Borrowing is easy, but you must pay for it

The CBI, in a plea to G. Brown, have urged him to hold back on further borrowing.

The annual budget deficit is rising rapidly, and could rise to £180 billion in 2009-2010. Even if it then falls back in recovery during 2010-2011, it would seem possible that by 2012 the national debt will have risen by £300 billion more than the Chancellor forecast last November, and the accumulated national debt will become larger than the level of national output in a year.

Such a debt has to be serviced. The CBI estimate that at the peak size before efforts are suffered to reduce it, the annual interest cost could rise to £60 billion per annum. In a fully employed economy, whenever and if ever we reach that, standard rate tax would have to rise by 15 pence in the pound, or nearly double, just to pay the interest on the debt.

This is merely to service the debt. If we wish to reduce the debt significantly*, and most economists would suggest that we must for all sorts of reason, then we could think of about £100 billion annually to pay interest and reduce the debt. This would be equivalent to raising standard rate by over 20p in pound and effectively doubling it.

No government, of whatever colour, would seriously expect the people to suffer this kind of reduction in their net income, and we could well have the social unrest suggested by Frank Field in an interview with the BBC. There would also be mass emigration of talent, and further impoverishment.

There must therefore be a large reduction in government expenditure. This is inescapable. In the medium term waste could be massively trimmed, perhaps as much as £40 billion a year, and a reform of public services will help, but immediately there must be a reduction in planned expenditure. There is no alternative, sacred cows or not.

* If debt rises alarmingly in relation to GDP, then our Tripple AAA credit rating could be lost, lenders will look less kindly on us as borrowers, and we shall then have to pay yet more interest to entice them.