Monday, 23 March 2009

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.


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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."
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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.
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roger.bootle@capitaleconomics.com
Roger Bootle is managing director of Capital Economics and economic 
adviser to Deloitte.