On a day when this paper headline say:- - - -
"Record deficit reveals dire state of public finances
The deteriorating state of Britain's finances is underlined with
figures that show the biggest deficit since records began."
the article below seems unduly optimistic!
XXXXXXXXXXXX CS
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TELEGRAPH 20.11.08
The Pre-Budget boost: pre-emptive strike or preamble to higher taxes?
Monday's Pre-Budget Report will fire the starting gun on the next
general election and draw its battle lines.
By Tom Stevenson
Confirming its split with Prudence, the Government has given the
Tories the opportunity to put clear blue water between the parties.
Forget foreign policy or climate change; there will only be one
argument that matters in the forthcoming campaign - it's the economy,
stupid.
The disagreement between Labour and the Conservatives over the
unfunded tax cuts that will be announced next week goes to the heart
of how to run an economy in a crisis. The Government (and the
business lobby) argues that this is no time for caution; desperate
times demand desperate short-term measures and we'll clear up the
mess later. The opposition, facing the prospect that it might be
doing the clearing up, argues that the longer-term damage to already
stretched public finances is too high a price to pay. It's Hobson's
choice, because to a degree they are both right.
You do not have to look far for evidence in support of a significant
short-term fiscal stimulus. Ask anyone at the commercial coal-face
and they will tell you that trading fell off a cliff in October. Car
sales, advertising, the manufacturing sector and housing are in such
rapid retreat that every company in the land is looking at its
headcount and wondering not whether but how deep to cut. No wonder
the CBI this week ripped up its September prediction of a short and
shallow recession.
Although we are some way from a deflationary slump, this week's slide
in the inflation rate is a straw in the wind. The Retail Price Index
looks certain to go into reverse next year for the first time since
1960 and yesterday's Bank of England minutes showed how the
deflationary penny has dropped for the Monetary Policy Committee.
Shocking as it was, the MPC knew this month's 1.5 percentage point
cut in the base rate would not be enough to bring inflation back to
its target within two years. It would have cut even more but feared a
run on the pound. It also, wisely, wanted to keep some powder dry for
the difficult months ahead.
It is right to worry about deflation. Japan's lost decade shows how
disastrous a persistent and general decline in prices can be.
Consumers don't see any point in spending, because they know things
will soon be cheaper. They feel poorer because the real burden of
their debts rises. Deflation means the interest-rate squeeze tightens
precisely when it should be aggressively loosened. It is an ugly
downward spiral that is much better and easier to prevent with
decisive early action than to try to cure after the event.
In a perfect world, the Government would clearly do whatever is
necessary to avert a deep and prolonged recession. But the state of
the UK's public finances confirms that our world is anything but
perfect. The Government has effectively abandoned its fiscal rules.
Even before next week's give-away, it is expected to spend £100bn
more next year than it gathers in taxes, a deficit that, at 7pc of
GDP, is within a whisker of the 8pc reached at the peak of the last
cycle. Financial markets are braced for the issue of around £140bn of
new government securities, a quarter of all the gilts currently
outstanding.
The last time we were in this state, in the mid-1990s, it took three
years of fiscal tightening and a public spending clampdown to reduce
the deficit by just 1.5pc of GDP. As the British consumer has found
while increasing his debts from £100bn to £230bn over the past 10
years, it is much easier to flash the credit card than to pay the
resulting tab.
After a decade in which the economy has grown at just under 3pc a
year on average since 1997, we should not find ourselves in this
position. The sort of spending required to ensure a deflationary
slump is averted is finger-in-the-air stuff. With the pound in the
doldrums, this kind of uncalibrated shot in the arm risks over-
stimulating the economy as much as underdoing it.
Next week's fiscal boost is probably a necessary evil. But for it to
have credibility, the Chancellor needs to make it abundantly clear
that the measures are temporary and will be reversed [an impossible
thing to do if the boost is in the form of hand-outs to the public, I
would have thought! -cs] when the immediate danger has passed. He
must set out a believable medium-term fiscal framework. Public and
private spending is what got us into this mess. It cannot be a
sustainable solution.
The economies of the US and Britain have been built in recent years
on uncontrolled consumption, a contempt for the virtue of living
within one's means and a belief that housing is an investment, which
can be true only to the extent that a pyramid-selling scheme is an
investment.
If the house is burning, the first thing to do is put the fire out.
But it is the foundations that are badly in need of attention.
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