Britannia Radio

TELEGRAPH   23.9.08
A Spiral of debt - and a Chancellor fast running out of options
The more the government borrows, the less room the Bank of England 
has to cut interest rates.
Edmund Conway

Alistair Darling broke a major taboo a few weeks ago by acknowledging 
the full scale of the economic crisis, which is as threatening as any 
for 60 years. Now he has broken another.

He has finally acknowledged that the government's finances will 
plunge perilously into the red.  In fact,  he will most likely be 
forced next year to borrow more than the Treasury has since the dark 
days of the early 1990s.

He may even generate a budget deficit as large as the one that caused 
Britain to be bailed out by the International Monetary Fund in the 
1970s.

This is almost inevitable in an economic downturn; the amount the 
government receives in tax revenues tends to disappoint while it is 
also forced to spend more on unemployment benefits.

Prosaic as this sounds, the results can be devastating for the 
Treasury's accounts.  In the early 1990s the budget deficit swung 
from 1% of gross domestic product to 7.3% within two years, 
eventually forcing the Conservative government to raise taxes.

This time around the starting point is even worse, with the deficit 
already around 3%.

But Mr Darling appears to believe he can borrow more without raising 
taxes.

He is being disingenuous. Government borrowing is always deferred 
taxation. By borrowing more today he will instead leave future 
generations to pay the bill.

All debt has to be paid back eventually, as a few banks have recently 
learnt to their cost.  Taxes will have to rise at some point - or 
public spending will have to be slashed.  Given the government's 
appalling record with the latter, one has to assume that the former 
is heading our way.

What is also clear is that the two borrowing rules trumpeted and 
cherished by Gordon Brown are well and truly shattered.   They had 
been bent and buckled in recent years as he sought to increase 
borrowing while retaining the impression of restraint, but that 
illusion is no more.

The only question is how long the government can hold off before the 
inevitable tax increase. Perhaps for a couple of years, by which 
stage the problem is unlikely to be his but the Tories'.

However, the decision is not in Mr Darling's hands but in those of 
the financial markets.  Foreign investors have been pulling their 
money out of Britain at a terrifying rate because the government will 
borrow more to get through this crisis.  If the exodus accelerates  
Mr Darling faces the unpalatable choice of either raising taxes or 
truly debauching the pound.

Meanwhile the Bank of England will be watching the Treasury very 
closely.  High budget deficits usually go hand-in-hand with inflation.

Simply put, the more the government borrows, the less the Bank will 
be able to cut interest rates.  Alistair Darling knows this only too 
well.    As he himself has admitted, there is no easy way out of this 
slump.