A former attaché speaks up about a 1979 incident deemed so sensitive that confidential reports were sent to PM Jim Callaghan, as newly released Cabinet papers reveal. Last updated at 8:37 AM on 03rd January 2010 In his New Year message, the Prime Minister attacked the Conservative Party but simultaneously gave priority to an important part of its economic policy. He criticised, though he did not name, those 'who say we must plan for a decade of austerity' but he went on to say that reducing Britain's deficit is 'his chief priority'. He does not say how he plans to reduce what is a record deficit without having a period of austerity. At best, Gordon Brown is aiming for the same end as David Cameron; both leaders see the necessity to reduce the burden of the deficit but Brown cannot bring himself to adopt the means. I'm not sure what he meant by 'his chief priority'; his chief priority is surely the next General Election. Scroll down for more Rees-Mogg cartoon Nothing could do more to undermine Britain's national credit than this prevarication. He should have learned from the experience of Chancellor Alistair Darling's pre-Budget report. It was generally regarded as a disaster precisely because Darling failed to provide coherent proposals for bringing the deficit under control. That failure was more the Prime Minister's responsibility than the Chancellor's. Darling, who is a serious Chancellor, would have greatly preferred a pre-Budget report with some solid proposals for reducing the deficit. He is aware of the difficulty of selling large quantities of UK bonds - which is how Britain borrows from abroad - without a convincing set of commitments to reduce the deficit. Indeed, he was allegedly overruled by Brown's determination, backed by Schools Secretary Ed Balls, to fight the coming Election on a policy of 'borrow and spend'. That is a dangerous financial policy for any government, and potentially disastrous in the aftermath of the worst recession in 80 years. The sums that Britain will have to borrow are the largest since the Second World War. In five years they will come close to £1trillion. They are the largest UK borrowings ever projected in peacetime. All lenders want to be sure they will get their capital back. They judge this partly on the credit rating of the borrowers. Historically, British governments have been extremely careful to protect the national credit rating, which allows Britain to borrow at affordable rates. At present Britain enjoys an AAA rating but this is an AAA rating with some doubts attached to it. As a result, the interest rate on British bonds has been rising. The ten-year bond now yields 4.1 per cent, which is quite a high rate compared to German bonds. Lenders like to be sure that borrowers are prepared to stand some pain in the support of their debts. It is damaging to confidence when a borrower shows he is unwilling to make cuts in expenditure. That is always a bad sign, in individuals, companies or governments. Britain will also be borrowing in a highly competitive market. America will be borrowing much more than Britain but will still be more attractive to most global lenders. There are, no doubt, concerns about the dollar as well as the pound but there is no question that the American economy is still the most powerful in the world, with the most advanced technology. If there is a panic in the markets, investors will feel safer lending in dollars than in sterling. In 1995, Ben Bernanke, now chairman of the US Federal Reserve, wrote a classic paper, The Macroeconomics Of The Great Depression: A Comparative Approach. This paper undoubtedly influenced his response to the 2007-2009 crisis. His conclusion has been summed up in the statement: 'Only sustained bad policies can drive the world economy so far off its path that it loses its capacity to recover.' Most economists agree that the world economy does have powerful self-correcting mechanisms. The reason America had a much worse recession in the early Thirties than Britain was that the Hoover administration pursued deflationary policies that turned the American recession into a slump. That did not happen in Britain, where the reluctant abandonment of the gold standard had the effect of devaluing the pound, and set the British economy on a new and more favourable track. What is required now is a return to stable monetary conditions and encouragement to economic development. This is really the other face of the stabilisation programme that Paul Volcker, an earlier chairman of the Federal Reserve, followed in the early Eighties. He brought American inflation under control. Stable monetary conditions do help to restore confidence without creating new stock markets or housing bubbles. The best example of a British stabilisation policy was that of Margaret Thatcher's Government after her victory in the 1979 Election. Former Chancellor Geoffrey Howe must share the credit, as must Milton Friedman, the main economic influence at the time. He was a guru who got it right. Cameron will have to convince the voters that his Government would be able to restabilise the British economy and that a counterattack on the deficit would serve the country better than a doomed dash for growth based on even higher borrowing. With a deficit of £178billion, the British economy cannot afford great new expenditures on the expansionist programme that Brown has been advocating. We do not have the money; we cannot afford the debt. There is no sign that Brown has come to terms with the brutal facts or with the weakening of British credit and borrowing power. Fortunately, British voters have recognised the longterm failure of Brown's economic policies in the past 13 years. These have not just been '13 wasted years', but years of relative economic decline for Britain. In almost every way the British economy is weaker in 2010 than it was in 1997; Brown, as Chancellor and Prime Minister, has more responsibility for that than any other person. Britain needs a sober process of recovery after the Brown explosion of 'spend, tax and borrow'. That issue should decide this year's General Election.Cold War? I'll say it was! British spook tells how KGB heavies 'debagged' him at minus 27 for snapping secret site
WILLIAM REES-MOGG: Gordon Brown had the party - but left us the hangover
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Sunday, 3 January 2010
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