• The post you are reporting:
   
  Richard - a golden age that never existed!
  
  The economy works on a natural cycle of growth and contraction.
  
  Sometimes the growth part of the cycle can go on too long and get too overheated so that is followed by a bigger, deeper contraction that can become a recession. This can be regarded as a 'correction'.
  
  Managing the growth cycle responsibly is part of what good fiscal governance is all about.
  
  During a growth cycle in which tax revenues rise and costs fall governments need to 'balance the current account' and build a surplus from which debt is repaid. Then at the start of the contraction governments can allow the current account to slip into deficit and in so doing build up debt to stabilise the economy.
  
  The problem we now have is as follows:
  ...during the growth cycle the governments current account was not balanced and the deficit was increased (from 2001) by increased public spending.
  ...by 2005 we got to the stage by which we have a 'structural deficit' in other words one that could not be closed before the start of the next contraction whatever happened.
  ...the deficit and debt just kept building up - made even worse by the off balance sheet spending no-one knew about that started in 1997.
  ...the result is the need to cut public spending because the size of the deficit, the amount of debt, the massive interest payments is all such that it would be more dangerous to the economy not to reduce public spending. Failure to deal with this will result in huge increases in interest payment, a loss of market confidence and a spiral even deeper into recession.
  
  The whole problem was made worse because the long, long 'boom' that Gordon Brown boasted about 'skipped' a natural (small) contraction part of the cycle. It was this that led Brown to boast he had 'banned boom and bust'. The problem is that this was fuelled by a massive debt bubble among the population due to interest rates being held down too low for too long and the error of not including the levels of debt in the Bank of England's inflation mandate - another error going back to 1997.
  
  Brown ran the economy as if he really had banned boom and bust. Bonkers.
  
  The whole problem was compounded by the changes to banking regulation in 1997. This allowed them to adopt unfettered business practices (in fact they were encouraged in this by Brown in his Mansion House speech - 1998 I believe from memory.) They were then vulnerable at the start of the contraction in 2007 leading to the crisis of 2008.
  
  Is this recoverable? Yes it is. I believe that you are too pessimistic. The big problem is less the level of debt but more the deficit that is just piling on more debt. Get the deficit into a surplus and growth will help clear down debt. It is vital though to get into surplus and reduce debt levels before the start of the next slowdown.
  
  The problem is the politics is more difficult than the economics and the government are trying to balance the two. This is holding us back from growth made worse by the Eurozone crisis where 40% of our overseas market is.
  
  I believe that good politics will arise from a stronger domestic economy and making the right decisions now however tough they are, but Osborne is placing too much importance on the politics, perhaps held back by the LDs.
  
  Incidentally - the public have been repaying their debt and many businesses have been building up reserves of cash. This is healthy so the big problem really is government deficit.
  
  It was once said by Osborne that he wants an economy built on and fueled by savings not debt - that is right, that is what we need. We cannot get that until the immediate crisis is over.

Report Post

Your Name

Reason