Sorry, money doesn’t grow on trees

 
Allister Heath
AT LAST, an interesting idea to tackle the something for nothing culture that has corrupted so much of Britain’s political debate. Sajid Javid, the MP for Bromsgrove and one of the Tories’ rising stars, will be introducing the National Debt Cap Bill (under the ten minute rule) in the House of Commons later this month. The idea is to limit by law how much the government can borrow as a percentage of GDP – and eventually, even off-balance sheet liabilities would be included, and progress monitored by the independent Office for Budget Responsibility.

Javid, a former executive at Deutsche Bank, would ideally like to cap the national debt at 40 per cent of GDP, though such a laudable goal would be at least a decade away given the current explosion in the UK’s liabilities. Writing down a debt limit would be a good idea because it will help remind everybody that money doesn’t grow on trees – if a government wants to spend, it needs to raise the funds somehow. The temptation will always be to add to the national credit card – a debt cap would make that much more difficult.

Of course, there may be emergencies that made it necessary to increase the cap. But while a government that hit the limit could always pass a law to increase the cap, even for the wrong reasons – Parliament is sovereign and can always undo previous laws – the scheme would help focus the debate on the national debt, not merely on levels of spending or on the budget deficit. If Javid’s Bill passes – regrettably, an unlikely prospect – a government that wishes to borrow vast amounts would not only have to pass a Budget (as is currently the case) but would also have to change the debt ceiling, with dire reputational consequences.

The problem, as we saw yesterday both in Greece and in the UK, is that a large chunk of the public just doesn’t understand the concept of a budget constraint. This needs to change. A country can’t consume more than it produces for ever – which means that spending needs to be brought back into line with reality. It is also vital – for moral as well as budgetary reasons – that taxpayers are not made to subsidise privileged groups of workers.

A debt cap would be no panacea but it would send a powerful message that the UK wants to start living within its means again.

CHEAP DEBT
IF Goldman Sachs is to be believed, the latest leg of the bull run in 10-year US Treasury bonds, which saw yields collapse to ultra-low levels, is finally over. Yields are back to 3.151 per cent, up from a six-month low of 2.842 per cent earlier this week. But this is not the real story. At some point – maybe in two years’ time, maybe in ten – the decades-long declines in long-term real interest rates which started in the 1980s will start to reverse themselves and bond yields will shoot up to heights that the present generation of investors can barely conceive of. This will happen when Asia starts to save less – perhaps if the Chinese authorities bolster domestic demand by fiat – or if ageing populations worldwide dip into their nest eggs all at the same time. Ultra-low long-term rates were the main driver for the bubble – but when they finally normalise, we will face an almighty bust. This is the number one risk to the global economy – and there is little any of us can do about it.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath