Drop the debt

Today, the British people will vote in the closest and least predictable
election in living memory. It is likely that whatever the result, this will be
thought of as a genuine game changer in relation to how politics is approached
in this country and how the electorate are expected
to interpret the increasingly complex arguments that our political class
presents.

It is discouraging that the core decision required of the electorate is not
fully focused. Instead, everything we hear relates to cost cutting and tax
increases.

The reality is that the huge deficit incurred by the current government must
be reduced by the next. But the parties refuse to focus on why it is important
to reduce the deficit.

It is true that huge government deficits will increase long-term interest
rates. As interest payments account for an increasing portion of government
expenditures – if no action is taken – it will be more difficult to service the
nation’s debt. Though I concur with this rationale, I disagree that this is the
only action that can be taken by government.

Regardless of political affiliation, ultimately, everyone wants a healthy
private sector, which produces thousands of well-paid jobs but this will require
investment. Most British companies will need to borrow money to make those
investments – but there’s a catch. If the government can’t somehow reduce
borrowing, the cost of doing so to the private sector will rise, restricting the
ability to invest, grow and create the sustainable jobs needed for economic
recovery.

But this works both ways. If private sector needs are lessened, or if it can
reduce current borrowings, then long-term interest rates will be easier to
control. If the total demand for borrowing is less, the price of borrowing will
also be less. So, it should be in the government’s interests to encourage the
private sector to reduce its need to do so.

I know – from REL Consultancy’s annual survey of the UK’s top companies –
that working capital (accounts receivable, plus inventories, less accounts
payables) could be reduced by as much as £40bn. This figure is close to covering
the entire defence budget for one year and more than the government budgets for
education, law and order or transport.

In removing £40bn of demand from the UK debt market over a five-year period,
it’s likely to expect a further decrease in long-term interest rates. It follows
that government should encourage the private sector to increase working capital
efficiency in order to reduce the cost of private investment in those new,
needed jobs.

I recommend that the government should offer private sector tax incentives to
manage working capital more efficiently and to reduce external borrowing. This
scenario not only helps the government and private sector but could make funds
available through the major banks for small businesses currently desperate for
them to release new funding.

Tax breaks for managing working capital will help everyone to keep long-term
interest rates down, which is good for government, big business and small
business. During the next Parliament, we all know there are tough decisions to
be made but we should be maximising the opportunity to reduce long-term interest
rates and create more economic winners.
Brian Shanahan is senior director at REL Consultancy.