Never mind talking about national debt, just cap it

Written by Total Politics has a free weekly Friday email bulletin. Follow this link to register. on 8 July 2011 in Diary
How can we stop our national debt reaching such high levels again? Jim McConalogue interviews Sajid Javid MP, who thinks he's got the answer in the shape of a National Debt Cap

I caught up with Sajid Javid, MP for Bromsgrove, to discuss what might sound like ‘just another’ ordinary Conservative proposal on restating Labour’s record on debt but in fact is about calling for a binding cap so that national debt levels may never again reach such disproportionate high peaks and again threaten the functioning of our entire economy. On Tuesday next week, Javid puts forward a Ten Minute Rule Motion – a brief speech in favour of a legislative proposal in the House of Commons – on the need for a National Debt Cap.

As Javid highlighted the debt situation in the Commons at the end of June: “There are some very reliable estimates of unfunded liabilities of central Government standing at over £1 trillion, which would more than double the national debt — not to mention private finance initiative liabilities potentially worth £300 billion.”

Again, more recently, on ConservativeHome, he wrote “Britain’s national debt stands at a massive £920 billion, up from £320 billion in 1997 – an increase of over 180%.  Every British household is groaning under its own £35,000 share of government debt.  In servicing this debt, Britain will spend £42 billion on interest this year – more than we spend on the defence of the country or educating our children.” 

Britain let this economic tragedy occur – but the vital question remains, what are we going to do about it for the future? After all, we may have a future government after 2015 that wants to raise borrowing again to disproportionately high levels and so, again, the same situation will arise. Naturally, again, the British taxpayer will suffer.  

For Javid, Britain needs a debt ceiling, and so he is introducing a National Debt Cap Bill so that, once the coalition government has attempted to fix the nation's finances, it would be impossible or at least unfeasible for a future Labour government to wreck them again. This may sound party-political but is it really? As Javid himself puts it, “Thankfully, we do not live in a one party state and you cannot rely on a good thing.” After all, his proposal would ensure a national debt cap for all governments that attempted to borrow beyond a given debt ceiling, not only a Labour government or any other government for that matter.

Some might say this is all very well but why do we really need this Bill? After all, why cap borrowing when in the long-term business of government this is simply the way we have to be governed, borrowing more on some occasions in accordance with our given domestic or international economic circumstances? In other words, it might be suggested we cannot accept a cap because we need to retain our flexibility to borrow when we really need to?

Javid accepts that this is “not some sort of magic bullet” but it simply helps politicians to confront the big decisions that need to be made. With Javid there is a clear feeling that “what happens is that MPs put off the major political decisions on public finances.” For future governments, his proposal would require that there be a future vote on the floor of the House of Commons if the cap were to be changed. The terms of the legislation would be responsible for “forcing a national conversation where we currently don’t have one and make it harder for politicians to take the easy way out”.

I also raised the concern that the coalition government has set out a programme to already deal with reducing national debt, so if this has been dealt with does his proposed legislation come too late? He sets out how the coalition government’s programme, in this sense, is “absolutely the right thing” and that his Bill would cap the amount government can borrow as a percentage of GDP – which he points out is currently at 60%, and this is expected to peak at 71% in 2014.

Javid is also on record as having said that the bill will leave it to the Treasury to define the cap level – but I asked him what he would say to rigorously fiscal prudential types (particularly within his own party) who might insist on setting a low level in advance, expressed as a proportion of our GDP? And given that scenario, what would he set the level at? He suggests that “if my Bill was implemented, personally I would suggest 40% of GDP or lower.”

I also questioned Javid for his previous claims that ideally the cap should also include off-balance sheet liabilities. In proposing that, I wandered if he also meant that the UK exposure to public sector pensions and banking interventions should be included in the cap, which appear to be recorded by statisticians as off-balance sheet liabilities? Yes, he is very keen for immense liabilities such as public sector pensions and Public Finance Initiative liabilities to be included in the cap.

Given that this legislation deals with debt ceilings, I put to Javid that given Britain is not the only culprit in the global economy to have not dealt with its debt, perhaps others could learn from this proposal, including the eurozone countries and even the Obama administration in the US? On this question, Javid tells me that the reverse is true – “I think other countries are ahead of us” and explains that in the United States “they’re having a major crisis and that’s exactly why we need the bill.” The answer for him is that this needs to be “self-imposed, so you can act early” – and before the markets decide, as in the case of Ireland, Portugal and Greece.

He points to Germany with their new so-called “debt brake” amendment to the constitution in 2009, which forces the government to cut spending and after 2016, the deficit is to be capped at 0.35% of GDP, although he does point out that this deals with the deficit and not national debt per se. He also points to France's lower house approving legislation under its Constitution which would have a similar effect.  

His proposal is, if nothing else, an idea worth considering seriously given the money-grows-on-trees political culture that Westminster and Britain at large suffers today and which is in urgent need of change.

Jim McConalogue is a Westminster-based political analyst

Tags: Bromsgrove, Deficit, National debt cap, Sajid Javid

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