Next Steps

TUESDAY, FEBRUARY 02, 2010

Next Steps

...into the darkness

As you may know, following a Freedom of Information request, HM Treasury has released an internal paper analysing international experience with so-called fiscal consolidations - ie how to tackle humongous fiscal deficits. Predictably, all the really interesting bits - including HMT's Next steps - have been blacked out (pic). This may be a crisis of historic proportions but we mere taxpayers are not to be trusted with HMT's real views on the choices before us.

Still, there are some useful snippets:

• Spending cuts are preferred to tax rises - "there is broad agreement in the literature that spending restraint is more likely to generate lasting fiscal consolidation and better economic performance than tax increases"
• Cuts should focus most heavily on public employment and welfare payments, which have featured in all major consolidations (eg see this blog).

Here's HMT's summary cuts menu, based on what's worked internationally (click on image to enlarge):

It will all be pretty familiar to BOM readers, and represents the mainstream consensus of what is needed. 

Unfortunately, it's one thing to analyse international experience and understand what you have to cut, and quite another to take the all-important next step of actually wielding the scissors.

And on that score, events are taking a very depressing turn. Dave and George are now so rattled by their falling poll lead and Mandy's superbly brass-necked attack on their economic competence, that they're wobbling around all over the road. Apparently, they're even recruiting the utterly discredited Lord Stern to advise on"green growth" - aka taxing and regulating our economy back to the Stone Age.

A hung parliament doesn't bear thinking about. But even if - as still seems likely to Tyler - the Tories win, fiscal policywise it sounds very much like we're just going to have more of the same. Which, as we all know, means drifting along until we hit the rocks of a market panic. By which stage, inflation will be well out of the traps, the management of our most dynamic companies will have relocated overseas, and we'll have to endure a decade of cuts with no prospect of stimulating private sector growth on the other side. 

And the next steps? After one stuttering term of Heath Cam, Labour squeak back in again under their new leader Commissar Balls. A fresh start for Britain - squeeze the rich, British jobs for British workers, and state direction of capital. Tony Benn officially installed as HM Treasure to the Nation.

O.M.G.

MONDAY, FEBRUARY 01, 2010

Spending Money We Don't Have

Just wait until we see the card statement

The man who refused to buy more military helicopters back in the good times isnow committing "to billions of pounds of extra defence spending". He's apparently going ahead with the Navy's new £5bn carriers, keeping Army strength above 100,000, and completing the Eurofighter and Joint Strike Fighter programmes.

And where, pray, is the money for all this extra spending coming from?

"A government source said there would have to be “tough decisions elsewhere”.

Ah. Of course. Tough decisions elsewhere.

But not apparently in the area of free personal care for needy adults at home. In a cynical attempt to buy votes among the elderly and their families, Brown announced at the last Labour Party Conference that he was ordering a huge expansion of the personal care programme. Yet according to the Directors of Adult Social Services it will cost around £1bn pa, whereas Brown has only come up with £420m. The rest? That will be down to those tough decisions elsewhere.

Not that Brown is alone. This morning we heard that nice but vacuous Mr Clegg promising to spend another £2.5bn pa on schooling for the underprivileged. £1.5bn will come from scrapping tax credits for all families on above average incomes - clear enough. But the rest will come from er... tough decisions elsewhere on er, quangos and inspection regimes... and stuff.

And then there are the Tories. According to the ever-helpful Mr Darling, they have made around £8bn of new spending pledges, including more single rooms in NHS hospitals and more maternity nurses (see this blog). But once again, the funding seems to be down to tough decisions elsewhere.

All of which raises the fundamental worry we've mentioned before: despite the direst warnings about the size of our national credit card bill, we don't yet seem to be ready for public spending cuts. Right across the board, our politicos have examined the entrails of their focus groups and private polls, and concluded there's simply no electoral upside in promising cuts. Which is why Brown is still dishing out new spending pledges, and why Cam is back-peddling furiously on his earlier promise of immediate cuts.

So how's it going to play out?

Well, if the politicos don't get a grip, sooner or later we will hit that sterling/gilts crisis we've blogged so often. At which point, we will end up being forced into an emergency package of cuts and tax increases just like back in the jolly old 70s. We'll have no choice.

Indeed, there is now a school of thought that Cam is back-peddling on his cuts promises precisely because of that. He knows the only reason there hasn't so far been a crisis of market confidence is that investors believe he will cut. But in political terms that means voters haven't yet been exposed to the real risks, so he gets no political credit for being tough. 

Far better to back off now, ahead of the election, jangle the market's nerves while Labour are still at the controls, let the voters understand the real risks, and let them see Labour totally incapable of handling them.

You know, we hope that is the correct interpretation. Because it implies that Cam and George do understand the real problem. 

But if we hit a pre-election market wobble, they'd better be ready with some convincing statements on their true fiscal intentions. The last thing we need is for them to get elected having already lost the confidence of the markets.

A very delicate flower, confidence.