Is it all the fault of the banks?
23rd June 2011
Wherever you turn, stories of bailouts, cuts and austerity abound. Although we are apparently out of recession, there is a distinct absence of the ‘feel good’ spirit that’s needed for a genuine recovery. Economies are highly sensitive to the prevailing mood, and if confidence is lacking in the general population of consumers then growth will be weak or non-existent.
There’s a common perception that we are where we are because of the banks, whether because they lent excessively without sufficient checks and security or because they are currently hoarding cash, attempting to boost their balance sheets, and thus starving business of cash for investment and homeowners of mortgages. But is this a fair analysis?
The truth, as always, is more complex. Banks have certainly been lax in their lending, and are guilty of inflating profits on the back of implicit state guarantees, creating overly-complex financial products and insensitive reward structures. But ‘deficits’ and ‘government debts’ are not the fault of the banks.
The real crisis in most western economies is that for years it has been considered acceptable to spend more than the countries earn in taxation. This difference, or deficit, has been funded by the governments themselves borrowing money from the financial markets. A government’s only source of income is taxation, so such borrowing is nothing more than deferred taxation – asking future generations to pay for today’s spending.
In so far as most governments have adopted this ‘spend more than they earn’ philosophy, it could be argued that western democracies are complicit in the whole shambles. After all, we have collectively voted for governments that have sought to make a virtue out of spending more than they earn, albeit by dressing it up in euphemisms such as ‘investing for the future’, ‘saving the NHS’, ‘providing welfare for those in need’. All worthy aims in themselves, but is that worthiness tarnished if we care for ourselves today by asking our children to pay the bill via future taxation?
In the final analysis, countries will either default on their debts, as seems possible with Greece and maybe Portugal, or will have no alternative but to address their deficits and return to budget surplus, when tax receipts exceed spending and the accumulated debt begins to be paid down. Default may sound like the easy option, but the ripples can have dire consequences for the world’s financial systems as confidence in the banks falls and consumers panic.
Governments can raise taxation only so far before people calculate that it simply isn’t worth their while trying to earn more, or they simply seek to emigrate to more favourable countries. Ultimately, spending cuts are inevitable, and on a massive scale. In the UK, we are still forecast to spend £122 billion more than we earn in 2011; that’s more than the entire NHS budget. It does make you wonder where cuts big enough to make a difference will come from.
There is significant public resistance to ‘cuts’ and ‘austerity’; witness the troubles in Greece, or the imminent teacher and public servants strikes in the UK. I wonder whether those who support such action fully appreciate the consequences of giving into their demands. Most economies are rather sick right now, and the medicine doesn’t taste very nice. But nice or not, it’s difficult to avoid.
Regards
Stuart Kellner
Managing Director
Click here to contact us online
