[As a very rough approximation to ‘gross up’ figures for Ireland to British size multiply by about 15! ]
Stop for a momewnt and think of Ireland. and then consider what that would mean here. For the inability of Ireland to borrow at reasonable rates is what I have continually highlighted from the writings of commentator after commentator.
Meanwhile Brown adamantly refuses to budge an inch and will not cut spending now so it will have to be cut even more savagedly later. The opposition is unable to make a proper policy framewprk because it is denied access to the figures. Nevertheless the Tories could help NOW by being more specific in their pronmouncements. We need something along the lines of “We believe in cutting taxes and reducing the size of the state by cutting spending. But cutting expenditure should be happening NOW so it may be that as an emergency measure we may have temporarily to raise some taxes to stop the state collapsing. The situation is dire and drastic measures will have to be taken. We will not flinch”
Use that Mr Cameron - no fee!
Christina
SUNDAY TELEGRAPH 19.7.09
1. Fiscal ruin of the Western world beckons
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.
By Ambrose Evans-Pritchard
Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.
A further 17,000 state jobs must go (equal to 1.25m in the US - or 255,000 here-cs), though unemployment is already 12pc and heading for 16pc next year.
Education must be cut 8pc. Scores of rural schools must close, and 6,900 [255,000 here-cs] teachers must go. "The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb", said the Teachers Union of Ireland.
Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.
"Something has to give," said Professor Colm McCarthy, the report's author. "We're borrowing €400m (£345m) a week at a penalty interest."
No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.
As the International Monetary Fund made clear last week, [And Halligan today - - sent last night as “Britain on the way to being a third world country” -cs] Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.
"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.
France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.
There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance. [Halligan is less worried about deflation than the lurking inflation! -qv -cs]
Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.
Error One was to permit a bubble in the 1980s. Error Two was to wait a decade before opting for monetary "shock and awe" through quantitative easing.
The US Federal Reserve has moved faster but already seems to think the job is done. "Quantitative tightening" has begun. Its balance sheet has contracted by almost $200bn (£122bn) from the peak. The M2 money supply has stagnated since January. The Fed is talking of "exit strategies".
Is this a replay of mid-2008 when the Fed lost its nerve, bristling over criticism that it had cut rates too low (then 2pc)? Remember what happened. Fed hawks in Dallas, St Louis, and Atlanta talked of rate rises. That had consequences. Markets tightened in anticipation, and arguably triggered the collapse of Lehman Brothers, AIG, Fannie and Freddie that Autumn.
The Fed's doctrine – New Keynesian Synthesis – has let it down time and again in this long saga, and there is scant evidence that Fed officials recognise the fact. As for the European Central Bank, it has let private loan growth contract this summer.
The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin. [back to the example of Ireland -cs]
2. Ernst and Young report says hopes of recovery in UK are unrealistic
Optimistic expectations that the British economy is on the cusp of recovery are unrealistic, a forthcoming report by the Ernst & Young Item Club is expected to say.
By Angela Monaghan
Revising down predictions for growth in 2009, it will say there has been no real evidence that banks are lending more to businesses and consumers and any recovery will be "anaemic" at best.
"We are less optimistic than we were," said Professor Peter Spencer, chief economic advisor to Item. "A lot of favourable signs from the financial markets haven't followed through. I think hopes of recovery have completely overtaken reality."
The only ray of hope was a potential recovery in world markets, which UK exporters could exploit because of the weak pound, he said.
Item will predict that the UK economy will shrink by 4.5pc in 2009, more sharply than the 3.5pc contraction it forecast in April. It will predict growth of 0.5pc for 2010.
Professor Spencer said that lending is unlikely to grow substantially until the banks have repaid the Government.
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