When your debts reach close to £3tn and any chance of making a significant dent in them lies far beyond the horizon, the lenders definitely have the upper hand. You are, as Andy Burnham put it before he became the parliamentary candidate for Makerfield and prime minister, “in hock to the bankers”.
At that stage, he was arguing against meek acceptance of this balance of power. But he has now adapted his stance to reality, pledging that, if he were to move into No 10, he would continue to abide by the fiscal rules set by Rachel Reeves, the chancellor.
At the end of March this year, the UK’s government debt amounted to 93.8% of GDP. In the balmy days before the financial crash of 2008, the ratio stood at just 35%. For a few months just before the tsunami hit, Burnham was chief secretary to the Treasury, so he should be in no doubt about the dependence of governments on the markets.
Earlier this month the House of Commons Library issued a briefing on government debt, perhaps in an effort to remind politicians of the UK’s financial plight. It began with this simple sentence: “The UK government generally spends more than it receives in taxes and other income, meaning it usually borrows money each year to cover the extra spending.”
This becomes increasingly uncomfortable when the scale of the borrowing escalates and rising interest rates have a compounding effect. In the last financial year, £110bn – 8.1% of public spending – went on servicing the debt, and now the Iran war threatens to inflate borrowing costs still further.
The financial realities are grim and pressing – yet some people in politics seem to have a blindspot.
The extraordinary embezzlement scandal engulfing Peter Murrell, the former chief executive of the SNP, felt like a continuation of the gory details of the MPs’ expenses scandal in 2009.
Despite improvements to the system, it is from this lax attitude to public cash that greater mistakes emerge, the ones that threaten to bankrupt the country.
Liz Truss demonstrated how a politician’s failure to grasp financial reality could have devastating effects. She believed tax cuts were a magic economic fix, and she announced them without any suggestion as to how she intended to pay for them. The financial markets reacted severely to this cavalier behaviour, and catastrophe ensued. Borrowing costs soared; the Bank of England had to take emergency action to protect pensions; the pound plummeted and so did Truss, whose reign lasted just 49 days.
Failure to understand markets can have devastating results. Gordon Brown, the former chancellor and then prime minister, took decisions that have caused long-term damage. His inexplicable decision to part with more than half the country’s gold reserves at the turn of the century wiped many billions off the nation’s balance sheet. He parted with 395 tonnes at what was the low point of a prolonged slump, selling at an average price of just $275 an ounce. Gold has since topped $4,000, having risen at an average 8% a year.
While dispensing with valuable assets, Brown also committed the country to some disastrously expensive and often poor-quality ones. His apparent conviction that the private sector would be prepared to give the country the new infrastructure it needed for peanuts was wrong. His expansion of the Private Finance Initiative has left schools and hospitals with unsatisfactory buildings and crippling running costs dictated by contracts from which they can’t escape.
Perhaps, now that a desperate Keir Starmer has recruited Brown as an adviser, he could put him to work sorting out the PFI contracts.
The simple financial lesson here is that you don’t get something for nothing. And yet politicians like to believe the opposite. Take David Cameron. Having left No 10 after the catastrophic Brexit vote, he turned to the financial world and started working for Greensill Capital. He tried to persuade the government and Whitehall that a slick operator from Australia could ease the country’s financial path through Covid and beyond.
In fact, Lex Greensill’s magic recipe was little more than the re-marketing of an old model that provided costly short-term cash for companies that could not wait for their debtors to pay. Perhaps the chunky sums that Cameron stood to make from any deal clouded his judgment.
But if Cameron did not understand the simple rules of finance, he would not have been completely unusual among politicians.
