We store cookies on your device to make sure we give you the best experience on this website. I'm fine with this - Turn cookies off
Switch to an accessible version of this website which is easier to read. (requires cookies)

Opinion: Will Hutton and his killer fact – the questions that need an answer

November 9, 2011 11:45 AM
By Ed Maxfield in Liberal
Originally published by East Midlands Liberal Democrats

We are all experts when we blog. So, let me break with convention and start by admitting I am no economist. What's more, I really hope I am wrong.

If you read the discussion in the Observer on the future of the economy you might have been struck, like me, by what seemed to be a killer point from Will Hutton. Challenging the notion that government borrowing is unsustainable he pointed out that when he was a child in the 1950s the level of borrowing was even higher as a proportion of national income than it is now. Doesn't that expose the great weakness in the Treasury View of the current crisis?

Mark Littlewood's response was simply: 'Greece'. Which is all well and good, but the world of sovereign debt has long horizons (the UK finished repaying its Second World War debt to the USA in 2006). Events like the Greek crisis come and go and are swallowed up in the long view.

But Will Hutton's starting point left me feeling uneasy. In the past the UK relied on a combination of stability, growth and inflation to manage its debt. Can any of those be relied upon now?

Take growth. UK growth has been sluggish since the war compared to our European neighbours, but in a sense this has pretty much not mattered. With half the world held back by Communism no one of any size was around to compete aggressively with what we had to offer.

Now the Chinese economy is growing at a rate that sees it double in size every few years. We have enjoyed the benefits of that - t-shirts for a pound make us all feel wealthy - but in the future we face the twin threats of rising resource costs (as China and others consume more raw materials) and competition from a huge and increasingly educated workforce.

Can we truly be sure of a future of guaranteed economic growth for the UK?

Inflation erodes the real value of debt: only the lenders lose. Except, high inflation is no longer politically viable. In a society that is both older than it was in the 1950s and more aspirational, saving has become politically important. Lending has been democratised by the private pension plan. Will voters who want to enjoy long and comfortable retirements tolerate the erosion of their pensions and savings by high inflation?

And what of stability? Surely a critical difference between Britain in the 1950s and Britain today is the mobility of capital? Nigel Lawson abolished exchange controls in the 1980s. The UK can no longer guarantee a captive market for its debt. At the moment 10-year bonds carry interest rates of little more than 2%. The Greek government has to pay 26% - that's more than I pay for my credit card!

Our rates are low because we trade from a position of strength in the debt markets. It does not have to stay that way and if the government signalled a loosening of its position on debt isnt it the case that the interest rates we pay could rise quickly to unsustainable levels?

I would love to be wrong but I have a nasty feeling that the easy assumptions of the baby boomer generation are as outdated as quiffs and crepe soles. Isnt austerity - an echo of the early 1950s - back in fashion?