The Conservative Party wants debt to play a lesser part in the economy of the next decade than it has in the middle of this one. That is understandable. There have been times when unduly easy credit led to destabilizing debt. The point, though, is that the market has already recognised this and has corrected it dramatically. The days of the mega-deal funded overwhelmingly by debt are over. So the real issue is whether the Conservatives want to reach further than the market would naturally travel via state intervention through the tax system to make debt much less attractive.
There are serious doubts as to whether this is wise, or workable. Debt is not an economic four-letter word. At the personal level, Britain would not have the Tory ideal of a property-owning democracy without a large mortgage market. In the corporate sector, debt is often the only device for securing the investment essential for companies to expand and prosper.
Sensible debt can offer a positive outcome. Take the household names Birds Eye and New Look. The first was a tired old trouper which has now been reinvigorated. The second has recorded a marked rise in sales in the teeth of this recession. Chiefs at each company would welcome the cut in corporation tax that changes in the taxation of debt are supposed to be subsidising. But for both companies there would not be healthy profits to be taxed had debt not allowed them to restructure.
The Government is hardly best placed to decide what is the "right" level of debt is for individual companies. And the Tories should recognise that well-intended reform can undermine business.
George Osborne is right to argue that the economy of the future will need to look different to today's. He is correct to assert that the balance between the private and public sectors must move back towards enterprise. Simply eradicating the tax-debctability of interest payments on debt would not allow him to meet his objectives and could force sound companies out of business. I suspect that the only beneficiaries would be specialists in the accounting sector who could exploit such a complicated landscape. Enhancing their incomes should not be a policy priority.
