By: Dr. Mike Campbell
The global financial crisis has brought one fact into sharp relief more than any other: the world’s major economies have been living on borrowed money. In the days of the Gold Standard, it was almost impossible for a country to run a deficit since, ultimately, all debt needed to be backed by gold.
Of course, nations used to issue bonds to raise money for major infrastructure projects (the expansion of railways springs to mind), but the goal was precisely defined.
The sovereign debt crisis has raised the spectre of governmental default on debt and has put stress on the system whereby countries just put things on “the tab”; like some city gent who has fallen on hard times and slipped into alcoholism.
But with ratings agencies playing the part of the local loan shark and pushing up the “vig” on outstanding debt (merely by questioning the borrower’s ability to pay), we can’t go on as we have been.
The cost of servicing the UK’s debt (not repaying it) has been put at £43 billion per annum. Chancellor George Osborne has put together a raft of measures which are designed to curb the structural deficit by 2015 and of course, they will be very unpopular.
The measures may cut 490 000 public sector jobs; see departmental budgets cut by an average of 19% over four years; chop £7 billion out of the welfare budget; hike the retirement age to 66 by 2020; chop 4% out of the police budget (a move warmly applauded by crooks everywhere); and make the banking levy a permanent feature. But then that is the problem with partying – the hangover you get when you wake up the next day.