Britannia Radio

The FT (second here) doesn’t add much to everybody else’s guesses possibly because it was Treasury inspired .   

But Jeff Randall hasn’t been sucked into the Labour complacency and makes some telling points.  

Christina

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TELEGRAPH 4.12.09

As we head for the rocks, will Captain Darling change course?

The Chancellor Alistair Darling must defy his boss and do what's best for the country, argues Jeff Randall.

Next week's pre-Budget report will be the defining moment of Alistair Darling's time at the Treasury. As he picks through the debris of Britain's financial and industrial wreckage, much of it caused by the ineptitude of his predecessor, the Chancellor has a choice: he can do what is right for the country's long-term interests, or he can pander to the short-term needs of his party.

In his ideal world, Mr Darling would, of course, be able to do both, championing Labour as a force for sound money. That option is no longer available, largely because the Government is precisely where it should not be: trapped in the middle of a sharp divergence between economic and political cycles.

The ship of state is heading for the rocks. Responsible stewardship of the budget requires brave action – now – on borrowing and spending. But with a general election looming, there is immense pressure on No 11 to delay the inevitable in favour of one last, desperate burst of vote-grabbing profligacy. The Prime Minister is demanding nothing less.

Suffering, as we are, from zeroes-fatigue, the scale of Mr Darling's challenge is hard to grasp. We have become immune to the shock of very large numbers in red ink. Examine closely, however, the full damage done to Britain's balance sheet and one can begin to share the Chancellor's vertigo.

The nation's annual deficit is heading for £200 billion. Yes, we are short to the tune of £200,000,000,000. That is considerably more than the state's combined spending each year on transport, housing, defence and education.

So great is this burden, Morgan Stanley has warned that the United Kingdom risks being the first G10 country to suffer a crisis of investor confidence, leading to a possible flight of domestic capital, a collapse in the value of sterling, and an exodus from government bonds. In short, a rout.

To avert such an outcome, those who are financing Britain's IOU mountain are demanding a route-map to viability. Not a vague outline of intent, or a wish-list of bogus efficiencies, but an unambiguous commitment, demonstrating in detail how we are going to live within our means.

If Mr Darling is not to be laughed off the stage next Wednesday, he needs to turn up with something more credible than Mr Brown's fiction that we can spend our way out of debt. As for the comedy team of Balls & Cooper, their scripts for recovery are best left as jokes to cheer up colleagues at the Cabinet's Christmas party. The pre-Budget report deserves serious thought.

According to Deloitte, the accountancy firm: "It is clear that the UK economy has done less well than the Treasury predicted at the Budget in April… Tax receipts so far have declined by 12.9 per cent – rather more than the Budget prediction of an 8 per cent drop to £465 billion."

The biggest shortfall is in corporation tax, which has dropped by 30 per cent, compared with the Chancellor's forecast of 20 per cent. Before the crunch, Royal Bank of Scotland, for example, was one of Britain's biggest corporate taxpayers, contributing about £2 billion a year.

It sounds, and is, a lot, but even if all of that RBS revenue could somehow magically be restored, it would still fill only 1 per cent of the hole that the Chancellor is facing. In effect, Mr Darling needs to discover the equivalent of 100 new mega-bank tax streams to eliminate his budget deficit.

It's not going to happen, which is why his efforts at book-balancing ought to focus on the gusher of public spending. As the British Chambers of Commerce notes, "The public sector must be pared back significantly over the next few years, so as to allow private firms to generate the wealth necessary to drive economic growth. As an initial step, and while inflation is still low, public-sector pay could be frozen without causing undue pain."

Step two will require even bolder measures. The public-sector payroll has ballooned not only because many of its most senior employees are overloaded with generous salaries but also because Mr Brown's employment "miracle" was little more than an explosion of state-sponsored "non-jobs".

In education, which the Government insists (falsely) is one of its successes, the Audit Commission has spotted vast scope to cut out waste. Since Labour came to power in 1997, the number of teachers in England has grown by 32,000, but there are 100,000 more teaching assistants and 70,000 more support staff. The commission's chief executive, Steve Bundred, concluded: "In these circumstances, it would be astonishing if savings could not be made without damaging education."

But does Mr Darling have the nerve? Can he face down a bullying neighbour, whose vision for sustainable prosperity has more missing parts than Tiger Woods's car-crash story? It would be nice to think so. What does the Chancellor have to lose? The Prime Minister can hardly sack him now.

After a decade of Mr Brown's micro-meddling, we are left with an industrial base in which manufacturing has declined more rapidly than it did under Margaret Thatcher. In 1997, it accounted for one fifth of British output; today it is down to about one ninth.

All those Brownian "Budgets for business" and "initiatives for enterprise" have resulted in nothing more durable than an economy built on property speculation, crippled banks, public spending and unaffordable consumer debt. Figures this week show that bad debts on credit cards alone doubled from £800 million to £1.6 billion in the third quarter.

Meanwhile, poverty is at least as widespread as it was 10 years ago. Contrary to Mr Brown's assertion that our social setbacks were caused entirely by global calamities, the UK's blight of poverty, unemployment and home repossessions began increasing in 2004, long before anyone here had heard of sub-prime mortgages or collateralised debt obligations.

A study by the Joseph Rowntree Foundation shows that 13.4 million people now live in low-income households, the same as in 2000. The number of very poor households earning less than 40 per cent of the national average is 5.7 million, the highest level since the early Eighties.

Mr Brown's baleful response to this crisis reveals an empty tank. He has rehabilitated Alastair Campbell, the man who helped bring us dodgy dossiers on Iraq, as a provider of stinging one-liners at Prime Minister's Questions. If, as is the case so far, the best they can deliver is a reference to David Cameron's education at Eton, then the Government's intellectual and moral implosion is complete.

Unlike some of his frontbench colleagues, Mr Darling is not an unsavoury man. The PBR offers him a final chance to prove that he understands and values the difference between political tactics and economic strategy.

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FINANCIAL TIMES 4.12.09

 Darling to defer moves to cut deficit

By George Parker and Chris Giles

Alistair Darling will next week set out a pre-Budget report that will increase taxes on the wealthy and funnel scarce resources into boosting the economy, while deferring tough new measures to cut Britain’s £175bn deficit.

Mr Darling has decided it is too early to announce a substantial fiscal tightening – Britain is the last G20 country still in recession – leaving him open to criticism that he has yet to devise a credible deficit reduction plan.

“We don’t anticipate any dramatic fiscal tightening,” said an official close to the preparations for next Wednesday’s statement, which will set the battlelines for the general election.

But the chancellor will seek to reassure the markets and critics such as Mervyn King, Bank of England governor, by announcing measures to be taken to halve the deficit in four years.

Mr Darling will argue that a further squeeze on spending now would choke the recovery, contrasting with the Tories who have promised to move more quickly to control borrowing.

A fiscal responsibility bill [This a total nonsense and pure spin - you don’t need a Bill or Act to do that - Governments just DO things like that -cs]  will be published setting out detailed provisions to cut the deficit to 5.5 per cent by 2014, and giving details of how the chancellor arrives at his forecasts, to boost their credibility in the markets.

Crucially, Mr Darling will give the first concrete indications of how the government intends to live within the so-called flat cash world of spending restraint he has mapped out until 2014, implying real cuts for most departments. He will define frontline services, such as patient care, classroom teaching and policing, that will be protected from cuts. Other “non-essential” areas will be in line for a big spending squeeze.

Mr Darling will also outline key projects, including London’s Crossrail, which he wants to protect within a sharply declining capital spending budget.

Funds from tax rises – likely to include changes to inheritance tax – will be channelled into growth initiatives, including “green” technology and a £1bn “jobs guarantee”  [more ‘spin’ -cs] for young people. James Purnell, former welfare secretary, on Friday calls in the FT for the guarantee to be extended to all jobseekers.

The government’s spending plans, which will be broadly confirmed by the chancellor, imply cuts to government departments of 8.6 per cent in real terms in the three years after April 2011.

The chancellor is expected to upgrade “by a few billion pounds” this year’s £175bn deficit projection, but Treasury officials are confident the deficit will come in well below £200bn.

After conceding the contraction in the economy will be 4.75 per cent this year, he will stick to growth forecasts of between 1 and 1.5 per cent for 2010, but with better-than-normal growth thereafter.