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Cut harder – we can’t go on as debt junkies (The Times)

    Reducing the State quickly is less risky than our current policy of avoiding too much pain, writes CPS Board Member Jon Moulton on his new report "Pain Aversion". 

    To read the full article, visit The Times website

    In the face of booming drug addiction, the policy of the Labour Government was to prescribe problem drug users with methadone. Methadone blunts the pain of withdrawal but does little to address the underlying causes of addiction.

    Whether this works for drug addicts is at best questionable. But what is amazing is that the coalition has adopted the same approach for its medium-term economic strategy. It, too, is doing all it can to dull pain today while ignoring deeper longer-term consequences.

    Consider this: we reached a position last year where the Government was spending £4 for every £3 it raised in taxes. The £1 does not vanish. It goes on to the UK government debt, now burning away towards 100 per cent of GDP. If you add in public pensions, private finance initiative (PFI) commitments and bank support, the figure can be three times more.

    Despite the coalition’s tough rhetoric, the deficit is still largely there: the Government borrowed £700 million a day last November — the highest borrowing month ever. And our debt binge is set to continue. Only after £400 billion is added to government debt will it stop increasing.

    Yes, there are real cuts taking place. But the question is, given the dire economic state we are in, are they large enough? The Western world is overspending and overindebted. The US Government will spend $1.40 for every dollar it raises this year. Ireland, Greece, Portugal, Spain and Italy are all in deep trouble. Global financial stability seems less and less likely.

    Despite the gravity of the situation, there has been, in relative terms, remarkably little pain. Unemployment has gone up, but by surprisingly little — from 5 per cent to 8 per cent (this was much less than the 4.5 per cent to 10 per cent rise in the US). And, intriguingly, company failures are at near-30-year lows. The 1990s recession was only one third as deep as our recent one, but corporate insolvencies then ran at six times today’s. Similarly, housing repossessions are startlingly low given the financial shambles.

    The reasons lying behind these remarkably mild short-term consequences are mostly the result of policies designed to lower interest rates to levels not seen in 30 years in the UK. You can manage a lot of debt if you pay next to no interest. The Bank of England printed money. And the Government increased borrowing to avoid cutting spending and to maintain low interest rates. All this has definitely reduced unemployment and avoided much financial distress.

    But this cannot go on. We have tried to solve the difficulties of too much debt by using more debt and making that debt tolerable, at least for a short time. This is the same as treating heroin addiction with more heroin. The addict may feel better but the problem grows. The debt is still there, and bigger, the day after. By avoiding pain now, we are making the future economy weaker and riskier.

    Take the lack of corporate casualties. Many uncompetitive enterprises that would normally have perished continue to trade. Assets and people that are tied up in hopeless businesses would do more good for the economy deployed elsewhere.

    The debt that we are accumulating today means that we live better now. But those who come after us have to deal with that same debt. The low interest rates hurt savers and pensioners and reward those who have borrowed rashly. Pain aversion, not morality, is the abiding characteristic of current economic policy.

    To read the full article, visit The Times website

    Date added: Tuesday 1st February 2011