Britannia Radio

The meltdown gets nearer and all the intelligent commentators agree.   
But the one thing nobody addresses properly is the cost to us all of  
Gordon Brown clinging on to his now grubby office to the last  
possible moment.  For if, as expected by most, Darling fails to live  
up to the moment and flunks his duty - maybe under orders! - there is  
little else we can do to swim towards the only lifebelt available.

We will have to suffer and sink with NewLabour.

xxxxxxxxxxxx cs
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TELEGRAPH                21.4.09
1. (Leader) Darling's moment to face the painful truth
Telegraph View: The humiliating 'sick man of Europe' tag is heading  
back our way.

No Chancellor in recent times has prepared a Budget statement in  
bleaker circumstances than Alistair Darling. The growth forecasts he  
made just five months ago in his pre-Budget report have had to be  
torn up, while the financial crisis has accentuated the already  
appalling state of the public finances. The baleful backdrop to  
tomorrow's package is a deficit running at a frighteningly high  
level: twice what it was when the last Labour government called in  
the IMF to rescue the economy in 1976.

Two courses are open to the Chancellor. He can confront the scale of  
the crisis facing the country honestly and implement the inevitably  
painful measures needed to prevent a decade or more of stagnation. Or  
he can evade his duty by conjuring up the usual New Labour concoction  
of eye-catching initiatives, make-work schemes in the public sector  
and a vague commitment to investing more of taxpayers' cash in Lord  
Mandelson's wonder industries of the future, such as electric cars.  
Given Labour's track record, and the imminence of a general election,  
it is safe to assume Mr Darling will follow the second path.

If so, he will be making a monumental mistake for which the country  
will pay a terribly high price. The think tank Reform argued  
persuasively yesterday that this unprecedented crisis in the public  
finances should be the catalyst for changes that are years overdue.  
More than a decade of unparalleled spending on health, education and  
welfare has tested to destruction the crude and wasteful tax-and- 
spend philosophy of this Government. Any public-service improvements  
have been risibly out of proportion to the vast sums spent. The party  
is now over and without drastic remedial action, our obese state  
sector will act as a lethal drag on the whole economy, consigning us  
to years of struggle. Remember that humiliating tag "the sick man of  
Europe" which the Thatcher reforms banished, we had hoped for ever?  
Well, it is heading back our way.

Reform has called for a £30 billion cut in public spending, about 4  
per cent of the total, to come in not this year but next, to kick- 
start recovery. It specifies how the money can be saved, with the big- 
ticket saving (£7 billion) achieved by ending the universal payment  
of child benefit and allocating it instead to low-income families.  
The move makes sense both in terms of value for money and also by  
dealing a long-overdue hammer blow to one of the worst aspects of our  
welfare state, the spraying around of state benefits to those who do  
not need them.

Such a move will be painful for many, but recovery cannot be pain- 
free. Most people appreciate this and are realistic enough to accept  
that these exceptional times will require sacrifices from all. That  
is not, regrettably, how the Government sees it. Since the credit  
crunch started more than 18 months ago, it has acted as though the  
public sector exists in some parallel universe. Everyone's belt has  
been tightened, except the state's. The Government even thinks –  
contrary to the view of virtually every expert – that a tax hike for  
the better-off is required, with its planned 45 per cent rate for  
those earning more than £150,000. The Institute for Fiscal Studies  
pointed out yesterday that this spiteful act of class warfare will  
not actually result in any extra revenue. It remains a mystery why  
the Tories have not already pledged to scrap it should they win power.

In other ways the Tories are showing that they appreciate the  
enormity of the economic challenge. George Osborne, the Shadow  
Chancellor, has been preparing the ground for tough decisions to cut  
deficits. In the post-crunch era, it is the countries that are smart  
at doing this that will prosper.

And Mr Darling will be making a profound error if he believes he can  
leave all the dirty work for the next government. For if, as we fear,  
he fails to produce a credible blueprint for paying off Labour's  
mountain of debt, the markets will punish him mercilessly – and we  
will all suffer the consequences.
==============
2. Markets braced for historic £200bn deficit
The pound slid after it emerged that Alistair Darling will this week  
unveil Budget plans which will consign Britain to a deficit dwarfing  
anything faced in peacetime.

    By Edmund Conway

With economists raising the prospect of £200bn deficit and a gilt  
strike in the coming years, sterling fell by 2.66 cents against the  
dollar to $1.4539, wiping out much of the ground made against the US  
currency in recent weeks.

The plunge came as it emerged that tomorrow the Chancellor will be  
forced to slash his economic forecasts and raise his borrowing  
forecast well into the future.

Even if Mr Darling does not, as some expect, spend on new  
discretionary measures to wrest Britain out of recession, he will  
drive up Britain’s total national debt to over 100pc of gross  
domestic product for the first time since the early 1960s, analysts  
at Capital Economics predicted. He will also generate an annual  
deficit of over £200bn for the first time in history, they added.

The figures are likely to cause jitters in financial markets. The  
Government last month suffered the first failure of a conventional  
government bond (gilt) auction since 1995 and experts have warned of  
further failed auctions as the deficit climbs to new highs. Should  
the Government repeatedly fail to sell its bonds it may be forced to  
call on the International Monetary Fund or to raise taxes to punitive  
levels to make up the difference.

Michael Saunders UK economist at Citigroup, said the prospect of a  
gilt strike was no longer unlikely.

“There is no doubt we are closer to the edge now than we have been in  
ages,” he said. “How close are we? That is unknowable — it’s akin to  
being on a cliff edge in the pitch black. There may be a level of  
fiscal deficit at which people could lose faith in the Government’s  
commitment to economic flexibility. The fact that we don’t know how  
close we are to the edge is part of the difficulty. The IMF warned  
them, the OECD warned them, the European Commission warned them and  
the Government dismissed the warnings.”

  With the cost of recession — in terms of higher unemployment  
benefit bills and lower tax revenues — set to eat into the public  
finances, the deficit is likely to rise this year to the highest  
level in peace time, while the economy shrinks at the fastest rate in  
over 60 years. The Treasury is expected to slash its 2009 economic  
output projection from a contraction of 1pc to a contraction of 3pc  
to 3.5pc.

At its peak, the Government deficit will rise to £230bn — some 16pc  
of GDP and higher than any other peacetime year on record, according  
to Capital Economics. As a consequence the size of the national debt,  
which was until recently comfortably below 40pc of GDP, will rise to  
above 100pc — a hugely embarrassing development for the Chancellor.

However, despite the precariousness of the public finances, the  
National Institute of Economic and Social Research said the  
Government has room to spend a further £30bn, or 2pc of GDP on an  
immediate income tax and national insurance rebate. [But ‘Reform,’ on  
the other hand, calls for a CUT of at least the same amount! -cs]
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3. On Budget day, Labour will be revealed as the can’t act, won’t act  
party
Labour is fond of deriding the Tory opposition as the “do nothing  
party”. But tomorrow it will be Labour which is revealed as the  
“can’t act, won’t act” party.

    By Damian Reece

For people elected to run the country this is much worse. Labour is  
in office but not in power, its influence ebbing on a tide of  
financial regret. [We need an election NOW -cs]

The ability to influence events has been surrendered by fiscal  
imprudence, irresponsible borrowing and a return to the bust side of  
the boom/bust equation. Alistair Darling’s disastrous reign will  
continue with a second Budget in which Government borrowing this year  
will soar to anything between £150bn-£200bn. That’s more than 10pc of  
our annual gross domestic product and the highest since 1955. Total  
public net debt is heading for 100pc of GDP, or more than £1? 
trillion. The fiscal lifeboat has been holed. It can’t be launched,  
so it won’t be launched.

Some of the causes of recession were out of our hands to resist, but  
a responsible government would have retained financial firepower to  
make sure that shaping a recovery was not entirely beyond our  
control. Instead we are so in debt we can do no more. We can’t spend  
more, so we won’t. We can’t cut taxes, so we won’t. We can’t cut  
public spending, so we won’t, beyond a measly £15bn after the election.

Darling told us borrowing in this tax year would be £118bn, not the  
£175bn or so that’s expected. He told us the economy would shrink  
this year by 0.75pc-1.25pc, not the 3pc-3.5pc he’ll admit to  
tomorrow. Any large company, having got its sums so dreadfully wrong,  
would have prepared the finance director’s resignation speech in  
advance.

I can only assume that Darling remains convinced he’ll still be in  
office this time next year. [NO- P L E A S E! -cs]  So what tactics  
can he employ as he helps steer Labour to election defeat in May 2010  
(surely Brown can’t go early, so won’t go early despite David  
Cameron’s pleas)?

The obvious tactic would be to “kitchen sink” the numbers tomorrow.  
If he makes them look as bad as possible now he can hope that, come  
next year’s Budget, things might have perked up enough to deliver a  
pre-election fillip. Having been so hopelessly over-optimistic about  
the economy so far, no one would be surprised if the Treasury was  
subsequently caught out being too pessimistic. Unfortunately, the  
pace at which the economy is deteriorating makes it hard to overdo  
the pessimism. For instance, even the tax-raising plans already  
announced by Labour may backfire.
The Institute of Fiscal Studies reckons the 45pc tax rate on salaries  
over £150,000, designed to raise £1.6bn, will do well to raise £550m  
because the wealthy will leave the country or employ accountants to  
help them avoid it. A case of can’t pay, won’t pay.
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4. Too much stimulus could spell disaster for Dr Darling’s ailing  
patient
On Wednesday, Alistair Darling will deliver his second Budget.

    By Terry Smith

I have little doubt that there will be much talk about the stimulus  
that he is delivering to the UK economy in line with his G20  
colleagues (expect much grandstanding about this) but also how fiscal  
prudence will be retained by a combination of lower public spending  
targets over the medium term (not now of course).

But what is the real background? Darling will be taking to his feet  
after a warning from Mervyn King, the Governor of the Bank of  
England, that the UK's public finances cannot stand any further  
increase in deficit spending.

The theories of the economist John Maynard Keynes are often cited to  
bless the stimuli which are being shovelled out by governments.  
Unfortunately, there is one part of Keynesian economics which they  
have conveniently forgotten: Keynes prescribed building up reserves  
during boom periods in order to fund deficit spending when this was  
necessary to provide such a stimulus. This part of Keynesian  
economics has clearly been observed mainly in the breach in the UK  
and the USA in particular.

As a result, there will be a severe constraint on the stimulus which  
Alistair Darling can deliver. The reality is that the UK is heading  
for a budget deficit which may hit 15pc of GDP and will make the so- 
called PIGS (Portugal, Ireland, Greece and Spain) look like models of  
budgetary rectitude. The reality is that the UK requires and will get  
a severe cutback in social services. The unmentionable will happen.  
At some point someone is going to have to confess that the NHS can  
only deal with items such as A&E, pregnancy and cancer. Everything  
else will have to be privately insured. Those who are government  
employees will have to lose their jobs and/or take pay cuts (not to  
mention pension cuts). But I doubt Chancellor Darling will be telling  
us this on Wednesday.

If Darling does not show such restraint there must be every  
likelihood that the international investment community will refuse to  
fund his plans by buying gilts, and the UK's lack of creditworthiness  
will be felt through further depreciation of sterling.

But what of that other item which has been deployed from the  
Chancellor's emergency toolkit for warding off depressions:  
Quantitative easing? The purchasing of assets (mainly government and  
corporate debt) with money "printed" by the central bank. It is the  
most extreme form of expansionary monetary policy. There has been  
much talk of "green shoots" and other signs of recovery, including  
the sharp equity market rally. But the analogy with the stimulus  
packages and quantitative easing is that the economy is like a  
patient in the emergency room who has suffered a heart attack. He has  
just been given the largest dose of adrenalin and the largest shock  
from the defibrillator in medical history. If there aren't a few  
flutters from the heart after that, be very afraid.

To take the analogy further, this patient had previously appeared fit  
but only because he had been taking steroids (i.e. the growth fuelled  
by the credit bubble). The chances of a patient in this condition  
making a full recovery would seem to me to be slim.

The application of these massive stimulus packages and quantitative  
easing is also analogous to trying to cure alcoholism by going binge  
drinking. Economies are suffering a hangover from the largest credit  
fuelled consumption binge in history. It will be rather extraordinary  
if this is cured by encouraging renewed borrowing and spending.

There are other problems with quantitative easing, even leaving aside  
the rather large issues of inflation and the potential effect on the  
currencies. The US is committed to buying large quantities of its own  
government debt using funds supplied by the Federal Reserve Bank.  
Coincidentally, the largest external holder of that debt in China has  
already expressed misgivings about the US dollar as a reserve  
currency. It would more than blunt the impact of quantitative easing  
if the Chinese supplied most of the bonds which the Fed buys.

In contrast, the Shadow Chancellor , George Osborne, should have a  
good day on Wednesday. He has started to show some form with his  
recent speech calling for a larger role in managing stability for the  
Bank of England, and smaller banks so that we can afford to let some  
fail, and pointing out that it's hard to see how you can borrow your  
way out of debt. He needs to press this last point home.

And finally, where does this potential policy disarray leave the  
recent market rally? I suspect the closest parallel is with 1931 when  
similar stories about recovery appeared, just prior to the second and  
most damaging leg of the Great Depression. But as ever, I'd be happy  
to be wrong.
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Terry Smith is chief executive of Tullett Prebon, the inter-dealer  
broker.
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5. Britain in elite company with budget blues
Our predicament is desperate but not serious, as they used to say in  
the Austro-Hungarian Empire. Britain’s budget deficit threatens to  
hit £175bn this year, or 12pc of GDP.

    By Ambrose Evans-Pritchard

That is just about the worst performance of any major country at any  
time in history, during peacetime.

Gordon Brown’s sin as Chancellor was to run a fiscal deficit of 3pc  
of GDP at the top of the long boom, when other countries were  
prudently using their windfall tax revenues to build a storm buffer.  
Many ran surpluses in 2007: Finland (+5.3pc), Denmark (+4.9pc),  
Sweden (+3.5pc), Spain (+2.2pc), Australia (+1.6pc) and Canada  
(+1.4pc). Germany was near balance.

This left Britain acutely exposed when the bubble burst, since the UK  
economy is by nature highly geared to global ups and downs. British  
tax revenues invariably fall off a cliff when trouble hits.

The result is that the UK national debt will jump from 44pc of GDP in  
2007 to 78pc by the end of next year, according to Fitch Ratings. But  
at least we have the adult company of the US and Japan in our  
immediate debacle, and sibling allies in Europe’s Club Med and most  
of the ex-Soviet bloc.
The US Congressional Budget Office (CBO) expects America to run a  
deficit of 13pc this year following the US bank rescue and President  
Obama’s fiscal package. The US national debt will rise from 41pc in  
2008 to 65pc next year.

What happens thereafter is the subject of fierce debate in  
Washington. The CBO fears the debt may ratchet up to 82pc by 2018,  
with trillion-dollar deficits as far as the eye can see. That gloomy  
prognosis seems to assume that the US political class lacks the  
discipline to retrench once the banking crisis passes. This is a  
matter of political judgment.

The good news is that Britain goes into the slump with a lower level  
of sovereign debt than some G7 states, thanks to the (now fading)  
Anglo-Saxon renaissance and the Thatcher reforms. The bad news is  
that our hard-fought gain has been squandered.

Fitch calculates that the debts of Britain, France and Germany will  
converge at around 78pc by the end of 2010, all pressing against the  
limits of AAA respectability. Italy will reach 115pc.

Japan is in a class of its own with debt nearing 200pc of GDP next  
year, not a happy picture for a country slipping into demographic  
decline. The working population peaked in 2005. The number of wealth  
creators needed to finance the debt shrinks year after year.