Britannia Radio

Well, he may think he's out on his own but he won't be alone for long.

Janet Daly points one truth and Mark Lawson another.    `That's the 
right way forward and once the Brown-Darling tinkering has run its 
course those are the routes we must follow.   I despair when I try 
and think of any politician today who is sufficiently alert to grasp 
this - ever!

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FINANCIAL TIMES   24.11.08
Britain will pay for Brown's fiscal boost
By Nigel Lawson

The outlines of today's pre-Budget report have already been 
extensively leaked. What remains to be revealed is the precise size 
and detail of the proposed fiscal "boost", the Treasury's latest 
estimate of the alarmingly large budget deficit to which it will 
contribute, and the means by which the public finances will be 
rescued at a later date - after the next election, needless to say.

Given that we are facing - at least in the UK - the worst recession 
since the war, it might be thought that the bigger the fiscal boost, 
the better. That would be a serious mistake. The truth is that the 
smaller the fiscal boost, the better.

The rationale for what Alistair Darling, the chancellor - and, to a 
greater or lesser extent, his opposite numbers across the world - 
will be announcing goes back to Keynes, who has been enjoying 
something of a revival lately.

However, while undoubtedly an economist of great insight, the Keynes 
of the General Theory made two significant, if understandable, 
mistakes. The first was his conviction that under-consumption, and 
indeed quasi-slump, were the default condition of free economies. It 
is not surprising that, writing in 1935, he believed this to be the 
case: even before the disaster of the early 1930s, the 1920s had been 
a miserable decade, with UK unemployment stuck at about 10 per cent 
or more - year in, year out. However, the experience of the 60 years 
since his untimely death has proved this not to be so.

It was this mistake that caused him to adopt an unfortunately 
cavalier disregard of the dangers both of inflation and of excessive 
credit boom.
His second mistake was to believe that fiscal activism was required 
because monetary policy was ineffective. This, too, has been 
invalidated by events. It is, for example, striking that, with the 
exception of Nazi Germany, which was for various reasons a special 
case, it was Britain that recovered faster than any other major 
nation from the 1930s slump. It did so largely on the basis of cheap 
money and a balanced budget.

Between the slump's deepest point, in 1932, and 1937 the UK economy 
grew at an unprecedented 4.5 per cent a year. Nor was this due to 
rearmament spending, which did not start until 1936.

Or to come to my own time in government: no fewer than 364 
distinguished economists protested, on the best Keynesian grounds, 
that Geoffrey Howe's tax-raising 1981 Budget would "deepen the 
recession, erode the industrial base of our economy, and threaten its 
social and political stability". In fact, by an exquisite 
coincidence, it marked the moment when the British economy embarked 
on a prolonged phase of vigorous growth.

It is understandable that, at a time of great economic difficulty, 
the government feels it has to do something; and with monetary policy 
quite rightly devolved to the Bank of England, that seems to point to 
fiscal policy. Nor is it unaware that both tax cuts and spending 
increases that apparently do not have to be paid for are likely to 
prove popular. Moreover, with other countries, for the same reason, 
singing the same tune, it would be strange to stand aside. And 
cheering us all up - or what is more pompously described as restoring 
confidence - is not to be despised.

But there is a trade-off. Mr Darling will be well-aware that any 
economic benefit secured now will be at the expense of increased 
problems in the not-too-distant future. And the trade-off is not an 
encouraging one, with the benefit likely to be trivial and the 
problems far from trivial - particularly since our structural budget 
deficit is worse than that of any other major economy. Indeed, were 
this not so, today's stimulus would be very much larger than is 
likely to prove the case.

So what should be done? It is clear that the Bank of England is 
rightly standing by to make further significant cuts in interest 
rates. Monetary policy is more powerful, more timely and far less 
troublesome to reverse.

The problem with the monetary route at the present time, however, 
lies in the continuing weakness of the banking system, which reduces 
the effectiveness of a cheap-money policy.

The solution lies in a further strengthening of the banks. This may 
well mean a further recapitalisation exercise, focused this time on 
the strongest institutions. But it should also mean adopting the 
somewhat orphaned child of Hank Paulson, the US Treasury secretary - 
the troubled asset relief programme (Tarp) - by taking toxic debt off 
the banks' books, albeit at a price that protects the interests of 
the taxpayer.

The remark attributed to Keynes - "When the facts change, I change my 
mind. What do you do, sir?" - has been much quoted lately as 
justification of throwing fiscal prudence to the winds. It would be 
better applied to accepting that subsequent events have invalidated 
the empirical foundations of Keynesianism - rather than to throwing 
fiscal prudence to the winds, in spite of the undoubted short-term 
political attractions of doing so.
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The writer was chancellor of the exchequer from 1983 to 1989