People are increasingly coming to grips with what George Osborne’s intention to slash public expenditure by £150 billion over four years will actually mean. What is less widely realised is that at the same time he is planning to increase private indebtedness by £570 billion over the same period.
Before last year’s general election, Osborne complained bitterly that household borrowing was far too high. Yet now he is deliberately stoking it up for his own perverse interests.
Private borrowing now stands at a staggering £1.56 trillion. According to the independent Office of Budget Responsibility (which some regard as a proxy for the Treasury), it is expected to reach an eye-watering £2.13 trillion in 2015. That is half as much again as the total national income and nearly twice the total household income. That might seem a disastrous failure for Government economic policy and, of course, it is. But the Chancellor and his colleagues are actually welcoming this situation. And this is why.
The Government is forecasting high growth (2.9 per cent) in 2013, 2014 (again 2.9 per cent) and 2015 (marginally less at 2.8 per cent). Where is the aggregate demand to come from to stimulate such levels of growth for three years running, at well above current trends in the United Kingdom? Currently, interest rates are near zero and the pound is worth 25 per cent less than it was before the last economic bubble burst. So it is difficult to see an engine of growth in that area. Osborne’s massive fiscal tightening – colossal spending cuts plus the VAT increase – can only squeeze demand drastically and drive the economy towards a double-dip recession, which would be worse than the collapse in 2008-09.
So the Chancellor is looking to a huge further explosion of private debt in order to get him out of the corner he’s boxed himself into with his savage public expenditure cuts.
Far from disclaiming this policy contortion, whereby public debt (which will peak at £1.2 trillion) is being savagely cut back only to see private debt ballooning to nearly twice that level, his great fear is that people might actually decide not to increase their indebtedness much more and prefer to save because of anxiety over what the future holds. In that case, the economy will contract drastically and the Government will need to concoct the Plan B it says it does not have, with a huge loss of confidence all round and all political bets are off.
Ironically, Osborne is in this jam because, under our current dysfunctional banking system, the only way in which the money supply can be expanded is by individuals and businesses borrowing further from banks and thus increasing private debt. Effectively, the money supply has long been in the hands of the banks, which generate domestic credit apparently out of thin air simply by creating “bank deposits” (the numbers in bank accounts), subject only to minimalist capital ratios.
By deregulating the City more than two decades ago, Margaret Thatcher sacrificed control of the money supply. It is poetic justice that this has now come back to haunt George Osborne. It may well destroy him.
Michael Meacher is Labour MP for Oldham West and Royton
