Britannia Radio

Here is the inevitable set out for all to read.

I have saying for years that if we didn’t make cuts in spending they  
would happen anyway - they were not optional.  But the longer we left  
it , the deeper they would be and that we would lose all control over  
where the cuts should fall.  I was right and it’s beginning to shape  
up to that worst scenario now.

Oh yes and here are some very nasty figures on negative equity too!

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THE TIMES           27.2.09
Our public debt is hitting Armageddon levels
The Government is breaching internationally agreed definitions of  
reckless fiscal policy. Prepare for huge spending cuts
    Steve Bundred

Its forecasts have been exposed as wildly optimistic, but the Pre- 
Budget Report of November is still worth a read. I suggest you start  
with table B21 on page 222. It sets in its proper context the scale  
of borrowing that the Government has undertaken since that statement,  
and the additional borrowing it plans over the next two years.

In only one year since the present Government was elected has public  
sector net borrowing as a percentage of GDP exceeded 3 per cent.  
Indeed, in three years it was negative, lending some credence to the  
Prime Minister's assertion that the Government did mend the roof when  
the sun was shining.

The 3 per cent figure is more than symbolically important. It is the  
threshold defined by the Maastricht treaty at which the “excessive  
deficit procedure” kicks in. In other words, it represents an  
internationally agreed definition of a reckless fiscal policy.

There have been occasions in the past when this threshold has been  
exceeded. In 1975-76, when the Callaghan Government had to go to the  
International Monetary Fund to rescue a failing economy and was  
forced to accept damaging public expenditure cuts in return for IMF  
support, public sector net borrowing was as high as 7per cent of GDP.  
And in 1993-94, after the recession of the early 1990s and the Major  
Government's expulsion from the exchange rate mechanism of the  
European Monetary System, it reached its highest level yet, of 7.7per  
cent.

I remember both periods well. I got married in 1976 and we  
honeymooned for a few days in Amsterdam. I had taken out plenty of  
spending money from the bank before we left, but I had not had time  
to change it into guilders. When we arrived I discovered that the  
pound was falling so fast that no one knew what the correct exchange  
rate should be, so the Dutch banks refused to change my money.

My pounds were, quite literally, worthless. We might well have  
starved had not a Yugoslav couple taken pity on us and bought us a  
meal. It's a miracle I'm still married.

And in September 1992, as a finance director, I unluckily found  
myself having to refinance a £40million loan on the day that Norman  
Lamont raised the metaphorical white flag on the steps of No11  
Downing Street. I was able to raise an overnight loan, but only at an  
eye-watering 29 per cent interest rate.

Those who are too young to remember those periods would do well to  
learn about them fast - because even the dark years of the mid-1970s  
and the early 1990s may look like days of wine and roses quite soon.  
This year net public sector borrowing will comfortably exceed 10 per  
cent of GDP.

Next year, according to credible forecasts published by the CBI, it  
will be about 12 per cent. Others have suggested that it might be as  
much as 15per cent, more than double the figure reached in 1976.

It is worth recalling that at the height of that sterling crisis, the  
Prime Minister, James Callaghan, (who was a former tax inspector),  
told the Labour Party Conference: “We used to think that you could  
spend your way out of a recession and increase employment by cutting  
taxes and boosting government spending. I tell you in all candour  
that that option no longer exists and, in so far as it ever did  
exist, it only worked on each occasion since the war by injecting a  
bigger dose of inflation into the economy, followed by a higher level  
of unemployment as the next step.”

How times change. What the mid-1970s and the early 1990s had in  
common was that huge government borrowing was quickly followed by  
public spending cuts. In the case of the Callaghan Government, the  
cuts were so huge that the Cabinet was torn apart by them.  
Ministerial diaries and memoirs of that period describe a level of  
dissent amounting to subversion.There is little doubt that if Labour  
wins the next election the scale of spending cuts needed to rebalance  
the public finances would again test loyalties within the Cabinet to  
near breaking point.

That is why some have argued that the present Government will simply  
carry its burden of debt on the public sector balance sheet for  
decades, in the hope that our children or grandchildren will pay it  
back, no doubt in even further devalued pounds. After all, it is  
argued, Japan and Italy have managed their economies with  
substantially higher debt-to-GDP ratios than Britain.

There is some merit to this argument. There are two definitions of  
reckless fiscal policy in the Maastricht treaty, and on the second  
the UK economy looked a lot more healthy at the time of the Pre- 
Budget Report. The treaty permits public sector net debt to rise to  
as much as 60 per cent of GDP.

Before the downturn began, it was only 36.3 per cent, having been  
reduced from 42.5 per cent when Tony Blair first became Prime  
Minister and Gordon Brown Chancellor. In 1976 when net borrowing was  
7 per cent of GDP, net debt was 53.8 per cent of GDP. And in every  
one of the Thatcher years it was more than 40 per cent.

Most economists and ministers now believe that a prudent fiscal  
policy means not allowing public sector debt to exceed 40 per cent of  
GDP. But the Government is under no obligation to manage the public  
finances with this target in mind. Indeed, Britain is not even bound  
by the 60 per cent limit in the Maastricht treaty, as Margaret  
Thatcher managed to win an opt-out from the relevant article.

This is just as well, given what has happened since last year. With  
the debts of the nationalised and part-nationalised banks now on the  
public sector balance sheet, the ratio of public sector debt to GDP  
in the UK exceeds that of Italy and Japan. And it is set to grow much  
higher. On the basis of the planned levels of borrowing, it could  
exceed 65 per cent of GDP in 2010-11.
And at that scale of indebtedness, the Armageddon scenario most  
feared by the Treasury - that there will be insufficient lenders to  
match the planned level of borrowing - begins to look a distinct  
possibility.

That is why tax increases and spending cuts are inevitable  
immediately after the election, assuming that there are signs of  
economic recovery by then - and why any managers of a public service  
who are not planning now on the basis that they will have  
substantially less money to spend in two years time are living in  
cloud-cuckoo-land.
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Steve Bundred is chief executive of the Audit Commission, the  
independent body that checks whether the public services are giving  
value for money
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SKY NEWS             27.2.09
Up To Five Million Facing Negative Equity

Up to five million homeowners could be in negative equity by the end  
of this year if house prices continue to fall.

Researchers say younger homeowners are likely to be hit hardest

An estimated 3.8m people either already owe more on their mortgage  
than their home is worth or are about to.

And another 1.2m will be hit if house prices drop by a further 10% to  
20%, according to research group GfK NOP.

The group also claims around 14% of people who are already in  
negative equity may be in financial difficulties.

Single people aged between 25 and 34, young couples and younger  
families are most likely to find themselves in trouble.

That is because they are likely to have taken out mortgages with high  
loan to value ratios near the peak of the housing market.

GfK NOP said anyone who took out a mortgage and around half of those  
who have remortgaged since 2005 are likely to be in negative equity,  
or be very close to it.

It has also warned an estimated 7.2m planning to use their home as  
part of their pension are also likely to be hit by falling house prices.

Andy Thwaites, director of insight at GfK Financial, said: "The shift  
to negative equity has the potential to be a mammoth welfare disaster  
for the nation.
"The reality is that if there are further job cuts, the problem will  
become significantly worse."

The research, which was based on responses from 60,000 people, also  
found only one in 10 potential first-time buyers had a deposit of at  
least 10%.