest-rate premium, relative to the Base Rate, to compensate them for their investment banking losses during the crisis. Arguably at least half of each British mortgage holder’s monthly debt repayment at present takes the form of a tacit bank recapitalisation charge. This is both intolerable and a significant drain on the growth prospects of the commercial and consumer economy. The banks need to be named and shamed and held publicly to account for their behaviour.
2. From private to public investment:
For as long as this persists, there is a powerful case to be made for not just private but public investment in support of a clearly articulated growth strategy built on identifying and supporting growth in a series of key export-oriented sectors. Apart from anything else, the cost of financing long-term public borrowing is significantly lower than for commercial lenders. More significantly still, public infrastructure projects are likely to be key to any reconfiguration of the economy which might more closely align its structure to a new (and more clearly export-oriented) growth strategy. Public investment might, in other words, be a highly cost-effective way of providing the public goods on which the transition to a new model of growth relies.
3. Hypothecated investment or growth bonds:
This is all very well, but how might it be funded? There are many options which might be considered here. One of these is the use of public investment or growth bonds – a form of hypothecated government debt and, in effect, an ethical form of investment available to financial institutions and private citizens alike. The funds secured in this way would be ear-marked for public infrastructural projects or might be distributed through a range of national or regional investment banks (agents for funding and promoting regionally-devolved growth strategies), almost certainly including a green investment bank. The latter might fund investments in sustainable technologies or the human capital to utilise such technologies.
4. Conditional deficit and debt reduction:
A further implication of the analysis is that we cannot afford to consider deficit and debt reduction as a goal in itself – and certainly not the principal goal guiding economic policy. Deficit and debt reduction must be made conditional on growth. Governments, in such a conception, would need to be clear about their strategy for securing growth and to make a strong public pre-commitment both to an explicit growth target and to a sliding scale of debt reduction.
5. International coordination of debt and growth management:
The economic case for conditional deficit and debt reduction is, I would contend, a very strong one; but it undoubtedly has its political difficulties. To announce the end of deficit and debt reduction in one economy alone, especially in the current global economic climate, and in a context of the timidity of financial institutions, threatens a run on the currency and a steep rise in the cost of servicing (short-term) national debt. Consequently, it is imperative that steps are taken at an international (and, ideally, a global) level (under the auspices of the IMF, for instance) to agree a coordinated strategy for managing debt and growth – as well as, in time, to move away from a simple notion of output growth as the global currency of economic performance.
The above five points do not, of course, constitute a growth model for the British economy. But they do suggest a way forward and they also suggest the possibilities that emerge as soon as we recognise that what we have been suffering from is not a crisis of debt but a crisis of growth.
Colin Hay is Director of SPERI at the University of Sheffield.
Sovereign Debt Crisis
Office of Budget Responsibility