Public debt, not the recession, will sink us

And we suffer not from one disaster but two. The first is the hardship of a severe recession; the second the appalling state of the public finances, which have been allowed to get completely out of control.

With business and industry suffering, and unemployment on a sharply rising trend, it is understandable that the main focus of attention is on the recession.

But, in fact, it is the second disaster, the unprecedented scale of the budget deficit and the ever-rising size of government borrowing to levels beyond any in living memory, that is the more alarming and the more dangerous.

Moreover, the true scale of government indebtedness, massive as the official figures indicate, is even greater than it seems, thanks to the dodges the present government has adopted to shift much of it off its balance sheet.

The so-called business cycle is endemic. Everyone except Gordon Brown, who liked to boast that he had abolished boom and bust, always knew this. Recessions have always occurred from time to time, here as elsewhere in the world, and they always will.

It is true that the present recession is worse than usual, as a result of the banking collapse, caused jointly by the folly and greed of the bankers and Gordon Brown's wanton destruction of the traditional system of banking supervision, based on the Bank of England, which I greatly strengthened when I was Chancellor, and its replacement by a bureaucratic box-ticking system which is now recognised to have been completely dysfunctional.

But history shows us that recessions pass, as even this one will. And we should not overlook that there are some benefits, as well as great costs, from the business cycle.

It is during the optimistic upswing that innovation and entrepreneurial creativity flourish. It is during the downswing that close attention is paid to efficiency and costs.

We are seeing that today.  Or, rather, we are seeing it in the hard-pressed private sector. In the bloated public sector it is different.

There, the long economic upswing has seen not innovation but a steady accretion of waste, extravagance, overmanning, inattention to costs, and unaffordable policy commitments.

And the necessary attack on all this will occur only if the government of the day has the will to do so.

That is what is lacking today. And that is why the problem of the public finances, unlike the recession, will not pass, unless there is a government with the will and the determination to take the inevitably unpopular measures needed to tackle it.

Otherwise, the problem will only grow, as the debt interest that has to be paid on that government's borrowing adds further to the total indebtedness, and the financial markets start to worry that the debt trap may be escaped only by the time-dishonoured way of allowing inflation to erode it - thus pushing up further the rate of interest that has to be paid to persuade the market, and particularly foreigners, to lend the government the money it has to borrow.

It is, of course, true that to some extent recovery from the recession will diminish that amount, as tax revenues start rising again.

But we will still be left with what the economists call a large structural deficit, leading inexorably  - if it is not tackled - to a steadily growing and ultimately insupportable burden of public debt.

Fortunately, we know that it can be successfully tackled. For we have been here before. When the Thatcher government took office 30 years ago, Britain's public debt was the second highest, as a proportion of GDP, among the G7 leading industrial countries.

Only Italy's debt was higher (and then only very slightly so). By the time Margaret Thatcher left office in 1990, this country's public debt was the lowest in the G7.

This was achieved by a firm and relentless control of government and local government spending, year in, year out.

During my own six years as Chancellor, for example, government spending rose, in real (inflation-adjusted) terms by only some 0.6 per cent a year, as a result of which it fell as a proportion of GDP by eight per cent. And this is without taking any credit at all for privatisation receipts.

As a result, a budget deficit was converted into a budget surplus, despite lower tax rates.

The present government knows full well that this now, urgently, needs to be repeated. Indeed, in his recent Budget the Chancellor made it clear that, as he saw it, there would need to be four years of public spending growth (which so far under Labour has not only been rising at a wholly unaffordable rate but to remarkably little discernible benefit to those outside the public sector) of only 0.7 per cent a year.

But not only did he give no indication at all of how this might be achieved, but he insisted that this essential task must be deferred until the recession is well and truly over.

The Government's argument for delay is that to act now would exacerbate the recession.

Poppycock. In fact, it would, if anything, boost confidence. The truth is that a demoralised and paralysed government, fearful of massive defeat at an election in a year's time, lacks the guts to do what it knows is needed in the pressing national interest.

Gordon Brown consistently seeks to portray the Conservatives as the "do-nothing" party.

In fact, confronted with the greatest economic threat we face, it is he who insists on being the "do nothing" Prime Minister. To repeat, the time to act is now.