Comment: A debt mountain to climb, and no help in sight

THROUGHOUT the coverage on the legacy of Margaret Thatcher in the past week has run a yearning for a political leadership capable of lifting us out of the debt and deficit mire we are in today.

Bill Jamieson

The problems are as least as deep as those we faced in May 1979. A year earlier, chancellor Denis Healey had unveiled a Budget with a £2 billion package of tax concessions to achieve a 3 per cent growth rate. But within months, in the face of a yawning trade gap, growing trade union unrest and yields on gilt-edged stock already at 13 per cent, the minimum lending rate (MLR) was raised to 8.75 per cent.

Worse – much worse – was to follow. Incoming Conservative chancellor Geoffrey Howe raised MLR two full percentage points to 14 per cent, and moved VAT to a unified rate of 15 per cent. He also set limits on money supply growth and announced spending cuts of £1.5bn. A month later, Howe was to describe the economic outlook as “almost frighteningly bad”.

Today we are drowning in a rising sea of government debt. Few countries have survived the debt levels we have incurred without a major financial and political crisis – and on a scale greater than anything experienced in the winter of discontent.

Yet investors have made a huge gamble on the premise that the UK can somehow avoid the lessons of history and that our savings will remain “safe”. We hope for the best – but are glaringly unprepared for the worst.

Arguably the most worrying feature of our situation now is that, unlike 1979, public awareness of the need for action and support for change is less developed than then.

Belief that the worst of the “austerity” programme is behind us – or that there are softer options, or that somehow we will muddle through – flies in the face of the facts of our predicament and the ever more worrying ­reminders from the eurozone of what happens when governments are overwhelmed by debt.

Our financial situation has worsened since 2010. Three years ago, when the coalition government took office, it found government debt at £700bn. Since then we have had “austerity” budgets, tax increases, record low interest rates, spending cuts – and monetary stimulus on an unprecedented scale. Yet government debt has continued to bound ahead.

As Merryn Somerset-Webb’s excellent Money Week and Money Morning bulletins remind us, despite all the talk of austerity, debt is set to rise by a further £700bn over the next five years – more than Tony Blair and Gordon Brown added in 11 years. It’s more than every British government of the past 100 years put together.

True, the rate at which our debt is rising – the annual budget deficit – is slowing. But there is a world of difference between bending the upward curve and changing direction.

And what exactly has been cut? Government spending is still rising, national debt is still rising and our annual interest payments are still rising. In fact, UK debt is scheduled to graze 80 per cent of GDP before it starts to fall – historically an alarm bell ratio for national economies. Add in our financial, personal and private debts and Britain is one of the most heavily indebted countries in the Western world – more than five times what our entire economy is worth. Do the crises in Greece, Italy, Portugal and Spain look so remote now?

Once a precedent has been set to seize bank deposits, impose Draconian restrictions and “top slice” savings above a certain level, little wonder there is growing apprehension across the eurozone that such measures may not be confined to Cyprus.

Increased flows from the North Sea, reflecting the rise in oilfield investment to a record £13bn this year, did not spare the UK harsh medicine of 1980-83. Indeed, it may slow a rebalancing of the economy as the pound strengthens. In any event, Britain’s public finances are in such an appalling mess as to require every penny of extra tax revenue to stop the debt total spiralling above £1.5 trillion.

Against this backcloth, investors need to pay attention as never before to basic financial safeguards. They will not provide full protection in the event of escalating crisis, but they are obvious and timeless in nature and within the reach of most to undertake.

First, build a core holding of savings in index-linked gilts. Inflation has been a well-trodden path by which governments have dealt with debt that has got out of control. Second, make sure your assets are well diversified, by geography as well as by activity. Take advantage of low-cost funds and trusts investing in the US, south-east Asia and developing country economies.

Third, cut mortgage and credit card debt. Fourth, look after and maintain residential property assets. This helps the marketability of property and gives the intrinsic benefits of security.

Five, make sure any cash deposits are spread across different institutions – not just one bank. Keep saving accounts in a separate bank from everyday current accounts and spread savings deposits across more than one bank, building society or institution.

Alarmist? Just look at the chart and see the magnitude of the debt mountain we face – but with a marked absence of political leadership that came forward in 1979 to take action.