The Chancellor's reckless borrowing is under fire from the CBI. They
knpw, we know that thus cannoyt hgo on. The sooner it is stopped the
less extreme pain will be felt as the nation convalesces.
Janet Daly says with approval " In Washington last week, I listened
to the Senate minority leader, Mitch McConnell,as he outline the
principles of Republican opposition to the Obama programme: the
government, he said with stunning clarity, "spends too much, borrows
too much and taxes too much" Now that is what you call a coherent
message"
Then Roger Bootle draws a sober map of the unhappy years ahead.
There are forecasts and dates.
XXXXXXXXXX CS
===============================
TELEGRAPH 23.3.09
1. CBI calls on Darling to hold back borrowing
The Chancellor risks causing long-term damage to the UK economy if he
attempts to launch any further fiscal stimulus in next month's
Budget, the CBI has warned.
By Yvette Essen and Graham Ruddick
Richard Lambert, the director-general, cautioned the benefits of a
short-term fiscal package, such as tax cuts or extra spending, would
be limited, while the long-term costs to the UK's battered public
finances would be "very real".
The CBI's pleas will add to the pressures Alistair Darling faces in
his attempts to find a way to stabilise the economy in the Budget on
April 22.
"A further significant addition to borrowing could only exacerbate
the pain caused by future fiscal consolidation over a protracted
period," Mr Lambert said in the business lobby group's annual Budget
submission. "It might simply promote increased saving on the part of
households, and greater caution on the part of businesses, in
anticipation of future tax bills."
Should the Chancellor rein in spending, this would mark a stark
contrast to the US's strategy to solve the credit crisis. Last night,
speculation mounted that President Barack Obama was putting the final
touches to a trillion-dollar plan to aid the US's crippled banking
system.
Hundreds of billions of pounds have already been set aside by Mr
Darling in an attempt to prevent the collapse of the British banking
system, while, in November's pre-Budget report, spending in public
sector projects was brought forward and VAT cut to 15pc in an attempt
to stimulate spending.
The UK's budget deficit is heading towards a record high with
borrowing set to exceed 10pc of GDP. The Ernst & Young ITEM Club has
predicted that unlike the Obama administration, the UK has limited
options to implement a large stimulus package.
It estimated that public sector net borrowing would shoot up to
£180bn in 2009/2010 - equivalent to 12.6pc of GDP. It added that this
trend of borrowing would continue well into the next decade, and that
over the course of the next five years total borrowing will be £270bn
higher than the Chancellor's current forecasts.
The perilous state of the UK economy was further highlighted by
estimates that the number of companies ceasing to trade is forecast
to reach its highest peak in 16 years.
Data from accountants Wilkins Kennedy predicted there will be 23,713
liquidations in the year to March 31 . This is the highest number
since 1992-1993, when liquidations reached 28,700 . Concerns have
also been mounting that the United Kingdom will be caught up in a
deflation trap, despite moves by the Bank of England to pump money
into the economy.
Official figures are expected to confirm tomorrow that the Retail
Price Index has fallen by 0.8pc compared to a year ago, marking its
first drop into negative territory in nearly 50 years.
George Osborne, the shadow chancellor, said: "Gordon Brown is now
looking increasingly isolated at home and abroad in his attempt to
make the argument for even more borrowing."
===========
2. The consumer crisis will really show its teeth as more jobs vanish
by Roger Bootle
Until recently it has been possible to believe that we are in a
phantom crisis. Banks may be all but bust and house prices sliding
yet out there in the real world things seemed to be going on much as
before. London restaurants were full to bursting. The shops seemed
busy. No wonder that a lot of people thought that the crisis was
something stirred up by the media.
For everyone who has believed that, last week's unemployment figures
should have come as a wake-up call. The claimant count rose by
138,000 in February alone, the biggest monthly rise since the series
began in 1971.
Unemployment is now back to where it was about 10 years ago and yet
we are only at the beginning of what will prove to be a long rise.
Recessions do not hit everything all at once. As I said last year,
you should think of them as a plague which spreads from sector to
sector.
Unemployment is the hinge which links the corporate sector to the
personal. When problems hit companies they do not immediately fire
employees. They initially bear the pain and hope that things will get
better but, once they can bear the pain no more and/or they believe
that things will not get better, they ease their own position by
reducing headcount - and thereby pass their pain on to employees.
They, in turn, then reduce their spending, which then transmits the
pain back to companies through reduced orders and output, and so on
and so forth.
The current crisis began in the banks. There will be much more bad
news to come as ordinary loans to consumers and businesses turn sour.
Yet, with massive public support already in place and more on the way
if needed, I suspect that the banking aspect of this crisis may
already be past the worst.
But don't be fooled into thinking that this means the recession is
almost over, for the consumer crisis is only just beginning.
As unemployment rises, plenty of innocent families will feel the
backwash from the financial excesses of recent years.
Admittedly, retail sales have so far held up surprisingly well. This
won't last.
We get the official measure for February retail sales this Thursday.
They could easily register a monthly fall - the first of many. I
think that real consumer spending will fall by around 3pc this year
and around 1.5pc next. That will make the employment situation worse.
On the broadest measure, I reckon that unemployment will rise to
3.5m, compared with its current level of 2m and its trough of 1.6m at
the end of 2007. The unemployment rate could peak at around 11pc,
broadly equal to the peaks seen in previous recessions.
Of course, many economists say that the importance of the
unemployment figures is exaggerated. Unemployment, they say, is a
"lagging indicator", and is not useful as a forecasting tool. Once
output starts to pick up, they say, we will be able to say that the
recession is over, yet unemployment will still be rising.
They are right about that. Indeed, in the past three recessions, it
took between one and three years after GDP had troughed for
unemployment to peak.
I reckon that GDP may start to rise again by the end of 2010. If that
is right, then, even allowing for shorter lags this time, the
earliest we could see unemployment peaking would be the middle of
2011 but the peak could easily not be seen until 2012.
This, and not the technical measure of recession used by economists,
gives the better gauge of both the human and economic disaster that
has befallen us. Modern economies are used to growth - that is what
they normally do. So the technical definition which signals the end
of a recession, when output starts to grow again, is nowhere near
demanding enough.
Recessions are all about resources lying idle in the midst of want
and the most important of all resources to be lying idle is people.
So, in both a human and a real economic sense, the recession will not
be over until unemployment gets back to its minimum sustainable
level. That might not be for 10 years.
Compared to previous recessions, this one is likely to be spread more
evenly across different types of workers, different sectors and
different regions. It won't just be the manufacturing north that is
hit, as it largely was in the recession of the early 1980s.
In another sense, the pain will be spread very unevenly. On past
form, we should expect some big drops in pay inflation. In the early
1980s, average earnings growth slowed from 11pc-plus to a trough of
5pc. In the early 1990s, it slowed from 10.5pc to a trough of 3pc. I
expect overall average earnings growth to slow from 3.5pc last year
to less than 1pc by 2010. This sounds pretty grim for workers but
remember the coming collapse of inflation and the shift into deflation.
In this environment, for those people who retain their jobs, even
minimal pay rises will generate increases in real incomes. For those
with hefty mortgages, the fall in interest payments implies an even
greater rise in disposable incomes. But those who have lost their
jobs will be snookered - and any savings they have will yield next to
no interest.
The greatest contrast, though, is between the public and private
sectors. On the latest figures, while pay in the private sector was
down over the year by 1.1pc, in the public sector it was up by 3.7pc.
If you are employed by the public sector you don't know what
recession is all about. No reductions in salary or disappearing
bonuses; no worries about your pension [but today deficits on a
growing scale for public pensions are announced ! -cs] ; no anxiety
about losing your job; no increased tensions at work because of the
pressure. You just sail blithely on.
Whenever I travel about the country I never cease to be struck by the
depth of anger about this contrast. It is going to intensify.But this
contrast will be temporary. For there will be yet another stage to
the recession.
As soon as the economy starts to recover, and maybe even before, the
next government will have to bring in massive cuts to public
expenditure programmes. If it is serious about improving both the
financial position of the government and the productivity of the
economy, these will have to involve substantial cutbacks in public
sector employment.
So the pain in the public sector could be intensifying well after the
private sector position has started to stabilise. Indeed, if this
economy is to return to health, it will have to.
------------------------------------------------------------
roger.bootle@capitaleconomics.com
Roger Bootle is managing director of Capital Economics and economic
adviser to Deloitte.
Monday, 23 March 2009
Posted by Britannia Radio at 08:12