Money talks, by Peter Roffey
Friday 20th September 2013, 10:30AM BST.
AS THE States struggles to find funding for all its priority capital projects, once again the siren call of borrowing is whispering in members’ ears.
It’s so alluring that you can’t help wondering how long our fallible deputies can resist its temptations.
- You can have all the shiny new facilities you need now – not five or 10 years down the line.
- It’s so cheap to borrow at the moment you would be mad not to – there’s never been a better time.
- Why shouldn’t the next generation help to pay for these facilities? After all, they’ll have the benefit of them too.
- The interest rates on loans taken out now may be lower than inflation over the next 10 years, so you’d actually be saving money in real terms.
- Nearly every other developed country uses borrowing as part of their public finances, so why not us?
That last argument in favour should actually be the biggest warning against setting foot on the slippery slope of government borrowing.
Yes, just about everybody else has done it and all of them have embarked on their borrowing programmes with the best intentions of keeping their public-sector debt low and manageable. But nearly always, once a country has broken the taboo and started to borrow, it has become habit-forming and damaging national debts have quickly built up. This means far too much government revenue has to be used on servicing interest payments and repaying capital. That in turn means it’s harder to fund new capital requirements out of current revenue surpluses, so the obvious answer is – new borrowing.
In so many cases it has turned into a vicious cycle, leaving incoming finance ministers ruing their predecessors’ lack of restraint and muttering, ‘if only the national debt was lower’.
The problem is that national-debt reduction is very hard to achieve. Either you need an economic boom with rising government income while resisting the temptation to increase spending, or you need a real austerity programme that tends to be politically damaging, very painful to ordinary citizens and risks creating an alternative vicious cycle by sucking cash out of the economy and depressing growth.
Far better to stay debt-free in the first place. By that I mean genuinely debt-free, not just avoiding formal government debt by financing capital projects through private finance initiatives (PFIs), which lead to even more of a burden on the public purse down the line.
Does that mean that all government borrowing is wrong?
Not necessarily. The States have long had a policy of allowing it for those capital projects that will generate a secure income stream sufficient to service the interest on that loan and repay the capital. For example, if the States were to buy a waste-treatment plant, whereby the purchase cost could be repaid from gate charges. Even in those situations, it’s still far preferable to pay for the project from reserves and then use the income to restore the value of those reserves.
But if the cash simply isn’t there and the project is vital then borrowing can be justified. It is when government starts to borrow for general, non-income-generating infrastructure projects that they are on the road of no return.
Of course, if States members do decide to opt for ‘limited borrowing’ in order to meet their current capital priorities, they’ll be sincerely convinced that it will be just that – limited. Somehow they will be different to governments elsewhere – they won’t get a taste for easy money and borrow again. No, sir, not them. Guernsey will be the exception that proves the rule and will simply borrow once before prudently returning to funding capital projects from retained surpluses once the economy improves.
In reality, quite the opposite is likely. With Guernsey deputies so accessible to the public they serve, they’ll find it even harder to say ‘no’.
After all, their own, personal electoral fortunes ride on keeping their parishioners happy. Even worse, with the current madness of having separate bodies overseeing high-level corporate policy and government finances, there is even less real control than there was in the days of Advisory and Finance.
Make no mistake, if our government gives in to temptation, we will all live to regret it. Far better to either increase States’ income (taxes) or else defer the spending until we can afford it.
Of course, neither will be popular, so don’t bet against Guernsey starting its own ‘national’ debt.