Note to Gordon Brown: Debt is not good

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Mr Micawber, "David Copperfield".



Readers of Dickens will be familiar with Mr Micawber's injunction against indebtedness, but it seems that the British Labour government has not heeded this warning from English literature. The debtors gaol was where the financially reckless ended up in Dickens' time; Downing Street is where they seem to end up nowadays. The problem is that the root cause of the crisis - debt - is being posited as the solution.

Thanks to 11 years of spending beyond our means, both public and private sectors in the UK are crippled by debt. The idea, therefore, that a fractional decrease in VAT is going to get the economy going again is laughable. Think about it: are you going to charge into the shops on a spending spree because iPods and clothing are now a pound or two cheaper? The stores themselves have 25% or even 50% sales, so what difference is VAT of 15% going to make? Not a jot, which is why politicians in Germany have rightly been mocking the Prime Minister's stratgegy. People's desire, understandably, is to save. That is the sentiment, and you can't buck it. So what should the government do?

In the 1930s government spending constituted a much smaller percentage of GDP than it does today so to 'pump' the economy the government of the day could increase public expenditure. Today government spending has soared and the tax take is a huge proportion of GDP. They say that generals always fight the last wars, but Gordon Brown's government seems to be fighting the slump of the 1930s - and it won't work.

To change the economy you have to chime with people's sentiment. This is because the crisis we are in is first and foremost about confidence. So - removing as many businesses and private citizens out of tax altogether will give them extra cash. Once they have this money they will use it - not to spend on things - but to reduce their debts and increase their cash holdings. This in turn will re-liquidate the banks, reducing their 'Please Sir, I want some more' begging-bowl act with the government (to continue my Dickensian theme). By doing this a virtuous circle of reduced debt will be created.

It is people, and their improved confidence - not meddling politicians - who will drag us out of recession. So Gordon Brown and his absurd Chancellor Alistair Darling could make a start by massively raising the tax threshold for as many people and businesses as possible. By contrast Brown's plan to borrow massively, cut VAT a little and mollycoddle the banks will be futile, and even worse will saddle us and our children with gargantuan debt for a long time to come.