The argument over borrowing

7 Jul 2013

Borrowing, deficits and the national debt. Apart from growth and living standards, these economic factors should be the most influential in deciding which party is more competent to manage the economy post-2015. Although the Coalition government has achieved some success with the economy in its first three years- by cutting the deficit by a third, 1m more private sector jobs, and relatively low inflation- in regards to borrowing, the Coalition can be said to have under-delivered compared to their promises so far. Their stated aim to eliminate the deficit by 2015 will not be fulfilled, they have failed to retain our Triple A rating, and our borrowing is expected to be over £200bn in this Parliament than planned. Yet the party that is most under pressure with their plans for borrowing isn’t the Tories or the Liberal Democrats, but it’s the Labour Party. Why is this?

 

First of all, one argument with regard to why the Coalition is borrowing so heavily is due to external factors. One of these is the fact that the Coalition government inherited a £156bn budget deficit in 2010. This simply means that every year the government has to borrow £156bn to simply cover the books and therefore the government has been unable to massively reduce the deficit within 1-2 years (taxation changes take quite a while to take effect and cutting spending cannot be done overnight), this results in high borrowing in the short-term at least. Secondly, the Eurozone crisis has developed in the last couple of years that was not seen in 2010 when they took over. This has directly impacted upon exports in particular (as the UK’s main export market is Europe) and ultimately can be argued has hurt growth. Less growth, less reduction in the deficit, more borrowing. Furthermore, due to the Coalition government’s macroeconomic policies, they’ve ensured interest rates for government bonds (Essentially interest rates on government borrowing. Low interest rates = low cost of borrowing) are exceptionally low.

Therefore, the argument that it’s all the Coalition’s fault for high borrowing levels isn’t instinctively obvious for a start. However, this shouldn’t mean that the argument over borrowing levels be fixated on the Labour position.

Although the Coalition government has made some progress in the economy and indeed some reasons why borrowing is high are due to external factors, this does not mean Labour cannot attack them on their borrowing record- far from it. Remember, the Coalition planned to eliminate the budget deficit by 2015- which they now admit they will fail- they promised to retain the Triple A rating which has now been downgraded twice, and they will now planned to borrow a significant £200bn more in this Parliament than they planned.

Consequently, Labour should be a good position to attack the Coalition government in their record on borrowing. Despite some good news on the economy, the Coalition has borrowed more than £200bn more than they planned. Labour need to be more direct here, if cutting spending faster results in less borrowing, why is the government failing its borrowing targets?

However, Labour is in a strange position here- when they plan to borrow more in the short-term to cut the deficit in the long-term. This manoeuvre strikes at the heart of hypocrisy when they criticise the government for borrowing too much. Therefore Labour needs to make it clear why more borrowing in the short-term (in investment such as infrastructure and cutting taxes temporarily) would help reduce the deficit in the long-term. Unless they’re honest about how much more they would borrow and what measures, they’ll be doomed to be known as “same old Labour” not learning their lessons on borrowing. 

Borrowing may not be the most important aspect of the next General Election. But it will be a pivotal component in which party will be more competent and trusted to cut the deficit and ultimately reduce the national debt. Therefore both sides need to frame the debate to suit themselves. Labour needs to argue that the Tories have been borrowing for failure, due to a lack of growth in the economy, whereas they would borrow for investment. And the Tories need to portray the argument in that only cutting spending will reduce borrowing in the long-term.

Backbench Chancellor

 

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