Public debt, private responsibility

by Sachin

“The financial crisis saw governments step in to take over debts that had been incurred by private citizens. They could do this because their power to tax their citizens assured lenders that they were good for the money.”

As a prelude to my forthcoming piece on austerity and public debt, Daniel Finkelstein‘s account in today’s The Times is lucid, accurately informed by personal history, and cuts through much of the misinformation being propagated by both right- and left-leaning members of the commentariat1.

Mr. Finkelstein believes we have reached what the financial writer John Mauldin terms “the endgame”. Borrowing has risen to unmanageable levels, and the authoritative, objective reason is this: private borrowing became large but theoretically manageable, but governments did not rigorously enforce the mechanisms by which they cover citizens’ debt. We see this most visibly in Italy and Greece, where efforts at tax collection were risible. People are fond of bashing bankers (but not other high earners, I notice), and are equally fond of trotting out the line that government borrowing increased in order to rescue the banking sector. This is seen as an apology for Gordon Brown’s time as Chancellor of the Exchequer, and as a refutation of the Coalition’s austerity.

Unfortunately, this is not wholly truthful. It is true that ballooning government borrowing was caused by quantitative easing and the government’s assuming ownership of once-private banks; however, a contributing factor to banks getting into such a mess was the unsustainable level of private borrowing which escalated during the 1990s, and subsequently could not be repaid. The Labour government’s spending on other things—new hospitals and schools and welfare packages—was sometimes unwise, but primarily because it was off-balance sheet, funded as it was by the ghastly Private Finance Initiative (PFI). The greater sin was instituting a reckless entitlement in individuals to borrow and spend beyond their means—and that’s what necessitated the bailouts.

Compounding this is the idea that governments run of out of sway with the public well before they run out of things to tax. The intractable result is that people reject governments who wish to call in debts, belatedly, even though the people are the architects of it. For Mr. Finkelstein, this means either revolution or authoritarianism is only a heartbeat away. People have short memories: it is not really so long ago that Franco ruled over Spain, and a military junta cast Greece into miasma.

1 Finkelstein, D. (2012), “We can’t afford public revolts against debt“, in The Times, 9 May.