Placing a statutory limit on government borrowing seems a straightforward way to keep the public finances in order. However, Tom Clarke has looked at the consequences of such a move in the US and urges caution.
Last Friday Conservative MP Ben Gummer’s latest policy brainchild had its Second Reading in the House of Commons. This proposal suggests a public debt ceiling and deficit brake for the UK –if passed, this could have concerning ramifications for the country’s economy and politics.
The Public Debt Management Bill proposes to limit deficits by demanding a budget surplus of 1% GDP pa, prohibiting any government expenditure above this level without legislative approval. This creates a debt ceiling, a cap designed to ensure that the country never again ends up in the dire economic position we find ourselves today.
On paper, this seems like a logical and straightforward idea. After all, what better way to prevent unhealthy borrowing than to legislate against debt? The reality however is more complex.
To shed light on this issue we need only look across the Atlantic – in the United States, the constitutionally enshrined federal debt ceiling has been a perennial source of problems. Raised frequently (and even lowered twice) over the decades, it has remained a bone of contention between the Republican and Democrat parties, leading to constant to-ing and fro-ing as debate over whether it should be raised eclipses all other concerns. Last year, it led to a stalemate between President Obama and the Republican Congress that dominated American politics – in 1995, a similar crisis led to a complete shutdown of the US government.
The American example shows the potential of a public debt ceiling to greater politicise economics. Admittedly, the danger of gridlock is less present in the UK system than in the US, but regardless, such policies serve to promote partisan point scoring – the exact opposite of what is needed in times of economic strife.
Common sense dictates that putting restraints on unchecked borrowing can help prevent another economic meltdown – but so too is it clear since the financial collapse of 2008 that no-one seems entirely certain of the best way to escape from the perilous economic situation we find ourselves in today. A mighty battle is being waged between the proponents of austerity, and those who believe that we should spend our way out of the crisis. While promoting a return to the catastrophic policies of excessive borrow-and-spend is unthinkable, to limit our responses to the still-developing financial crisis would be equally foolish.
Borrowing, while currently deeply unfashionable, is part and parcel of our economic system. Without it, we run the risk of curtailing government spending in areas where it is crucially needed, such as welfare provision. The American case has shown us that policies like a public debt ceiling make it even more difficult for governments to make the difficult decisions needed to recover from financial crises, heal ailing economies and move towards a return to prosperity.
Another of Gummer’s proposals is a national deficit brake, requiring a balanced structural budget. This measure has support from within his party, for instance from Kwasi Kwarteng MP. Even if such policies don’t become law, they can inform the government’s stance and foreshadow future legislation.
When dealing with issues as sensitive and crucial as the management of the UK’s economy it is profoundly important to weigh policy based on reason, with a full understanding of the wider implications. Entertaining proposals like Mr Gummer’s, however, would give us a reactionary, populist economic policy, which in the long-term will likely do more harm than good. With Moody’s set to review the UK’s credit rating early next year – remember the US suffered a downgrade from Standard and Poor in 2011 – this would set a worrying precedent.