A Mountain of Debt

By Mark Crutchley

Real incomes are being squeezed as pay rises fail to keep pace with inflation; unemployment is at its highest since 1994; Portugal follows Greece and Ireland in going to the EU for a bail-out of its financial system and here in the UK it’s the start of a new financial year. So disasters of the natural kind are pushed off the top of the news by those of a more human construction and I thought I might share a few thoughts on the subject and perhaps challenge some cherished notions.

Let’s start with some facts which can hardly be considered radical. Here in the UK, and indeed in the developed world as a whole, we have been through a period of sustained economic growth since the end of the Second World War with only the most fleeting of setbacks interrupting the trend to greater wealth and income. Our economic system has grown increasingly dependent on consumer demand, and huge multinational industries have grown up based on devising an ever expanding range of products; convincing us that we “must have” those products; and lending us the money with which to buy them.

So today we find ourselves crushed under an enormous pile of debt we have taken on in order to maintain our lifestyles. Of course neither we or the lenders are particularly concerned about this because for most people it is underpinned by the value of their properties. But here lies the root of the problem. House prices have been driven up by ever looser lending policies at the banks and building societies, giving increasing multiples of salary so people can pay ever higher prices for the same housing stock most of which existed fifty years ago. Now unless you have a very short memory, you might remember where that got us just a couple of years ago – bankrupt banks and a recession.

The fact is that the growth we had was completely unsustainable, based as it was on continuously expanding debt. So unless we repeat the mistakes which led to the last recession – which would ultimately bring an even bigger bust - the economy is not going to recover the way politicians would like us to believe. We are going to have to get used to the idea that the current squeeze on living standards could last for much of the next decade.

So if things are bad for individuals what about our government? The recent Budget showed that it is still living in the dream land that the economy will recover and bail it out from the current massive deficit. But it isn’t going to happen, because the buoyant revenues of the last growth cycle were built on an unsustainable boom funded by financial institutions which were about to go bust. These revenues are not coming back. Ever!

Now before I bring this to a conclusion I think just a few words need to be said about debt. Any individual who has ever overspent and then had to scrimp to pay their debts off, knows instinctively that debt is a tax on the future. This is as true for governments as it is for individuals; the more debt they build up today, the more tax has to be raised in the future. If the economy keeps on growing, then this is a fairly easy trick to pull off, but once the growth stops – as I am suggesting it now has – it becomes much more painful to have to pay higher taxes. That though is exactly what we are storing up for the future.

Though more money may be squeezed from the corporate sector and by clamping down on tax evasion, it will barely make a start on reducing the deficit. So the government, and the electorate, face a stark choice. We can have the level of services we have become accustomed to, but only if we are prepared to pay higher taxes to maintain them. Or we can keep our taxes where they are now and accept a lower level of provision in the NHS, education and other key services. What we cannot do is pretend that we can have it all; low taxes and high spending. That just postpones the day when we have to pay and makes the ultimate price even higher. The harsh reality is that we are not as rich as we thought we were and we are going to have to get used to it.