Gary's views

CREDIT CRUNCH 2

Over the next few days the answer to the economic challenges we now face will become clearer. Next Monday afternoon the Chancellor will stand at the despatch box and tell us the master plan.

But already the framework is clear: they will encourage the independent Bank of England to continue to slash interest rates; they will not cut government spending but will allow borrowing to soar to fund the growing black hole between tax revenues and government spending, and possibly even bring forward public sector projects; and they will reduce taxes, especially for those on modest incomes.

All of this has only one purpose: to stimulate economic activity. To encourage us all to spend, spend, spend, to increase demand so that the economy grows.

I recognise it is a legitimate policy option, but I worry about it.

We got into this mess by irresponsible lending in the private sector fuelling reckless personal spending. I fail to see how we can escape it in the long term by irresponsible borrowing in the public sector to do the same thing.

The British government intends to borrow its way out of the recession. But who will pay that money back and how long will it take? (You may also ask who will lend the money to the government in the first place, but that is another matter!)

This gentle medicine may well help the forthcoming recession to be shallower than it would otherwise be. Obviously it is a good thing to minimise job losses and house repossessions. But it must mean that the following period, the recovery whenever it comes, will be much more tentative and protracted as taxes must rise, government spending must be pruned and borrowing will have to be repaid over many, many years.

It will also mean that we might not learn the crucial lesson we all need to learn from recent years, including myself, that we should not spend more than we can afford and we should not over borrow against assets that can go down as well as up.

When I was growing up, I was sometimes given a choice of punishment: a smack now or two weeks with no pocket money. I would always take the smack and get it over with. I worry that the country may be choosing the soft option just to avoid short term pain, and that we might live to regret it. What do you think?