First up, I give Liam Halligan with a blood-chilling warning
There’s unanimity amongst the commentators and here’s Rees Mogg joining in.
Christina
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SUNDAY TELEGRAPH 13.12.09
Labour's dishonesty is leading us down the road to sovereign default
The starting point for last week's pre-Budget report could hardly have been less promising. The UK remains the only major economy still in recession.
Over the past 10 years, Labour has turned a budget surplus into a deficit equal to 13pc of GDP – the biggest in our peacetime history.
Government borrowing is at its highest since the Second World War and almost twice the previous post-war peak. And yet, and yet … when he stood up to deliver the PBR on Wednesday, the Chancellor, Alistair Darling, managed to make a ghastly situation even worse.
Our political "elite" just don't "get it". For them, all that matters is the general election – which must be held by June 3, 2010. In their blinkered minds, the normal pre-election rules apply - hike public spending, say nothing about how you're going to pay for it, obfuscate like crazy and forget anything to do with the country's long-term fiscal health.
That's exactly what Mr Darling did on Wednesday. Or, more accurately, that's what the Prime Minister, Gordon Brown, and his lieutenants forced the Chancellor to do. This was Brown's PBR – ill-conceived, dishonest and deeply irresponsible. The lack of clarity was unprecedented, the determination to ignore reality simply breath-taking.
History will judge Mr Darling as someone who tried but failed to stand up to his political masters. History will judge Mr Brown as a rampaging fiscal vandal, a man who wilfully destroyed the UK's hard-won reputation for financial prudence. In both cases, the pre-Budget report of December 2009 will be presented as Exhibit A. And as he goes down, consigning himself and his once-proud party to political ignominy, Mr Brown is determined to take no prisoners.
The grim reality is that the UK, of all the world's major economies, is uniquely vulnerable to a sovereign default. Economic Agenda has been banging this drum for more than a year - and been derided for it. Yet this unsavoury view is now conventional wisdom not only at the International Monetary Fund but among the sophisticated global investors upon whom the UK relies to buy its sovereign debt.
Apart from boasting the G20's biggest deficit, the UK's rate of debt accumulation is steeper than any other developed country. The main reason is that government expenditure was woefully over-stretched during Mr Brown's reign of terror at the Treasury, as he tried to spend his way to popularity and outshine Tony Blair. On the revenue side, too, the UK is suffering badly given the Exchequer's over-reliance on financial services and the housing market – two sectors still on their knees.
Labour has compounded these problems with its wild policy response to the sub-prime crisis. Brown's prolonged Keynesian boost has exacerbated the long-term fiscal damage. And, above all, the extent to which the UK has used "quantitative easing" – or money printing – in a bid to stimulate the economy has shocked the rest of the world.
Other countries – such as the United States - have also used QE, but not to the same extent as Britain. Since March, the UK has almost tripled the size of its "monetary base". We've then used more than 99pc of that freshly-minted money to buy our own sovereign debt so Mr Brown and his ilk can keep spending, in a last-ditch attempt to prevail at the polls. As a result, the UK is now being kept afloat by a bizarre, Zimbabwe-style form of circular financing that will ultimately explode in our faces.
At a time like this, the overwhelming priority of any sane policy-maker - of anyone, in fact, who cares about their country - must be to demonstrate to our creditors that we are serious. The UK's so-called leaders, Labour and Tory, must do everything to prevent a looming gilts strike – which would see the world's bond markets refuse to buy any more UK sovereign instruments, making it impossible for the world's fifth-biggest economy to roll over its debts.
Such a disastrous outcome wouldn't only spark a sell-off of gilts, sterling and UK equity, to say nothing of public sector chaos. It would also see borrowing costs shoot up right across the economy – doing serious damage not only to our already precarious government finances, but to the finances of firms and households too.
Under these circumstances, our political classes need rapidly to build financial credibility. That requires both a determination to take tough decisions and utmost transparency. On both counts, the PBR failed miserably. Future historians will wince.
Mr Darling insists his plans allow the UK to "halve the deficit over four years, as a share of national income", bringing it down to 5.5pc of GDP by 2013/14. Should we believe him? A decade ago, Labour said it would stick to its fabled "golden rule" – only to borrow for capital investment and not for day-to-day spending. That rule has been flouted every single year since 2001. But fear not – for the PBR's technical documents show it will be met in 2017/18.
Labour spin-doctors claim the PBR did include "tough choices". We are invited to applaud the 0.5pc rise in National Insurance contributions for the 10m employees with the audacity to earn more than £20,000. Will this burdensome stealth tax, which will impact hard-pressed workers on less than the average wage, be used to pay-down the deficit, putting the UK's finances on a more stable footing? Er, no. The cash will be used to raise public spending even more, by another £15bn in 2011 and 2012.
To the extent that cash spending will be reined in, or increased less sharply, the Treasury's numbers lack credibility. Brown and Co have decided to suppress any details of how this magical "halving of the deficit" will be achieved. Even while sticking to generalities, Mr Darling spent more time stressing the areas of spending that will be protected from cuts, than he did outlining his ambition to get the public finances under control.
Some may ascribe such behaviour to electioneering. But other data admissions were recklessly irresponsible, bordering on outrageous. The Government currently spends about the same on debt interest as it does on defence. That total is set to rise, as the state borrows the thick end of £200bn a year for the next three years.
The size of our future debt interest payments is of absolutely crucial importance to our creditors – as anyone applying for a mortgage knows. Consider, then, that in the PBR, HM Treasury refused to publish its forecasts for debt interest.
I hate to say this, but the numbers in the PBR look little more than fiction. In his March budget, Mr Darling said the UK economy would contract by 3.5pc this year. He's now admitted the slump will be much deeper, with GDP falling 4.75pc. Yet his borrowing total for this year is almost identical to his March estimate, even though the sharper slowdown will generate more benefit spending and much lower tax revenues.
The Government's "fiscal consolidation" also relies on the UK expanding by 1.5pc next year and 3.5pc in both 2011 and 2012. In the 2008 Budget, prior to sub-prime, the Government was forecasting growth of only 2.5pc in these latter two years. Are ministers really saying the UK's medium-term growth prospects have been improved
by sub-prime? Or are they simply pencilling-in rosy growth assumptions so they can pretend the public finances can be rescued without making genuinely difficult choices?
The markets aren't buying it – and why should they? Since the PBR, UK gilt yields – the risk premium investors demand to buy our bonds – has spiked. Sterling has fallen heavily against both the dollar and the yen. Some say myopia is the cost of democracy. But this PBR wasn't just myopic. It was reckless in the extreme.
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MAIL ON SUNDAY 13.12.09
Guilty men at the centre of a gilt-edged mess
By WILLIAM REES-MOGG
Britain is in a crisis of debt and borrowing. We shall have to worry about the national capacity for borrowing in the gilt-edged market for years to come.
The alarm bell rang last Wednesday, when it became apparent that the gilt-edged market had not liked the Chancellor of the Exchequer's pre-Budget report, not one little bit.
One broker described the mood in the market as 'absolutely furious'. That is bad news for Britain. The gilt-edged market is the heart of British finance.
Brown has built up the greatest, and most frightening debt in British history. He still plans to spend and borrow more
I fear that the very phrase 'gilt-edged market' is mere financial jargon for most of the people who may be hardest hit by the recession. I always try to look up words in the Oxford English Dictionary when they move on to centre stage in public debate.
I thought I would find a learned reference to a period, probably near the end of the 18th Century, when the Bank of England issued British Government bonds on paper that was literally gilt-edged, like the edges of some leather-bound books.
Instead of that, I found that ' gilt-edged', which is now a phrase confined to British Government bonds, used to refer to any securities of high value. One gets references to colonial or Indian stocks, so described; one even finds 'gilt-edged butter' in the commodity markets. But now the description is indeed confined to those bonds that are issued by the British Government as a way of borrowing money.
Last Wednesday, dealers in these bonds were listening with some anxiety to Alistair Darling's pre-Budget report. They knew he would have to borrow a hideously large sum of money - the deficit has risen to £175 billion.
They know that a large part of the money will have to be borrowed from foreign banks or sovereign funds. They hoped Darling would be able to convince foreign lenders that he was bringing this huge borrowing requirement under control.
Up until the very last moment, Darling must have shared their hopes. He knew better than anyone that the core of the financial problem would be to convince foreign lenders that Britain would tackle the debt problem promptly and firmly.
Foreign lenders do not want to buy a cartload of British gilt-edged stock on a long-term falling market. They want to put their money in a safe place, not bet on a loser.
In order to maintain foreign confidence, Darling, who is a patriotic man, proposed not only to restore the 17.5 per cent VAT rate but to raise it as well.
The brave decision would have been to raise VAT to 20 per cent, which many observers see as inevitable in the next year. A 20 per cent VAT rate would have raised £12billion more than the 17.5 per cent rate, for which the Chancellor had to settle.
The worst of it all, from the point of view of the foreign purchasers of British bonds, is that this showed that the Chancellor is not the master of Government finance.
Nor is the Treasury the master in Whitehall. Darling was allegedly overturned by two men. He had Prime Minister Gordon Brown and Schools Secretary Ed Balls against him.
By and large, foreign bankers have come to trust the Chancellor. When they see him overruled by the Prime Minister, with the aid of a spending Minister, they lose confidence.
They see the Chancellor lacks the power even when he has the will. The Chancellor could have resigned when his policy was rejected by the Prime Minister, but that would only have opened the way for Balls to achieve his ambition of becoming Chancellor.
Sometimes it is tempting for a politician to accept his own weakness but remain in office, rather than leave office and let greater evils occur; Balls as Chancellor would qualify in the role of the greater evil.
The threat to British finance is coming closer. Last week, Greece, a country which is in the eurozone, suffered exactly the bond market crisis that Darling was trying to avoid, but Brown is willing to risk.
The fall in the Greek bond market was described by the Financial Times as: 'The most spectacular collapse in the history of the eurozone . . . investors have decided the country's public finances may be beyond repair.'
Britain is not yet in the position of Greece, which has for a long time been the weakest of the eurozone economies. Nevertheless, one leading authority, Huw Worthington of Barclays Capital, has given the warning that: 'Unless governments reduce their debt and budget deficits, then they could see sell-offs like Greece. Investors want debt reduced and they want it now.' This applies to the United Kingdom.
Britain's borrowing requirement will not be confined to one year or to the £175 billion of the Budget deficit. Robert Stheeman, the head of the Debt Management Office, says: 'We have never issued so much debt.'
In the current fiscal year, Britain will have to issue, if we can, £225 billion of gilt-edged bonds, a 75 per cent increase on the previous year. Britain also plans to raise an average of £166billion per year over the next five years.
That means that the next Government will have to try to borrow £830 billion over the term of the next Parliament. This will be difficult.
I do not believe that it would be possible for Brown to borrow on this scale, since he is blamed for the deterioration of Britain's finances, which were strong when Kenneth Clarke handed them to him in 1997. It is a tragedy that so much good work was wasted, and so much debt incurred.
Britain now faces a generation of debt, yet Brown believes that he can win a General Election by increasing it.
Debt is always dangerous. It risks the collapse of bond markets, and therefore the loss of ability to borrow. It risks inflation and higher interest rates. Debt inevitably limits public expenditure and calls for higher taxes. For a country, as for an individual, debt mortgages the future in order to provide for the present.
Brown has built up the greatest, and most frightening, debt in British history. He still plans to spend and borrow more.
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