Can the UK afford a government stimulus package?

With the recent release of economic data confirming that the UK’s double-dip recession has continued for another quarter, people are calling for the government to take advantage of the low-interest rates on government bonds to fund infrastructure projects and inject money into the economy. It is true that our economy might need help, and at the same time, our infrastructure is in need of improvement if we want to stay ahead of the rest of the world in the future. So, as a result, people are calling for investment to tackle both problems at the same time, but they are forgetting something important: we simply cannot afford to spend more. With this in mind, we need to look towards other solutions.

UK government debt, ignoring the cost of saving the financial industry, is currently higher than £1 trillion. This year, that figured is expected to grow by more than £130 billion. This leads into two things that people are forgetting when they call for more stimulus.

First, they need to consider that a £130 billion deficit is already £130 billion injection into the economy. This is already a massive, massive figured, and borrowing £10-20 billion more is unlikely to do any difference. Anything else, and we risk a rating’s agency downgrade. This would then lead to higher debt levels, a higher cost of servicing the debt and increased difficulty of repaying the debt in the future. A downgrade by Fitch or Moody’s might not seem terrible at first, but it is a sign of things to come. With more debt, and with it being harder to repay, we risk becoming more like Greece, where, whichever way you put it, is currently in a far worse situation than we currently are in the UK. That might seem a long way off, but all it would take is another crisis and the UK debt problem would be out of control. Economies follow a cycle of recession and boom, and I personally don’t see the UK repaying a large proportion of the debt before the next recession, no matter how far away it is. Therefore, borrowing more now, to solve a short term problem, places us at risk of a much larger problem in the future.

Second, this potential investment is ignoring common sense. Most people have to spend less than they receive in income, or they will likely be thrown out of their house and unable to afford anything. There is no safety net. The banks won’t give you an endless supply of money. People might want to purchase an iPhone or go on a nice holiday, but most people simply cannot afford to do so, as they don’t have the disposable income. In the glory days, you might have been able to get a nice big fat loan, but that’s just stupid; paying for something you enjoy now, but have to pay off for years to come. Not to mention, it would be impossible to do that every year, which is what the UK has been doing; running a budget deficit for many years.

Therefore, why do people forget this when it comes to the government? Why do they expect the government to run into debt, when it’s stupid to do that in their personal lives?  We are taught this lesson as children; remember when you were denied to have that shiny new toy, because your parents couldn’t afford? The UK is already breaking this rule, borrowing more than £130 billion this year. Money doesn’t grow on trees, so it’s time to stop ignoring this valuable lesson that we all know as common sense. Greed eventually leads to homes being foreclosed, or the situation in Greece.

With the idea that the government should borrow more money to help get us out of this economic situation being incredibly stupid and something that we are already doing, there is one possible solution that stands out. This is to leave the EU. Currently, the UK is paying £19.2 billion per year, £53 million per day to Brussels, with a net contribution of £8.4 billion this year. If we pulled out of the EU, this could be spent to create a UK Sovereign Wealth Fund. These investments would then help the UK in the future, while also bringing in profits to help pay off the national debt. This could be done without raising borrowing.

If the UK had done this in 1973, instead of paying European bureaucrats to sit around, the Sovereign Wealth Fund would now be valued around at least £550 billion, comparable to the two biggest in the world; Norway and Abu Dhabi. This would be enough to pay off half of the UK debt, or the proceeds could be used to fund investment and infrastructure in the UK. Therefore, this leads us to a conclusion. Instead of spending more, which we simply cannot afford, we should instead leave the EU and create a Sovereign Wealth Fund in its place. This would do something that would actually benefit us long term, leaving a legacy rather than increasing the burden on future generations, and most importantly, setting the UK on a sustainable and positive economic path.

 

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